Table of Contents

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

(Mark One)
x	 	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934	

For the quarterly period ended June 30, 2008

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	84-0748903	
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)	
 	 	
121 SOUTH 13TH STREET, SUITE 201
LINCOLN, NEBRASKA	68508	
(Address of principal executive offices)	(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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  
 
Large accelerated filer x	 	Accelerated filer o	
Non-accelerated filer o	 	Smaller reporting company o	

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

As of July 31, 2008, there were 37,969,493 and 11,495,377 shares of Class A Common Stock and Class B Common Stock, par value $0.01 per share, outstanding, respectively (excluding 11,058,604 shares of Class A Common Stock held by a wholly owned subsidiary).

Table of Contents
 
NELNET, INC.
FORM 10-Q
INDEX
June 30, 2008

PART I.  FINANCIAL INFORMATION	 	
 	Item 1.	Financial Statements	2	
 	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29	
 	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	65	
 	Item 4.	Controls and Procedures	71	
 	 	
PART II.  OTHER INFORMATION	 	
 	Item 1.	Legal Proceedings	71	
 	Item 1A.	Risk Factors	73	
 	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	74	
 	Item 4.	Submission of Matters to a Vote of Security Holders	76	
 	Item 6.	Exhibits	77	
 	 	
Signatures	78	

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)

 	 	As of	 	As of	 	
 	 	June 30, 2008	 	December 31, 2007	 	
 	 	(unaudited)	 	 	 	
Assets:	 	 	 	 	 	 	 	
Student loans receivable (net of allowance for loan losses of $47,909 and $45,592, respectively)	 	$	25,993,307	 	 	26,736,122	 	
Cash and cash equivalents:	 	 	 	 	 	 	 	
Cash and cash equivalents - not held at a related party	 	 	15,629	 	 	38,305	 	
Cash and cash equivalents - held at a related party	 	 	122,825	 	 	73,441	 	
Total cash and cash equivalents	 	 	138,454	 	 	111,746	 	
 	 	 	 	 	 	 	 	
Restricted cash	 	 	912,252	 	 	842,020	 	
Restricted investments	 	 	95,061	 	 	85,227	 	
Restricted cash - due to customers	 	 	29,543	 	 	81,845	 	
Accrued interest receivable	 	 	501,544	 	 	593,322	 	
Accounts receivable, net	 	 	45,986	 	 	49,084	 	
Goodwill	 	 	175,178	 	 	164,695	 	
Intangible assets, net	 	 	90,163	 	 	112,830	 	
Property and equipment, net	 	 	46,429	 	 	55,797	 	
Other assets	 	 	108,662	 	 	107,624	 	
Fair value of derivative instruments	 	 	295,346	 	 	222,471	 	
Total assets	 	$	28,431,925	 	 	29,162,783	 	
	 	 	 	 	 	 	 	
Liabilities:	 	 	 	 	 	 	 	
Bonds and notes payable	 	$	27,530,237	 	 	28,115,829	 	
Accrued interest payable	 	 	86,496	 	 	129,446	 	
Other liabilities	 	 	162,761	 	 	220,899	 	
Due to customers	 	 	29,543	 	 	81,845	 	
Fair value of derivative instruments	 	 	38,846	 	 	5,885	 	
Total liabilities	 	 	27,847,883	 	 	28,553,904	 	
 	 	 	 	 	 	 	 	
Shareholders' equity:	 	 	 	 	 	 	 	
Preferred stock, $0.01 par value. Authorized 50,000,000 shares;no shares issued or outstanding	 	 	—	 	 	—	 	
Common stock:	 	 	 	 	 	 	 	
Class A, $0.01 par value. Authorized 600,000,000 shares; issued and outstanding 37,952,246 shares as of June 30, 2008 and 37,980,617 shares as of December 31, 2007	 	 	380	 	 	380	 	
Class B, convertible, $0.01 par value. Authorized 60,000,000 shares; issued and outstanding 11,495,377 shares as of June 30, 2008 and December 31, 2007	 	 	115	 	 	115	 	
Additional paid-in capital	 	 	99,854	 	 	96,185	 	
Retained earnings	 	 	485,739	 	 	515,317	 	
Employee notes receivable	 	 	(2,046	)	 	(3,118	)	
Total shareholders' equity	 	 	584,042	 	 	608,879	 	
Commitments and contingencies	 	 	 	 	 	 	 	
Total liabilities and shareholders' equity	 	$	28,431,925	 	 	29,162,783	 	

See accompanying notes to consolidated financial statements.

2

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NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
(unaudited)

 	 	Three months	 	Six months	 	
 	 	ended June 30,	 	ended June 30,	 	
 	 	2008	 	2007	 	2008	 	2007	 	
Interest income:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan interest	 	$	296,686	 	 	417,086	 	 	626,672	 	 	814,140	 	
Investment interest	 	 	9,116	 	 	18,783	 	 	20,796	 	 	40,208	 	
Total interest income	 	 	305,802	 	 	435,869	 	 	647,468	 	 	854,348	 	
Interest expense:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest on bonds and notes payable	 	 	232,464	 	 	367,893	 	 	557,605	 	 	718,388	 	
Net interest income	 	 	73,338	 	 	67,976	 	 	89,863	 	 	135,960	 	
Less provision for loan losses	 	 	6,000	 	 	2,535	 	 	11,000	 	 	5,288	 	
Net interest income after provision for loan losses	 	 	67,338	 	 	65,441	 	 	78,863	 	 	130,672	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other income (expense):	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing income	 	 	24,904	 	 	31,610	 	 	51,017	 	 	62,076	 	
Other fee-based income	 	 	40,817	 	 	38,262	 	 	86,730	 	 	78,291	 	
Software services income	 	 	4,896	 	 	5,848	 	 	11,648	 	 	11,596	 	
Other income	 	 	1,646	 	 	1,927	 	 	3,056	 	 	7,020	 	
Gain (loss) on sale of loans	 	 	48	 	 	1,010	 	 	(47,426	)	 	2,796	 	
Derivative market value, foreign currency, and put option adjustments and derivative settlements, net	 	 	20,192	 	 	10,743	 	 	3,594	 	 	2,853	 	
Total other income	 	 	92,503	 	 	89,400	 	 	108,619	 	 	164,632	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	43,549	 	 	59,761	 	 	97,392	 	 	121,465	 	
Other operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Impairment expense	 	 	—	 	 	—	 	 	18,834	 	 	—	 	
Advertising and marketing	 	 	16,143	 	 	15,456	 	 	32,346	 	 	29,449	 	
Depreciation and amortization	 	 	10,603	 	 	10,647	 	 	21,437	 	 	21,657	 	
Professional and other services	 	 	8,478	 	 	10,514	 	 	16,585	 	 	18,883	 	
Occupancy and communications	 	 	4,914	 	 	5,032	 	 	10,755	 	 	10,251	 	
Postage and distribution	 	 	2,743	 	 	5,624	 	 	6,560	 	 	10,143	 	
Trustee and other debt related fees	 	 	2,464	 	 	2,785	 	 	4,854	 	 	5,628	 	
Other	 	 	9,028	 	 	10,827	 	 	17,996	 	 	24,399	 	
Total other operating expenses	 	 	54,373	 	 	60,885	 	 	129,367	 	 	120,410	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating expenses	 	 	97,922	 	 	120,646	 	 	226,759	 	 	241,875	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before income taxes	 	 	61,919	 	 	34,195	 	 	(39,277	)	 	53,429	 	
Income tax expense (benefit)	 	 	19,195	 	 	13,306	 	 	(12,176	)	 	20,570	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from continuing operations	 	 	42,724	 	 	20,889	 	 	(27,101	)	 	32,859	 	
Income (loss) from discontinued operations, net of tax	 	 	981	 	 	(6,135	)	 	981	 	 	(3,325	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	43,705	 	 	14,754	 	 	(26,120	)	 	29,534	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Earnings (loss) per share, basic and diluted:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from continuing operations	 	 	0.87	 	 	0.42	 	 	(0.55	)	 	0.66	 	
Income (loss) from discontinued operations	 	 	0.02	 	 	(0.12	)	 	0.02	 	 	(0.07	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	0.89	 	 	0.30	 	 	(0.53	)	 	0.59	 	

See accompanying notes to consolidated financial statements.

3

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NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands, except share data)
(unaudited)

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Accumulated	 	 	 	
 	 	Preferred	 	 	 	 	 	 	 	Class A	 	Class B	 	Additional	 	 	 	Employee	 	other	 	Total	 	
 	 	stock	 	Common stock shares	 	Preferred	 	common	 	common	 	paid-in	 	Retained	 	notes	 	comprehensive	 	shareholders’	 	
 	 	shares	 	Class A	 	Class B	 	stock	 	stock	 	stock	 	capital	 	earnings	 	receivable	 	income	 	equity	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance as of March 31, 2007	 	 	—	 	 	38,097,623	 	 	11,495,377	 	$	—	 	 	381	 	 	115	 	 	105,345	 	 	507,596	 	 	(2,701	)	 	382	 	 	611,118	 	
Comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	14,754	 	 	—	 	 	—	 	 	14,754	 	
Other comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Foreign currency translation	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(574	)	 	(574	)	
Non-pension postretirement benefit plan	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	192	 	 	192	 	
Total comprehensive income	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	14,372	 	
Cash dividend on Class A and Class B common stock - $0.07 per share	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(3,440	)	 	—	 	 	—	 	 	(3,440	)	
Issuance of common stock, net of forfeitures	 	 	—	 	 	39,182	 	 	—	 	 	—	 	 	1	 	 	—	 	 	880	 	 	—	 	 	—	 	 	—	 	 	881	 	
Compensation expense for stock based awards	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	772	 	 	—	 	 	—	 	 	—	 	 	772	 	
Repurchase of common stock	 	 	—	 	 	(998	)	 	—	 	 	—	 	 	—	 	 	—	 	 	(22	)	 	—	 	 	—	 	 	—	 	 	(22	)	
Acquisition of enterprise under common control	 	 	—	 	 	(474,426	)	 	—	 	 	—	 	 	(5	)	 	—	 	 	(12,502	)	 	—	 	 	—	 	 	—	 	 	(12,507	)	
Reduction of employee stock notes receivable	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	4	 	 	—	 	 	4	 	
Balance as of June 30, 2007	 	 	—	 	 	37,661,381	 	 	11,495,377	 	$	—	 	 	377	 	 	115	 	 	94,473	 	 	518,910	 	 	(2,697	)	 	—	 	 	611,178	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance as of March 31, 2008	 	 	—	 	 	37,912,773	 	 	11,495,377	 	$	—	 	 	379	 	 	115	 	 	97,875	 	 	442,034	 	 	(2,296	)	 	—	 	 	538,107	 	
Comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	43,705	 	 	—	 	 	—	 	 	43,705	 	
Total comprehensive income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	43,705	 	
Issuance of common stock, net of forfeitures	 	 	—	 	 	53,467	 	 	—	 	 	—	 	 	1	 	 	—	 	 	310	 	 	—	 	 	—	 	 	—	 	 	311	 	
Compensation expense for stock based awards	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	1,848	 	 	—	 	 	—	 	 	—	 	 	1,848	 	
Repurchase of common stock	 	 	—	 	 	(13,994	)	 	—	 	 	—	 	 	—	 	 	—	 	 	(179	)	 	—	 	 	—	 	 	—	 	 	(179	)	
Reduction of employee stock notes receivable	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	250	 	 	—	 	 	250	 	
Balance as of June 30, 2008	 	 	—	 	 	37,952,246	 	 	11,495,377	 	$	—	 	 	380	 	 	115	 	 	99,854	 	 	485,739	 	 	(2,046	)	 	—	 	 	584,042	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance as of December 31, 2006	 	 	—	 	 	39,035,169	 	 	13,505,812	 	$	—	 	 	390	 	 	135	 	 	177,678	 	 	496,341	 	 	(2,825	)	 	131	 	 	671,850	 	
Comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	29,534	 	 	—	 	 	—	 	 	29,534	 	
Other comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Foreign currency translation	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(322	)	 	(322	)	
Non-pension postretirement benefit plan	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	191	 	 	191	 	
Total comprehensive income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	29,403	 	
Cash dividend on Class A and Class B common stock - $0.14 per share	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(6,904	)	 	—	 	 	—	 	 	(6,904	)	
Adjustment to adopt provisions of	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
FASB Interpretation No. 48	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(61	)	 	—	 	 	—	 	 	(61	)	
Issuance of common stock, net of forfeitures	 	 	—	 	 	152,273	 	 	—	 	 	—	 	 	2	 	 	—	 	 	3,219	 	 	—	 	 	—	 	 	—	 	 	3,221	 	
Compensation expense for stock based awards	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	1,530	 	 	—	 	 	—	 	 	—	 	 	1,530	 	
Repurchase of common stock	 	 	—	 	 	(3,062,070	)	 	—	 	 	—	 	 	(30	)	 	—	 	 	(75,452	)	 	—	 	 	—	 	 	—	 	 	(75,482	)	
Conversion of common stock	 	 	—	 	 	2,010,435	 	 	(2,010,435	)	 	—	 	 	20	 	 	(20	)	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	
Acquisition of enterprise under common control	 	 	—	 	 	(474,426	)	 	—	 	 	—	 	 	(5	)	 	—	 	 	(12,502	)	 	—	 	 	—	 	 	—	 	 	(12,507	)	
Reduction of employee stock notes receivable	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	128	 	 	—	 	 	128	 	
Balance as of June 30, 2007	 	 	—	 	 	37,661,381	 	 	11,495,377	 	$	—	 	 	377	 	 	115	 	 	94,473	 	 	518,910	 	 	(2,697	)	 	—	 	 	611,178	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance as of December 31, 2007	 	 	—	 	 	37,980,617	 	 	11,495,377	 	$	—	 	 	380	 	 	115	 	 	96,185	 	 	515,317	 	 	(3,118	)	 	—	 	 	608,879	 	
Comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(26,120	)	 	—	 	 	—	 	 	(26,120	)	
Total comprehensive income (loss)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(26,120	)	
Cash dividend on Class A and Class B common stock - $0.07 per share	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(3,458	)	 	—	 	 	—	 	 	(3,458	)	
Issuance of common stock, net of forfeitures	 	 	—	 	 	33,687	 	 	—	 	 	—	 	 	—	 	 	—	 	 	1,073	 	 	—	 	 	—	 	 	—	 	 	1,073	 	
Compensation expense for stock based awards	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	3,263	 	 	—	 	 	—	 	 	—	 	 	3,263	 	
Repurchase of common stock	 	 	—	 	 	(62,058	)	 	—	 	 	—	 	 	—	 	 	—	 	 	(667	)	 	—	 	 	—	 	 	—	 	 	(667	)	
Reduction of employee stock notes receivable	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	1,072	 	 	—	 	 	1,072	 	
Balance as of June 30, 2008	 	 	—	 	 	37,952,246	 	 	11,495,377	 	$	—	 	 	380	 	 	115	 	 	99,854	 	 	485,739	 	 	(2,046	)	 	—	 	 	584,042	 	

See accompanying notes to consolidated financial statements.

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NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)

 	 	Six months ended June 30,	 	
 	 	2008	 	2007	 	
 	 	  	 	  	 	
Net income (loss)	 	$	(26,120	)	 	29,534	 	
Income (loss) from discontinued operations	 	 	981	 	 	(3,325	)	
Income (loss) from continuing operations	 	 	(27,101	)	 	32,859	 	
Adjustments to reconcile income from continuing operations to net cash provided by operating activities, net of business acquisitions:	 	 	 	 	 	 	 	
Depreciation and amortization, including loan premiums and deferred origination costs	 	 	74,312	 	 	150,465	 	
Derivative market value adjustment	 	 	(47,462	)	 	(20,374	)	
Foreign currency transaction adjustment	 	 	88,530	 	 	24,974	 	
Change in value of put options issued in business acquisitions	 	 	538	 	 	1,983	 	
Proceeds from termination of derivative instruments	 	 	7,547	 	 	—	 	
Payments to terminate floor contracts	 	 	—	 	 	(8,100	)	
Impairment expense	 	 	18,834	 	 	—	 	
Loss on sale of business	 	 	—	 	 	9,041	 	
Loss (gain) on sale of student loans	 	 	47,426	 	 	(2,796	)	
Non-cash compensation expense	 	 	4,372	 	 	2,591	 	
Deferred income tax benefit	 	 	(24,237	)	 	(921	)	
Provision for loan losses	 	 	11,000	 	 	5,288	 	
Other non-cash items	 	 	344	 	 	(2,906	)	
Decrease (increase) in accrued interest receivable	 	 	91,778	 	 	(81,421	)	
Decrease (increase) in accounts receivable	 	 	3,098	 	 	(6,698	)	
Decrease in other assets	 	 	9,419	 	 	6,491	 	
Decrease in accrued interest payable	 	 	(42,950	)	 	(1,545	)	
(Decrease) increase in other liabilities	 	 	(28,351	)	 	5,667	 	
Net cash flows from operating activities - continuing operations	 	 	187,097	 	 	114,598	 	
Net cash flows from operating activities - discontinued operations	 	 	—	 	 	(4,467	)	
Net cash provided by operating activities	 	 	187,097	 	 	110,131	 	
 	 	 	 	 	 	 	 	
Cash flows from investing activities, net of business acquisitions:	 	 	 	 	 	 	 	
Originations, purchases, and consolidations of student loans, including loan premiums and deferred origination costs	 	 	(1,480,305	)	 	(3,390,016	)	
Purchases of student loans, including loan premiums, from a related party	 	 	(212,888	)	 	(191,003	)	
Net proceeds from student loan repayments, claims, capitalized interest, participations, and other	 	 	1,061,510	 	 	1,060,117	 	
Proceeds from sale of student loans	 	 	1,267,826	 	 	89,311	 	
Purchases of property and equipment, net	 	 	(3,721	)	 	(13,830	)	
(Increase) decrease in restricted cash	 	 	(70,232	)	 	279,349	 	
Purchases of restricted investments	 	 	(170,512	)	 	(239,691	)	
Proceeds from maturities of restricted investments	 	 	160,678	 	 	261,597	 	
Purchases of equity method investments	 	 	(2,988	)	 	—	 	
Distributions from equity method investments	 	 	—	 	 	434	 	
Business acquisitions, net of cash acquired	 	 	(18,000	)	 	2,211	 	
Proceeds from sale of business, net of cash sold	 	 	—	 	 	7,551	 	
Net cash flows from investing activities - continuing operations	 	 	531,368	 	 	(2,133,970	)	
Net cash flows from investing activities - discontinued operations	 	 	—	 	 	(294	)	
Net cash provided by (used in) investing activities	 	 	531,368	 	 	(2,134,264	)	
 	 	 	 	 	 	 	 	
Cash flows from financing activities:	 	 	 	 	 	 	 	
Payments on bonds and notes payable	 	 	(5,444,408	)	 	(1,435,054	)	
Proceeds from issuance of bonds and notes payable	 	 	4,761,143	 	 	3,601,480	 	
Proceeds (payments) from issuance of notes payable due to a related party, net	 	 	9,269	 	 	(55,715	)	
Payments of debt issuance costs	 	 	(14,634	)	 	(5,899	)	
Dividends paid	 	 	(3,458	)	 	(6,904	)	
Proceeds from issuance of common stock	 	 	423	 	 	951	 	
Repurchases of common stock	 	 	(667	)	 	(75,482	)	
Payments received on employee stock notes receivable	 	 	575	 	 	128	 	
Net cash flows from financing activities - continuing operations	 	 	(691,757	)	 	2,023,505	 	
Net cash flows from financing activities - discontinued operations	 	 	—	 	 	—	 	
Net cash (used in) provided by financing activities	 	 	(691,757	)	 	2,023,505	 	
 	 	 	 	 	 	 	 	
Effect of exchange rate fluctuations on cash	 	 	—	 	 	548	 	
 	 	 	 	 	 	 	 	
Net increase (decrease) in cash and cash equivalents	 	 	26,708	 	 	(80	)	
 	 	 	 	 	 	 	 	
Cash and cash equivalents, beginning of period	 	 	111,746	 	 	106,086	 	
 	 	 	 	 	 	 	 	
Cash and cash equivalents, end of period	 	$	138,454	 	 	106,006	 	
 	 	 	 	 	 	 	 	
Supplemental disclosures of cash flow information:	 	 	 	 	 	 	 	
Interest paid	 	$	589,578	 	 	630,175	 	
Income taxes paid, net of refunds	 	$	14,126	 	 	12,130	 	

See accompanying notes to consolidated financial statements.

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NELNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2008 and for the three months and six months ended
June 30, 2008 and 2007 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)

1. Basis of Financial Reporting

The accompanying unaudited consolidated financial statements of Nelnet, Inc. and subsidiaries (the “Company”) as of June 30, 2008 and for the three and six months ended June 30, 2008 and 2007 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2007 and, in the opinion of the Company’s management, the unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of results of operations for the interim periods presented. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three and six months ended June 30, 2008 are not necessarily indicative of the results for the year ending December 31, 2008. 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, 2007. Certain amounts from 2007 have been reclassified to conform to the current period presentation.

2. Discontinued Operations  
 
On May 25, 2007, the Company sold EDULINX Canada Corporation (“EDULINX”), a Canadian student loan service provider and a subsidiary of the Company, for initial proceeds of $19. 0 million. The Company recognized an initial net loss of $9.0 million related to this transaction. During the three months ended June 30, 2008, the Company earned $2.0 million ($1.0 million net of tax) in additional consideration as a result of the sale of EDULINX. This payment represented contingent consideration earned by the Company based on EDULINX meeting certain performance measures. As a result of the sale of EDULINX, the results of operations for EDULINX, including the contingent payment earned during the current period, are reported as discontinued operations in the accompanying consolidated statements of operations.

The components of income (loss) from discontinued operations are presented below.

 	 	Three months ended June 30,	 	Six months ended June 30,	 	
 	 	2008	 	2007	 	2008	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating income of discontinued operations	 	$	—	 	 	4,864	 	 	—	 	 	9,278	 	
Income tax on operations	 	 	—	 	 	(1,958	)	 	—	 	 	(3,562	)	
Gain (loss) on disposal	 	 	1,966	 	 	(8,151	)	 	1,966	 	 	(8,151	)	
Income tax on disposal	 	 	(985	)	 	(890	)	 	(985	)	 	(890	)	
Income (loss) from discontinued operations, net of tax	 	$	981	 	 	(6,135	)	 	981	 	 	(3,325	)	

The following operations of EDULINX have been segregated from continuing operations and reported as discontinued operations through the date of disposition. Interest expense was not allocated to EDULINX and, therefore, all of the Company’s interest expense is included within continuing operations.

 	 	Three months ended	 	Six months ended	 	
 	 	June 30, 2007	 	June 30, 2007	 	
 	 	 	 	 	 	 	 	
Net interest income	 	$	53	 	 	124	 	
Other income	 	 	12,480	 	 	31,511	 	
Operating expenses	 	 	(7,669	)	 	(22,357	)	
Income before income taxes	 	 	4,864	 	 	9,278	 	
Income tax expense	 	 	1,958	 	 	3,562	 	
 	 	 	 	 	 	 	 	
Operating income of discontinued operations, net of tax	 	$	2,906	 	 	5,716	 	

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As a result of the contingent consideration received during the second quarter 2008, the Company earned $0.8 million of foreign tax credits available to offset future U.S. federal income taxes. Under current tax law, these tax credits expire in 2018. The Company established a valuation allowance for these tax credits due to the Company’s assessment that this deferred tax asset did not meet the more-likely-than-not recognition criteria of Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes .

3. Restructuring Charges

Legislative Impact

On September 6, 2007, the Company announced a strategic initiative to create efficiencies and lower costs in advance of the enactment of the College Cost Reduction Act, which impacted the Federal Family Education Loan Program (the “FFEL Program” or “FFELP”) in which the Company participates. In anticipation of the federally driven cuts to the student loan programs, management initiated a variety of strategies to modify the Company’s student loan business model, including lowering the cost of student loan acquisition, creating efficiencies in the Company’s asset generation business, and decreasing operating expenses through a reduction in workforce and realignment of operating facilities. Implementation of the plan began immediately and was completed as of December 31, 2007. As a result of these strategic decisions, the Company recorded restructuring charges of $15.0 million and $5.3 million in the third and fourth quarters of 2007, respectively.

Information related to the remaining restructuring accrual, which is included in “other liabilities” on the consolidated balance sheet, follows:

 	 	Employee	 	 	 	 	 	
 	 	termination	 	Lease	 	 	 	
 	 	benefits	 	terminations	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	
Restructuring accrual as of December 31, 2007	 	$	1,193	 	 	3,682	 	 	4,875	 	
 	 	 	 	 	 	 	 	 	 	 	
Adjustment from initial estimated charges	 	 	(191	)	 	—	 	 	(191	)	
 	 	 	 	 	 	 	 	 	 	 	
Cash payments	 	 	(868	)	 	(358	)	 	(1,226	)	
 	 	 	 	 	 	 	 	 	 	 	
Restructuring accrual as of March 31, 2008	 	 	134	 	 	3,324	 	 	3,458	 	
 	 	 	 	 	 	 	 	 	 	 	
Cash payments	 	 	(134	)	 	(45	)	 	(179	)	
 	 	 	 	 	 	 	 	 	 	 	
Restructuring accrual as of June 30, 2008	 	$	—	 	 	3,279	 	 	3,279	 	

Capital Markets Impact

On January 23, 2008, the Company announced a plan to further reduce operating expenses related to its student loan origination and related businesses as a result of disruptions in the credit markets. Management developed a restructuring plan related to its asset generation and supporting businesses which reduced marketing, sales, service, and related support costs through a reduction in workforce of approximately 300 positions and realignment of certain operating facilities. Implementation of the plan began immediately and was completed as of June 30, 2008. As a result of these strategic decisions, the Company recorded restructuring charges of $26.5 million during the three months ended March 31, 2008 and income of $0.4 million during the three months ended June 30, 2008 to recognize adjustments from initial estimates.

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Selected information relating to the restructuring charge follows:

 	 	Employee	 	 	 	 	 	 	 	
 	 	termination	 	Lease	 	Write-down	 	 	 	
 	 	benefits	 	terminations	 	of assets	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Restructuring costs recognized during the three month period ended March 31, 2008	 	$	6,095	(a)	 	1,573	(b)	 	18,834	(c)	 	26,502	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Write-down of assets to net realizable value	 	 	—	 	 	—	 	 	(18,834	)	 	(18,834	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash payments	 	 	(4,952	)	 	—	 	 	—	 	 	(4,952	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Restructuring accrual as of March 31, 2008	 	 	1,143	 	 	1,573	 	 	—	 	 	2,716	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Adjustment from initial estimated charges	 	 	(190)	(a)	 	(175)	(b)	 	—	 	 	(365	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash payments	 	 	(792	)	 	(369	)	 	—	 	 	(1,161	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Restructuring accrual as of June 30, 2008	 	$	161	 	 	1,029	 	 	—	 	 	1,190	 	

(a) Employee termination benefits are included in "salaries and benefits" in the consolidated statements of operations.
 
(b) Lease termination costs are included in "occupancy and communications" in the consolidated statements of operations.
 
(c) Costs related to the write-down of assets are included in "impairment expense" in the consolidated statements of operations.

Selected information relating to the restructuring charge by operating segment and Corporate Activity and Overhead follows:

 	 	Restructuring costs	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	recognized during	 	 	 	 	 	 	 	Adjustment	 	 	 	 	 	
 	 	the three month	 	Write-down of	 	 	 	Restructuring	 	from initial	 	 	 	Restructuring	 	
 	 	period ended	 	assets to net	 	Cash	 	accrual as of	 	estimated	 	Cash	 	accrual as of	 	
Operating segment	 	March 31, 2008	 	realizable value	 	payments	 	March 31, 2008	 	charges	 	payments	 	March 31, 2008	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Student Loan and Guaranty Servicing	 	$	6,010	 	 	(5,074	)	 	(430	)	 	506	 	 	(104	)	 	(352	)	 	50	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Tuition Payment Processing and Campus Commerce	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Enrollment Services and List Management	 	 	312	 	 	—	 	 	(291	)	 	21	 	 	(15	)	 	(19	)	 	(13	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Software and Technical Services	 	 	518	 	 	—	 	 	(472	)	 	46	 	 	(8	)	 	—	 	 	38	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Asset Generation and Management	 	 	11,287	 	 	(9,351	)	 	(1,806	)	 	130	 	 	(52	)	 	(72	)	 	6	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Corporate Activity and Overhead	 	 	8,375	 	 	(4,409	)	 	(1,953	)	 	2,013	 	 	(186	)	 	(718	)	 	1,109	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	26,502	 	 	(18,834	)	 	(4,952	)	 	2,716	 	 	(365	)	 	(1,161	)	 	1,190	 	

4. Legal, Industry, and Legislative Developments

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. 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.

Municipal Derivative Bid Practices Investigation

On February 8, 2008, Shockley Financial Corp. (“SFC”), an indirect wholly owned subsidiary of the Company with two associates that provides investment advisory services for the investment of proceeds from the issuance of municipal and corporate bonds, received a grand jury subpoena issued by the U.S. District Court for the Southern District of New York upon application of the Antitrust Division of the U.S. Department of Justice. The subpoena seeks certain information and documents from SFC in connection with the Department of Justice’s ongoing criminal investigation of the bond industry with respect to possible anti-competitive practices related to awards of guaranteed investment contracts (“GICs”) and other products for the investment of proceeds from bond issuances. The Company and SFC are cooperating with the investigation.

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In addition, on March 5, 2008, SFC received a subpoena from the Securities and Exchange Commission (the “SEC”) related to an ongoing industry-wide investigation concerning the bidding of municipal GICs. The subpoena seeks certain information and documents from SFC relating to its GIC business. The Company and SFC are cooperating with the investigation.

On or about June 6, 2008, SFC received a subpoena from the New York Attorney General (the “NYAG”) relating to the NYAG’s investigation concerning the bidding of municipal GICs and possible violations of various state and federal laws. The subpoena seeks certain information and documents from SFC relating to its GIC business. The Company and SFC are cooperating with the investigation.

On or about June 12, 2008, SFC received a subpoena from the Florida Attorney General (the “FLAG”) relating to the FLAG’s investigation concerning the bidding of municipal GICs and possible violations of various state and federal laws. The subpoena seeks certain information and documents from SFC relating to its GIC business. The Company and SFC are cooperating with the investigation.

SFC has also been named as a defendant in a total of eight substantially identical purported class action lawsuits. In each of the lawsuits, a large number of financial institutions and financial service providers, including SFC, are named as defendants. The complaints allege that the defendants engaged in a conspiracy not to compete and to fix prices and rig bids for municipal derivatives (including GICs) sold to issuers of municipal bonds. All the complaints assert claims for violations of Section 1 of the Sherman Act and fraudulent concealment, and three complaints also assert claims for unfair competition and violation of the California Cartwright Act. On June 16, 2008, the United States Judicial Panel on Multidistrict Litigation issued an order transferring the cases then before it to the U.S. District Court for the Southern District of New York which consolidated several cases under the caption Hinds County, Mississippi v. Wachovia Bank, N.A. et al. SFC intends to vigorously contest these purported class action lawsuits.

SFC, the Company, or other subsidiaries of the Company may receive subpoenas from other regulatory agencies. Due to the preliminary nature of these matters as to SFC, the Company is unable to predict the ultimate outcome of the investigations or the class action lawsuits.
 
Industry Inquiries and Investigations

On January 11, 2007, the Company received a letter from the NYAG requesting certain information and documents from the Company in connection with the NYAG’s investigation into preferred lender list activities. Since January 2007, a number of state attorneys general, including the NYAG, and the U.S. Senate Committee on Health, Education, Labor, and Pensions also announced or are reportedly conducting broad inquiries or investigations of the activities of various participants in the student loan industry, including activities which may involve perceived conflicts of interest. A focus of the inquiries or investigations has been on any financial arrangements among student loan lenders and other industry participants which may facilitate increased volumes of student loans for particular lenders. Like many other student loan lenders, the Company received requests for information from certain state attorneys general and the Chairman of the U.S. Senate Committee on Health, Education, Labor, and Pensions in connection with their inquiries or investigations. In addition, the Company received subpoenas for information from the NYAG, the New Jersey Attorney General, and the Ohio Attorney General. In each case the Company is cooperating with the requests and subpoenas for information that it has received.

On July 31, 2007, the Company announced that it had agreed with the NYAG to adopt the NYAG’s Code of Conduct, which is substantially similar to the Company's previously adopted Nelnet Student Loan Code of Conduct. As part of the agreement, the Company agreed to contribute $2.0 million to a national fund for educating high school seniors and their parents regarding the financial aid process.

On October 10, 2007, the Company received a subpoena from the NYAG requesting certain information and documents from the Company in connection with the NYAG’s investigation into direct-to-consumer marketing practices of student lenders. The Company is cooperating with the subpoena.

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.
 
Department of Education Review
 
The Department of Education periodically reviews participants in the FFEL Program for compliance with program provisions. On June 28, 2007, the Department of Education notified the Company that it would be conducting a review of the Company’s administration of the FFEL Program under the Higher Education Act. The Company understands that the Department of Education has selected several schools and lenders for review. Specifically, the Department is reviewing the Company’s practices in connection with the prohibited inducement provisions of the Higher Education Act and the provisions of the Higher Education Act and the associated regulations which allow borrowers to have a choice of lenders. The Company has responded to the Department of Education’s requests for information and documentation and is cooperating with their review.

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While the Company cannot predict the ultimate outcome of the review, the Company believes its activities have materially complied with 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.

Department of Justice

In connection with the Company’s settlement with the Department of Education in January 2007 to resolve the Office of Inspector General of the Department of Education (the “OIG”) audit report with respect to the Company’s student loan portfolio receiving special allowance payments at a minimum 9.5% interest rate, the Company was informed by the Department of Education that a civil attorney with the Department of Justice had opened a file regarding the issues set forth in the OIG report, which the Company understands is common procedure following an OIG audit report. The Company has engaged in discussions with and provided information to the Department of Justice in connection with the review.

While the Company is unable to predict the ultimate outcome of the review, the Company believes its practices complied with applicable law, including the provisions of 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.

Internal Revenue Service

In October 2007, the Company received a letter from the Internal Revenue Service (“IRS”) revoking a previously issued Private Letter Ruling retroactive to September 30, 2003 concerning the Company’s arbitrage and excess interest calculations on certain of its tax-exempt bonds. The IRS letter provided procedures for the Company to follow to appeal the retroactive application of the revocation. The Company responded to the IRS in November 2007 requesting relief from retroactivity. In March 2008, the IRS responded with a final determination that the revocation of the Private Letter Ruling will apply prospectively beginning on July 1, 2008. Management believes that a July 1, 2008 prospective application of the Private Letter Ruling will not have a significant impact on the Company’s operating results.

Legislative Developments

On May 7, 2008, the President signed into law H.R. 5715, the Ensuring Continued Access to Student Loans Act of 2008 (“HR 5715”). This legislation contains provisions that expand the federal government’s support of financing the cost of higher education. Among other things, HR 5715:

 	·	Increases statutory limits on annual and aggregate borrowing for FFELP loans; and	
 	·	Allows the Department to act as a secondary market and enter into forward purchasing agreements with lenders.	

As a result of this legislation, the Departments of Education and Treasury developed a plan. Among other things, this plan:

 	·	Offers to purchase loans from lenders for the 2008-2009 academic year and offers lenders access to short-term liquidity; and	
 	·	Commits to continue working with the FFELP community to explore programs to reengage the capital markets in the long-run.	

On May 22, 2008, the Company announced that, as a result of the above plan, it will continue originating new federal student loans for the 2008-2009 academic year to all students regardless of the school they attend.

On July 1, 2008, pursuant to HR 5715, the Department of Education announced terms under which it will offer to purchase FFELP student loans and loan participations from lenders. See note 7 for information related to the Department’s programs.
 
On August 6, 2008, having passed in identical form in both the House of Representatives and the Senate, the Higher Education Opportunity Act was sent to the President. Upon the President’s approval, this legislation will become law. The Higher Education Opportunity Act amends the Higher Education Act of 1965 (“HEA”) to revise and reauthorize HEA programs. In addition, among other items, this legislation:

 	·	Contains lender and school code of conduct requirements applicable to FFELP and private education lenders;	
 	·	Contains additional provisions and reporting requirements for lenders and schools participating in preferred lender arrangements; and	
 	·	Contains additional disclosures that FFELP lenders must make to borrowers as well as added FFELP loan servicing requirements for lenders.	

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5. Student Loans Receivable and Allowance for Loan Losses

Student loans receivable consisted of the following:

 	 	As of	 	As of	 	
 	 	June 30, 2008	 	December 31, 2007	 	
 	 	 	 	 	 	
Federally insured loans	 	$	25,332,173	 	 	26,054,398	 	
Non-federally insured loans	 	 	279,953	 	 	274,815	 	
 	 	 	25,612,126	 	 	26,329,213	 	
Unamortized loan premiums and deferred origination costs	 	 	429,090	 	 	452,501	 	
Allowance for loan losses - federally insured loans	 	 	(24,084	)	 	(24,534	)	
Allowance for loan losses - non-federally insured loans	 	 	(23,825	)	 	(21,058	)	
 	 	$	25,993,307	 	 	26,736,122	 	
 	 	 	 	 	 	 	 	
Federally insured allowance as a percentage of ending balance of federally insured loans	 	 	0.10	%	 	0.09	%	
Non-federally insured allowance as a percentage of ending balance of non-federally insured loans	 	 	8.51	%	 	7.66	%	
Total allowance as a percentage of ending balance of total loans	 	 	0.19	%	 	0.17	%	

Loan Sales

On March 31, 2008, the Company sold $857.8 million (par value) of federally insured student loans resulting in the recognition of a loss of $30.4 million. In addition, on April 8, 2008, the Company sold $428.6 million (par value) of federally insured student loans. The portfolio of student loans sold on April 8, 2008 was presented as “held for sale” on the March 31, 2008 consolidated balance sheet and was valued at the lower of cost or fair value. The Company recognized a loss of $17.1 million during the three month period ended March 31, 2008 as a result of marking these loans to fair value. Combined, the portfolios sold on March 31, 2008 and April 8, 2008 were sold for a purchase price of approximately 98% of the par value of such loans. As a result of the disruptions in the debt and secondary markets, the Company sold these loan portfolios in order to reduce the amount of student loans remaining under the Company’s multi-year committed financing facility for FFELP loans, which reduced the Company’s exposure related to certain equity support provisions included in this facility (see note 7 for additional information related to these equity support provisions).

As part of the Company ’ s asset management strategy, the Company periodically sells student loan portfolios to third parties. During the three and six months ended June 30, 2007, the Company sold $34.4 million (par value) and $86.0 million (par value), respectively, of federally insured student loans resulting in the recognition of gains of $1.0 million and $2.8 million , respectively.

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6.   Intangible Assets and Goodwill
 
Intangible assets consist of the following:
 
 	 	Weighted 	 	 	 	 	 	
 	 	average	 	 	 	 	 	
 	 	remaining	 	 	 	 	 	
 	 	useful life as of	 	As of	 	As of 	 	
 	 	June 30,	 	June 30,	 	December 31, 	 	
 	 	2008	 	2008	 	2007	 	
Amortizable intangible assets:	 	 	 	 	 	 	 	 	 	 	
Customer relationships (net of accumulated amortization of $25,048 and $20,299, respectively)	 	 	112	 	$	55,312	 	 	60,061	 	
Trade names (net of accumulated amortization of $3,372 and $1,258, respectively)	 	 	47	 	 	13,687	 	 	1,609	 	
Covenants not to compete (net of accumulated amortization of $11,939 and $11,815, respectively)	 	 	25	 	 	11,683	 	 	15,425	 	
Database and content (net of accumulated amortization of $4,320 and $3,193, respectively)	 	 	28	 	 	5,160	 	 	6,287	 	
Computer software (net of accumulated amortization of $6,238 and $4,898, respectively)	 	 	15	 	 	2,764	 	 	4,189	 	
Student lists (net of accumulated amortization of $6,831 and $5,806, respectively)	 	 	8	 	 	1,366	 	 	2,391	 	
Other (net of accumulated amortization of $83 and $71, respectively)	 	 	92	 	 	191	 	 	203	 	
Loan origination rights (net of accumulated amortization of $8,180)	 	 	—	 	 	—	 	 	8,473	 	
Total - amortizable intangible assets	 	 	81 months	 	 	90,163	 	 	98,638	 	
Unamortizable intangible assets - trade names	 	 		 	 	—	 	 	14,192	 	
 	 	 		 	$	90,163	 	 	112,830	 	

As disclosed in note 3 , as a result of the disruption in the debt and secondary markets and the student loan business model modifications the Company implemented due to the disruption, the Company recorded an impairment charge of $18.8 million during the first quarter of 2008. This charge is included in “impairment expense” in the Company’s consolidated statements of operations. Information related to the impairment charge follows:

 	 	Operating	 	Impairment	 	
Asset	 	segment	 	charge	 	
Amortizable intangible assets:	 	 	 	 	 	
Covenants not to compete	 	 	Student Loan and Guaranty Servicing	 	$	4,689	 	
Covenants not to compete	 	 	Asset Generation and Management	 	 	336	 	
Loan origination rights	 	 	Asset Generation and Management	 	 	8,336	 	
Computer software	 	 	Asset Generation and Management	 	 	12	 	
 	 	 	 	 	 	 	 	
Goodwill	 	 	Asset Generation and Management	 	 	667	 	
 	 	 	 	 	 	 	 	
Property and equipment	 	 	Student Loan and Guaranty Servicing	 	 	385	 	
Property and equipment	 	 	Corporate activities	 	 	4,409	 	
 	 	 	 	 	 	 	 	
Total impairment charge	 	 	 	 	$	18,834	 	

The fair value of the intangible assets and reporting unit within the Asset Generation and Management operating segment were estimated using the expected present value of future cash flows.

During the first quarter of 2008, management determined that the trade names not subject to amortization have a finite useful life. As such, these assets will be amortized prospectively over their estimated remaining useful lives.

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The Company recorded amortization expense on its intangible assets of $6.6 million and $6.5 million for the three months ended June 30, 2008 and 2007, respectively, and $13.1 million for the six months ended June 30, 2008 and 2007, respectively. The Company will continue to amortize intangible assets over their remaining useful lives. As of June 30, 2008, the Company estimates it will record amortization expense as follows:

2008	 	$	13,109	 	
2009	 	 	22,319	 	
2010	 	 	15,985	 	
2011	 	 	10,031	 	
2012	 	 	9,029	 	
2013 and thereafter	 	 	19,690	 	
 	 	$	90,163	 	

The change in the carrying amount of goodwill by operating segment was as follows:
 
 	 	 	 	Tuition	 	 	 	 	 	 	 	 	 	
 	 	 	 	Payment	 	Enrollment	 	Software	 	Asset	 	 	 	
 	 	Student Loan	 	Processing	 	Services	 	and	 	Generation	 	 	 	
 	 	and Guaranty	 	and Campus	 	and List	 	Technical	 	and	 	 	 	
 	 	Servicing	 	Commerce	 	Management	 	Services	 	Management	 	Total	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance as of December 31, 2007	 	$	—	 	 	58,086	 	 	55,463	 	 	8,596	 	 	42,550	 	 	164,695	 	
Additional contingent consideration paid (a)	 	 	—	 	 	—	 	 	11,150	 	 	—	 	 	—	 	 	11,150	 	
Impairment charge	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(667	)	 	(667	)	
Balance as of March 31, 2008 (b)	 	$	—	 	 	58,086	 	 	66,613	 	 	8,596	 	 	41,883	 	 	175,178	 	
 
 	(a)	In January 2008, the Company paid $18.0 million (of which $6.8 million was accrued as of December 31, 2007) of additional consideration related to its 2005 acquisitions of Student Marketing Group, Inc. and National Honor Roll, L.L.C. This payment satisfies all of the Company’s obligations related to the contingencies per the terms of the purchase agreement.	

 	(b)	During the quarter ended June 30, 2008, there was no change in goodwill.	

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7. Bonds and Notes Payable

The following tables summarize outstanding bonds and notes payable by type of instrument:
 
 	 	As of June 30, 2008	 	
 	 	Carrying	 	Interest rate	 	 	 	
 	 	amount	 	range	 	Final maturity	 	
 	 	 	 	 	 	 	 	
Variable-rate bonds and notes (a):	 	 	 	 	 	 	 	 	 	 	
Bonds and notes based on indices	 	$	21,339,035	 	 	2.65% - 4.97	%	 	09/25/13 - 06/25/41	 	
Bonds and notes based on auction or remarketing	 	 	2,841,245	 	 	0.67% - 7.00	%	 	11/01/09 - 07/01/43	 	
Total variable-rate bonds and notes	 	 	24,180,280	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	
Commercial paper - FFELP facility (b)	 	 	1,986,212	 	 	2.08% - 2.91	%	 	05/09/10	 	
Commercial paper - private loan facility (b)	 	 	159,800	 	 	3.08	%	 	03/14/09	 	
Fixed-rate bonds and notes (a)	 	 	207,376	 	 	5.30% - 6.68	%	 	11/01/09 - 05/01/29	 	
Unsecured fixed rate debt	 	 	475,000	 	 	5.13% and 7.40	%	 	06/01/10 and 09/15/61	 	
Unsecured line of credit	 	 	450,000	 	 	2.90	%	 	05/08/12	 	
Other borrowings	 	 	71,569	 	 	3.19% - 5.10	%	 	05/22/09 - 11/01/15	 	
 	 	$	27,530,237	 	 	 	 	 	 	 	
 
 	 	As of December 31, 2007	 	
 	 	Carrying	 	Interest rate	 	 	 	
 	 	amount	 	range	 	Final maturity	 	
Variable-rate bonds and notes (a):	 	 	 	 	 	 	 	 	 	 	
Bonds and notes based on indices	 	$	17,508,810	 	 	4.73% - 5.78	%	 	09/25/12 - 06/25/41	 	
Bonds and notes based on auction or remarketing	 	 	2,905,295	 	 	2.96% - 7.25	%	 	11/01/09 - 07/01/43	 	
Total variable-rate bonds and notes	 	 	20,414,105	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	
Commercial paper - FFELP facility (b)	 	 	6,629,109	 	 	5.22% - 5.98	%	 	05/09/10	 	
Commercial paper - private loan facility (b)	 	 	226,250	 	 	5.58	%	 	03/14/09	 	
Fixed-rate bonds and notes (a)	 	 	214,476	 	 	5.20% - 6.68	%	 	11/01/09 - 05/01/29	 	
Unsecured fixed rate debt	 	 	475,000	 	 	5.13% and 7.40	%	 	06/01/10 and 09/15/61	 	
Unsecured line of credit	 	 	80,000	 	 	5.40% - 5.53	%	 	05/08/12	 	
Other borrowings	 	 	76,889	 	 	4.65% - 5.20	%	 	09/28/08 - 11/01/15	 	
 	 	$	28,115,829	 	 	 	 	 	 	 	

	(a)	Issued in asset-backed securitizations	

	(b)	Loan warehouse facilities	

Secured Financing Transactions

The Company relies 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 are loan warehouse facilities and asset-backed securitizations.

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Loan warehouse facilities

Student loan warehousing allows the Company to buy and manage student loans prior to transferring them into more permanent financing arrangements. The Company has historically relied upon three conduit warehouse loan financing vehicles to support its funding needs on a short-term basis: a multi-year committed facility for FFELP loans, a private loan warehouse for non-federally insured student loans, and a single-seller extendible commercial paper conduit for FFELP loans.

The multi-year committed facility for FFELP loans, which terminates in May 2010, was supported by 364-day liquidity which was up for renewal on May 9, 2008. The Company obtained an extension on this renewal until July 31, 2008. On July 31, 2008, the Company did not renew the liquidity provisions of this facility. Accordingly, as of July 31, 2008, the facility became a term facility with an outstanding balance of approximately $2.8 billion and a final maturity date of May 9, 2010. The FFELP warehouse facility has a provision requiring the Company to refinance or remove 75% of the pledged collateral on an annual basis. The Company must refinance or remove approximately $900 million of loans by May 2009 to satisfy this provision. Pursuant to the terms of the agreement, since liquidity was not renewed, the Company’s cost of financing under this facility increased 10 basis points. The agreement also includes provisions which allow the banks to charge a rate equal to LIBOR plus 128.5 basis points if they choose to finance their portion of the facility with sources of funds other than their commercial paper conduit.
 
The terms and conditions of the Company’s warehouse facility for FFELP loans provide for advance rates related to financed loans subject to a valuation formula based on current market conditions. Dislocation in the credit markets including disruptions in the current capital markets can and will cause short-term volatility in the loan valuation formulas. Severe volatility and dislocation in the credit markets, even if temporary, could cause the valuation assigned to the Company’s student loan portfolio financed by the applicable line to be significantly less than par. Should a significant change in the valuation of subject loans result in a reduction in advance rate and require equity support greater than what the Company can or is willing to provide, the facility could be subject to termination. While the Company does not believe the loan valuation formula is reflective of the fair market value of its loans, it is subject to compliance with provisions of the warehouse documents. As of August 8, 2008, the Company has $135.3 million utilized as equity funding support based on provisions of this agreement.

The private loan warehouse facility is an uncommitted facility that is offered to the Company by a banking partner, which terminates on March 14, 2009. As of June 30, 2008, $159.8 million was outstanding under this facility and $90.2 million was available for future use. As of August 8, 2008, $132.0 million was outstanding under this facility and $118.0 million was available for future use. New advances are also subject to approval by the sponsor bank and the Company believes it is unlikely such approval would be granted in the future. The Company guarantees the performance of the assets in the private loan warehouse facility. This facility provides for advance rates on subject collateral which require certain levels of equity enhancement support. As of August 8, 2008, the Company has $54.5 million utilized as equity funding support based on provisions of this agreement. There can be no assurance that the Company will be able to maintain this conduit facility, find alternative funding, or make adequate equity contributions, if necessary. While the Company’s bank supported facilities have historically been renewed for successive terms, there can be no assurance that this will continue in the future. In January 2008, the Company suspended originating private loans.

In August 2006, the Company established a $5.0 billion extendable commercial paper warehouse program for FFELP loans, under which it can issue one or more short-term extendable secured liquidity notes. As of June 30, 2008, no notes were outstanding under this warehouse program. As a result of the disruption of the credit markets, there is no market for the issuance of notes under this facility. Management believes it is currently unlikely a market will exist in the future.

The Company expects to access alternative sources of funding to originate new FFELP student loans, including the Department of Education’s Loan Participation Program (“Participation Program”), an existing facility with Union Bank and Trust Company (“Union Bank”), an entity under common control with the Company, and its $750 million unsecured operating line of credit.

On July 1, 2008, pursuant to HR 5715, the Department of Education announced terms under which it will offer to purchase FFELP student loans and loan participations from FFELP lenders. Under the Department’s Loan Purchase Commitment Program (“Purchase Program”), the Department will purchase loans at a price equal to the sum of (i) par value, (ii) accrued interest, (iii) the one percent origination fee paid to the Department, and (iv) a fixed amount of $75 per loan. Lenders will have until September 30, 2009, to sell loans to the Department. Under the Participation Program, the Department will provide interim short-term liquidity to FFELP lenders by purchasing participation interests in pools of FFELP loans. FFELP lenders will be charged a rate of commercial paper plus 50 basis points on the principal amount of participation interests outstanding. Loans funded under the Participation Program must be either refinanced by the lender or sold to the Department pursuant to the Purchase Program prior to its expiration on September 30, 2009. To be eligible for purchase or participation under the Department’s programs, loans must be FFELP Stafford or PLUS loans made for the academic year 2008-2009, first disbursed between May 1, 2008 and July 1, 2009, with eligible borrower benefits. The Company is in the process of completing and filing all relevant documents to participate in the Department of Education’s Participation Program and expects to utilize the Participation Program to fund a significant portion of its loan originations for the 2008-2009 academic year.

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The Company maintains an agreement with Union Bank, as trustee for various grantor trusts, under which Union Bank has agreed to purchase from the Company participation interests in student loans (the “FFELP Participation Agreement”). The Company has the option to purchase the participation interests from the grantor trusts at the end of a 364-day term upon termination of the participation certificate. As of June 30, 2008 and August 8, 2008, approximately $228.7 million and $56.4 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 on a short-term basis. The Company can participate loans to Union Bank to the extent of availability under the grantor trusts, up to $750 million. Loans participated under this agreement qualify as a sale pursuant to the provisions of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS No. 140”). Accordingly, the participation interests sold are not included on the Company’s consolidated balance sheet.

Asset-backed Securitizations

On March 7, 2008, April 2, 2008, April 22, 2008, and May 19, 2008, the Company completed asset-backed securities transactions of $1.2 billion, $0.5 billion, $1.5 billion, and $1.3 billion, respectively. Notes issued in these transactions carry interest rates based on a spread to LIBOR. As part of the Company’s issuance of asset-backed securitizations in March 2008 and May 2008, due to credit market conditions when these notes were issued, the Company purchased the Class B subordinated notes of $36 million (par value) and $41 million (par value), respectively. These notes are not included on the Company’s consolidated balance sheet. If the credit market conditions 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. Upon sale, these notes would be shown as “bonds and notes payable” on the Company’s consolidated balance sheet. Unless there is a significant market improvement, the Company believes the market value of such notes will be less than par value. The difference between the par value and market value would be recognized by the Company as interest expense over the life of the bonds.
 
Notes issued during 2006 included €773.2 million   (950 million in U.S. dollars) with variable interest rates initially based on a spread to EURIBOR (the “Euro Notes”). As of June 30, 2008 and December 31, 2007, the Euro Notes were recorded on the Company’s balance sheet at $1.2 billion and $1.1 billion , respectively. The change in the principal amount of Euro Notes as a result of the fluctuation of the foreign currency exchange rate was a decrease of $4.4 million and an increase of $88.5 million for the three and six months ended June 30, 2008, respectively, and increases of $11.3 million and $25.0 million for the three and six months ended June 30, 2007, respectively, and is included in the “derivative market value, foreign currency, and put option adjustments and derivative settlements, net” in the consolidated statements of operations. Concurrently with the issuance of the Euro Notes, the Company entered into cross-currency interest rate swaps which are further discussed in note 8 .

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 broker-dealers and remarketing agents ("Variable Rate Demand Notes"). The Company is currently sponsor on approximately $2.0 billion of Auction Rate Securities and $0.9 billion 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, several 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 stepped in when investor demand is weak. However, recently banks have been allowing these auctions to fail.

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 commercial paper, governing documents, or indenture. While these rates will vary by the trust structure the notes were issued from as well as the class and rating of the security, they will generally be based on a spread to LIBOR, commercial paper, or Treasury Securities. Based on the relative levels of these indices as of June 30, 2008, the rates expected to be paid by the Company range from 91-day T-Bill plus 125 basis points, on the low end, to LIBOR plus 250 basis points on the high end.
 
During the three month period ended June 30, 2008, the Company paid favorable interest rates on the majority of its Auction Rate Securities as a result of the application of certain of these maximum rate auction provisions in the underlying documents for such financings. The Company does not expect this funding benefit on its Auction Rate Securities in future periods.
 
The Company cannot predict whether future auctions related to its Auction Rate Securities will be successful, but management believes it is likely auctions will continue to fail indefinitely. The Company is currently seeking alternatives for reducing its exposure to the auction rate market, but may not be able to achieve alternate financing for some or all of its Auction Rate Securities.

For Variable Rate Demand Notes, the remarketing agents set the price, which is then offered to investors. If there are insufficient potential bid orders to purchase all of the notes offered for sale, the Company could be subject to interest costs substantially above the anticipated and historical rates paid on these types of securities. The maximum rate for Variable Rate Demand Notes is based on a spread to certain indexes as defined in the underlying documents, with the highest to the Company being Prime plus 200 basis points. Certain of the Variable Rate Demand Notes are secured by financial guaranty insurance policies issued by MBIA Insurance Corporation. These Variable Rate Demand Notes are currently experiencing reduced investor demand and certain of these securities have been put to the liquidity provider, Lloyds TSB Bank, at a cost ranging from Federal Funds plus 150 basis points to LIBOR plus 175 basis points.

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Unsecured Lines of Credit

The Company has a $750 million unsecured line of credit that terminates in May 2012. As of June 30, 2008, there was $450.0 million outstanding on this line and $300.0 million available for future use. The weighted average interest rate on this line of credit was 2.90% as of June 30, 2008. 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. As discussed previously, the Company may need to fund certain loans or provide equity funding support related to advance rates on its warehouse facilities. As of August 8, 2008, the Company has contributed $189.8 million in equity funding support to these facilities. The Company has funded these contributions primarily by advances on its operating line of credit. As of August 8, 2008, the Company has $450 .0 million outstanding under this line of credit and $300.0 million available for future uses.

The Company has a $725.0 million unsecured commercial paper program in which the Company may issue commercial paper for general corporate purposes. The maturities of the notes issued under this program will vary, but may not exceed 397 days from the date of issue. Notes issued under this program will bear interest at rates that will vary based on market conditions at the time of issuance. As of June 30, 2008, there were no borrowings outstanding on this line and $725.0 million of remaining authorization. The Company does not expect to be able to issue unsecured commercial paper in the near or intermediate future at a cost effective level relative to the Company’s unsecured line of credit.

Other Borrowings

As of June 30, 2008 and December 31, 2007, bonds and notes payable includes $66.6 million and $57.3 million , respectively, of notes due to Union Bank. The Company has used the proceeds from these notes to invest in student loan assets via a participation agreement. This participation agreement is in addition to the $750 million FFELP Participation Agreement, and participations under this participation agreement do not qualify as sales pursuant to SFAS No. 140.

8.   Derivative Financial Instruments

The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility and fluctuations in foreign currency exchange rates. Derivative instruments used as part of the Company’s risk management strategy include interest rate swaps, basis swaps, and cross-currency interest rate swaps.

Interest Rate Swaps

FFELP student loans 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 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 continues to decline. In these interest rate environments, the Company earns additional spread income that it refers to as floor income.

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

Absent the use of derivative instruments, a rise in interest rates will have an adverse effect 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 the SAP formula. 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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As of June 30, 2008, the Company held the following interest rate derivatives to hedge fixed-rate student loan assets earning fixed rate floor income or variable-rate floor income.

 	 	 	 	Weighted	 	
 	 	 	 	average fixed	 	
 	 	Notional	 	rate paid by	 	
Maturity	 	Amount	 	the Company (a)	 	
 	 	 	 	 	 	
2008 (b)	 	$	2,000,000	 	 	4.18	%	
2009	 	 	500,000	 	 	4.08	 	
2010	 	 	700,000	 	 	3.44	 	
2011	 	 	500,000	 	 	3.57	 	
2012	 	 	250,000	 	 	3.86	 	
 	 	$	3,950,000	 	 	3.94	%	

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

 	(b)	The maturity date on these derivatives is June 30, 2008. The Company has hedged a portion of its student loan portfolio in which the borrower interest rate resets annually on July 1. These loans can generate excess spread income compared with the rate based on the special allowance formula in declining interest rate environments. As discussed above, the Company refers to this additional income as variable-rate floor income.	

In April 2008 and May 2008, the Company entered into interest rate swaps with notional amounts of $200.0 million and $250 .0 million which had forward-start dates of July 25, 2008 and June 25, 2008, respectively. The Company receives a fixed rate of 2.9805 % and 3.693 %, respectively, and pays discrete three-month LIBOR. These trades offset $450.0 million of fixed rate swaps previously entered into by the Company (included in the above table) and were executed in order to maintain the Company’s desired hedge ratio.

Basis Swaps

The Company has entered into basis swaps in which the Company receives three-month LIBOR set discretely in advance and pays a daily weighted average three-month LIBOR less a spread as defined in the individual agreements. The Company entered into these derivative instruments to better match the interest rate characteristics on its student loan assets and the debt funding such assets.

The following table summarizes these derivatives as of June 30, 2008:

 	 	Notional Amount (a)	 	
Maturity	 	Effective date in second
quarter 2007	 	Effective date in third
quarter 2007	 	Effective date in second
quarter 2008	 	Effective date in third
quarter 2008	 	Total	 	
 	 	 	 	 	 	 	 	 	        	 	 	
2008	 	$	1,000,000	 	 	2,000,000	 	 	—	 	 	—	 	 	3,000,000	 	
2009	 	 	2,000,000	 	 	4,000,000	 	 	—	 	 	3,000,000	(b)(f)	 	9,000,000	 	
2010	 	 	500,000	 	 	2,000,000	(c)	 	2,000,000	 	 	1,000,000	 	 	5,500,000	 	
2011	 	 	—	(d)	 	2,700,000	 	 	—	 	 	—	 	 	2,700,000	 	
2012	 	 	—	(e)	 	1,000,000	(f)	 	800,000	 	 	1,600,000	 	 	3,400,000	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	3,500,000	 	 	11,700,000	 	 	2,800,000	 	 	5,600,000	 	 	23,600,000	 	

 	(a)	All basis swaps were executed by the Company during the second quarter 2007, unless otherwise noted.	

 	(b)	Executed by the Company during the second quarter 2008.	

 	(c)	In March 2008, the Company terminated a basis swap with a notional amount of $1.0 billion, which is not included in the table above.	

 	(d)	In March 2008, the Company terminated a basis swap with a notional amount of $1.35 billion, which is not included in the table above.	

 	(e)	In March 2008, the Company terminated a basis swap with a notional amount of $0.5 billion, which is not included in the table above.	

 	(f)	In July 2008, the Company terminated these basis swaps.	

During the first quarter of 2008, the Company unwound three, 10 year basis swaps with notional amounts of $500 million each in which the Company received three-month LIBOR and paid one-month LIBOR less a spread as defined in the individual agreements.

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Cross-Currency Interest Rate Swaps

The Company entered into derivative instruments in 2006 as a result of the issuance of the Euro Notes as discussed in note 7 . Under the terms of these derivative instrument agreements, the Company receives from a counterparty a spread to the EURIBOR index based on a notional amount of €420.5 million and €352.7 million , respectively, and pays a spread to the LIBOR index based on a notional amount of $500.0 million and $450.0 million , respectively. In addition, under the terms of these agreements, all principal payments on the Euro Notes will effectively be paid at the exchange rate in effect as of the issuance of these notes.

Accounting for Derivative Financial Instruments

The Company accounts for derivative instruments under SFAS No. 133, which requires that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. Management has structured all 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 under SFAS No. 133. As a result, the change in fair value of derivative instruments is recorded in the consolidated statements of operations at each reporting date.

The following table summarizes the net fair value of the Company’s derivative portfolio:

 	 	As of	 	As of	 	
 	 	June 30, 2008	 	December 31, 2007	 	
 	 	 	 	 	 	
Interest rate swaps	 	$	1,403	 	 	(2,695	)	
Basis swaps	 	 	(28,326	)	 	27,525	 	
Cross-currency interest rate swaps	 	 	283,423	 	 	191,756	 	
 	 	 	 	 	 	 	 	
Net fair value	 	$	256,500	 	 	216,586	 	

The change in the fair value of the Company’s derivative portfolio included in “derivative market value, foreign currency, and put option adjustments and derivative settlements, net” on the Company’s consolidated statements of operations resulted in a gain of $11.5 million and $47.5 million for the three and six months ended June 30, 2008, respectively, and $16.7 million and $20.4 million for the three and six months ended June 30, 2007, respectively.

The following table summarizes the net derivative settlements which are included in the “derivative market value, foreign currency, and put option adjustments and derivative settlements, net” in the consolidated statements of operations:

 	 	Three months ended June 30,	 	Six months ended June 30,	 	
 	 	2008	 	2007	 	2008	 	2007	 	
 	 	 	 	 	 	 	 	 	 	
Interest rate swaps	 	$	(7,842	)	 	7,576	 	 	(11,019	)	 	15,074	 	
Basis swaps	 	 	5,148	 	 	58	 	 	45,605	 	 	119	 	
Cross-currency interest rate swaps	 	 	7,131	 	 	(2,438	)	 	10,614	 	 	(5,757	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative settlements received, net	 	$	4,437	 	 	5,196	 	 	45,200	 	 	9,436	 	

By using derivative instruments, the Company is exposed to credit and market risk. When the fair value of a derivative contract is positive, this generally indicates that the counterparty owes the Company. If the counterparty fails to perform, credit risk is equal to the extent of the fair value gain in a derivative. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, it has no credit risk. The Company minimizes the credit (or repayment) risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by the Company’s risk committee. The Company also maintains a policy of requiring that all derivative contracts be governed by an International Swaps and Derivatives Association, Inc. Master Agreement.

Market risk is the adverse effect that a change in interest rates, or implied volatility rates, has on the value of a financial instrument. The Company manages market risk associated with interest rates by establishing and monitoring limits as to the types and degree of risk that may be undertaken.

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9.   Fair Value

On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a consistent framework for measuring fair value, and expands disclosure requirements about fair value measurements. The Company elected to delay the application of SFAS No. 157 to nonfinancial assets and nonfinancial liabilities, as allowed by FASB Staff Position SFAS No. 157-2. SFAS No. 157 applies when other accounting pronouncements require or permit fair value measurements; it does not require new fair value measurements.

Fair value under SFAS No. 157 is defined as the price to sell an asset or transfer a liability in an orderly transaction between willing and able market participants. The Company determines fair value using valuation techniques which are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. Transaction costs are not included in the determination of fair value. When possible, the Company seeks to validate the model’s output to market transactions. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.

Under SFAS No. 157, the Company categorizes its fair value estimates based on a hierarchal framework associated with three levels of price transparency utilized in measuring financial instruments at fair value. Classification is based on the lowest level of input that is significant to the fair value of the instrument. The three levels include:

 	·	Level 1: Quoted prices for identical instruments in active markets. The types of financial instruments included in Level 1 are highly liquid instruments with quoted prices.	

 	·	Level 2: Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active; and model derived valuations whose inputs are observable or whose primary value drivers are observable.	

 	·	Level 3: Instruments whose primary value drivers are unobservable . Inputs are developed based on the best information available; however, significant judgment is required by management in developing the inputs.	

The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis. All financial assets and liabilities that are measured at fair value are categorized as Level 1 or 2 based on the above hierarchy.

 	 	As of June 30, 2008	 	
 	 	Level 1	 	Level 2	 	Total	 	
Assets:	 	 	 	 	 	 	 	
Other assets (a)	 	$	4,185	 	 	5,540	 	 	9,725	 	
Fair value of derivative instruments (b)	 	 	—	 	 	295,346	 	 	295,346	 	
Total assets	 	$	4,185	 	 	300,886	 	 	305,071	 	
	 	 	 	 	 	 	 	 	 	 	
Liabilities:	 	 	 	 	 	 	 	 	 	 	
Fair value of derivative instruments (b)	 	$	—	 	 	38,846	 	 	38,846	 	
Other liabilities (c)	 	 	—	 	 	6,655	 	 	6,655	 	
Total liabilities	 	$	—	 	 	45,501	 	 	45,501	 	

 	 	As of December 31, 2007	 	
 	 	Level 1	 	Level 2	 	Total	 	
Assets:	 	 	 	 	 	 	 	
Fair value of derivative instruments (b)	 	$	—	 	 	222,471	 	 	222,471	 	
Total assets	 	$	—	 	 	222,471	 	 	222,471	 	
 	 	 	 	 	 	 	 	 	 	 	
Liabilities:	 	 	 	 	 	 	 	 	 	 	
Fair value of derivative instruments (b)	 	$	—	 	 	5,885	 	 	5,885	 	
Other liabilities (c)	 	 	—	 	 	6,117	 	 	6,117	 	
Total liabilities	 	$	—	 	 	12,002	 	 	12,002	 	

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	(a)	Other assets includes investments recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices. Level 1 investments include investments traded on an active exchange, such as the New York Stock Exchange, and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets. Level 2 investments include corporate debt securities.	

 	(b)	All derivatives are accounted for at fair value in the financial statements. The fair values of derivative financial instruments are 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. It is the Company’s policy to compare its derivative fair values to those received by its counterparties in order to validate the model’s outputs. Fair value of derivative instruments is comprised of market value less accrued interest and excludes collateral.	

 	(c)	Other liabilities includes put options valued using a Black-Scholes pricing model using the stated terms of the contracts and observable inputs including the Company’s common stock volatility and dividend yield and a risk-free interest rate over the expected term of the option.	

10. Earnings per Common Share

Basic earnings per common share (“basic EPS”) is computed by dividing net income by the weighted average number of shares of common stock outstanding during each period. SFAS No. 128, Earnings Per Share (“SFAS No. 128”), requires that nonvested restricted stock that vests solely upon continued service be excluded from basic EPS but reflected in diluted earnings per common share (“diluted EPS”) by application of the treasury stock method.  

A reconciliation of weighted average shares outstanding follows:

 	 	Three months ended June 30,	 	Six months ended June 30,	 	
 	 	2008	 	2007	 	2008	 	2007	 	
 	 	 	 	 	 	 	 	 	 	
Weighted average shares outstanding	 	 	49,442,435	 	 	49,452,960	 	 	49,443,425	 	 	50,213,349	 	
Less: Nonvested restricted stock - vesting solely upon continued service	 	 	347,282	 	 	—	 	 	369,845	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average shares outstanding used to compute basic EPS	 	 	49,095,153	 	 	49,452,960	 	 	49,073,580	 	 	50,213,349	 	
Dilutive effect of nonvested restricted stock	 	 	9,488	 	 	—	 	 	—	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average shares used to compute diluted EPS	 	 	49,104,641	 	 	49,452,960	 	 	49,073,580	 	 	50,213,349	 	

The Company had no common stock equivalents and no potentially dilutive common shares outstanding during the three and six months ended June 30, 2007.

No dilutive effect of nonvested restricted stock is presented for the six months ended June 30, 2008 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.

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11. Segment Reporting
 
The Company has five operating segments as defined in SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information , as follows: Student Loan and Guaranty Servicing, Tuition Payment Processing and Campus Commerce, Enrollment Services and List Management, Software and Technical Services, and Asset Generation and Management. The Company’s operating segments are defined by the products and services they offer or the types of customers they serve, and they reflect the manner in which financial information is currently evaluated by management. The accounting policies of the Company’s operating segments are the same as those described in the summary of significant accounting policies. Intersegment revenues are charged by a segment to another segment that provides the product or service. Intersegment revenues and expenses are included within each segment consistent with the income statement presentation provided to management. Changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial information.

The management reporting process measures the performance of the Company’s operating segments based on the management structure of the Company as well as the methodology used by management to evaluate performance and allocate resources. Management, including the Company’s chief operating decision maker, evaluates the performance of the Company’s operating segments based on their profitability. As discussed further 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 GAAP and may not be comparable to similarly titled measures reported by other companies. Unlike financial accounting, there is no comprehensive, authoritative guidance for management reporting.

In May 2007, the Company sold EDULINX, a Canadian student loan service provider and subsidiary of the Company. As a result of this transaction, the results of operations for EDULINX are reported as discontinued operations for all periods presented. The operating results of EDULINX were included in the Student Loan and Guaranty Servicing operating segment. The Company presents “base net income” excluding discontinued operations since the operations and cash flows of EDULINX have been eliminated from the ongoing operations of the Company. Therefore, the results of operations for the Student Loan and Guaranty Servicing segment exclude the operating results of EDULINX for all periods presented. See note 2 for additional information concerning EDULINX’s detailed operating results that have been segregated from continuing operations and reported as discontinued operations.

Historically, the Company generated the majority of its revenue from net interest income earned in its Asset Generation and Management operating segment. In recent years, the Company has made several acquisitions that have expanded the Company’s products and services and has diversified its revenue - primarily from fee-based businesses. The Company currently offers a broad range of pre-college, in-college, and post-college products and services to students, families, schools, and financial institutions. These products and services help students and families plan and pay for their education and students plan their careers. The Company’s products and services are designed to simplify the education planning and financing process and are focused on providing value to students, families, and schools throughout the education life cycle. The Company continues to diversify its sources of revenue, including those generated from businesses that are not dependent upon government programs, reducing legislative and political risk.

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Fee-Based Operating Segments

Student Loan and Guaranty Servicing

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

 	·	Origination and servicing of FFELP loans;	
 	·	Servicing of non-federally insured student loans; and	
 	·	Servicing and support outsourcing for guaranty agencies.	

Tuition Payment Processing and Campus Commerce

The Tuition Payment Processing and Campus Commerce segment provides products and services to help institutions and education seeking families manage the payment of education costs during the pre-college and college stages of the education life cycle. The Company provides actively managed tuition payment solutions, online payment processing, detailed information reporting, financial needs analysis, and data integration services to K-12 and higher educational institutions, families, and students. In addition, the Company provides customer-focused electronic transactions, information sharing, and account and bill presentment to colleges and universities.

Enrollment Services and List Management

The Enrollment Services and List Management segment provides a wide range of direct marketing products and services to help schools and businesses reach the middle school, high school, college bound high school, college, and young adult market places. In addition, this segment offers products and services that are focused on helping (i) students plan and prepare for life after high school and (ii) colleges recruit and retain students.

Software and Technical Services

The Software and Technical Services segment provides information technology products and full-service technical consulting, with core areas of business in educational loan software solutions, business intelligence, technical consulting services, and Enterprise Content Management (ECM) solutions.

Asset Generation and Management Operating Segment

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

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. Reconciliation of the segment totals to the Company’s operating results in accordance with GAAP are also included in the tables below.

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Segment Results and Reconciliations to GAAP

 	 	Three months ended June 30, 2008	 	
 	 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Student	 	Tuition	 	Enrollment	 	 	 	 	 	 	 	 	 	 	 	"Base net	 	 	 	
 	 	Loan	 	Payment	 	Services	 	Software	 	 	 	Asset	 	Corporate	 	 	 	income"	 	 	 	
 	 	and	 	Processing	 	and	 	and	 	Total	 	Generation	 	Activity	 	Eliminations	 	Adjustments	 	GAAP	 	
 	 	Guaranty	 	and Campus	 	List	 	Technical	 	Fee-	 	and	 	and	 	and	 	to GAAP	 	Results of	 	
 	 	Servicing	 	Commerce	 	Management	 	Services	 	Based	 	Management	 	Overhead	 	Reclassifications	 	Results	 	Operations	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total interest income	 	$	243	 	 	310	 	 	1	 	 	—	 	 	554	 	 	282,293	 	 	1,574	 	 	(546	)	 	21,927	 	 	305,802	 	
Interest expense	 	 	—	 	 	—	 	 	1	 	 	—	 	 	1	 	 	222,402	 	 	10,607	 	 	(546	)	 	—	 	 	232,464	 	
Net interest income (loss)	 	 	243	 	 	310	 	 	—	 	 	—	 	 	553	 	 	59,891	 	 	(9,033	)	 	—	 	 	21,927	 	 	73,338	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Less provision for loan losses	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	6,000	 	 	—	 	 	—	 	 	—	 	 	6,000	 	
Net interest income (loss) after provision for loan losses	 	 	243	 	 	310	 	 	—	 	 	—	 	 	553	 	 	53,891	 	 	(9,033	)	 	—	 	 	21,927	 	 	67,338	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other income (expense):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing income	 	 	24,747	 	 	—	 	 	—	 	 	—	 	 	24,747	 	 	157	 	 	—	 	 	—	 	 	—	 	 	24,904	 	
Other fee-based income	 	 	—	 	 	10,292	 	 	26,067	 	 	—	 	 	36,359	 	 	4,458	 	 	—	 	 	—	 	 	—	 	 	40,817	 	
Software services income	 	 	—	 	 	—	 	 	—	 	 	4,896	 	 	4,896	 	 	—	 	 	—	 	 	—	 	 	—	 	 	4,896	 	
Other income	 	 	6	 	 	(21	)	 	—	 	 	—	 	 	(15	)	 	393	 	 	1,268	 	 	—	 	 	—	 	 	1,646	 	
Gain on sale of loans	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	48	 	 	—	 	 	—	 	 	—	 	 	48	 	
Intersegment revenue	 	 	18,382	 	 	(76	)	 	—	 	 	1,517	 	 	19,823	 	 	—	 	 	13,960	 	 	(33,783	)	 	—	 	 	—	 	
Derivative market value, foreign currency, and put option adjustments	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	15,755	 	 	15,755	 	
Derivative settlements, net	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	11,638	 	 	—	 	 	—	 	 	(7,201	)	 	4,437	 	
Total other income (expense)	 	 	43,135	 	 	10,195	 	 	26,067	 	 	6,413	 	 	85,810	 	 	16,694	 	 	15,228	 	 	(33,783	)	 	8,554	 	 	92,503	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	12,491	 	 	5,784	 	 	6,373	 	 	4,702	 	 	29,350	 	 	1,954	 	 	12,828	 	 	(1,333	)	 	750	 	 	43,549	 	
Restructure expense - severance and contract termination costs	 	 	(104	)	 	—	 	 	(15	)	 	(8	)	 	(127	)	 	(52	)	 	(186	)	 	365	 	 	—	 	 	—	 	
Other expenses	 	 	8,011	 	 	2,551	 	 	17,284	 	 	714	 	 	28,560	 	 	5,095	 	 	14,921	 	 	(764	)	 	6,561	 	 	54,373	 	
Intersegment expenses	 	 	9,822	 	 	461	 	 	1,580	 	 	342	 	 	12,205	 	 	18,952	 	 	894	 	 	(32,051	)	 	—	 	 	—	 	
Total operating expenses	 	 	30,220	 	 	8,796	 	 	25,222	 	 	5,750	 	 	69,988	 	 	25,949	 	 	28,457	 	 	(33,783	)	 	7,311	 	 	97,922	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before income taxes	 	 	13,158	 	 	1,709	 	 	845	 	 	663	 	 	16,375	 	 	44,636	 	 	(22,262	)	 	—	 	 	23,170	 	 	61,919	 	
Income tax expense (benefit) (a)	 	 	4,079	 	 	530	 	 	262	 	 	206	 	 	5,077	 	 	13,837	 	 	(6,902	)	 	—	 	 	7,183	 	 	19,195	 	
Net income (loss) from continuing operations	 	 	9,079	 	 	1,179	 	 	583	 	 	457	 	 	11,298	 	 	30,799	 	 	(15,360	)	 	—	 	 	15,987	 	 	42,724	 	
Income from discontinued operations, net of tax	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	981	 	 	981	 	
Net income (loss)	 	$	9,079	 	 	1,179	 	 	583	 	 	457	 	 	11,298	 	 	30,799	 	 	(15,360	)	 	—	 	 	16,968	 	 	43,705	 	

(a) Beginning in 2008, the consolidated effective tax rate is used to calculate income taxes for each operating segment.

24

Table of Contents

 	 	Three months ended June 30, 2007	 	
 	 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Student	 	Tuition	 	Enrollment	 	 	 	 	 	 	 	 	 	 	 	"Base net	 	 	 	
 	 	Loan	 	Payment	 	Services	 	Software	 	 	 	Asset	 	Corporate	 	 	 	income"	 	 	 	
 	 	and	 	Processing	 	and	 	and	 	Total	 	Generation	 	Activity	 	Eliminations	 	Adjustments	 	GAAP	 	
 	 	Guaranty	 	and Campus	 	List	 	Technical	 	Fee-	 	and	 	and	 	and	 	to GAAP	 	Results of	 	
 	 	Servicing	 	Commerce	 	Management	 	Services	 	Based	 	Management	 	Overhead	 	Reclassifications	 	Results	 	Operations	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total interest income	 	$	1,181	 	 	670	 	 	93	 	 	—	 	 	1,944	 	 	433,404	 	 	554	 	 	(33	)	 	—	 	 	435,869	 	
Interest expense	 	 	—	 	 	2	 	 	2	 	 	—	 	 	4	 	 	358,341	 	 	9,581	 	 	(33	)	 	—	 	 	367,893	 	
Net interest income (loss)	 	 	1,181	 	 	668	 	 	91	 	 	—	 	 	1,940	 	 	75,063	 	 	(9,027	)	 	—	 	 	—	 	 	67,976	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Less provision for loan losses	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	2,535	 	 	—	 	 	—	 	 	—	 	 	2,535	 	
Net interest income (loss) after provision for loan losses	 	 	1,181	 	 	668	 	 	91	 	 	—	 	 	1,940	 	 	72,528	 	 	(9,027	)	 	—	 	 	—	 	 	65,441	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other income (expense):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing income	 	 	31,492	 	 	—	 	 	—	 	 	—	 	 	31,492	 	 	118	 	 	—	 	 	—	 	 	—	 	 	31,610	 	
Other fee-based income	 	 	—	 	 	9,405	 	 	24,923	 	 	—	 	 	34,328	 	 	3,674	 	 	260	 	 	—	 	 	—	 	 	38,262	 	
Software services income	 	 	—	 	 	—	 	 	157	 	 	5,691	 	 	5,848	 	 	—	 	 	—	 	 	—	 	 	—	 	 	5,848	 	
Other income	 	 	5	 	 	25	 	 	—	 	 	—	 	 	30	 	 	105	 	 	1,792	 	 	—	 	 	—	 	 	1,927	 	
Gain on sale of loans	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	1,010	 	 	—	 	 	—	 	 	—	 	 	1,010	 	
Intersegment revenue	 	 	20,120	 	 	188	 	 	178	 	 	4,389	 	 	24,875	 	 	—	 	 	4,100	 	 	(28,975	)	 	—	 	 	—	 	
Derivative market value, foreign currency, and put option adjustments	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	5,547	 	 	5,547	 	
Derivative settlements, net	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(461	)	 	5,657	 	 	—	 	 	—	 	 	5,196	 	
Total other income (expense)	 	 	51,617	 	 	9,618	 	 	25,258	 	 	10,080	 	 	96,573	 	 	4,446	 	 	11,809	 	 	(28,975	)	 	5,547	 	 	89,400	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	22,023	 	 	5,082	 	 	9,022	 	 	5,857	 	 	41,984	 	 	7,167	 	 	12,272	 	 	(2,138	)	 	476	 	 	59,761	 	
Other expenses	 	 	8,404	 	 	2,333	 	 	14,589	 	 	751	 	 	26,077	 	 	7,246	 	 	21,071	 	 	—	 	 	6,491	 	 	60,885	 	
Intersegment expenses	 	 	3,750	 	 	25	 	 	29	 	 	403	 	 	4,207	 	 	22,034	 	 	596	 	 	(26,837	)	 	—	 	 	—	 	
Total operating expenses	 	 	34,177	 	 	7,440	 	 	23,640	 	 	7,011	 	 	72,268	 	 	36,447	 	 	33,939	 	 	(28,975	)	 	6,967	 	 	120,646	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before income taxes	 	 	18,621	 	 	2,846	 	 	1,709	 	 	3,069	 	 	26,245	 	 	40,527	 	 	(31,157	)	 	—	 	 	(1,420	)	 	34,195	 	
Income tax expense (benefit) (a)	 	 	7,076	 	 	1,082	 	 	649	 	 	1,167	 	 	9,974	 	 	15,400	 	 	(11,500	)	 	—	 	 	(568	)	 	13,306	 	
Net income (loss) from continuing operations	 	 	11,545	 	 	1,764	 	 	1,060	 	 	1,902	 	 	16,271	 	 	25,127	 	 	(19,657	)	 	—	 	 	(852	)	 	20,889	 	
Loss from discontinued operations, net of tax	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(6,135	)	 	(6,135	)	
Net income (loss)	 	$	11,545	 	 	1,764	 	 	1,060	 	 	1,902	 	 	16,271	 	 	25,127	 	 	(19,657	)	 	—	 	 	(6,987	)	 	14,754	 	

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

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Table of Contents

 	 	Six months ended June 30, 2008	 	
 	 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Student	 	Tuition	 	Enrollment	 	 	 	 	 	 	 	 	 	 	 	"Base net	 	 	 	
 	 	Loan	 	Payment	 	Services	 	Software	 	 	 	Asset	 	Corporate	 	 	 	income"	 	 	 	
 	 	and	 	Processing	 	and	 	and	 	Total	 	Generation	 	Activity	 	Eliminations	 	Adjustments	 	GAAP	 	
 	 	Guaranty	 	and Campus	 	List	 	Technical	 	Fee-	 	and	 	and	 	and	 	to GAAP	 	Results of	 	
 	 	Servicing	 	Commerce	 	Management	 	Services	 	Based	 	Management	 	Overhead	 	Reclassifications	 	Results	 	Operations	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total interest income	 	$	856	 	 	1,075	 	 	10	 	 	—	 	 	1,941	 	 	602,651	 	 	2,771	 	 	(640	)	 	40,745	 	 	647,468	 	
Interest expense	 	 	—	 	 	—	 	 	2	 	 	—	 	 	2	 	 	538,417	 	 	19,826	 	 	(640	)	 	—	 	 	557,605	 	
Net interest income (loss)	 	 	856	 	 	1,075	 	 	8	 	 	—	 	 	1,939	 	 	64,234	 	 	(17,055	)	 	—	 	 	40,745	 	 	89,863	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Less provision for loan losses	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	11,000	 	 	—	 	 	—	 	 	—	 	 	11,000	 	
Net interest income (loss) after provision for loan losses	 	 	856	 	 	1,075	 	 	8	 	 	—	 	 	1,939	 	 	53,234	 	 	(17,055	)	 	—	 	 	40,745	 	 	78,863	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other income (expense):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing income	 	 	50,855	 	 	—	 	 	—	 	 	—	 	 	50,855	 	 	162	 	 	—	 	 	—	 	 	—	 	 	51,017	 	
Other fee-based income	 	 	—	 	 	24,114	 	 	53,289	 	 	—	 	 	77,403	 	 	9,327	 	 	—	 	 	—	 	 	—	 	 	86,730	 	
Software services income	 	 	—	 	 	—	 	 	37	 	 	11,611	 	 	11,648	 	 	—	 	 	—	 	 	—	 	 	—	 	 	11,648	 	
Other income	 	 	38	 	 	4	 	 	—	 	 	—	 	 	42	 	 	381	 	 	2,633	 	 	—	 	 	—	 	 	3,056	 	
Loss on sale of loans	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(47,426	)	 	—	 	 	—	 	 	—	 	 	(47,426	)	
Intersegment revenue	 	 	38,606	 	 	184	 	 	—	 	 	3,333	 	 	42,123	 	 	—	 	 	31,173	 	 	(73,296	)	 	—	 	 	—	 	
Derivative market value, foreign currency, and put option adjustments	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	466	 	 	—	 	 	—	 	 	(42,072	)	 	(41,606	)	
Derivative settlements, net	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	55,165	 	 	—	 	 	—	 	 	(9,965	)	 	45,200	 	
Total other income (expense)	 	 	89,499	 	 	24,302	 	 	53,326	 	 	14,944	 	 	182,071	 	 	18,075	 	 	33,806	 	 	(73,296	)	 	(52,037	)	 	108,619	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	26,489	 	 	11,214	 	 	12,896	 	 	9,870	 	 	60,469	 	 	4,178	 	 	27,419	 	 	3,280	 	 	2,046	 	 	97,392	 	
Restructure expense - severance and contract termination costs	 	 	747	 	 	—	 	 	282	 	 	510	 	 	1,539	 	 	1,844	 	 	3,729	 	 	(7,112	)	 	—	 	 	—	 	
Impairment expense	 	 	5,074	 	 	—	 	 	—	 	 	—	 	 	5,074	 	 	9,351	 	 	4,409	 	 	—	 	 	—	 	 	18,834	 	
Other expenses	 	 	16,498	 	 	4,611	 	 	35,447	 	 	1,333	 	 	57,889	 	 	10,439	 	 	28,786	 	 	298	 	 	13,121	 	 	110,533	 	
Intersegment expenses	 	 	23,100	 	 	757	 	 	3,427	 	 	736	 	 	28,020	 	 	39,554	 	 	2,188	 	 	(69,762	)	 	—	 	 	—	 	
Total operating expenses	 	 	71,908	 	 	16,582	 	 	52,052	 	 	12,449	 	 	152,991	 	 	65,366	 	 	66,531	 	 	(73,296	)	 	15,167	 	 	226,759	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before income taxes	 	 	18,447	 	 	8,795	 	 	1,282	 	 	2,495	 	 	31,019	 	 	5,943	 	 	(49,780	)	 	—	 	 	(26,459	)	 	(39,277	)	
Income tax expense (benefit) (a)	 	 	5,719	 	 	2,727	 	 	397	 	 	774	 	 	9,617	 	 	1,842	 	 	(15,433	)	 	—	 	 	(8,202	)	 	(12,176	)	
Net income (loss) from continuing operations	 	 	12,728	 	 	6,068	 	 	885	 	 	1,721	 	 	21,402	 	 	4,101	 	 	(34,347	)	 	—	 	 	(18,257	)	 	(27,101	)	
Income from discontinued operations, net of tax	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	981	 	 	981	 	
Net income (loss)	 	$	12,728	 	 	6,068	 	 	885	 	 	1,721	 	 	21,402	 	 	4,101	 	 	(34,347	)	 	—	 	 	(17,276	)	 	(26,120	)	

(a) Beginning in 2008, the consolidated effective tax rate is used to calculate income taxes for each operating segment.

26

Table of Contents

 	 	Six months ended June 30, 2007	 	
 	 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Student	 	Tuition	 	Enrollment	 	 	 	 	 	 	 	 	 	 	 	"Base net	 	 	 	
 	 	Loan	 	Payment	 	Services	 	Software	 	 	 	Asset	 	Corporate	 	 	 	income"	 	 	 	
 	 	and	 	Processing	 	and	 	and	 	Total	 	Generation	 	Activity	 	Eliminations	 	Adjustments	 	GAAP	 	
 	 	Guaranty	 	and Campus	 	List	 	Technical	 	Fee-	 	and	 	and	 	and	 	to GAAP	 	Results of	 	
 	 	Servicing	 	Commerce	 	Management	 	Services	 	Based	 	Management	 	Overhead	 	Reclassifications	 	Results	 	Operations	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total interest income	 	$	3,425	 	 	1,680	 	 	180	 	 	18	 	 	5,303	 	 	847,894	 	 	4,355	 	 	(3,204	)	 	—	 	 	854,348	 	
Interest expense	 	 	—	 	 	7	 	 	4	 	 	—	 	 	11	 	 	699,999	 	 	21,582	 	 	(3,204	)	 	—	 	 	718,388	 	
Net interest income (loss)	 	 	3,425	 	 	1,673	 	 	176	 	 	18	 	 	5,292	 	 	147,895	 	 	(17,227	)	 	—	 	 	—	 	 	135,960	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Less provision for loan losses	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	5,288	 	 	—	 	 	—	 	 	—	 	 	5,288	 	
Net interest income (loss) after provision for loan losses	 	 	3,425	 	 	1,673	 	 	176	 	 	18	 	 	5,292	 	 	142,607	 	 	(17,227	)	 	—	 	 	—	 	 	130,672	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other income (expense):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing income	 	 	61,958	 	 	—	 	 	—	 	 	—	 	 	61,958	 	 	118	 	 	—	 	 	—	 	 	—	 	 	62,076	 	
Other fee-based income	 	 	—	 	 	21,176	 	 	49,870	 	 	—	 	 	71,046	 	 	6,985	 	 	260	 	 	—	 	 	—	 	 	78,291	 	
Software services income	 	 	—	 	 	—	 	 	287	 	 	11,309	 	 	11,596	 	 	—	 	 	—	 	 	—	 	 	—	 	 	11,596	 	
Other income	 	 	11	 	 	28	 	 	—	 	 	—	 	 	39	 	 	3,148	 	 	3,833	 	 	—	 	 	—	 	 	7,020	 	
Gain on sale of loans	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	2,796	 	 	—	 	 	—	 	 	—	 	 	2,796	 	
Intersegment revenue	 	 	36,584	 	 	340	 	 	928	 	 	8,221	 	 	46,073	 	 	—	 	 	6,116	 	 	(52,189	)	 	—	 	 	—	 	
Derivative market value, foreign currency, and put option adjustments	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(6,583	)	 	(6,583	)	
Derivative settlements, net	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(885	)	 	10,321	 	 	—	 	 	—	 	 	9,436	 	
Total other income (expense)	 	 	98,553	 	 	21,544	 	 	51,085	 	 	19,530	 	 	190,712	 	 	12,162	 	 	20,530	 	 	(52,189	)	 	(6,583	)	 	164,632	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	45,027	 	 	10,000	 	 	18,391	 	 	12,332	 	 	85,750	 	 	14,446	 	 	24,978	 	 	(4,662	)	 	953	 	 	121,465	 	
Other expenses	 	 	17,654	 	 	4,493	 	 	29,148	 	 	1,535	 	 	52,830	 	 	15,511	 	 	38,940	 	 	—	 	 	13,129	 	 	120,410	 	
Intersegment expenses	 	 	7,068	 	 	399	 	 	185	 	 	403	 	 	8,055	 	 	38,670	 	 	802	 	 	(47,527	)	 	—	 	 	—	 	
Total operating expenses	 	 	69,749	 	 	14,892	 	 	47,724	 	 	14,270	 	 	146,635	 	 	68,627	 	 	64,720	 	 	(52,189	)	 	14,082	 	 	241,875	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before income taxes	 	 	32,229	 	 	8,325	 	 	3,537	 	 	5,278	 	 	49,369	 	 	86,142	 	 	(61,417	)	 	—	 	 	(20,665	)	 	53,429	 	
Income tax expense (benefit) (a)	 	 	12,247	 	 	3,164	 	 	1,344	 	 	2,006	 	 	18,761	 	 	32,734	 	 	(23,826	)	 	—	 	 	(7,099	)	 	20,570	 	
Net income (loss) from continuing operations	 	 	19,982	 	 	5,161	 	 	2,193	 	 	3,272	 	 	30,608	 	 	53,408	 	 	(37,591	)	 	—	 	 	(13,566	)	 	32,859	 	
Loss from discontinued operations, net of tax	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(3,325	)	 	(3,325	)	
Net income (loss)	 	$	19,982	 	 	5,161	 	 	2,193	 	 	3,272	 	 	30,608	 	 	53,408	 	 	(37,591	)	 	—	 	 	(16,891	)	 	29,534	 	

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

Corporate Activity and Overhead in the previous tables primarily includes the following items:

 	·	Income earned on certain investment activities;	
 	·	Interest expense incurred on unsecured debt transactions;	
 	·	Other products and service offerings that are not considered operating segments; and	
	·	Corporate activities and overhead functions such as executive management, human resources, accounting and finance, legal, marketing, and corporate technology support.	

The adjustments required to reconcile from the Company’s “base net income” measure to its GAAP results of operations relate to differing treatments for derivatives, foreign currency transaction adjustments, discontinued operations, and certain other items that management does not consider in evaluating the Company’s operating results. The following tables reflect adjustments associated with these areas by operating segment and Corporate Activity and Overhead:

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 	 	Student	 	Tuition	 	Enrollment	 	 	 	 	 	 	 	 	 	
 	 	Loan	 	Payment	 	Services	 	Software	 	Asset	 	Corporate	 	 	 	
 	 	and	 	Processing	 	and	 	and	 	Generation	 	Activity	 	 	 	
 	 	Guaranty	 	and Campus	 	List	 	Technical	 	and	 	and	 	 	 	
 	 	Servicing	 	Commerce	 	Management	 	Services	 	Management	 	Overhead	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended June 30, 2008	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative market value, foreign currency, and put option adjustments (1)	 	$	—	 	 	—	 	 	—	 	 	—	 	 	(15,866	)	 	111	 	 	(15,755	)	
Amortization of intangible assets (2)	 	 	1,165	 	 	1,997	 	 	3,113	 	 	286	 	 	—	 	 	—	 	 	6,561	 	
Compensation related to business combinations (3)	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	750	 	 	750	 	
Variable-rate floor income, net of settlements on derivatives (4)	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(14,726	)	 	—	 	 	(14,726	)	
Income from discontinued operations, net of tax (5)	 	 	(981	)	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(981	)	
Net tax effect (6)	 	 	(361	)	 	(619	)	 	(965	)	 	(89	)	 	9,484	 	 	(267	)	 	7,183	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total adjustments to GAAP	 	$	(177	)	 	1,378	 	 	2,148	 	 	197	 	 	(21,108	)	 	594	 	 	(16,968	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended June 30, 2007	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative market value, foreign currency, and put option adjustments (1)	 	$	—	 	 	—	 	 	—	 	 	—	 	 	6,002	 	 	(11,549	)	 	(5,547	)	
Amortization of intangible assets (2)	 	 	1,350	 	 	1,469	 	 	1,545	 	 	287	 	 	1,840	 	 	—	 	 	6,491	 	
Compensation related to business combinations (3)	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	476	 	 	476	 	
Variable-rate floor income, net of settlements on derivatives (4)	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	
Loss from discontinued operations, net of tax (5)	 	 	6,135	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	6,135	 	
Net tax effect (6)	 	 	(513	)	 	(558	)	 	(587	)	 	(109	)	 	(2,980	)	 	4,179	 	 	(568	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total adjustments to GAAP	 	$	6,972	 	 	911	 	 	958	 	 	178	 	 	4,862	 	 	(6,894	)	 	6,987	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Six months ended June 30, 2008	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative market value, foreign currency, and put option adjustments (1)	 	$	—	 	 	—	 	 	—	 	 	—	 	 	41,534	 	 	538	 	 	42,072	 	
Amortization of intangible assets (2)	 	 	2,421	 	 	4,048	 	 	5,935	 	 	572	 	 	145	 	 	—	 	 	13,121	 	
Compensation related to business combinations (3)	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	2,046	 	 	2,046	 	
Variable-rate floor income, net of settlements on derivatives (4)	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(30,780	)	 	—	 	 	(30,780	)	
Income from discontinued operations, net of tax (5)	 	 	(981	)	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(981	)	
Net tax effect (6)	 	 	(750	)	 	(1,255	)	 	(1,840	)	 	(178	)	 	(3,378	)	 	(801	)	 	(8,202	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total adjustments to GAAP	 	$	690	 	 	2,793	 	 	4,095	 	 	394	 	 	7,521	 	 	1,783	 	 	17,276	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    	 	Six months ended June 30, 2007	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative market value, foreign currency, and put option adjustments (1)	 	$	—	 	 	—	 	 	—	 	 	—	 	 	12,216	 	 	(5,633	)	 	6,583	 	
Amortization of intangible assets (2)	 	 	2,394	 	 	2,938	 	 	3,355	 	 	617	 	 	3,825	 	 	—	 	 	13,129	 	
Compensation related to business combinations (3)	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	953	 	 	953	 	
Variable-rate floor income, net of settlements on derivatives (4)	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	
Loss from discontinued operations, net of tax (5)	 	 	3,325	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	3,325	 	
Net tax effect (6)	 	 	(910	)	 	(1,116	)	 	(1,275	)	 	(234	)	 	(6,096	)	 	2,532	 	 	(7,099	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total adjustments to GAAP	 	$	4,809	 	 	1,822	 	 	2,080	 	 	383	 	 	9,945	 	 	(2,148	)	 	16,891	 	

 	(1)	Derivative market value, foreign currency, and put option adjustments: “Base net income” excludes the periodic unrealized gains and losses that are caused by the change in fair value on derivatives used in the Company’s risk management strategy in which the Company does not qualify for “hedge treatment” under GAAP. 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 and the change in fair value of put options issued by the Company for certain business acquisitions.	
 
 	(2)	Amortization of intangible assets: “Base net income” excludes the amortization of acquired intangibles.	
 
 	(3)	Compensation related to business combinations: The Company has structured certain business combinations in which the consideration paid has been dependent on the sellers’ continued employment with the Company. As such, the value of the consideration paid is recognized as compensation expense by the Company over the term of the applicable employment agreement. “Base net income” excludes this expense.	

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 	(4)	Variable-rate floor income: Loans that reset annually on July 1 can generate excess spread income compared with the rate based on the special allowance payment formula in declining interest rate environments. The Company refers to this additional income as variable-rate floor income. The Company excludes variable-rate floor income, net of settlements paid on derivatives used to hedge student loan assets earning variable-rate floor income, from its base net income since the timing and amount of variable-rate floor income (if any) is uncertain, it has been eliminated by legislation for all loans originated on and after April 1, 2006, and it is in excess of expected spreads. In addition, because variable-rate floor income is subject to the underlying rate for the subject loans being reset annually on July 1, it is a factor beyond the Company’s control which can affect the period-to-period comparability of results of operations.	
 
 	(5)	Discontinued operations:   In May 2007, the Company sold EDULINX. As a result of this transaction, the results of operations for EDULINX are reported as discontinued operations for all periods presented. The Company presents “base net income” excluding discontinued operations since the operations and cash flows of EDULINX have been eliminated from the ongoing operations of the Company.  	
 
 	(6)	Beginning in 2008, tax effect is computed using the Company’s consolidated effective tax rate for each applicable period. In prior periods, tax effect was computed at 38%. The change in the value of the put options for prior periods (included in Corporate Activities and Overhead) was not tax effected as this is not deductible for income tax purposes.	

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

(Management’s Discussion and Analysis of Financial Condition and Results of Operations is for the three and six months ended June 30, 2008 and 2007. 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, 2007.

Forward-looking and cautionary statements

This report contains forward-looking statements and information based on management’s current expectations as of the date of this document. When used in this report, the words “anticipate,” “believe,” “estimate,” “intend,” and “expect” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to risks, uncertainties, assumptions, and other factors that may cause the actual results to be materially different from those reflected in such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, prior quarterly reports filed by the Company, and the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, changes in the terms of student loans and the educational credit marketplace arising from the implementation of, or changes in, applicable laws and regulations, which may reduce the volume, average term, special allowance payments, and costs of yields on student loans under the FFEL Program or result in loans being originated or refinanced under non-FFEL programs or may affect the terms upon which banks and others agree to sell FFELP loans to the Company. In addition, a larger than expected increase in third party consolidations of the Company’s FFELP loans could materially adversely affect the Company’s results of operations. The Company could also be affected by changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students, and their families; the Company’s ability to maintain its credit facilities or obtain new facilities; changes to the terms and conditions of the liquidity programs offered by the Department of Education; changes in the general interest rate environment and in the securitization markets for education loans, which may increase the costs or limit the availability of financings necessary to initiate, purchase, or carry education loans; losses from loan defaults; changes in prepayment rates, guaranty rates, loan floor rates, and credit spreads; the uncertain nature of the expected benefits from acquisitions and the ability to successfully integrate operations; and the uncertain nature of estimated expenses that may be incurred and cost savings that may result from the Company’s strategic restructuring initiatives. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Additionally, financial projections may not prove to be accurate and may vary materially. The Company is not obligated to publicly release any revisions to forward-looking statements to reflect events after the date of this Quarterly Report on Form 10-Q or unforeseen events. Although the Company may from time to time voluntarily update its prior forward-looking statements, it disclaims any commitment to do so except as required by securities laws.

Overview

The Company is an education planning and financing company focused on providing quality products and services to students, families, and schools nationwide. The Company is a vertically-integrated organization that offers a broad range of products and services to its customers throughout the education life cycle.

Built through a focus on long-term organic growth and further enhanced by strategic acquisitions, the Company earns its revenues from fee-based revenues related to its diversified education finance and service operations and from net interest income on its portfolio of student loans.

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During the three months ended June 30, 2008, significant events impacted the operating results of the Company related to:

 	·	Legislative developments;	
	·	Student loan spread;	
	·	Operating expenses; and	
 	·	Fee-based businesses.	

Legislative Developments

On May 7, 2008, the President signed into law H.R. 5715, the Ensuring Continued Access to Student Loans Act of 2008 (“HR 5715”). This legislation contains provisions that expand the federal government’s support of financing the cost of higher education. Among other things, HR 5715:

 	·	Increases statutory limits on annual and aggregate borrowing for FFELP loans; and	
 	·	Allows the Department to act as a secondary market and enter into forward purchasing agreements with lenders.	

As a result of this legislation, the Departments of Education and Treasury developed a plan. Among other things, this plan:

 	·	Offers to purchase loans from lenders for the 2008-2009 academic year and offers lenders access to short-term liquidity; and	
 	·	Commits to continue working with the FFELP community to explore programs to reengage the capital markets in the long-run.	

On May 22, 2008, the Company announced that, as a result of the above plan, it will continue originating new federal student loans for the 2008-2009 academic year to all students regardless of the school they attend.

On July 1, 2008, pursuant to HR 5715, the Department of Education announced terms under which it will offer to purchase FFELP student loans and loan participations from lenders. The Company is in the process of completing and filing all relevant documents to participate in the Department of Education’s Participation Program and expects to utilize the Participation Program to fund a significant portion of its loan originations for the 2008-2009 academic year.

Student Loan Spread

The Company’s core student loan spread for the three months ended June 30, 2008 increased to 107 basis points compared to 73 basis points for the three months ended March 31, 2008. Excluding fixed-rate floor income, core student loan spread for the three month period ended June 30, 2008 was 92 basis points compared to 60 basis points for the prior quarter. The increase in core student loan spread was driven by the change in relationship between the short-term interest rate indices in which the Company earns on its loan assets and the rate the Company pays to fund such assets, as well as a non-recurring reduction in rates paid on certain of its auction rate securities. These increases were partially offset due to asset-backed securitizations completed during 2008 in which the funding costs were higher than prior funding costs. The Company believes 15 basis points of the improvement in core student loan spread during the second quarter of 2008 is not sustainable and may not benefit future periods.
 
Excluded from student loan spread was income recognized by the Company in the second quarter of 2008 of $4.6 million related to a change in estimate on certain liabilities initially established by the Company during its purchase price allocation related to a 2005 business acquisition.
 
Operating Expenses

As a result of the restructuring plans implemented in September 2007 and January 2008, as well as the Company’s continued focus on capitalizing on the operating leverage of the Company’s business structure and strategies, operating expenses continued to decrease. Excluding restructuring and impairment charges, operating expenses decreased $22.4 million and $41.1 million for the three and six months ended June 30, 2008 compared to the same periods in 2007, respectively .
 
Fee-based businesses

During the three month period ended June 30, 2008, certain of the Company’s fee based businesses were negatively impacted by recent events in the student loan industry. These items included a decrease to guaranty servicing revenue due to the loss of the Voluntary Flexible Agreement between the Department of Education and College Assist and decreased demand for the Company’s software and technical services and list marketing services. However, the Company also experienced significant growth in other product and service offerings. In particular, the Company experienced significant growth in certain of its products and services in its Enrollment Services and Tuition Payment Processing operating segments.

In addition, during the second quarter of 2008, the Company made investments in products, services, and technology in the Tuition Payment Processing and Campus Commerce segment. These investments were made by the Company to meet customer needs and support continued revenue growth. However, these investments increased operating expenses and lowered operating margins in this segment compared to prior periods.

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RESULTS OF OPERATIONS

The Company’s operating results are primarily driven by the performance of its existing portfolio, the cost necessary to generate new assets, the revenues generated by its fee based businesses, and the cost to provide those 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 operations as net interest income. The amortization of loan premiums, including capitalized costs of origination, the consolidation loan rebate fee, and yield adjustments from borrower benefit programs, are netted against loan interest income on the Company’s statements of operations. The amortization of debt issuance costs is included in interest expense on the Company’s statements of operations.

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 (SAP) formula set by the U.S. Department of Education (the “Department”) and the borrower rate. The SAP formula is based on an applicable index plus a fixed spread that is dependent upon when the loan was originated, the loan’s repayment status, and funding sources for the loan. As a result of one of the provisions of the Higher Education Reconciliation Act of 2005 (“HERA”), 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.

On most consolidation loans, the Company must pay a 1.05% per year rebate fee to the Department. Those consolidation loans that have variable interest rates based on the SAP formula earn an annual yield less than that of a Stafford loan. Those consolidation loans that have fixed interest rates less than the sum of 1.05% and the variable rate based on the SAP formula also earn an annual yield less than that of a Stafford loan.

On September 27, 2007, the President signed into law the College Cost Reduction Act. This legislation will have a significant impact on the Company’s net interest income in future periods and should be considered when reviewing the Company’s results of operations. Among other things, this legislation:

 	·	Reduced special allowance payments to for-profit lenders and not-for-profit lenders by 0.55 percentage points and 0.40 percentage points, respectively, for both Stafford and Consolidation loans disbursed on or after October 1, 2007;	

 	·	Reduced special allowance payments to for-profit lenders and not-for-profit lenders by 0.85 percentage points and 0.70 percentage points, respectively, for PLUS loans disbursed on or after October 1, 2007;	

 	·	Increased origination fees paid by lenders on all FFELP loan types, from 0.5 percent to 1.0 percent, for all loans first disbursed on or after October 1, 2007;	

 	·	Eliminated all provisions relating to Exceptional Performer status, and the monetary benefit associated with it, effective October 1, 2007; and	

 	·	Reduces default insurance to 95 percent of the unpaid principal of such loans, for loans first disbursed on or after October 1, 2012.	

Management estimates the impact of this legislation will reduce the annual yield on FFELP loans originated after October 1, 2007 by 70 to 80 basis points. The Company believes it can mitigate some of the reduction in annual yield by creating efficiencies and lowering costs, modifying borrower benefits, and reducing loan acquisition costs.

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 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 and have been used by the Company to fund general business operations, certain asset and business acquisitions, and the repurchase of stock under the Company’s stock repurchase plan.

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 collectibility 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 adequate 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.

Management bases the allowance for the federally insured loan portfolio on periodic evaluations of the Company’s loan portfolios, considering 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. One of the changes to the Higher Education Act as a result of HERA’s enactment in February 2006, was to lower the guaranty rates on FFELP loans, including a decrease in insurance and reinsurance on portfolios receiving the benefit of the Exceptional Performance designation by 1%, from 100% to 99% of principal and accrued interest (effective July 1, 2006), and a decrease in insurance and reinsurance on portfolios not subject to the Exceptional Performance designation by 1%, from 98% to 97% of principal and accrued interest (effective for all loans first disbursed on and after July 1, 2006).

In September 2005, the Company was re-designated as an Exceptional Performer by the Department in recognition of its exceptional level of performance in servicing FFELP loans. As a result of this designation, the Company received 99% reimbursement (100% reimbursement prior to July 1, 2006) on all eligible FFELP default claims submitted for reimbursement during the applicable period. Only FFELP loans that were serviced by the Company, as well as loans owned by the Company and serviced by other service providers designated as Exceptional Performers by the Department, were eligible for the 99% reimbursement.

On September 27, 2007, the President signed into law the College Cost Reduction Act. Among other things, this legislation eliminated all provisions relating to Exceptional Performer status, and the monetary benefit associated with it, effective October 1, 2007. Accordingly, the majority of claims submitted on or after October 1, 2007 are subject to reimbursement at 97% or 98% of principal and accrued interest depending on the disbursement date of the loan. During the three month period ended September 30, 2007, the Company recorded an expense of $15.7 million to increase the Company’s allowance for loan losses related to the increase in risk share as a result of the elimination of the Exceptional Performer program.

In determining the adequacy 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, months in repayment, delinquency status, type of program, and trends in defaults in the portfolio based on Company and industry data. The Company places a non-federally insured loan on nonaccrual status and charges off the loan when the collection of principal and interest is 120 days past due.

Other Income

The Company also earns fees and generates income from other sources, including principally loan and guaranty servicing income; fee-based income on borrower late fees, payment management activities, and certain marketing and enrollment services; and fees from providing software services.

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

Other Fee-Based Income - Other fee-based income includes borrower late fee income, payment management fees, the sale of lists and print products, and subscription-based products and services. Borrower late fee income earned by the Company’s education lending subsidiaries is recognized when payments are collected from the borrower. Fees for payment management services are recognized over the period in which services are provided to customers. Revenue from the sale of lists and printed products is generally earned and recognized, net of estimated returns, upon shipment or delivery. Revenues from the sales of subscription-based products and services are recognized ratably over the term of the subscription. Subscription revenue received or receivable in advance of the delivery of services is included in deferred revenue.
 
Software Services - Software services income 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.

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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, costs incurred to provide tuition payment processing, campus commerce, enrollment, list management, software, and technical services to third parties, the depreciation and amortization of capital assets and intangible assets, and other general and administrative expenses. Operating expenses also includes employee termination benefits, lease termination costs, and the write-down of certain assets related to the Company’s September 2007 and January 2008 restructuring plans.

Three and six months ended June 30, 2008 compared to the three and six months ended June 30, 2007

Net Interest Income

 	 	Three months ended June 30,	 	Six months ended June 30,	 	
 	 	2008	 	2007	 	$ Change	 	2008	 	2007	 	$ Change	 	
Interest income:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan interest	 	$	296,686	 	 	417,086	 	 	(120,400	)	 	626,672	 	 	814,140	 	 	(187,468	)	
Investment interest	 	 	9,116	 	 	18,783	 	 	(9,667	)	 	20,796	 	 	40,208	 	 	(19,412	)	
  Total interest income	 	 	305,802	 	 	435,869	 	 	(130,067	)	 	647,468	 	 	854,348	 	 	(206,880	)	
Interest expense:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest on bonds and notes payable	 	 	232,464	 	 	367,893	 	 	(135,429	)	 	557,605	 	 	718,388	 	 	(160,783	)	
  Net interest income	 	 	73,338	 	 	67,976	 	 	5,362	 	 	89,863	 	 	135,960	 	 	(46,097	)	
Provision for loan losses	 	 	6,000	 	 	2,535	 	 	3,465	 	 	11,000	 	 	5,288	 	 	5,712	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net interest income after provision for loan losses	 	$	67,338	 	 	65,441	 	 	1,897	 	 	78,863	 	 	130,672	 	 	(51,809	)	
 
 	·	Net interest income decreased for the six months ended June 30, 2008 compared to 2007 as a result of the compression in the core student loan spread as discussed in this Item 2 under “Asset Generation and Management Operating Segment - Results of Operations.” The decrease in net interest income was offset by $40.7 million of variable-rate floor income earned by the Company in 2008 and an increase in average student loans compared to 2007. Net interest income increased for the three months ended June 30, 2008 compared to the same period in 2007 as a result of an increase in student loan spread (including approximately $21.9 million of variable-rate floor income in 2008) and an increase in average student loans.	

 	·	The provision for loan losses increased for the three and six months ended June 30, 2008 compared to 2007 due to an increase in risk share as a result of the elimination of the Exceptional Performer program.	

Other Income

 	 	Three months ended June 30,	 	Six months ended June 30,	 	
 	 	2008	 	2007	 	$ Change	 	2008	 	2007	 	$ Change	 	
Loan and guaranty servicing income	 	$	24,904	 	 	31,610	 	 	(6,706	)	 	51,017	 	 	62,076	 	 	(11,059	)	
Other fee-based income	 	 	40,817	 	 	38,262	 	 	2,555	 	 	86,730	 	 	78,291	 	 	8,439	 	
Software services income	 	 	4,896	 	 	5,848	 	 	(952	)	 	11,648	 	 	11,596	 	 	52	 	
Other income	 	 	1,646	 	 	1,927	 	 	(281	)	 	3,056	 	 	7,020	 	 	(3,964	)	
Gain (loss) on sale of loans	 	 	48	 	 	1,010	 	 	(962	)	 	(47,426	)	 	2,796	 	 	(50,222	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative market value, foreign currency, and put option adjustments	 	 	15,755	 	 	5,547	 	 	10,208	 	 	(41,606	)	 	(6,583	)	 	(35,023	)	
Derivative settlements, net	 	 	4,437	 	 	5,196	 	 	(759	)	 	45,200	 	 	9,436	 	 	35,764	 	
Total other income	 	$	92,503	 	 	89,400	 	 	3,103	 	 	108,619	 	 	164,632	 	 	(56,013	)	

 	·	“Loan and guaranty servicing income” decreased due to decreases in both FFELP loan servicing income and guaranty servicing income as further discussed in this Item 2 under “Student Loan and Guaranty Servicing Operating Segment - Results of Operations.”	
 
 	·	“Other fee-based income” increased due to an increase in the number of managed tuition payment plans and an increase in campus commerce and related clients in the Tuition Payment Processing and Campus Commerce Operating Segment, as well as an increase in lead generation sales volume in the Enrollment Services and List Management Operating Segment.	

 	·	The Company recognized a loss of $47.5 million during the first quarter of 2008 as a result of the sale of $1.3 billion of student loans as further discussed in this Item 2 under “Asset Generation and Management Operating Segment - Results of Operations.”	

 	·	The change in “derivative market value, foreign currency, and put option adjustments” was caused by a change in the fair value of the Company’s derivative portfolio and foreign currency rate fluctuations which are further discussed in Item 3, “Quantitative and Qualitative Disclosures about Market Risk.”	

 	·	The change in derivative settlements is discussed in Item 3, “Quantitative and Qualitative Disclosures about Market Risk.”	

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Operating Expense s
 
 	 	 	 	 	 	Net change	 	 	 	
 	 	 	 	 	 	after impact of	 	 	 	
 	 	Three months ended	 	Impact of restructuring	 	restructuring and	 	Three months ended	 	
 	 	June 30, 2007	 	and impairment charges	 	impairment charges	 	June 30, 2008	 	
 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	$	59,761	 	 	(190	)	 	(16,022	)	 	43,549	 	
Other expenses	 	 	60,885	 	 	(175	)	 	(6,337	)	 	54,373	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating expenses	 	$	120,646	 	 	(365	)	 	(22,359	)	 	97,922	 	

 	 	 	 	 	 	Net change	 	 	 	
 	 	 	 	 	 	after impact of	 	 	 	
 	 	Six months ended	 	Impact of restructuring	 	restructuring and	 	Six months ended	 	
 	 	June 30, 2007	 	and impairment charges	 	impairment charges	 	June 30, 2008	 	
 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	$	121,465	 	 	5,714	 	 	(29,787	)	 	97,392	 	
Other expenses	 	 	120,410	 	 	20,232	 	 	(11,275	)	 	129,367	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
  Total operating expenses	 	$	241,875	 	 	25,946	 	 	(41,062	)	 	226,759	 	

Excluding restructuring and impairment charges, operating expenses decreased $22.4 million and $41.1 million for the three and six months ended June 30, 2008 compared to the same periods in 2007, respectively. The decrease is the result of cost savings from the September 2007 and January 2008 restructuring plans implemented by the Company. These plans resulted in the net reduction of approximately 700 positions in the Company’s overall workforce, leading to decreases in salaries and benefits and other expenses. The decrease is also a result of the Company capitalizing on the operating leverage of its business structure and strategies.

Income Taxes  

The Company’s effective tax rate was 31.0% for the three and six months ended June 30, 2008, compared to 38.9% and 38.5% for the same periods in 2007. The effective tax rate decreased due to the year-to-date tax benefit reduced by various state gross receipts taxes and other items which are not deductible for tax purposes. Management expects the Company’s effective income tax rate to remain relatively stable for the remainder of 2008.

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”.

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Financial Condition as of June 30, 2008 compared to December 31, 2007

 	 	As of	 	As of	 	 	 	 	 	
 	 	June 30,	 	December 31,	 	Change	 	
 	 	2008	 	2007	 	Dollars	 	Percent	 	
Assets:	 	 	 	 	 	 	 	 	 	
Student loans receivable, net	 	$	25,993,307	 	 	26,736,122	 	 	(742,815	)	 	(2.8	)%	
Cash, cash equivalents, and investments	 	 	1,175,310	 	 	1,120,838	 	 	54,472	 	 	4.9	 	
Goodwill	 	 	175,178	 	 	164,695	 	 	10,483	 	 	6.4	 	
Intangible assets, net	 	 	90,163	 	 	112,830	 	 	(22,667	)	 	(20.1	)	
Fair value of derivative instruments	 	 	295,346	 	 	222,471	 	 	72,875	 	 	32.8	 	
Other assets	 	 	702,621	 	 	805,827	 	 	(103,206	)	 	(12.8	)	
Total assets	 	$	28,431,925	 	 	29,162,783	 	 	(730,858	)	 	(2.5	)%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Bonds and notes payable	 	$	27,530,237	 	 	28,115,829	 	 	(585,592	)	 	(2.1	)%	
Fair value of derivative instruments	 	 	38,846	 	 	5,885	 	 	32,961	 	 	560.1	 	
Other liabilities	 	 	278,800	 	 	432,190	 	 	(153,390	)	 	(35.5	)	
Total liabilities	 	 	27,847,883	 	 	28,553,904	 	 	(706,021	)	 	(2.5	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Shareholders' equity	 	 	584,042	 	 	608,879	 	 	(24,837	)	 	(4.1	)	
Total liabilities and shareholders' equity	 	$	28,431,925	 	 	29,162,783	 	 	(730,858	)	 	(2.5	)%	
 
The Company’s total assets decreased during 2008 primarily due to a decrease in student loans receivable as a result of a sale of $1.3 billion of student loans in 2008 as further discussed in this Item 2 under “Asset Generation and Management Operating Segment - Results of Operations.” Total liabilities decreased primarily due to a decrease in bonds and notes payable. This decrease is a result of the decrease in student loan funding obligations due to a decrease in the Company’s student loan portfolio. Total equity decreased $24.8 million as a result of a $26.1 million net loss for the six months ended June 30, 2008. In addition, the Company paid a $0.07 per share dividend on its Class A and Class B common stock in the first quarter of 2008, which reduced equity by $3.5 million. These decreases to equity were offset by increases due to the issuance of common stock, compensation expense for stock-based awards, and payments received on employee stock notes receivable.

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OPERATING SEGMENTS

The Company has five operating segments as defined in SFAS No. 131 as follows: Student Loan and Guaranty Servicing, Tuition Payment Processing and Campus Commerce, Enrollment Services and List Management, Software and Technical Services, and Asset Generation and Management. The Company’s operating segments are defined by the products and services they offer or the types of customers they serve, and they reflect the manner in which financial information is currently evaluated by management. The accounting policies of the Company’s operating segments are the same as those described in the summary of significant accounting policies included in the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. Intersegment revenues are charged by a segment to another segment that provides the product or service. Intersegment revenues and expenses are included within each segment consistent with the income statement presentation provided to management. Changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial information.

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

In May 2007, the Company sold EDULINX, a Canadian student loan service provider and subsidiary of the Company. As a result of this transaction, the results of operations for EDULINX are reported as discontinued operations for all periods presented. The operating results of EDULINX were included in the Student Loan and Guaranty Servicing operating segment. The Company presents “base net income” excluding discontinued operations since the operations and cash flows of EDULINX have been eliminated from the ongoing operations of the Company. Therefore, the results of operations for the Student Loan and Guaranty Servicing segment exclude the operating results of EDULINX for all periods presented. See note 2 in the notes to the consolidated financial statements included in this Report for additional information concerning EDULINX’s detailed operating results that have been segregated from continuing operations and reported as discontinued operations.

Historically, the Company generated the majority of its revenue from net interest income earned in its Asset Generation and Management operating segment. In recent years, the Company has made several acquisitions that have expanded the Company’s products and services and has diversified its revenue - primarily from fee-based businesses. The Company currently offers a broad range of pre-college, in-college, and post-college products and services to students, families, schools, and financial institutions. These products and services help students and families plan and pay for their education and students plan their careers. The Company’s products and services are designed to simplify the education planning and financing process and are focused on providing value to students, families, and schools throughout the education life cycle. The Company continues to diversify its sources of revenue, including those generated from businesses that are not dependent upon government programs, reducing legislative and political risk.

“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.

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Segment Results and Reconciliations to GAAP

 	 	Three months ended June 30, 2008	 	
 	 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Student	 	Tuition	 	Enrollment	 	 	 	 	 	 	 	 	 	 	 	"Base net	 	 	 	
 	 	Loan	 	Payment	 	Services	 	Software	 	 	 	Asset	 	Corporate	 	 	 	income"	 	 	 	
 	 	and	 	Processing	 	and	 	and	 	Total	 	Generation	 	Activity	 	Eliminations	 	Adjustments	 	GAAP	 	
 	 	Guaranty	 	and Campus	 	List	 	Technical	 	Fee-	 	and	 	and	 	and	 	to GAAP	 	Results of	 	
 	 	Servicing	 	Commerce	 	Management	 	Services	 	Based	 	Management	 	Overhead	 	Reclassifications	 	Results	 	Operations	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total interest income	 	$	243	 	 	310	 	 	1	 	 	—	 	 	554	 	 	282,293	 	 	1,574	 	 	(546	)	 	21,927	 	 	305,802	 	
Interest expense	 	 	—	 	 	—	 	 	1	 	 	—	 	 	1	 	 	222,402	 	 	10,607	 	 	(546	)	 	—	 	 	232,464	 	
Net interest income (loss)	 	 	243	 	 	310	 	 	—	 	 	—	 	 	553	 	 	59,891	 	 	(9,033	)	 	—	 	 	21,927	 	 	73,338	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Less provision for loan losses	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	6,000	 	 	—	 	 	—	 	 	—	 	 	6,000	 	
Net interest income (loss) after provision for loan losses	 	 	243	 	 	310	 	 	—	 	 	—	 	 	553	 	 	53,891	 	 	(9,033	)	 	—	 	 	21,927	 	 	67,338	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other income (expense):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing income	 	 	24,747	 	 	—	 	 	—	 	 	—	 	 	24,747	 	 	157	 	 	—	 	 	—	 	 	—	 	 	24,904	 	
Other fee-based income	 	 	—	 	 	10,292	 	 	26,067	 	 	—	 	 	36,359	 	 	4,458	 	 	—	 	 	—	 	 	—	 	 	40,817	 	
Software services income	 	 	—	 	 	—	 	 	—	 	 	4,896	 	 	4,896	 	 	—	 	 	—	 	 	—	 	 	—	 	 	4,896	 	
Other income	 	 	6	 	 	(21	)	 	—	 	 	—	 	 	(15	)	 	393	 	 	1,268	 	 	—	 	 	—	 	 	1,646	 	
Gain on sale of loans	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	48	 	 	—	 	 	—	 	 	—	 	 	48	 	
Intersegment revenue	 	 	18,382	 	 	(76	)	 	—	 	 	1,517	 	 	19,823	 	 	—	 	 	13,960	 	 	(33,783	)	 	—	 	 	—	 	
Derivative market value, foreign currency, and put option adjustments	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	15,755	 	 	15,755	 	
Derivative settlements, net	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	11,638	 	 	—	 	 	—	 	 	(7,201	)	 	4,437	 	
Total other income (expense)	 	 	43,135	 	 	10,195	 	 	26,067	 	 	6,413	 	 	85,810	 	 	16,694	 	 	15,228	 	 	(33,783	)	 	8,554	 	 	92,503	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	12,491	 	 	5,784	 	 	6,373	 	 	4,702	 	 	29,350	 	 	1,954	 	 	12,828	 	 	(1,333	)	 	750	 	 	43,549	 	
Restructure expense - severance and contract termination costs	 	 	(104	)	 	—	 	 	(15	)	 	(8	)	 	(127	)	 	(52	)	 	(186	)	 	365	 	 	—	 	 	—	 	
Other expenses	 	 	8,011	 	 	2,551	 	 	17,284	 	 	714	 	 	28,560	 	 	5,095	 	 	14,921	 	 	(764	)	 	6,561	 	 	54,373	 	
Intersegment expenses	 	 	9,822	 	 	461	 	 	1,580	 	 	342	 	 	12,205	 	 	18,952	 	 	894	 	 	(32,051	)	 	—	 	 	—	 	
Total operating expenses	 	 	30,220	 	 	8,796	 	 	25,222	 	 	5,750	 	 	69,988	 	 	25,949	 	 	28,457	 	 	(33,783	)	 	7,311	 	 	97,922	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before income taxes	 	 	13,158	 	 	1,709	 	 	845	 	 	663	 	 	16,375	 	 	44,636	 	 	(22,262	)	 	—	 	 	23,170	 	 	61,919	 	
Income tax expense (benefit) (a)	 	 	4,079	 	 	530	 	 	262	 	 	206	 	 	5,077	 	 	13,837	 	 	(6,902	)	 	—	 	 	7,183	 	 	19,195	 	
Net income (loss) from continuing operations	 	 	9,079	 	 	1,179	 	 	583	 	 	457	 	 	11,298	 	 	30,799	 	 	(15,360	)	 	—	 	 	15,987	 	 	42,724	 	
Income from discontinued operations, net of tax	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	981	 	 	981	 	
Net income (loss)	 	$	9,079	 	 	1,179	 	 	583	 	 	457	 	 	11,298	 	 	30,799	 	 	(15,360	)	 	—	 	 	16,968	 	 	43,705	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
(a) Beginning in 2008, the consolidated effective tax rate is used to calculate income taxes for each operating segment.	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Three months ended June 30, 2008:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin -excluding restructure expense	 	 	30.1	%	 	16.3	%	 	3.2	%	 	10.2	%	 	18.8	%	 	63.2	%	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Three months ended June 30, 2007:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin	 	 	35.3	%	 	27.7	%	 	6.7	%	 	30.4	%	 	26.6	%	 	52.7	%	 	 	 	 	 	 	 	 	 	 	 	 	

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 	 	Three months ended June 30, 2007	 	
 	 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Student	 	Tuition	 	Enrollment	 	 	 	 	 	 	 	 	 	 	 	"Base net	 	 	 	
 	 	Loan	 	Payment	 	Services	 	Software	 	 	 	Asset	 	Corporate	 	 	 	income"	 	 	 	
 	 	and	 	Processing	 	and	 	and	 	Total	 	Generation	 	Activity	 	Eliminations	 	Adjustments	 	GAAP	 	
 	 	Guaranty	 	and Campus	 	List	 	Technical	 	Fee-	 	and	 	and	 	and	 	to GAAP	 	Results of	 	
 	 	Servicing	 	Commerce	 	Management	 	Services	 	Based	 	Management	 	Overhead	 	Reclassifications	 	Results	 	Operations	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total interest income	 	$	1,181	 	 	670	 	 	93	 	 	—	 	 	1,944	 	 	433,404	 	 	554	 	 	(33	)	 	—	 	 	435,869	 	
Interest expense	 	 	—	 	 	2	 	 	2	 	 	—	 	 	4	 	 	358,341	 	 	9,581	 	 	(33	)	 	—	 	 	367,893	 	
Net interest income (loss)	 	 	1,181	 	 	668	 	 	91	 	 	—	 	 	1,940	 	 	75,063	 	 	(9,027	)	 	—	 	 	—	 	 	67,976	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Less provision for loan losses	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	2,535	 	 	—	 	 	—	 	 	—	 	 	2,535	 	
Net interest income (loss) after provision for loan losses	 	 	1,181	 	 	668	 	 	91	 	 	—	 	 	1,940	 	 	72,528	 	 	(9,027	)	 	—	 	 	—	 	 	65,441	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other income (expense):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing income	 	 	31,492	 	 	—	 	 	—	 	 	—	 	 	31,492	 	 	118	 	 	—	 	 	—	 	 	—	 	 	31,610	 	
Other fee-based income	 	 	—	 	 	9,405	 	 	24,923	 	 	—	 	 	34,328	 	 	3,674	 	 	260	 	 	—	 	 	—	 	 	38,262	 	
Software services income	 	 	—	 	 	—	 	 	157	 	 	5,691	 	 	5,848	 	 	—	 	 	—	 	 	—	 	 	—	 	 	5,848	 	
Other income	 	 	5	 	 	25	 	 	—	 	 	—	 	 	30	 	 	105	 	 	1,792	 	 	—	 	 	—	 	 	1,927	 	
Gain on the sale of loans	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	1,010	 	 	—	 	 	—	 	 	—	 	 	1,010	 	
Intersegment revenue	 	 	20,120	 	 	188	 	 	178	 	 	4,389	 	 	24,875	 	 	—	 	 	4,100	 	 	(28,975	)	 	—	 	 	—	 	
Derivative market value, foreign currency, and put option adjustments	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	5,547	 	 	5,547	 	
Derivative settlements, net	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(461	)	 	5,657	 	 	—	 	 	—	 	 	5,196	 	
Total other income (expense)	 	 	51,617	 	 	9,618	 	 	25,258	 	 	10,080	 	 	96,573	 	 	4,446	 	 	11,809	 	 	(28,975	)	 	5,547	 	 	89,400	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	22,023	 	 	5,082	 	 	9,022	 	 	5,857	 	 	41,984	 	 	7,167	 	 	12,272	 	 	(2,138	)	 	476	 	 	59,761	 	
Other expenses	 	 	8,404	 	 	2,333	 	 	14,589	 	 	751	 	 	26,077	 	 	7,246	 	 	21,071	 	 	—	 	 	6,491	 	 	60,885	 	
Intersegment expenses	 	 	3,750	 	 	25	 	 	29	 	 	403	 	 	4,207	 	 	22,034	 	 	596	 	 	(26,837	)	 	—	 	 	—	 	
Total operating expenses	 	 	34,177	 	 	7,440	 	 	23,640	 	 	7,011	 	 	72,268	 	 	36,447	 	 	33,939	 	 	(28,975	)	 	6,967	 	 	120,646	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before income taxes	 	 	18,621	 	 	2,846	 	 	1,709	 	 	3,069	 	 	26,245	 	 	40,527	 	 	(31,157	)	 	—	 	 	(1,420	)	 	34,195	 	
Income tax expense (benefit) (a)	 	 	7,076	 	 	1,082	 	 	649	 	 	1,167	 	 	9,974	 	 	15,400	 	 	(11,500	)	 	—	 	 	(568	)	 	13,306	 	
Net income (loss) from continuing operations	 	 	11,545	 	 	1,764	 	 	1,060	 	 	1,902	 	 	16,271	 	 	25,127	 	 	(19,657	)	 	—	 	 	(852	)	 	20,889	 	
Loss from discontinued operations, net of tax	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(6,135	)	 	(6,135	)	
Net income (loss)	 	$	11,545	 	 	1,764	 	 	1,060	 	 	1,902	 	 	16,271	 	 	25,127	 	 	(19,657	)	 	—	 	 	(6,987	)	 	14,754	 	

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

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 	 	Six months ended June 30, 2008	 	
 	 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Student	 	Tuition	 	Enrollment	 	 	 	 	 	 	 	 	 	 	 	"Base net	 	 	 	
 	 	Loan	 	Payment	 	Services	 	Software	 	 	 	Asset	 	Corporate	 	 	 	income"	 	 	 	
 	 	and	 	Processing	 	and	 	and	 	Total	 	Generation	 	Activity	 	Eliminations	 	Adjustments	 	GAAP	 	
 	 	Guaranty	 	and Campus	 	List	 	Technical	 	Fee-	 	and	 	and	 	and	 	to GAAP	 	Results of	 	
 	 	Servicing	 	Commerce	 	Management	 	Services	 	Based	 	Management	 	Overhead	 	Reclassifications	 	Results	 	Operations	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total interest income	 	$	856	 	 	1,075	 	 	10	 	 	—	 	 	1,941	 	 	602,651	 	 	2,771	 	 	(640	)	 	40,745	 	 	647,468	 	
Interest expense	 	 	—	 	 	—	 	 	2	 	 	—	 	 	2	 	 	538,417	 	 	19,826	 	 	(640	)	 	—	 	 	557,605	 	
Net interest income (loss)	 	 	856	 	 	1,075	 	 	8	 	 	—	 	 	1,939	 	 	64,234	 	 	(17,055	)	 	—	 	 	40,745	 	 	89,863	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Less provision for loan losses	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	11,000	 	 	—	 	 	—	 	 	—	 	 	11,000	 	
Net interest income (loss) after provision for loan losses	 	 	856	 	 	1,075	 	 	8	 	 	—	 	 	1,939	 	 	53,234	 	 	(17,055	)	 	—	 	 	40,745	 	 	78,863	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other income (expense):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing income	 	 	50,855	 	 	—	 	 	—	 	 	—	 	 	50,855	 	 	162	 	 	—	 	 	—	 	 	—	 	 	51,017	 	
Other fee-based income	 	 	—	 	 	24,114	 	 	53,289	 	 	—	 	 	77,403	 	 	9,327	 	 	—	 	 	—	 	 	—	 	 	86,730	 	
Software services income	 	 	—	 	 	—	 	 	37	 	 	11,611	 	 	11,648	 	 	—	 	 	—	 	 	—	 	 	—	 	 	11,648	 	
Other income	 	 	38	 	 	4	 	 	—	 	 	—	 	 	42	 	 	381	 	 	2,633	 	 	—	 	 	—	 	 	3,056	 	
Loss on sale of loans	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(47,426	)	 	—	 	 	—	 	 	—	 	 	(47,426	)	
Intersegment revenue	 	 	38,606	 	 	184	 	 	—	 	 	3,333	 	 	42,123	 	 	—	 	 	31,173	 	 	(73,296	)	 	—	 	 	—	 	
Derivative market value, foreign currency, and put option adjustments	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	466	 	 	—	 	 	—	 	 	(42,072	)	 	(41,606	)	
Derivative settlements, net	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	55,165	 	 	—	 	 	—	 	 	(9,965	)	 	45,200	 	
Total other income (expense)	 	 	89,499	 	 	24,302	 	 	53,326	 	 	14,944	 	 	182,071	 	 	18,075	 	 	33,806	 	 	(73,296	)	 	(52,037	)	 	108,619	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	26,489	 	 	11,214	 	 	12,896	 	 	9,870	 	 	60,469	 	 	4,178	 	 	27,419	 	 	3,280	 	 	2,046	 	 	97,392	 	
Restructure expense - severance and contract termination costs	 	 	747	 	 	—	 	 	282	 	 	510	 	 	1,539	 	 	1,844	 	 	3,729	 	 	(7,112	)	 	—	 	 	—	 	
Impairment expense	 	 	5,074	 	 	—	 	 	—	 	 	—	 	 	5,074	 	 	9,351	 	 	4,409	 	 	—	 	 	—	 	 	18,834	 	
Other expenses	 	 	16,498	 	 	4,611	 	 	35,447	 	 	1,333	 	 	57,889	 	 	10,439	 	 	28,786	 	 	298	 	 	13,121	 	 	110,533	 	
Intersegment expenses	 	 	23,100	 	 	757	 	 	3,427	 	 	736	 	 	28,020	 	 	39,554	 	 	2,188	 	 	(69,762	)	 	—	 	 	—	 	
Total operating expenses	 	 	71,908	 	 	16,582	 	 	52,052	 	 	12,449	 	 	152,991	 	 	65,366	 	 	66,531	 	 	(73,296	)	 	15,167	 	 	226,759	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before income taxes	 	 	18,447	 	 	8,795	 	 	1,282	 	 	2,495	 	 	31,019	 	 	5,943	 	 	(49,780	)	 	—	 	 	(26,459	)	 	(39,277	)	
Income tax expense (benefit) (a)	 	 	5,719	 	 	2,727	 	 	397	 	 	774	 	 	9,617	 	 	1,842	 	 	(15,433	)	 	—	 	 	(8,202	)	 	(12,176	)	
Net income (loss) from continuing operations	 	 	12,728	 	 	6,068	 	 	885	 	 	1,721	 	 	21,402	 	 	4,101	 	 	(34,347	)	 	—	 	 	(18,257	)	 	(27,101	)	
Income from discontinued operations, net of tax	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	981	 	 	981	 	
Net income (loss)	 	$	12,728	 	 	6,068	 	 	885	 	 	1,721	 	 	21,402	 	 	4,101	 	 	(34,347	)	 	—	 	 	(17,276	)	 	(26,120	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
(a) Beginning in 2008, the consolidated effective tax rate is used to calculate income taxes for each operating segment.	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Six months ended June 30, 2008:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin - excluding restructure expense, impairment expense, and the loss on sale of loans during the first quarter of 2008	 	 	26.9	%	 	34.7	%	 	2.9	%	 	20.1	%	 	20.5	%	 	54.4	%	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Six months ended June, 2007:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin	 	 	31.6	%	 	35.9	%	 	6.9	%	 	27.0	%	 	25.2	%	 	55.7	%	 	 	 	 	 	 	 	 	 	 	 	 	

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Table of Contents

 	 	Six months ended June 30, 2007	 	
 	 	Fee-Based	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Student	 	Tuition	 	Enrollment	 	 	 	 	 	 	 	 	 	 	 	"Base net	 	 	 	
 	 	Loan	 	Payment	 	Services	 	Software	 	 	 	Asset	 	Corporate	 	 	 	income"	 	 	 	
 	 	and	 	Processing	 	and	 	and	 	Total	 	Generation	 	Activity	 	Eliminations	 	Adjustments	 	GAAP	 	
 	 	Guaranty	 	and Campus	 	List	 	Technical	 	Fee-	 	and	 	and	 	and	 	to GAAP	 	Results of	 	
 	 	Servicing	 	Commerce	 	Management	 	Services	 	Based	 	Management	 	Overhead	 	Reclassifications	 	Results	 	Operations	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total interest income	 	$	3,425	 	 	1,680	 	 	180	 	 	18	 	 	5,303	 	 	847,894	 	 	4,355	 	 	(3,204	)	 	—	 	 	854,348	 	
Interest expense	 	 	—	 	 	7	 	 	4	 	 	—	 	 	11	 	 	699,999	 	 	21,582	 	 	(3,204	)	 	—	 	 	718,388	 	
Net interest income (loss)	 	 	3,425	 	 	1,673	 	 	176	 	 	18	 	 	5,292	 	 	147,895	 	 	(17,227	)	 	—	 	 	—	 	 	135,960	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Less provision for loan losses	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	5,288	 	 	—	 	 	—	 	 	—	 	 	5,288	 	
Net interest income (loss) after provision for loan losses	 	 	3,425	 	 	1,673	 	 	176	 	 	18	 	 	5,292	 	 	142,607	 	 	(17,227	)	 	—	 	 	—	 	 	130,672	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other income (expense):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing income	 	 	61,958	 	 	—	 	 	—	 	 	—	 	 	61,958	 	 	118	 	 	—	 	 	—	 	 	—	 	 	62,076	 	
Other fee-based income	 	 	—	 	 	21,176	 	 	49,870	 	 	—	 	 	71,046	 	 	6,985	 	 	260	 	 	—	 	 	—	 	 	78,291	 	
Software services income	 	 	—	 	 	—	 	 	287	 	 	11,309	 	 	11,596	 	 	—	 	 	—	 	 	—	 	 	—	 	 	11,596	 	
Other income	 	 	11	 	 	28	 	 	—	 	 	—	 	 	39	 	 	3,148	 	 	3,833	 	 	—	 	 	—	 	 	7,020	 	
Gain on the sale of loans	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	2,796	 	 	—	 	 	—	 	 	—	 	 	2,796	 	
Intersegment revenue	 	 	36,584	 	 	340	 	 	928	 	 	8,221	 	 	46,073	 	 	—	 	 	6,116	 	 	(52,189	)	 	—	 	 	—	 	
Derivative market value, foreign currency, and put option adjustments	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(6,583	)	 	(6,583	)	
Derivative settlements, net	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(885	)	 	10,321	 	 	—	 	 	—	 	 	9,436	 	
Total other income (expense)	 	 	98,553	 	 	21,544	 	 	51,085	 	 	19,530	 	 	190,712	 	 	12,162	 	 	20,530	 	 	(52,189	)	 	(6,583	)	 	164,632	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	45,027	 	 	10,000	 	 	18,391	 	 	12,332	 	 	85,750	 	 	14,446	 	 	24,978	 	 	(4,662	)	 	953	 	 	121,465	 	
Other expenses	 	 	17,654	 	 	4,493	 	 	29,148	 	 	1,535	 	 	52,830	 	 	15,511	 	 	38,940	 	 	—	 	 	13,129	 	 	120,410	 	
Intersegment expenses	 	 	7,068	 	 	399	 	 	185	 	 	403	 	 	8,055	 	 	38,670	 	 	802	 	 	(47,527	)	 	—	 	 	—	 	
Total operating expenses	 	 	69,749	 	 	14,892	 	 	47,724	 	 	14,270	 	 	146,635	 	 	68,627	 	 	64,720	 	 	(52,189	)	 	14,082	 	 	241,875	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before income taxes	 	 	32,229	 	 	8,325	 	 	3,537	 	 	5,278	 	 	49,369	 	 	86,142	 	 	(61,417	)	 	—	 	 	(20,665	)	 	53,429	 	
Income tax expense (benefit) (a)	 	 	12,247	 	 	3,164	 	 	1,344	 	 	2,006	 	 	18,761	 	 	32,734	 	 	(23,826	)	 	—	 	 	(7,099	)	 	20,570	 	
Net income (loss) from continuing operations	 	 	19,982	 	 	5,161	 	 	2,193	 	 	3,272	 	 	30,608	 	 	53,408	 	 	(37,591	)	 	—	 	 	(13,566	)	 	32,859	 	
Loss from discontinued operations, net of tax	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(3,325	)	 	(3,325	)	
Net income (loss)	 	$	19,982	 	 	5,161	 	 	2,193	 	 	3,272	 	 	30,608	 	 	53,408	 	 	(37,591	)	 	—	 	 	(16,891	)	 	29,534	 	

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

Non-GAAP Performance Measures

In accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”), the Company prepares financial statements in accordance with generally accepted accounting principles (“GAAP”). In addition to evaluating the Company’s GAAP-based financial information, management also evaluates the Company’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, allocate resources, track results, evaluate performance, establish corporate performance targets, 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.

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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, discontinued operations, and certain other items that management does not consider in evaluating the Company’s operating results. The following table reflects adjustments associated with these areas by operating segment and Corporate Activity and Overhead:

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 	 	Student	 	Tuition	 	Enrollment	 	 	 	 	 	 	 	 	 	
 	 	Loan	 	Payment	 	Services	 	Software	 	Asset	 	Corporate	 	 	 	
 	 	and	 	Processing	 	and	 	and	 	Generation	 	Activity	 	 	 	
 	 	Guaranty	 	and Campus	 	List	 	Technical	 	and	 	and	 	 	 	
 	 	Servicing	 	Commerce	 	Management	 	Services	 	Management	 	Overhead	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended June 30, 2008	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative market value, foreign currency, and put option adjustments	 	$	—	 	 	—	 	 	—	 	 	—	 	 	(15,866	)	 	111	 	 	(15,755	)	
Amortization of intangible assets	 	 	1,165	 	 	1,997	 	 	3,113	 	 	286	 	 	—	 	 	—	 	 	6,561	 	
Compensation related to business combinations	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	750	 	 	750	 	
Variable-rate floor income, net of settlements on derivatives	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(14,726	)	 	—	 	 	(14,726	)	
Income from discontinued operations, net of tax	 	 	(981	)	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(981	)	
Net tax effect (a)	 	 	(361	)	 	(619	)	 	(965	)	 	(89	)	 	9,484	 	 	(267	)	 	7,183	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total adjustments to GAAP	 	$	(177	)	 	1,378	 	 	2,148	 	 	197	 	 	(21,108	)	 	594	 	 	(16,968	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months ended June 30, 2007	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative market value, foreign currency, and put option adjustments	 	$	—	 	 	—	 	 	—	 	 	—	 	 	6,002	 	 	(11,549	)	 	(5,547	)	
Amortization of intangible assets	 	 	1,350	 	 	1,469	 	 	1,545	 	 	287	 	 	1,840	 	 	—	 	 	6,491	 	
Compensation related to business combinations	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	476	 	 	476	 	
Variable-rate floor income, net of settlements on derivatives	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	
Loss from discontinued operations, net of tax	 	 	6,135	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	6,135	 	
Net tax effect (a)	 	 	(513	)	 	(558	)	 	(587	)	 	(109	)	 	(2,980	)	 	4,179	 	 	(568	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total adjustments to GAAP	 	$	6,972	 	 	911	 	 	958	 	 	178	 	 	4,862	 	 	(6,894	)	 	6,987	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Six months ended June 30, 2008	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative market value, foreign currency, and put option adjustments	 	$	—	 	 	—	 	 	—	 	 	—	 	 	41,534	 	 	538	 	 	42,072	 	
Amortization of intangible assets	 	 	2,421	 	 	4,048	 	 	5,935	 	 	572	 	 	145	 	 	—	 	 	13,121	 	
Compensation related to business combinations	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	2,046	 	 	2,046	 	
Variable-rate floor income, net of settlements on derivatives	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(30,780	)	 	—	 	 	(30,780	)	
Income from discontinued operations, net of tax	 	 	(981	)	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	(981	)	
Net tax effect (a)	 	 	(750	)	 	(1,255	)	 	(1,840	)	 	(178	)	 	(3,378	)	 	(801	)	 	(8,202	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total adjustments to GAAP	 	$	690	 	 	2,793	 	 	4,095	 	 	394	 	 	7,521	 	 	1,783	 	 	17,276	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Six months ended June 30, 2007	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative market value, foreign currency, and put option adjustments	 	$	—	 	 	—	 	 	—	 	 	—	 	 	12,216	 	 	(5,633	)	 	6,583	 	
Amortization of intangible assets	 	 	2,394	 	 	2,938	 	 	3,355	 	 	617	 	 	3,825	 	 	—	 	 	13,129	 	
Compensation related to business combinations	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	953	 	 	953	 	
Variable-rate floor income, net of settlements on derivatives	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	
Loss from discontinued operations, net of tax	 	 	3,325	 	 	—	 	 	—	 	 	—	 	 	—	 	 	—	 	 	3,325	 	
Net tax effect (a)	 	 	(910	)	 	(1,116	)	 	(1,275	)	 	(234	)	 	(6,096	)	 	2,532	 	 	(7,099	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total adjustments to GAAP	 	$	4,809	 	 	1,822	 	 	2,080	 	 	383	 	 	9,945	 	 	(2,148	)	 	16,891	 	
 
 	(a)	Beginning in 2008, tax effect is computed using the Company’s consolidated effective tax rate for each applicable period. In prior periods, tax effect was computed at 38%. The change in the value of the put options for prior periods (included in Corporate Activity and Overhead) was not tax effected as this is not deductible for income tax purposes.	

Differences between GAAP and “Base Net Income”

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

Derivative market value, foreign currency, and put option adjustments: “ Base net income” excludes the periodic unrealized gains and losses that are caused by the change in fair value on derivatives used in the Company’s risk management strategy in which the Company does not qualify for “hedge treatment” under GAAP. Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”), requires that changes in fair value of derivative instruments be recognized currently in earnings unless specific hedge accounting criteria, as specified by SFAS No. 133, are met. The Company maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Derivative instruments primarily used by the Company include interest rate swaps, basis swaps, and cross-currency interest rate swaps. Management has structured all of the Company's derivative transactions with the intent that each is economically effective. However, the Company does not qualify its derivatives for “hedge treatment” as defined by SFAS No. 133, and the stand-alone derivative must be marked-to-market in the income statement with no consideration for the corresponding change in fair value of the hedged item. The Company believes these point-in-time estimates of asset and liability values that are subject to interest rate fluctuations make it difficult to evaluate the ongoing results of operations against its business plan and affect the period-to-period comparability of the results of operations. Included in “base net income” are the economic effects of the Company’s derivative instruments, which includes any cash paid or received being recognized as an expense or revenue upon actual derivative settlements. These settlements are included in “Derivative market value, foreign currency, and put option adjustments and derivative settlements, net” on the Company’s consolidated statements of operations.

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

“Base net income” also excludes the change in fair value of put options issued by the Company for certain business acquisitions. The put options are valued by the Company each reporting period using a Black-Scholes pricing model. Therefore, the fair value of these options is primarily affected by the strike price and term of the underlying option, the Company’s current stock price, and the dividend yield and volatility of the Company’s stock. The Company believes these point-in-time estimates of value that are subject to fluctuations make it difficult to evaluate the ongoing results of operations against the Company’s business plans and affects the period-to-period comparability of the results of operations.
 
The gains and/or losses included in “Derivative market value, foreign currency, and put option adjustments and derivative settlements, net” on the Company’s consolidated statements of operations are primarily caused by interest rate and currency volatility, changes in the value of put options based on the inputs used in the Black-Scholes pricing model, as well as the volume and terms of put options and of derivatives not receiving hedge treatment. “Base net income” excludes these unrealized gains and losses and isolates the effect of interest rate, currency, and put option volatility on the fair value of such instruments during the period. Under GAAP, the effects of these factors on the fair value of the put options and the derivative instruments (but not the underlying hedged item) tend to show more volatility in the short term.

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

Compensation related to business combinations: The Company has structured certain business combinations in which the consideration paid has been dependent on the sellers’ continued employment with the Company. As such, the value of the consideration paid is recognized as compensation expense by the Company over the term of the applicable employment agreement. “Base net income” excludes this expense because the Company believes such charges do not drive its operating performance on a long-term basis and can affect the period-to-period comparability of the results of operations. If the Company did not enter into the employment agreements in connection with the acquisition, the amount paid to these former shareholders of the acquired entity would have been recorded by the Company as additional consideration of the acquired entity, thus, not having an effect on the Company’s results of operations.

Variable-rate floor income, net of settlements on derivatives : Loans that reset annually on July 1 can generate excess spread income compared with the rate based on the special allowance payment formula in declining interest rate environments. The Company refers to this additional income as variable-rate floor income. The Company excludes variable-rate floor income, net of settlements paid on derivatives used to hedge student loan assets earning variable-rate floor income, from its “base net income” since the timing and amount of variable-rate floor income (if any) is uncertain, it has been eliminated by legislation for all loans originated on and after April 1, 2006, and it is in excess of expected spreads. In addition, because variable-rate floor income is subject to the underlying rate for the subject loans being reset annually on July 1, it is a factor beyond the Company’s control which can affect the period-to-period comparability of results of operations.

Variable-rate floor income is calculated by the Company on a statutory basis. As a result of the disruptions in the debt and secondary capital markets beginning in August 2007, the full benefit of variable-rate floor income has not been realized by the Company due to the widening of the spread between short term interest rate indices and the Company’s actual cost of funds.

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Discontinued operations: In May 2007, the Company sold EDULINX. As a result of this transaction, the results of operations for EDULINX are reported as discontinued operations for all periods presented. The Company presents “base net income” excluding discontinued operations since the operations and cash flows of EDULINX have been eliminated from the ongoing operations of the Company.

STUDENT LOAN AND GUARANTY SERVICING OPERATING SEGMENT - RESULTS OF OPERATIONS

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

 	 	As of	 	As of	 	
 	 	June 30,	 	June 30,	 	
 	 	2008	 	2007	 	
 	 	Dollar	 	Percent	 	Dollar	 	Percent	 	
 	 	(dollars in millions)	 	
 	 	 	 	 	 	 	 	 	 	
Company	 	$	24,873	(a)	 	70.0	%	$	24,429	 	 	75.6	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Third Party	 	 	10,680	(b)	 	30.0	 	 	7,884	 	 	24.4	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	35,553	 	 	100.0	%	$	32,313	 	 	100.0	%	

 	(a)	Approximately $26 million of these loans were disbursed on or after May 1, 2008 and are eligible to be sold to the Department of Education pursuant to its Purchase Commitment Program. The Department obtains all rights to service loans which it purchases as part of this program.	

 	(b)	Approximately $145 million of these loans were disbursed on or after May 1, 2008 and may be eligible to be sold to the Department of Education pursuant to its Purchase Commitment Program. The Department obtains all rights to service loans which it purchases as part of this program.	

Three and six months ended June 30, 2008 compared to the three and six months ended June 30, 2007  

 	 	Three months ended June 30,	 	Six months ended June 30,	 	
 	 	2008	 	2007	 	$ Change	 	2008	 	2007	 	$ Change	 	
Net interest income after the provision for loan losses	 	$	243	 	 	1,181	 	 	(938	)	 	856	 	 	3,425	 	 	(2,569	)	
Loan and guaranty servicing income	 	 	24,747	 	 	31,492	 	 	(6,745	)	 	50,855	 	 	61,958	 	 	(11,103	)	
Other income	 	 	6	 	 	5	 	 	1	 	 	38	 	 	11	 	 	27	 	
Intersegment revenue	 	 	18,382	 	 	20,120	 	 	(1,738	)	 	38,606	 	 	36,584	 	 	2,022	 	
Total other income	 	 	43,135	 	 	51,617	 	 	(8,482	)	 	89,499	 	 	98,553	 	 	(9,054	)	
Salaries and benefits	 	 	12,491	 	 	22,023	 	 	(9,532	)	 	26,489	 	 	45,027	 	 	(18,538	)	
Restructure expense - severance and contract termination costs	 	 	(104	)	 	—	 	 	(104	)	 	747	 	 	—	 	 	747	 	
Impairment expense	 	 	—	 	 	—	 	 	—	 	 	5,074	 	 	—	 	 	5,074	 	
Other expenses	 	 	8,011	 	 	8,404	 	 	(393	)	 	16,498	 	 	17,654	 	 	(1,156	)	
Intersegment expenses	 	 	9,822	 	 	3,750	 	 	6,072	 	 	23,100	 	 	7,068	 	 	16,032	 	
Total operating expenses	 	 	30,220	 	 	34,177	 	 	(3,957	)	 	71,908	 	 	69,749	 	 	2,159	 	
"Base net income" before income taxes	 	 	13,158	 	 	18,621	 	 	(5,463	)	 	18,447	 	 	32,229	 	 	(13,782	)	
Income tax expense	 	 	4,079	 	 	7,076	 	 	(2,997	)	 	5,719	 	 	12,247	 	 	(6,528	)	
"Base net income"	 	$	9,079	 	 	11,545	 	 	(2,466	)	 	12,728	 	 	19,982	 	 	(7,254	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin	 	 	30.3	%	 	35.3	%	 	 	 	 	20.4	%	 	31.6	%	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin - excluding restructure expense and impairment expense	 	 	30.1	%	 	35.3	%	 	 	 	 	26.9	%	 	31.6	%	 	 	 	

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Net interest income after the provision for loan losses . Investment income decreased as a result of an overall decrease in cash held in 2008 compared to 2007, as well as lower interest rates.
 
Loan and guaranty servicing income . Loan and guaranty servicing income for the three and six months ended June 30, 2008 decreased from the same periods in 2007 as follows:

 	 	Three months ended June 30,	 	Six months ended June 30,	 	
 	 	2008	 	2007	 	$ Change	 	% Change	 	2008	 	2007	 	$ Change	 	% Change	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Origination and servicing of FFEL Program loans	 	$	12,533	 	 	13,774	 	 	(1,241	)	 	(9.0	)%	$	24,812	 	 	27,904	 	 	(3,092	)	 	(11.1	)%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Origination and servicing of non-federally insured student loans	 	 	1,872	 	 	2,335	 	 	(463	)	 	(19.8	)	 	4,143	 	 	4,656	 	 	(513	)	 	(11.0	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Servicing and support outsourcing for guaranty agencies	 	 	10,342	 	 	15,383	 	 	(5,041	)	 	(32.8	)	 	21,900	 	 	29,398	 	 	(7,498	)	 	(25.5	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing income to external parties	 	$	24,747	 	 	31,492	 	 	(6,745	)	 	(21.4)	% 	$	50,855	 	 	61,958	 	 	(11,103	)	 	(17.9)	%	

 	·	FFELP loan servicing income decreased due to new servicing contracts being priced at lower rates following the legislative developments in September 2007. This decrease was partially offset by an increase in loan servicing volume due to entering into new servicing contracts.  	
 
 	·	Servicing and support outsourcing for guaranty agencies decreased due to the termination of the Voluntary Flexible Agreement between the Department of Education and College Assist and the timing of certain activities offset by an increase in the volume of guaranteed loans serviced as well as an increase in collections due to utilizing an outside collection agency.	
 
Intersegment revenue . The decrease in intersegment revenue for the three months ended June 30, 2008 and the increase for the six months ended June 30, 2008 compared to the same periods in 2007 was the result of a decrease in internal call center revenue due to the Company’s reduction in direct-to-consumer marketing and an increase in servicing volume and rates for internal customers.

Operating expenses . Excluding restructuring and impairment charges, operating expenses decreased $3.9 million and $3.7 million for the three and six months ended June 30, 2008 compared to the same period in 2007 as a result of cost savings from the Company’s September 2007 and January 2008 restructuring plans. This decrease was offset by an increase in operating expenses resulting from the allocation of additional corporate overhead expenses, which were included in Corporate Activity and Overhead for the three and six months ended June 30, 2007

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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 institutions and education seeking families manage the payment of education costs during the pre-college and college stages of the education life cycle. The Company provides actively managed tuition payment solutions, online payment processing, detailed information reporting, financial needs analysis, and data integration services to K-12 and higher educational institutions, families, and students. In addition, the Company provides customer-focused electronic transactions, information sharing, and account and bill presentment to colleges and universities.

Three and six months ended June 30, 2008 compared to the three and six months ended June 30, 2007

 	 	Three months ended June 30,	 	Six months ended June 30,	 	
 	 	2008	 	2007	 	$ Change	 	2008	 	2007	 	$ Change	 	
Net interest income after the provision for loan losses	 	$	310	 	 	668	 	 	(358	)	 	1,075	 	 	1,673	 	 	(598	)	
Other fee-based income	 	 	10,292	 	 	9,405	 	 	887	 	 	24,114	 	 	21,176	 	 	2,938	 	
Other income	 	 	(21	)	 	25	 	 	(46	)	 	4	 	 	28	 	 	(24	)	
Intersegment revenue	 	 	(76	)	 	188	 	 	(264	)	 	184	 	 	340	 	 	(156	)	
Total other income	 	 	10,195	 	 	9,618	 	 	577	 	 	24,302	 	 	21,544	 	 	2,758	 	
Salaries and benefits	 	 	5,784	 	 	5,082	 	 	702	 	 	11,214	 	 	10,000	 	 	1,214	 	
Other expenses	 	 	2,551	 	 	2,333	 	 	218	 	 	4,611	 	 	4,493	 	 	118	 	
Intersegment expenses	 	 	461	 	 	25	 	 	436	 	 	757	 	 	399	 	 	358	 	
Total operating expenses	 	 	8,796	 	 	7,440	 	 	1,356	 	 	16,582	 	 	14,892	 	 	1,690	 	
"Base net income" before income taxes	 	 	1,709	 	 	2,846	 	 	(1,137	)	 	8,795	 	 	8,325	 	 	470	 	
Income tax expense	 	 	530	 	 	1,082	 	 	(552	)	 	2,727	 	 	3,164	 	 	(437	)	
"Base net income"	 	$	1,179	 	 	1,764	 	 	(585	)	 	6,068	 	 	5,161	 	 	907	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin	 	 	16.3	%	 	27.7	%	 	 	 	 	34.7	%	 	35.9	%	 	 	 	

Other fee-based income . Other fee-based income increased for the three and six months ended June 30, 2008 compared to the same period in 2007 as a result of an increase in the number of managed tuition payment plans as well as an increase in campus commerce clients.

Operating expenses . Operating expenses increased for the three and six months ended June 30, 2008 compared to the same period in 2007 as a result of incurring additional costs associated with salaries and benefits, as well as other expenses, to support the increase in the number of managed tuition payment plans and campus commerce clients. In addition, the Company continues to invest in products, services, and technology to meet customer needs and support continued revenue growth. These investments increased 2008 operating expenses compared to 2007.

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ENROLLMENT SERVICES AND LIST MANAGEMENT OPERATING SEGMENT - RESULTS OF OPERATIONS

The Company’s Enrollment Services and List Management segment provides a wide range of direct marketing products and services to help schools and businesses reach the middle school, high school, college bound high school, college, and young adult market places. In addition, this segment offers products and services that are focused on helping (i) students plan and prepare for life after high school and (ii) colleges recruit and retain students.
 
Three and six months ended June 30, 2008 compared to the three and six months ended June 30, 2007

 	 	Three months ended June 30,	 	Six months ended June 30,	 	
 	 	2008	 	2007	 	$ Change	 	2008	 	2007	 	$ Change	 	
Net interest income after the provision for loan losses	 	$	—	 	 	91	 	 	(91	)	 	8	 	 	176	 	 	(168	)	
Other fee-based income	 	 	26,067	 	 	24,923	 	 	1,144	 	 	53,289	 	 	49,870	 	 	3,419	 	
Software services income	 	 	—	 	 	157	 	 	(157	)	 	37	 	 	287	 	 	(250	)	
Intersegment revenue	 	 	—	 	 	178	 	 	(178	)	 	—	 	 	928	 	 	(928	)	
Total other income	 	 	26,067	 	 	25,258	 	 	809	 	 	53,326	 	 	51,085	 	 	2,241	 	
Salaries and benefits	 	 	6,373	 	 	9,022	 	 	(2,649	)	 	12,896	 	 	18,391	 	 	(5,495	)	
Restructure expense - severance and contract termination costs	 	 	(15	)	 	—	 	 	(15	)	 	282	 	 	—	 	 	282	 	
Other expenses	 	 	17,284	 	 	14,589	 	 	2,695	 	 	35,447	 	 	29,148	 	 	6,299	 	
Intersegment expenses	 	 	1,580	 	 	29	 	 	1,551	 	 	3,427	 	 	185	 	 	3,242	 	
Total operating expenses	 	 	25,222	 	 	23,640	 	 	1,582	 	 	52,052	 	 	47,724	 	 	4,328	 	
"Base net income" before income taxes	 	 	845	 	 	1,709	 	 	(864	)	 	1,282	 	 	3,537	 	 	(2,255	)	
Income tax expense	 	 	262	 	 	649	 	 	(387	)	 	397	 	 	1,344	 	 	(947	)	
"Base net income"	 	$	583	 	 	1,060	 	 	(477	)	 	885	 	 	2,193	 	 	(1,308	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin	 	 	3.2	%	 	6.7	%	 	 	 	 	2.4	%	 	6.9	%	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin - excluding restructure expense	 	 	3.2	%	 	6.7	%	 	 	 	 	2.9	%	 	6.9	%	 	 	 	

Other fee-based income. Other fee-based income increased as a result of an increase in lead generation volume and an increase in other enrollment products and services, such as test preparation study guides and online courses, admissions consulting, and essay and resume editing services. This increase in income was offset by a decrease due to the impacts of the legislative developments in the student loan industry on the list marketing services offered by this segment. In addition, the Company reduced the number of student recognition publications it plans to offer. Excluding the income associated with the list marketing services and student recognition publications, other fee-based income increased approximately $6 million , or 33% , and $12 million, or 31% , for the three and six months ended June 30, 2008 compared to the same periods in 2007.

Operating expenses . Total operating expenses increased for the three and six months ended June 30, 2008 compared to the same periods in 2007 as a result of an increase in costs associated with providing lead generation services and the allocation of additional corporate overhead expenses, which were included in Corporate Activity and Overhead for the three and six months ended June 30, 2007. Excluding intersegment expenses, the before tax operating margin was 9.3% and 8.8% for the three and six months ended June 30, 2008.  The increases in operating expenses were offset as a result of cost savings from the September 2007 and January 2008 restructuring plans.

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SOFTWARE AND TECHNICAL SERVICES OPERATING SEGMENT - RESULTS OF OPERATIONS

The Software and Technical Services segment provides information technology products and full-service technical consulting, with core areas of business in educational loan software solutions, business intelligence, technical consulting services, and Enterprise Content Management (ECM) solutions.

Many of the Company’s customers receiving services in this segment have been negatively impacted as a result of the passage of the College Cost Reduction Act and the recent disruption in the capital markets. This impact could decrease the demand for products and services and affect this segment’s future revenue and profit margins.

Three and six months ended June 30, 2008 compared to the three and six months ended June 30, 2007

 	 	Three months ended June 30,	 	Six months ended June 30,	 	
 	 	2008	 	2007	 	$ Change	 	2008	 	2007	 	$ Change	 	
Net interest income after the provision for loan losses	 	$	—	 	 	—	 	 	—	 	 	—	 	 	18	 	 	(18	)	
Software services income	 	 	4,896	 	 	5,691	 	 	(795	)	 	11,611	 	 	11,309	 	 	302	 	
Intersegment revenue	 	 	1,517	 	 	4,389	 	 	(2,872	)	 	3,333	 	 	8,221	 	 	(4,888	)	
Total other income	 	 	6,413	 	 	10,080	 	 	(3,667	)	 	14,944	 	 	19,530	 	 	(4,586	)	
Salaries and benefits	 	 	4,702	 	 	5,857	 	 	(1,155	)	 	9,870	 	 	12,332	 	 	(2,462	)	
Restructure expense - severance and contract	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
termination costs	 	 	(8	)	 	—	 	 	(8	)	 	510	 	 	—	 	 	510	 	
Other expenses	 	 	714	 	 	751	 	 	(37	)	 	1,333	 	 	1,535	 	 	(202	)	
Intersegment expenses	 	 	342	 	 	403	 	 	(61	)	 	736	 	 	403	 	 	333	 	
Total operating expenses	 	 	5,750	 	 	7,011	 	 	(1,261	)	 	12,449	 	 	14,270	 	 	(1,821	)	
"Base net income" before income taxes	 	 	663	 	 	3,069	 	 	(2,406	)	 	2,495	 	 	5,278	 	 	(2,783	)	
Income tax expense	 	 	206	 	 	1,167	 	 	(961	)	 	774	 	 	2,006	 	 	(1,232	)	
"Base net income"	 	$	457	 	 	1,902	 	 	(1,445	)	 	1,721	 	 	3,272	 	 	(1,551	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin	 	 	10.3	% 	 	30.4	% 	 	 	 	 	16.7	% 	 	27.0	% 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin - excluding restructure expense	 	 	10.2	%	 	30.4	%	 	 	 	 	20.1	%	 	27.0	%	 	 	 	

Software services income . Software services income decreased for the three months ended June 30, 2008 compared to the same period in 2007 as the result of a reduction in the number of projects for existing customers and the loss of customers due to the legislative developments in the student loan industry throughout 2008. Software services income during the first quarter of 2008 compared to 2007 increased due to additional projects that were completed prior to the second quarter.

Intersegment revenue . Intersegment revenue decreased for the three and six months ended June 30, 2008 compared to the same periods in 2007 as a result of a decrease in projects for internal customers.

Operating expenses . The decrease in operating expenses was driven by a decrease in costs associated with salaries and benefits as a result of the decrease in projects for internal customers.

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ASSET GENERATION AND MANAGEMENT OPERATING SEGMENT - RESULTS OF OPERATIONS

The Asset Generation and Management segment includes the acquisition, management, and ownership of the Company’s student loan assets. Revenues are primarily generated from the Company’s earnings from the spread, referred to as the Company’s student loan spread, between the yield received on the student loan portfolio and the costs associated with originating, acquiring, financing, servicing, and managing the student loan portfolio. The Company generates student loan assets through direct origination or through acquisitions. The student loan assets are held in a series of education lending subsidiaries designed specifically for this purpose.

In addition to the student loan portfolio, all costs and activity associated with the generation of assets, funding of those assets, and maintenance of the debt transactions are included in this segment. This includes derivative activity and the related derivative market value and foreign currency adjustments. The Company is also able to leverage its capital market expertise by providing investment advisory services and other related services to third parties through a licensed broker dealer subsidiary. Revenues and expenses for those functions are also included in the Asset Generation and Management segment.

Student Loan Portfolio

The table below outlines the components of the Company’s student loan portfolio:

 	 	As of June 30, 2008	 	As of December 31, 2007	 	
 	 	Dollars	 	Percent	 	Dollars	 	Percent	 	
Federally insured: (a) (b)	 	 	 	 	 	 	 	 	 	 	 	 	 	
Stafford	 	 	 	 	 	 	 	 	 	 	 	 	 	
Originated prior to 10/1/07	 	$	6,668,100	 	 	25.6	% 	$	6,624,009	 	 	24.8	%	
Originated on or after 10/1/07	 	 	386,669	 	 	1.5	 	 	101,901	 	 	0.4	 	
PLUS/SLS	 	 	 	 	 	 	 	 	 	 	 	 	 	
Originated prior to 10/1/07	 	 	424,609	 	 	1.6	 	 	414,708	 	 	1.5	 	
Originated on or after 10/1/07	 	 	47,133	 	 	0.2	 	 	15,233	 	 	0.1	 	
Consolidation	 	 	 	 	 	 	 	 	 	 	 	 	 	
Originated prior to 10/1/07	 	 	17,683,114	 	 	68.0	 	 	18,646,993	 	 	69.8	 	
Originated on or after 10/1/07	 	 	122,548	 	 	0.5	 	 	251,554	 	 	0.9	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Non-federally insured	 	 	279,953	 	 	1.1	 	 	274,815	 	 	1.0	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	25,612,126	 	 	98.5	 	 	26,329,213	 	 	98.5	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Unamortized premiums and deferred origination costs	 	 	429,090	 	 	1.7	 	 	452,501	 	 	1.7	 	
Allowance for loan losses:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Allowance - federally insured	 	 	(24,084	)	 	(0.1	)	 	(24,534	)	 	(0.1	)	
Allowance - non-federally insured	 	 	(23,825	)	 	(0.1	)	 	(21,058	)	 	(0.1	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	25,993,307	 	 	100.0	%	$	26,736,122	 	 	100.0	%	

 	(a)	The College Cost Reduction Act reduced the yield on federally insured loans originated on or after October 1, 2007. As of June 30, 2008 and December 31, 2007, $228.7 million and $278.9 million, respectively, of federally insured student loans are excluded from the above table as these loans are accounted for as participation interests sold under an agreement with Union Bank which is further discussed in note 7 of the Company ’ s consolidated financial statements included in this Quarterly Report. As of June 30, 2008, $197.5 million of the loans accounted for as participation interests sold under this agreement were originated on or after October 1, 2007.	

 	(b)	As of June 30, 2008, approximately $27 million of federally insured student loans were eligible to be sold or participated to the Department under the Department’s Loan Purchase Commitment and Participation Programs.	

Origination and Acquisition

The Company originates and acquires loans through various methods and channels including: (i) direct-to-consumer channel (in which the Company originates student loans directly with student and parent borrowers), (ii) campus based origination channels, and (iii) spot purchases.

The Company will originate or acquire loans through its campus based channel either directly under one of its brand names or through other originating lenders. In addition to its brands, the Company acquires student loans from lenders to whom the Company provides marketing and/or origination services established through various contracts. Branding partners are lenders for which the Company acts as a marketing agent in specified geographic areas. A forward flow lender is one for whom the Company provides origination services but provides no marketing services or whom simply agrees to sell loans to the Company under forward sale commitments. The following table sets forth the activity of loans originated or acquired through each of the Company’s channels:

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 	 	Three months ended June 30,	 	Six months ended June 30,	 	
 	 	2008	 	2007	 	2008	 	2007	 	
 	 	 	 	 	 	 	 	 	 	
Beginning balance	 	$	26,347,354	 	 	24,617,030	 	 	26,329,213	 	 	23,414,468	 	
Direct channel:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Consolidation loan originations	 	 	3,284	 	 	836,711	 	 	69,029	 	 	1,900,949	 	
Less consolidation of existing portfolio	 	 	(988	)	 	(438,993	)	 	(28,447	)	 	(912,788	)	
Net consolidation loan originations	 	 	2,296	 	 	397,718	 	 	40,582	 	 	988,161	 	
Stafford/PLUS loan originations	 	 	114,228	 	 	141,882	 	 	535,329	 	 	496,709	 	
Branding partner channel	 	 	127,929	 	 	255,703	 	 	601,307	 	 	457,993	 	
Forward flow channel	 	 	84,216	 	 	392,174	 	 	403,060	 	 	768,115	 	
Other channels	 	 	—	 	 	560,796	 	 	55,922	 	 	766,714	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total channel acquisitions	 	 	328,669	 	 	1,748,273	 	 	1,636,200	 	 	3,477,692	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Repayments, claims, capitalized interest, participations, and other	 	 	(585,443	)	 	(397,556	)	 	(885,243	)	 	(633,363	)	
Consolidation loans lost to external parties	 	 	(46,849	)	 	(187,350	)	 	(176,267	)	 	(426,754	)	
Loans sold	 	 	(431,605	)	 	(34,397	)	 	(1,291,777	)	 	(86,043	)	
Ending balance	 	$	25,612,126	 	 	25,746,000	 	 	25,612,126	 	 	25,746,000	 	

The Company has significant financing needs that it meets through the capital markets, including the debt and secondary markets. Since August 2007, these markets have experienced unprecedented disruptions, which has had an adverse impact on the Company’s earnings and financial condition. Since the Company could not determine nor control the length of time or extent to which the capital markets would remain disrupted, it reduced its direct and indirect costs related to its asset generation activities and was more selective in pursuing origination activity, in both the school and direct to consumer channels. Accordingly, in January 2008, the Company suspended Consolidation and private student loan originations and, during the second quarter of 2008, exercised contractual rights to discontinue, suspend, or defer the acquisition of student loans in connection with substantially all of its branding and forward flow relationships. Prior to and in conjunction with exercising this right, during the first quarter of 2008, the Company accelerated the purchase of loans from certain branding partner and forward flow lenders of approximately $511 million.

During July 2008, the Company purchased approximately $440 million of student loans from certain branding partners and forward flow lenders of which such purchases were previously deferred. These loans were financed in the Company’s FFELP warehouse facility prior to the term-out of this agreement.

On May 7, 2008, the President signed into law H.R. 5715, the Ensuring Continued Access to Student Loans Act of 2008 (“HR 5715”). This legislation contains provisions that expand the federal government’s support of financing the cost of higher education. Among other things, HR 5715:

 	·	Increases statutory limits on annual and aggregate borrowing for FFELP loans; and	
 	·	Allows the Department to act as a secondary market and enter into forward purchasing agreements with lenders.	

As a result of this legislation, the Departments of Education and Treasury developed a plan. Among other things, this plan:

 	·	Offers to purchase loans from lenders for the 2008-2009 academic year and offers lenders access to short-term liquidity; and	
 	·	Commits to continue working with the FFELP community to explore programs to reengage the capital markets in the long-run.	

On May 22, 2008, the Company announced that, as a result of the above plan, it will continue originating new federal student loans for the 2008-2009 academic year to all students regardless of the school they attend. Accordingly, the Company anticipates an increase in origination activity.

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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. An analysis of the Company’s allowance for loan losses is presented in the following table:
 
 	 	Three months ended June 30,	 	Six months ended June 30,	 	
 	 	2008	 	2007	 	2008	 	2007	 	
 	 	 	 	 	 	 	 	 	 	
Balance at beginning of period	 	$	46,137	 	 	26,224	 	 	45,592	 	 	26,003	 	
Provision for loan losses:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Federally insured loans	 	 	4,000	 	 	1,665	 	 	7,500	 	 	3,118	 	
Non-federally insured loans	 	 	2,000	 	 	870	 	 	3,500	 	 	2,170	 	
Total provision for loan losses	 	 	6,000	 	 	2,535	 	 	11,000	 	 	5,288	 	
Charge-offs, net of recoveries:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Federally insured loans	 	 	(3,878	)	 	(1,330	)	 	(7,200	)	 	(2,525	)	
Non-federally insured loans	 	 	(350	)	 	(289	)	 	(733	)	 	(455	)	
Net charge-offs	 	 	(4,228	)	 	(1,619	)	 	(7,933	)	 	(2,980	)	
Sale of federally insured loans	 	 	—	 	 	—	 	 	(750	)	 	—	 	
Sale of non-federally insured loans	 	 	—	 	 	—	 	 	—	 	 	(1,171	)	
Balance at end of period	 	$	47,909	 	 	27,140	 	 	47,909	 	 	27,140	 	
Allocation of the allowance for loan losses:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Federally insured loans	 	$	24,084	 	 	8,194	 	 	24,084	 	 	8,194	 	
Non-federally insured loans	 	 	23,825	 	 	18,946	 	 	23,825	 	 	18,946	 	
Total allowance for loan losses	 	$	47,909	 	 	27,140	 	 	47,909	 	 	27,140	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loan charge-offs as a percentage of average student loans	 	 	0.066	%	 	0.026	%	 	0.060	%	 	0.025	%	
Total allowance as a percentage of average student loans	 	 	0.186	%	 	0.110	%	 	0.182	%	 	0.112	%	
Total allowance as a percentage of ending balance of student loans	 	 	0.187	%	 	0.105	%	 	0.187	%	 	0.105	%	
Non-federally insured allowance as a percentage of the ending balance of non-federally insured loans	 	 	8.510	%	 	8.061	%	 	8.510	%	 	8.061	%	
Average student loans	 	$	25,767,123	 	 	24,687,280	 	 	26,313,226	 	 	24,266,048	 	
Ending balance of student loans	 	 	25,612,126	 	 	25,746,000	 	 	25,612,126	 	 	25,746,000	 	
Ending balance of non-federally insured loans	 	 	279,953	 	 	235,023	 	 	279,953	 	 	235,023	 	

The allowance for loan losses increased during the three and six months ended June 30, 2008 compared to the same periods in 2007 as a result of the elimination of the Exceptional Performer program. Due to the elimination of this program, the Company recorded an expense of $15.7 million in September 2007 to increase the Company’s allowance for loan losses related to the increase in risk share.

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:

 	 	As of June 30, 2008	 	As of December 31, 2007	 	
 	 	Dollars	 	Percent	 	Dollars	 	Percent	 	
Federally Insured Loans:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loans in-school/grace/deferment(1)	 	$	7,352,864	 	 	 	 	$	7,115,505	 	 	 	 	
Loans in forebearance(2)	 	 	2,562,434	 	 	 	 	 	3,015,456	 	 	 	 	
Loans in repayment status:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loans current	 	 	13,596,739	 	 	88.2	%	 	13,937,702	 	 	87.5	%	
Loans delinquent 31-60 days(3)	 	 	550,423	 	 	3.6	 	 	682,956	 	 	4.3	 	
Loans delinquent 61-90 days(3)	 	 	327,090	 	 	2.1	 	 	353,303	 	 	2.2	 	
Loans delinquent 91 days or greater(4)	 	 	942,623	 	 	6.1	 	 	949,476	 	 	6.0	 	
Total loans in repayment	 	 	15,416,875	 	 	100.0	%	 	15,923,437	 	 	100.0	%	
Total federally insured loans	 	$	25,332,173	 	 	 	 	$	26,054,398	 	 	 	 	
Non-Federally Insured Loans:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loans in-school/grace/deferment(1)	 	$	103,785	 	 	 	 	$	111,946	 	 	 	 	
Loans in forebearance(2)	 	 	11,659	 	 	 	 	 	12,895	 	 	 	 	
Loans in repayment status:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loans current	 	 	156,341	 	 	95.0	%	 	142,851	 	 	95.3	%	
Loans delinquent 31-60 days(3)	 	 	3,163	 	 	1.9	 	 	3,450	 	 	2.3	 	
Loans delinquent 61-90 days(3)	 	 	1,950	 	 	1.2	 	 	1,247	 	 	0.8	 	
Loans delinquent 91 days or greater(4)	 	 	3,055	 	 	1.9	 	 	2,426	 	 	1.6	 	
Total loans in repayment	 	 	164,509	 	 	100.0	%	 	149,974	 	 	100.0	%	
Total non-federally insured loans	 	$	279,953	 	 	 	 	$	274,815	 	 	 	 	

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

(2)	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.	

(3)	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.	

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(4)	Loans delinquent 91 days or greater include loans in claim status, which are loans that have gone into default and have been submitted to the guaranty agency for FFELP loans, or, if applicable, the insurer for non-federally insured loans, to process the claim for payment.	

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 June 30,	 	Six months ended June 30,	 	
 	 	2008	 	2007	 	2008	 	2007	 	
Student loan yield	 	 	5.65	%	 	7.93	%	 	5.85	%	 	7.90	%	
Consolidation rebate fees	 	 	(0.74	)	 	(0.78	)	 	(0.74	)	 	(0.78	)	
Premium and deferred origination costs amortization	 	 	(0.36	)	 	(0.37	)	 	(0.37	)	 	(0.36	)	
Student loan net yield	 	 	4.55	 	 	6.78	 	 	4.74	 	 	6.76	 	
Student loan cost of funds (a)	 	 	(3.25	)	 	(5.50	)	 	(3.61	)	 	(5.48	)	
Student loan spread	 	 	1.30	 	 	1.28	 	 	1.13	 	 	1.28	 	
Variable-rate floor income, net of settlements on derivatives (b)	 	 	(0.23	)	 	—	 	 	(0.24	)	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Core student loan spread	 	 	1.07	%	 	1.28	%	 	0.89	%	 	1.28	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Average balance of student loans	 	$	25,767,123	 	 	24,687,280	 	 	26,313,226	 	 	24,266,048	 	
Average balance of debt outstanding	 	 	26,767,459	 	 	26,158,525	 	 	27,297,445	 	 	25,770,551	 	

 	(a)	The student loan cost of funds includes the effects of net settlement costs on the Company's derivative instruments (excluding the net settlements of $5.7 million and $10.3 million, for the three and six months ended June 30, 2007, respectively, on those derivatives no longer hedging student loan assets).	

 	(b)	Variable-rate floor income is calculated by the Company on a statutory basis. As a result of the disruptions in the debt and secondary capital markets which began in August 2007, the full benefit of variable-rate floor income has not been realized by the Company due to the widening of the spread between short term interest rate indices and the Company’s actual cost of funds. The Company entered into interest rate swaps with effective dates beginning in January 2008 to hedge a portion of the variable-rate floor income. Settlements on these derivatives are presented as part of the Company’s statutory calculation of variable-rate floor income.	

As noted in Item 3, “Quantitative and Qualitative Disclosures about Market Risk”, 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 creating fixed rate floor income which is included in its core student loan spread. The majority of these loans are consolidation loans that earn the greater of the borrower rate or 2.64% above the average commercial paper rate during the calendar quarter. When excluding fixed rate floor income, the Company’s core student loan spread was 0.92% and 0.75% for the three and six months ended June 30, 2008, respectively, and 1.23% for both the three and six months ended June 30, 2007.

The compression of the Company’s core student loan spread during the three and six months ended June 30, 2008 compared to 2007 was the result of the following items:

 	·	Historically, the movement of the various interest rate indices received on the Company’s student loan assets and paid on the debt to fund such loans was highly correlated. As shown in Item 3, “Quantitative and Qualitative Disclosures about Market Risk,” the short-term movement of the indices was dislocated beginning in August 2007. This dislocation has had a negative impact on the Company’s student loan net interest income.	

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 	·	The spread to LIBOR on asset-backed securities transactions has increased significantly since August 2007. Since August 2007, the Company has issued $6.0 billion of notes in asset-backed securities transactions ($1.5 billion in August 2007, $1.2 billion in March 2008, $1.9 billion in April 2008, and $1.3 billion in May 2008). The increase in costs on these transactions from historical levels have had and will continue to have a negative impact on the Company’s student loan net interest income. The increased spread to LIBOR on asset-backed securities transactions is shown in the below table:	

 	·	As a result of the passage of the College Cost Reduction Act, the yield on FFELP loans originated after October 1, 2007 was reduced. As of June 30, 2008, the Company had $556.4 million of FFELP loans originated after October 1, 2007. The core student loan spread on FFELP loans originated after October 1, 2007 for the second quarter of 2008 was approximately 40 to 50 basis points.	

The decrease in the Company’s core student loan spread was offset by a non-recurring benefit related to the Company’s cost of funds related to certain of its asset-backed securities. The interest rates on approximately $2.0 billion of the Company’s asset-backed securities are set and periodically reset via a “dutch auction” (“Auction Rate Securites”). As previously disclosed, the auction process to establish the rates on the Auction Rate Securities has failed. 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 governing documents. During the three month period ended June 30, 2008, the Company paid favorable interest rates on the majority of its Auction Rate Securities as a result of the application of certain of these maximum rate auction provisions in the underlying documents for such financings. The Company does not expect this funding benefit on its Auction Rate Securities in future periods.

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Three and six months ended June 30, 2008 compared to the three and six months ended June 30, 2007

 	 	Three months ended June 30,	 	Six months ended June 30,	 	
 	 	2008	 	2007	 	$ Change	 	2008	 	2007	 	$ Change	 	
Net interest income after the provision for loan losses	 	$	53,891	 	 	72,528	 	 	(18,637	)	 	53,234	 	 	142,607	 	 	(89,373	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loan and guaranty servicing income	 	 	157	 	 	118	 	 	39	 	 	162	 	 	118	 	 	44	 	
Other fee-based income	 	 	4,458	 	 	3,674	 	 	784	 	 	9,327	 	 	6,985	 	 	2,342	 	
Other income	 	 	393	 	 	105	 	 	288	 	 	381	 	 	3,148	 	 	(2,767	)	
Gain (loss) on sale of loans	 	 	48	 	 	1,010	 	 	(962	)	 	(47,426	)	 	2,796	 	 	(50,222	)	
Derivative market value, foreign currency, and put option adjustments	 	 	—	 	 	—	 	 	—	 	 	466	 	 	—	 	 	466	 	
Derivative settlements, net	 	 	11,638	 	 	(461	)	 	12,099	 	 	55,165	 	 	(885	)	 	56,050	 	
Total other income	 	 	16,694	 	 	4,446	 	 	12,248	 	 	18,075	 	 	12,162	 	 	5,913	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and benefits	 	 	1,954	 	 	7,167	 	 	(5,213	)	 	4,178	 	 	14,446	 	 	(10,268	)	
Restructure expense - severance and contract termination costs	 	 	(52	)	 	—	 	 	(52	)	 	1,844	 	 	—	 	 	1,844	 	
Impairment expense	 	 	—	 	 	—	 	 	—	 	 	9,351	 	 	—	 	 	9,351	 	
Other expenses	 	 	5,095	 	 	7,246	 	 	(2,151	)	 	10,439	 	 	15,511	 	 	(5,072	)	
Intersegment expenses	 	 	18,952	 	 	22,034	 	 	(3,082	)	 	39,554	 	 	38,670	 	 	884	 	
Total operating expenses	 	 	25,949	 	 	36,447	 	 	(10,498	)	 	65,366	 	 	68,627	 	 	(3,261	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
"Base net income (loss)" before income taxes	 	 	44,636	 	 	40,527	 	 	4,109	 	 	5,943	 	 	86,142	 	 	(80,199	)	
Income tax expense (benefit)	 	 	13,837	 	 	15,400	 	 	(1,563	)	 	1,842	 	 	32,734	 	 	(30,892	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
"Base net income (loss)"	 	$	30,799	 	 	25,127	 	 	5,672	 	 	4,101	 	 	53,408	 	 	(49,307	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin	 	 	63.2	%	 	52.7	%	 	 	 	 	8.3	%	 	55.7	%	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Before Tax Operating Margin - excluding restructure expense, impairment expense, and the loss on sale of loans during the first quarter 2008	 	 	63.2	%	 	52.7	%	 	 	 	 	54.4	%	 	55.7	%	 	 	 	
 
Net interest income after the provision for loan losses  

 	 	Three months ended June 30,	 	Change	 	
 	 	2008	 	2007	 	Dollars	 	Percent	 	
 	 	 	 	 	 	 	 	 	 	
Loan interest	 	$	345,321	 	 	487,465	 	 	(142,144	)	 	(29.2)	%	
Consolidation rebate fees	 	 	(47,721	)	 	(47,745	)	 	24	 	 	0.1	 	
Amortization of loan premiums and deferred origination costs	 	 	(22,841	)	 	(22,634	)	 	(207	)	 	(0.9	)	
Total loan interest	 	 	274,759	 	 	417,086	 	 	(142,327	)	 	(34.1	)	
Investment interest	 	 	7,534	 	 	16,318	 	 	(8,784	)	 	(53.8	)	
Total interest income	 	 	282,293	 	 	433,404	 	 	(151,111	)	 	(34.9	)	
Interest on bonds and notes payable	 	 	221,856	 	 	358,308	 	 	(136,452	)	 	(38.1	)	
Intercompany interest	 	 	546	 	 	33	 	 	513	 	 	1,554.5	 	
Provision for loan losses	 	 	6,000	 	 	2,535	 	 	3,465	 	 	136.7	 	
Net interest income after provision for loan losses	 	$	53,891	 	 	72,528	 	 	(18,637	)	 	(25.7)	%	

 	·	The average student loan portfolio increased $1.1 billion, or 4.4%, for the three months ended June 30, 2008 compared to the same period in 2007. The increase in average loans was offset by a decrease in the yield earned on student loans. Loan interest income decreased $142.1 million as a result of these factors.	

 	·	Investment income decreased as a result of an overall decrease in average cash held in 2008 as compared to 2007, as well as lower interest rates.	

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 	·	Interest expense decreased as a result of a decrease in interest rates on the Company’s variable rate debt which lowered the Company’s cost of funds (excluding net derivative settlements) to 3.33% for the three months ended June 30, 2008 compared to 5.49% for the same period a year ago. This was offset by a $0.6 billion, or 2.3%, increase in average debt for the three months ended June 30, 2008 compared to the same period in 2007. Interest expense was impacted in 2008 by credit market disruptions as further discussed in this Report.	

 	·	The provision for loan loss increased due to an increase in risk share as a result of the elimination of the Exceptional Performer program in the third quarter of 2007.	

 	 	Six months ended June 30,	 	Change	 	
 	 	2008	 	2007	 	Dollars	 	Percent	 	
 	 	 	 	 	 	 	 	 	 	
Loan interest	 	$	731,747	 	 	951,998	 	 	(220,251	)	 	(23.1)	%	
Consolidation rebate fees	 	 	(97,575	)	 	(94,165	)	 	(3,410	)	 	(3.6	)	
Amortization of loan premiums and deferred origination costs	 	 	(48,245	)	 	(43,693	)	 	(4,552	)	 	(10.4	)	
Total loan interest	 	 	585,927	 	 	814,140	 	 	(228,213	)	 	(28.0	)	
Investment interest	 	 	16,724	 	 	33,754	 	 	(17,030	)	 	(50.5	)	
Total interest income	 	 	602,651	 	 	847,894	 	 	(245,243	)	 	(28.9	)	
Interest on bonds and notes payable	 	 	537,777	 	 	696,795	 	 	(159,018	)	 	(22.8	)	
Intercompany interest	 	 	640	 	 	3,204	 	 	(2,564	)	 	(80.0	)	
Provision for loan losses	 	 	11,000	 	 	5,288	 	 	5,712	 	 	108.0	 	
Net interest income after provision for loan losses	 	$	53,234	 	 	142,607	 	 	(89,373	)	 	(62.7)	%	

 	·	The average student loan portfolio increased $2.0 billion, or 8.4%, for the six months ended June 30, 2008 compared to the same period in 2007. The increase in average loans was offset by a decrease in the yield earned on student loans. Loan interest income decreased $220.3 million as a result of these factors.	

 	·	Consolidation rebate fees increased due to the $0.8 billion, or 4.6%, increase in the average consolidation loan portfolio.	

 	·	The amortization of loan premiums and deferred origination costs increased $4.6 million as a result of an increase in the average student loan portfolio.	

 	·	Investment income decreased as a result of an overall decrease in average cash held in 2008 as compared to 2007, as well as lower interest rates.	

 	·	Interest expense decreased as a result of a decrease in interest rates on the Company’s variable rate debt which lowered the Company’s cost of funds (excluding net derivative settlements) to 3.96% for the six months ended June 30, 2008 compared to 5.48% for the same period a year ago. This was offset by a $1.5 billion, or 5.9%, increase in average debt for the six months ended June 30, 2008 compared to the same period in 2007. Interest expense was impacted in 2008 by credit market disruptions as further discussed in this Report.	

 	·	The provision for loan loss increased due to an increase in risk share as a result of the elimination of the Exceptional Performer program in the third quarter of 2007.	

Other fee-based income . Borrower late fees increased $0.8 million and $1.8 million for the three and six months ended June 30, 2008 compared to the same periods in 2007.

Gain (loss) on sale of loans . The Company sold $857.8 million (par value) of federally insured student loans resulting in the recognition of a loss of $30.4 million on March 31, 2008. In addition, on April 8, 2008, the Company sold $428.6 million (par value) of federally insured student loans. The Company recognized a loss of $17.1 million during the three month period ended March 31, 2008 as a result of marking these loans to fair value. Combined, the portfolios sold on March 31, 2008 and April 8, 2008 were sold for a purchase price of approximately 98% of the par value of such loans. As a result of the disruptions in the debt and secondary markets, the Company sold these loan portfolios in order to reduce the amount of student loans remaining under the Company’s multi-year committed financing facility for FFELP loans which reduced the Company’s exposure to certain equity support provisions included in this facility.

Operating expenses . Excluding the restructure and impairment charges, operating expenses decreased $10.4 million, or 28.7%, and $14.5 million, or 21.1%, for the three and six months ended June 30, 2008 compared to same periods in 2007. This decrease is a result of the September 2007 and January 2008 restructuring plans and the Company capitalizing on the operating leverage of its business structure and strategies.

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LIQUIDITY AND CAPITAL RESOURCES

The Company utilizes operating cash flow, secured financing transactions, asset-backed securitizations, and operating lines of credit to fund operations and student loan and business acquisitions. The Company has also used its common stock to partially fund certain business acquisitions. In addition, the Company has a universal shelf registration statement with the SEC which allows the Company to sell up to $750.0 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. This shelf registration statement expires in December 2008.

The following table summarizes the Company’s bonds and notes outstanding as of June 30, 2008:

 	 	As of June 30, 2008	 	
 	 	Carrying	 	Interest rate	 	 	 	
 	 	amount	 	range	 	Final maturity	 	
 	 	 	 	 	 	 	 	
Variable-rate bonds and notes (a):	 	 	 	 	 	 	 	 	 	 	
Bonds and notes based on indices	 	$	21,339,035	 	 	2.65% - 4.97%	 	 	09/25/13 - 06/25/41	 	
Bonds and notes based on auction or remarketing	 	 	2,841,245	 	 	0.67% - 7.00%	 	 	11/01/09 - 07/01/43	 	
Total variable-rate bonds and notes	 	 	24,180,280	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	
Commercial paper - FFELP facility (b)	 	 	1,986,212	 	 	2.08% - 2.91%	 	 	05/09/10	 	
Commercial paper - private loan facility (b)	 	 	159,800	 	 	3.08%	 	 	03/14/09	 	
Fixed-rate bonds and notes (a)	 	 	207,376	 	 	5.30% - 6.68%	 	 	11/01/09 - 05/01/29	 	
Unsecured fixed rate debt	 	 	475,000	 	 	5.13% and 7.40%	 	 	06/01/10 and 09/15/61	 	
Unsecured line of credit	 	 	450,000	 	 	2.90%	 	 	05/08/12	 	
Other borrowings	 	 	71,569	 	 	3.19% - 5.10%	 	 	05/22/09 - 11/01/15	 	
 	 	$	27,530,237	 	 	 	 	 	 	 	

(a) Issued in asset-backed securitizations
(b) Loan warehouse facilities

Secured Financing Transactions

The Company relies 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 are loan warehouse facilities and asset-backed securitizations.

Loan warehouse facilities

Student loan warehousing allows the Company to buy and manage student loans prior to transferring them into more permanent financing arrangements. The Company has historically relied upon three conduit warehouse loan financing vehicles to support its funding needs on a short-term basis: a multi-year committed facility for FFELP loans, a private loan warehouse for non-federally insured student loans, and a single-seller extendible commercial paper conduit for FFELP loans.

The multi-year committed facility for FFELP loans, which terminates in May 2010, was supported by 364-day liquidity which was up for renewal on May 9, 2008. The Company obtained an extension on this renewal until July 31, 2008. On July 31, 2008, the Company did not renew the liquidity provisions of this facility. Accordingly, as of July 31, 2008, the facility became a term facility with an outstanding balance of approximately $2.8 billion and a final maturity date of May 9, 2010. The FFELP warehouse facility has a provision requiring the Company to refinance or remove 75% of the pledged collateral on an annual basis. The Company must refinance or remove approximately $900 million of loans by May 2009 to satisfy this provision. Pursuant to the terms of the agreement, since liquidity was not renewed, the Company’s cost of financing under this facility increased 10 basis points. The agreement also includes provisions which allow the banks to charge a rate equal to LIBOR plus 128.5 basis points if they choose to finance their portion of the facility with sources of funds other than their commercial paper conduit. Subsequent to July 31, 2008, the Company expects its cost of funds on this facility to increase approximately 10 to 30 basis points.

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The terms and conditions of the Company’s warehouse facility for FFELP loans provide for advance rates related to financed loans subject to a valuation formula based on current market conditions. Dislocation in the credit markets including disruptions in the current capital markets can and will cause short-term volatility in the loan valuation formulas. Severe volatility and dislocation in the credit markets, even if temporary, could cause the valuation assigned to the Company’s student loan portfolio financed by the applicable line to be significantly less than par. Should a significant change in the valuation of subject loans result in a reduction in advance rate and require equity support greater than what the Company can or is willing to provide, the facility could be subject to termination. While the Company does not believe the loan valuation formula is reflective of the fair market value of its loans, it is subject to compliance with provisions of the warehouse documents. As of August 8, 2008, the Company has $135.3 million utilized as equity funding support based on provisions of this agreement.

The private loan warehouse facility is an uncommitted facility that is offered to the Company by a banking partner, which terminates on March 14, 2009. As of June 30, 2008, $159.8 million was outstanding under this facility and $90.2 million was available for future use. As of August 8, 2008, $132.0 million was outstanding under this facility and $118.0 million was available for future use. New advances are also subject to approval by the sponsor bank and the Company believes it is unlikely such approval would be granted in the future. The Company guarantees the performance of the assets in the private loan warehouse facility. This facility provides for advance rates on subject collateral which require certain levels of equity enhancement support. As of August 8, 2008, the Company has $54.5 million utilized as equity funding support based on provisions of this agreement. There can be no assurance that the Company will be able to maintain this conduit facility, find alternative funding, or make adequate equity contributions, if necessary. While the Company’s bank supported facilities have historically been renewed for successive terms, there can be no assurance that this will continue in the future. In January 2008, the Company suspended originating private loans.

In August 2006, the Company established a $5.0 billion extendable commercial paper warehouse program for FFELP loans, under which it can issue one or more short-term extendable secured liquidity notes. As of June 30, 2008, no notes were outstanding under this warehouse program. As a result of the disruption of the credit markets, there is no market for the issuance of notes under this facility. Management believes it is currently unlikely a market will exist in the future.

The Company expects to access alternative sources of funding to originate new FFELP student loans, including the Department of Education’s Loan Participation Program (“Participation Program”), an existing facility with Union Bank and Trust Company (“Union Bank”), an entity under common control with the Company, and its $750 million unsecured operating line of credit.

On July 1, 2008, pursuant to HR 5715, the Department of Education announced terms under which it will offer to purchase FFELP student loans and loan participations from FFELP lenders. Under the Department’s Loan Purchase Commitment Program (“Purchase Program”), the Department will purchase loans at a price equal to the sum of (i) par value, (ii) accrued interest, (iii) the one percent origination fee paid to the Department, and (iv) a fixed amount of $75 per loan. Lenders will have until September 30, 2009, to sell loans to the Department. Under the Participation Program, the Department will provide interim short-term liquidity to FFELP lenders by purchasing participation interests in pools of FFELP loans. FFELP lenders will be charged a rate of commercial paper plus 50 basis points on the principal amount of participation interests outstanding. Loans funded under the Participation Program must be either refinanced by the lender or sold to the Department pursuant to the Purchase Program prior to its expiration on September 30, 2009. To be eligible for purchase or participation under the Department’s programs, loans must be FFELP Stafford or PLUS loans made for the academic year 2008-2009, first disbursed between May 1, 2008 and July 1, 2009, with eligible borrower benefits. The Company is in the process of completing and filing all relevant documents to participate in the Department of Education’s Participation Program and expects to utilize the Participation Program to fund a significant portion of its loan originations for the 2008-2009 academic year.
 
The Company maintains an agreement with Union Bank, as trustee for various grantor trusts, under which Union Bank has agreed to purchase from the Company participation interests in student loans (the “FFELP Participation Agreement”). The Company has the option to purchase the participation interests from the grantor trusts at the end of a 364-day term upon termination of the participation certificate. As of June 30, 2008 and August 8, 2008, approximately $228.7 million and $56.4 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 on a short-term basis. The Company can participate loans to Union Bank to the extent of availability under the grantor trusts, up to $750 million. Loans participated under this agreement qualify as a sale pursuant to the provisions of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS No. 140”). Accordingly, the participation interests sold are not included on the Company’s consolidated balance sheet.

Asset-backed securitizations

Of the $27.5 billion of debt outstanding as of June 30, 2008, $24.4 billion was issued under term asset-backed securitizations. Depending on market conditions, the Company anticipates continuing to access the asset-backed securities market. As a result of the disruptions in the credit markets, the Company may not be able to issue asset-backed financings at rates historically achieved by the Company, at levels equal to or less than other financing agreements, or at levels otherwise considered beneficial to the Company. Accordingly, the Company’s operational and financial results may be negatively impacted. Securities issued in the securitization transactions are generally priced based upon a spread to LIBOR or set under an auction or remarketing procedure.

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LIBOR based notes

As of June 30, 2008, the Company had $21.3 billion of notes issued under asset-backed securitizations that primarily reprice at a fixed spread to three month LIBOR and are structured to substantially match the maturity of the funded assets. These notes fund FFELP student loans that are predominantly set based on a spread to three month commercial paper. The three month LIBOR and three month commercial paper indexes have been highly correlated historically. Based on cash flows 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 these transactions will be approximately $1.4 billion. These cash flows consist of net spread and servicing and administrative revenue in excess of estimated cost.

Auction or remarketing based notes

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 broker-dealers and remarketing agents ("Variable Rate Demand Notes"). The Company is currently sponsor on approximately $1.9 billion of Auction Rate Securities and $0.9 billion 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, several 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 stepped in when investor demand is weak. However, recently banks have been allowing these auctions to fail.

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 commercial paper, governing documents, or indenture. While these rates will vary by the trust structure the notes were issued from as well as the class and rating of the security, they will generally be based on a spread to LIBOR, commercial paper, or Treasury Securities. Based on the relative levels of these indices as of June 30, 2008, the rates expected to be paid by the Company range from 91-day T-Bill plus 125 basis points, on the low end, to LIBOR plus 250 basis points on the high end.
 
During the three month period ended June 30, 2008, the Company paid favorable interest rates on the majority of its Auction Rate Securities as a result of the application of certain of these maximum rate auction provisions in the underlying documents for such financings. The Company does not expect this funding benefit on its Auction Rate Securities in future periods.
 
The Company cannot predict whether future auctions related to its Auction Rate Securities will be successful, but management believes it is likely auctions will continue to fail indefinitely. The Company is currently seeking alternatives for reducing its exposure to the auction rate market, but may not be able to achieve alternate financing for some or all of its Auction Rate Securities.

For Variable Rate Demand Notes, the remarketing agents set the price, which is then offered to investors. If there are insufficient potential bid orders to purchase all of the notes offered for sale, the Company could be subject to interest costs substantially above the anticipated and historical rates paid on these types of securities. The maximum rate for Variable Rate Demand Notes is based on a spread to certain indexes as defined in the underlying documents, with the highest to the Company being Prime plus 200 basis points. Certain of the Variable Rate Demand Notes are secured by financial guaranty insurance policies issued by MBIA Insurance Corporation. These Variable Rate Demand Notes are currently experiencing reduced investor demand and certain of these securities have been put to the liquidity provider, Lloyds TSB Bank, at a cost ranging from Federal Funds plus 150 basis points to LIBOR plus 175 basis points.  

Operating Lines of Credit

The Company uses its line of credit agreements primarily for general operating purposes, to fund certain asset and business acquisitions, and to repurchase stock under the Company’s stock repurchase program. The Company maintains a $750. 0 million unsecured line of credit supported by various banking entities. At June 30, 2008, $450.0 million was outstanding under this line and $300.0 million was available for future uses. The $750. 0 million line of credit terminates in May 2012. 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. As discussed previously, the Company may need to fund certain loans or provide equity funding support related to advance rates on its warehouse facilities. As of August 8, 2008, the Company has contributed $189.8 million in equity funding support to these facilities. The Company has funded these contributions primarily by advances on its operating line of credit. As of August 8, 2008, the Company has $450.0 million outstanding under this line of credit and $300.0 million available for future uses.

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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:

 	(i)	A minimum consolidated net worth;	

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

 	(iii)	A limitation on subsidiary indebtedness; and	

 	(iv)	A limitation on the percentage of non-guaranteed loans in the Company’s portfolio.	

As of June 30, 2008, the Company was in compliance with all of these requirements and believes it has the ability to maintain the covenants in future periods. Many of these covenants are duplicated in the Company’s other lending facilities, including its FFELP and private loan warehouses.

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) may have modest implications on the pricing level at which the Company obtains funding.

The Company also has a $725. 0 million unsecured commercial paper program. Under the program, the Company may issue commercial paper for general corporate purposes. The maturities of the notes issued under this program will vary, but may not exceed 397 days from the date of issue. Notes issued under this program will bear interest at rates that will vary based on market conditions at the time of issuance. As of June 30, 2008, there were no borrowings outstanding on this line and $725.0 million of remaining authorization. The Company does not expect to be able to issue unsecured commercial paper in the near or intermediate future at a cost effective level relative to the Company’s unsecured line of credit.

Universal Shelf Offerings

In May 2005, the Company consummated a debt offering under its universal shelf consisting of $275.0 million in aggregate principal amount of Senior Notes due June 1, 2010 (the “Notes”). The Notes are unsecured obligations of the Company. The interest rate on the Notes is 5.125%, payable semiannually. At the Company’s option, the Notes are redeemable in whole at any time or in part from time to time at the redemption price described in the Company’s prospectus supplement.

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

The proceeds from these unsecured debt offerings were or will be used by the Company to fund general business operations, certain asset and business acquisitions, and the repurchase of stock under the Company’s stock repurchase plan.  

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Sources of Liquidity

The following table details the Company’s primary sources of liquidity and the available capacity at June 30, 2008:

Sources of primary liquidity: (a)	 	 	 	 	
Cash and cash equivalents (b)	 	$	138,454	 	
Unencumbered student loan assets	 	 	6,858	 	
Unused unsecured line of credit (c)	 	 	300,000	 	
 	 	 	 	 	
Total sources of primary liquidity	 	$	445,312	 	

 	(a)	The sources of primary liquidity table above does not include the following items:	

 	·	FFELP warehouse facility - On July 31, 2008, the Company did not renew the liquidity provisions of this facility. Accordingly, on July 31, 2008, the facility became a term facility with a final maturity date of May 9, 2010. No new student loan originations can be funded under this program.	

 	·	Private loan warehouse facility - As of June 30, 2008, the Company has $90.2 million of capacity on this facility. However, in January 2008, the Company suspended originating private loans. As such, the capacity on this facility is not included in the above table. The Company’s private loan warehouse facility expires on March 14, 2009.	

 	·	Extendible commercial paper warehouse program - The Company has $5.0 billion authorized for future issuance under this facility. As a result of the disruption of the credit markets, there is no market for the issuance of notes under this facility. Management believes it is unlikely a market will exist in the future.	

 	·	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 Company has the option to purchase the participation interests from the grantor trusts at the end of a 364-day term upon termination of the participation certificate. As of  June 30, 2008 and August 8, 2008, approximately $228.7 million and $56.4 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 on a short-term basis. The Company can participate loans to Union Bank to the extent of availability under the grantor trusts, up to $750 million. The Company does not include this participation agreement in the table above because the Company is limited to the amount they can participate under this facility by the amount of investments in the grantor trusts.	

 	·	Department of Education’s Loan Participation Program - On July 1, 2008, pursuant to HR 5715, the Department of Education announced terms under which it will offer to purchase FFELP student loans and loan participations from FFELP lenders. Under the Participation Program, the Department will provide interim short-term liquidity to FFELP lenders by purchasing participation interest in pools of FFELP loans. FFELP lenders will be charged a rate of commercial paper plus 50 basis points on the principal amount of participation interests outstanding. Loans funded under the Participation Program must be either refinanced by the lender or sold to the Department prior to its expiration on September 30, 2009. To be eligible for purchase or participation under the Department’s program, loans must be FFELP Stafford or PLUS loans made for the academic year 2008-2009, first disbursed between May 1, 2008 and July 1, 2009, with eligible borrower benefits. The Company is in the process of completing and filing all relevant documents to participate in the Department’s program and expects to utilize the Participation Program to fund a significant portion of its loan originations for the 2008-2009 academic year.	

 	·	Asset-backed security investments - As part of the Company’s issuance of asset-backed securitizations in March 2008 and May 2008, due to credit market conditions when these notes were issued, the Company purchased the Class B subordinated notes of $36 million (par value) and $41 million (par value), respectively. These notes are not included on the Company’s consolidated balance sheet. If the credit market conditions 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. Upon sale, these notes would be shown as “bonds and notes payable” on the Company’s consolidated balance sheet. Unless there is a significant market improvement, the Company believes the market value of such notes will be less than par value. The difference between the par value and market value would be recognized by the Company as interest expense over the life of the bonds.	

 	(b)	The Company also has restricted cash and investments, however, the Company is limited in the amounts of funds that can be transferred from its subsidiaries through intercompany loans, advances, or cash dividends. These limitations result from the restrictions contained in trust indentures under debt financing arrangements to which the Company’s education lending subsidiaries are parties. The Company does not believe these limitations will significantly affect its operating cash needs. The amounts of cash and investments restricted in the respective reserve accounts of the education lending subsidiaries are shown on the balance sheets as restricted cash and investments.	

 	(c)	As of August 8, 2008, the unused unsecured line of credit was $300.0 million.	

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Contractual Obligations

The Company is committed under noncancelable operating leases for certain office and warehouse space and equipment. The Company’s contractual obligations as of June 30, 2008 were as follows:  

 	 	Total	 	Less than
1 year	 	1 to 3 years	 	3 to 5 years	 	More than
5 years	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Bonds and notes payable	 	$	27,530,237	 	 	2,227,217	 	 	390,173	 	 	513,847	 	 	24,399,000	 	
Operating lease obligations	 	 	41,571	 	 	9,032	 	 	16,201	 	 	11,449	 	 	4,889	 	
Other	 	 	7,675	 	 	7,355	 	 	320	 	 	—	 	 	—	 	
Total	 	$	27,579,483	 	 	2,243,604	 	 	406,694	 	 	525,296	 	 	24,403,889	 	

As of June 30, 2008, the Company had a reserve of $7.9 million for uncertain income tax positions per the provisions of FIN 48. 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.

The Company’s bonds and notes payable due in less than one year includes $2.0 billion of bonds and notes outstanding related to the Company’s FFELP warehouse facility. On July 31, 2008, the Company was unable to renew the liquidity provisions of this facility. Accordingly, as of July 31, 2008, the facility became a term facility with an outstanding balance of approximately $2.8 billion and a final maturity date of May 9, 2010 .

The Company has commitments with its branding partners and forward flow lenders which obligate the Company to purchase loans originated under specific criteria, although the branding partners and forward flow lenders are typically not obligated to provide the Company with a minimum amount of loans. These commitments generally run for periods ranging from one to five years and are generally renewable. The Company has significant financing needs that it meets through the capital markets, including the debt and secondary markets. Since August 2007, these markets have experienced unprecedented disruptions, which are having an adverse impact on the Company’s earnings and financial condition. The Company cannot determine nor control the length of time or extent to which the capital markets will remain disrupted. Accordingly, the Company has the ability to exercise contractual rights to discontinue, suspend, or defer the acquisition of student loans in connection with its branding and forward flow relationships. Commitments to purchase loans under these arrangements are not included in the table above.    

As a result of the Company’s recent acquisitions, the Company has certain contractual obligations or commitments as follows:

 	·	LoanSTAR Funding Group, Inc. (“LoanSTAR”) – As part of the agreement for the acquisition of the capital stock of LoanSTAR from the Greater Texas Foundation (“Texas Foundation”), the Company agreed to sell student loans in an aggregate amount sufficient to permit the Texas Foundation to maintain a portfolio of loans equal to no less than $200 million through October 2010. The sales price for such loans is the fair value mutually agreed upon between the Company and the Texas Foundation. To satisfy this obligation, the Company is obligated to sell loans to the Texas Foundation on a quarterly basis; however, the Foundation recently has chosen not to purchase such loans.	

 	·	infiNET Integrated Solutions, Inc. (“infiNET”) – Stock price guarantee of $104.8375 per share on 95,380 shares of Class A Common Stock (less the greater of $41.9335 or the gross sales price such seller obtains from a sale of the shares occurring subsequent to February 28, 2011 as defined in the agreement) issued as part of the original purchase price. The obligation to pay this guaranteed stock price is due February 28, 2011 and is not included in the table above. Based upon the closing sale price of the Company’s Class A Common Stock as of June 30, 2008 of $11.23 per share, the Company’s obligation under this stock price guarantee would have been $6.0 million (($104.8375 - $41.9335) x 95,380 shares). Any cash paid by the Company in consideration of satisfying the guaranteed value of stock issued for this acquisition would be recorded by the Company as a reduction to additional paid-in capital.	

 	·	5280 Solutions, Inc. – 258,760 shares of Class A Common Stock issued as part of the original purchase price is subject to a put option arrangement whereby during the 30-day period ending November 30, 2008, the holders may require the Company to repurchase all or part of the shares at a price of $37.10 per share. The value of this put option as of June 30, 2008 was $6.7 million and is included in “other” in the above table.	

Dividends

In the first quarter of 2007, the Company began paying dividends of $0.07 per share on the Company’s Class A and Class B Common Stock which were paid quarterly through the first quarter of 2008. On May 21, 2008, the Company announced that it was temporarily suspending its quarterly dividend program. The Company will continue to evaluate its dividend policy, which is subject to future earnings, capital requirements, financial condition, and other factors.

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CRITICAL ACCOUNTING POLICIES

This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods. The Company bases its estimates and judgments on historical experience and on various other factors that the Company believes are reasonable under the circumstances. Actual results may differ from these estimates under varying assumptions or conditions. Note 3 of the consolidated financial statements, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, 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, purchase price accounting related to business and certain asset acquisitions, and income taxes.

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 adequacy 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 past experience, trends in student loan claims rejected for payment by guarantors, changes to federal student loan programs, current economic conditions, and other relevant factors. Should any of these factors change, the estimates made by management would also change, which in turn would impact the level of the Company’s future provision for loan losses.

In determining the adequacy 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, months in repayment, delinquency status, type of program, and trends in defaults in the portfolio based on Company and industry data. 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 and charges off the loan when the collection of principal and interest is 120 days past due.

The allowance for federally insured and non-federally insured loans is maintained at a level management believes is adequate 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 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 purposes, the Company frequently changes 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, 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 in accordance with SFAS No. 91, Accounting for Non-Refundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases . The most sensitive estimate for loan premiums, 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. A number of factors can affect the CPR estimate such as the rate 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 and deferred origination cost amortization recognized by the Company in a particular period.

Other Fee-Based Income – Other fee-based income is primarily attributable to fees for providing services and the sale of lists and print products. Fees associated with services are recognized in the period services are rendered and earned under service arrangements with clients where service fees are fixed or determinable and collectibility 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. Revenue from the sale of lists and print products is generally earned and recognized, net of estimated returns, upon shipment or delivery.

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The Company assesses collectibility of revenues and our 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 our services, revenue is recognized upon the receipt of cash.

Purchase Price Accounting Related to Business and Certain Asset Acquisitions

The Company has completed several business and asset acquisitions which have generated significant amounts of goodwill and intangible assets and related amortization. The values assigned to goodwill and intangibles, as well as their related useful lives, are subject to judgment and estimation by the Company. Goodwill and intangibles related to acquisitions are determined and based on purchase price allocations. Valuation of intangible assets is generally based on the estimated cash flows related to those assets, while the initial value assigned to goodwill is the residual of the purchase price over the fair value of all identifiable assets acquired and liabilities assumed. Useful lives are determined based on the expected future period of the benefit of the asset, the assessment of which considers various characteristics of the asset, including historical cash flows. Due to the number of estimates involved related to the allocation of purchase price and determining the appropriate useful lives of intangible assets, management has identified purchase price accounting as a critical accounting policy.

Goodwill and Intangible Assets - Impairment Assessments

The Company reviews goodwill for impairment annually and whenever triggering events or changes in circumstances indicate its carrying value may not be recoverable in accordance with FASB Statement No. 142, Goodwill and Other Intangible Assets . The provisions of Statement 142 require that a two-step impairment test be performed 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. In accordance with FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , recoverability of these assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.

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

Income Taxes

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

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RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued SFAS No. 141R, Business Combinations (“SFAS No. 141R”), which changes the accounting for business acquisitions.  SFAS No. 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination.  Certain provisions of this standard will, among other things, impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquired contingencies, acquisition-related restructuring costs, in-process research and development, indemnification assets, and tax benefits.  For the Company, SFAS No. 141R is effective for business combinations and adjustments to an acquired entity’s deferred tax asset and liability balances occurring after December 31, 2008.  The Company is currently evaluating the future impacts and disclosures of this standard.
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective as of the beginning of the first fiscal year that begins after November 15, 2007 (January 1, 2008 for the Company) and is to be applied prospectively. The Company adopted SFAS No. 157 on January 1, 2008. The Company elected to delay the application of SFAS No. 157 to nonfinancial assets and nonfinancial liabilities, as allowed by FASB Staff Position SFAS No. 157-2. The Company is currently evaluating the impacts and disclosures of SFAS No. 157-2, but would not expect SFAS No. 157-2 to have a material impact on the Company’s consolidated results of operations or financial condition.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115 (“SFAS No. 159”), which permits an entity to choose, at specified election dates, to measure eligible financial instruments and certain other items at fair value that are not currently required to be measured at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The Statement allows entities to achieve an offset accounting effect for certain changes in fair value of related assets and liabilities without having to apply complex hedge accounting provisions, and is expected to expand the use of fair value measurement consistent with the Board’s long-term objectives for financial instruments. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007 (January 1, 2008 for the Company). At the effective date, an entity may elect the fair value option for eligible items that exist at that date. The entity shall report the effect of the first remeasurement to fair value as a cumulative-effect adjustment to the opening balance of retained earnings. Upon the effective date of SFAS No. 159, the Company has elected not to measure any items at fair value that were not currently required to be measured at fair value. Accordingly, the adoption of SFAS No. 159 had no impact on the Company’s financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS No. 160”), which establishes new standards governing the accounting for and reporting of noncontrolling interests (“NCIs”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries.  Certain provisions of this standard indicate, among other things, that NCIs (previously referred to as minority interests) be treated as a separate component of equity, not as a liability; that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions, rather than as step acquisitions or dilution gains or losses; and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also requires changes to certain presentation and disclosure requirements. For the Company, SFAS No. 160 is effective beginning January 1, 2009. The provisions of the standard are to be applied to all NCIs prospectively, except for the presentation and disclosure requirements, which are to be to applied retrospectively to all periods presented. The Company is currently evaluating the future impacts and disclosures of this standard.
 
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities , which is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand the effects of derivative instruments and hedging activities on an entity’s financial position, financial performance, and cash flows. The new standard also improves transparency about the location and amounts of derivative instruments in an entity’s financial statements, how derivative instruments and related hedged items are accounted for under SFAS No. 133, and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. The standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company is currently evaluating the future impacts and disclosures of this standard.
 
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS No. 162”). This standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities. SFAS No. 162 is effective 60 days following approval by the U.S. Securities and Exchange Commission (“SEC”) of the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles . The Company does not expect SFAS No. 162 to have a material impact on the preparation of its consolidated financial statements.

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In December 2007, the FASB ratified the Emerging Issues Task Force consensus on EITF Issue No. 07-1, Accounting for Collaborative Arrangements , that discusses how parties to a collaborative arrangement (which does not establish a legal entity within such arrangement) should account for various activities. The consensus indicates that costs incurred and revenues generated from transactions with third parties (i.e. parties outside of the collaborative arrangement) should be reported by the collaborators on the respective line items in their income statements pursuant to EITF Issue No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent .  Additionally, the consensus provides that income statement characterization of payments between the participants in a collaborative arrangement should be based upon existing authoritative pronouncements; analogy to such pronouncements if not within their scope; or a reasonable, rational, and consistently applied accounting policy election. EITF Issue No. 07-1 is effective for the Company beginning January 1, 2009 and is to be applied retrospectively to all periods presented for collaborative arrangements existing as of the date of adoption. The Company is currently evaluating the impacts and disclosures of this standard.
 
In April 2008, the FASB issued FSP SFAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). This guidance is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R when the underlying arrangement includes renewal or extension of terms that would require substantial costs or result in a material modification to the asset upon renewal or extension. Companies estimating the useful life of a recognized intangible asset must now consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, must consider assumptions that market participants would use about renewal or extension as adjusted for SFAS 142’s entity-specific factors. FSP 142-3 is effective for the Company beginning January 1, 2009. The Company is currently evaluating the potential impact of the adoption of FSP 142-3 on its consolidated financial position, results of operations, and cash flows.
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 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 sensitivity of the balance sheet is a key profitability driver.

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

 	 	As of June 30, 2008	 	As of December 31, 2007	 	
 	 	Dollars	 	Percent	 	Dollars	 	Percent	 	
Fixed-rate loan assets	 	$	2,391,089	 	 	9.3	%	$	1,136,544	 	 	4.3	%	
Variable-rate loan assets	 	 	23,221,037	 	 	90.7	 	 	25,192,669	 	 	95.7	 	
Total	 	$	25,612,126	 	 	100.0	%	$	26,329,213	 	 	100.0	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed-rate debt instruments	 	 	682,376	 	 	2.5	%	 	689,476	 	 	2.5	%	
Variable-rate debt instruments	 	 	26,847,861	 	 	97.5	 	 	27,426,353	 	 	97.5	 	
Total	 	$	27,530,237	 	 	100.0	%	$	28,115,829	 	 	100.0	%	

FFELP student loans 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 index plus a fixed spread that is dependant 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 continues to decline. In these interest rate environments, the Company earns additional spread income that it refers to as fixed rate floor income. For the three and six months ended June 30, 2008, loan interest income includes approximately $9.9 million and $18.4 million of fixed rate floor income, respectively. For the three and six months ended June 30, 2007, loan interest income includes approximately $2.7 million and $6.2 million of fixed rate floor income, respectively.

Depending on the type of the student loan and when it was originated, the borrower rate is either fixed to term or is reset to market rate each July 1. As a result, 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, and for those loans where the borrower rate is reset annually on July 1, the Company earns floor income to the next reset date, which the Company refers to as variable-rate floor income. In accordance with new legislation enacted in 2006, lenders are required to rebate floor income and variable-rate floor income to the Department for all new FFELP loans 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 the special allowance payment formula. In higher interest rate environments, where the interest rate rises above the borrower rate and fixed-rate loans effectively become variable rate loans, the impact of the rate fluctuations is reduced.

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

 
The following table shows the Company’s student loan assets that are earning fixed rate floor income as of June 30, 2008:

 	 	Borrower/	 	Estimated	 	Balance of	 	
Fixed	 	lender	 	variable	 	assets earning fixed-rate	 	
interest 	 	weighted	 	conversion	 	floor income as of	 	
rate range	 	average yield	 	rate (a)	 	June 30, 2008 (b)	 	
 	 	 	 	 	 	 	 	
4.5 - 4.99%	 	 	4.88	%	 	2.24	%	$	942	 	
5.0 - 5.49%	 	 	5.09	%	 	2.45	%	 	1,046	 	
5.5 - 5.99%	 	 	5.67	%	 	3.03	%	 	355,270	 	
6.0 - 6.49%	 	 	6.19	%	 	3.55	%	 	425,480	 	
6.5 - 6.99%	 	 	6.70	%	 	4.06	%	 	381,260	 	
7.0 - 7.49%	 	 	7.17	%	 	4.53	%	 	132,967	 	
7.5 - 7.99%	 	 	7.71	%	 	5.07	%	 	229,591	 	
8.0 - 8.99%	 	 	8.16	%	 	5.52	%	 	532,306	 	
> 9.0%	 	 	9.04	%	 	6.40	%	 	332,227	 	
 	 	 	 	 	 	 	 	$	2,391,089	 	

	(a)	The estimated variable conversion rate is the estimated short-term interest rate at which loans would convert to variable rate .	

	(b)	As of June 30, 2008, the Company had $206.7 million of fixed rate debt that was used by the Company to hedge fixed-rate student loan assets. The weighted average interest rate paid by the Company on this debt as of June 30, 2008 was 6.17% .	

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The following table summarizes the outstanding derivative instruments as of June 30, 2008 used by the Company to hedge fixed-rate student loan assets.

 	 	 	 	Weighted	 	
 	 	 	 	average fixed	 	
 	 	Notional	 	rate paid by	 	
Maturity	 	Amount	 	the Company (a)	 	
 	 	 	 	 	 	
2009	 	$	500,000	 	 	4.08	%	
2010	 	 	700,000	 	 	3.44	 	
2011	 	 	500,000	(b) 	 	3.57	 	
2012	 	 	250,000	(c)	 	3.86	 	
 	 	$	1,950,000	 	 	3.69	%	
 
	(a)	For all interest rate derivatives for which the Company pays a fixed rate, the Company receives discrete three-month LIBOR.	

	(b)	$250.0 million notional amount of derivatives have an effective start date in the first quarter of 2010.	

	(c)	Derivatives have an effective start date in the first quarter 2009.	

In April 2008 and May 2008, the Company entered into interest rate swaps with notional amounts of $200.0 million and $250.0 million which had forward-start dates of July 25, 2008 and June 25, 2008, respectively. The Company receives a fixed rate of 2.9805% and 3.693%, respectively, and pays discrete three-month LIBOR. These trades offset $450.0 million of fixed rate swaps previously entered into by the Company (included in the above table) and were executed in order to maintain the Company’s desired hedge ratio.

As of June 30, 2008, the Company had $3.9 billion of student loan assets that were earning variable-rate floor income. For the three and six months ended June 30, 2008, loan interest income includes approximately $21.9 million and $40.7 million of variable-rate floor income, respectively. The Company earned no variable-rate floor income during the first six months of 2007. As discussed previously, because the borrower rate resets on these loans on July 1, 2008, unless there is a decrease in short-term interest rates prior to the next borrower reset date, the Company will no longer earn variable-rate floor income on these loans.

The Company had outstanding interest rate derivatives with a notional amount of $1.95 billion to hedge a portion of its student loans earning variable-rate floor income. These derivatives terminated on June 30, 2008. The Company paid total settlements on these derivatives of $7.2 million and $10.0 million during the three and six months ended June 30, 2008, respectively.
 
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.

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The following table presents the Company’s student loan assets and related funding arranged by underlying indices as of June 30, 2008:

Index (e)	 	Frequency of
Variable Resets	 	Assets	 	Debt
outstanding
that funded
student loan
assets (a)	 	
 	 	 	 	 	 	 	 	
3 month H15 financial commercial paper (b)	 	 	Daily	 	$	23,962,096	 	 	—	 	
3 month Treasury bill	 	 	Varies	 	 	1,370,077	 	 	—	 	
Private student loans	 	 	 	 	 	279,953	 	 	—	 	
3 month LIBOR (c)	 	 	Quarterly	 	 	—	 	 	21,339,035	 	
Auction-rate or remarketing	 	 	Varies	 	 	—	 	 	2,841,245	 	
Asset-backed commercial paper	 	 	Varies	 	 	—	 	 	2,146,012	 	
Fixed rate	 	 	 	 	 	—	 	 	207,376	 	
Other (d)	 	 	 	 	 	921,542	 	 	—	 	
 	 	 	 	 	$	26,533,668	 	 	26,533,668	 	

 	(a)	During 2007, the Company entered into basis swaps in which the Company receives three-month LIBOR set discretely in advance and pays a daily weighted average three-month LIBOR less a spread as defined in the individual agreements. The Company entered into these derivative instruments to better match the interest rate characteristics on its student loan assets and the debt funding such assets. The following table summarizes these derivatives as of June 30, 2008:	

 	 	Notional Amount	 	
Maturity	 	Effective date in second
quarter 2007	 	Effective date in third
quarter 2007	 	Effective date in second
quarter 2008	 	Effective date in third
quarter 2008	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	
2008	 	$	1,000,000	 	 	2,000,000	 	 	—	 	 	—	 	 	3,000,000	 	
2009	 	 	2,000,000	 	 	4,000,000	 	 	—	 	 	3,000,000	 	 	9,000,000	 	
2010	 	 	500,000	 	 	2,000,000	 	 	2,000,000	 	 	1,000,000	 	 	5,500,000	 	
2011	 	 	—	 	 	2,700,000	 	 	—	 	 	—	 	 	2,700,000	 	
2012	 	 	—	 	 	1,000,000	 	 	800,000	 	 	1,600,000	 	 	3,400,000	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	3,500,000	 	 	11,700,000	 	 	2,800,000	 	 	5,600,000	 	 	23,600,000	 	

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

 	(c)	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 index to 3 month LIBOR. As a result, these notes are reflected in the 3 month LIBOR category in the above table. See “Foreign Currency Exchange Risk.”	

 	(d)	Assets include restricted cash and investments, pre-funding on certain debt transactions, and other assets.	

 	(e)	Historically, the movement of the various interest rate indices received on the Company’s student loan assets and paid on the debt to fund such loans was highly correlated. As shown below, the short-term movement of the indices was dislocated beginning in August 2007. This dislocation has had a negative impact on the Company’s student loan net interest income.	

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Financial Statement Impact of Derivative Instruments

The Company accounts for its derivative instruments in accordance with SFAS No. 133. SFAS No. 133 requires that changes in the fair value of derivative instruments be recognized currently in earnings unless specific hedge accounting criteria as specified by SFAS No. 133 are met. Management has structured all 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 under SFAS No. 133; 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, foreign currency, and put option adjustments and derivative settlements, net ” in the Company’s consolidated statements of operations and resulted in income of $11.5 million and $47.5 million for the three and six months ended June 30, 2008, respectively, and income of $16.7 million and $20.3 million for the three and six months ended June 30, 2007, respectively.

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

 	 	Three months ended June 30,	 	Six months ended June 30,	 	
 	 	2008	 	2007	 	2008	 	2007	 	
 	 	 	 	 	 	 	 	 	 	
Interest rate swaps - loan portfolio	 	$	(7,842	)	 	1,977	 	 	(11,019	)	 	4,872	 	
Basis swaps - loan portfolio	 	 	5,148	 	 	—	 	 	45,605	 	 	—	 	
Interest rate swaps - other (a)	 	 	—	 	 	5,657	 	 	—	 	 	10,321	 	
Cross-currency interest rate swaps	 	 	7,131	 	 	(2,438	)	 	10,614	 	 	(5,757	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative settlements received, net	 	$	4,437	 	 	5,196	 	 	45,200	 	 	9,436	 	

 	(a)	During the fourth quarter 2006, in consideration of not receiving 9.5% special allowance payments on a prospective basis, the Company entered into a series of off-setting interest rate swaps that mirrored the $2.45 billion in pre-existing interest rate swaps that the Company had utilized to hedge its loan portfolio receiving 9.5% special allowance payments against increases in interest rates.	

During the second quarter 2007, the Company entered into a series of off-setting interest rate swaps that mirrored the remaining interest rate swaps utilized to hedge the Company’s student loan portfolio against increases in interest rates.

The net effect of the offsetting derivatives discussed above was to lock in a series of future income streams on underlying trades through their respective maturity dates. The net settlements on these derivatives are included in “interest rate swaps - other.” In August 2007, the Company terminated these derivatives for net proceeds of $50.8 million.

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Sensitivity Analysis

The following tables summarize the effect on the Company’s earnings, based upon a sensitivity analysis performed by the Company assuming a hypothetical increase and decrease in interest rates of 100 basis points and an increase in interest rates of 200 basis points while funding spreads remain constant. The effect on earnings was performed on the Company’s variable-rate assets and liabilities. The analysis includes the effects of the Company’s interest rate and basis swaps in existence during these periods. As a result of the Company’s interest rate management activities, the Company expects such a change in pre-tax net income resulting from a 100 basis point increase or decrease or a 200 basis point increase in interest rates would not result in a proportional decrease in net income.

 	 	Three months ended June 30, 2008	 	
 	 	Change from decrease of 100
basis points	 	Change from increase of 100
basis points	 	Change from increase of 200
basis points	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Dollar	 	Percent	 	Dollar	 	Percent	 	Dollar	 	Percent	 	
 	 	(dollars in thousands)	 	
Effect on earnings:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Increase (decrease) in pre-tax net income before impact of derivative settlements	 	$	10,566	 	 	17.1	%	 	(10,566	)	 	(17.1)	%	 	(21,132	)	 	(34.1)	%	
Impact of derivative settlements	 	 	(8,492	)	 	(13.7	)	 	8,492	 	 	13.7	 	 	16,984	 	 	27.4	 	
Increase (decrease) in net income before taxes	 	$	2,074	 	 	3.4	%	 	(2,074	)	 	(3.4)	%	 	(4,148	)	 	(6.7)	%	
Increase (decrease) in basic and diluted earning per share	 	$	0.03	 	 	 	 	 	(0.03	)	 	 	 	 	(0.06	)	 	 	 	

 	 	Three months ended June 30, 2007	 	
 	 	Change from decrease of 100
basis points	 	Change from increase of 100
basis points	 	Change from increase of 200
basis points	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Dollar	 	Percent	 	Dollar	 	Percent	 	Dollar	 	Percent	 	
 	 	(dollars in thousands)	 	
Effect on earnings:	 	 	
Increase in pre-tax net income before impact of derivative settlements	 	$	6,519	 	 	21.1	%	 	535	 	 	1.7	%	 	2,192	 	 	7.1	%	
Impact of derivative settlements	 	 	(1,932	)	 	(6.3	)	 	1,932	 	 	6.3	 	 	3,864	 	 	12.5	 	
Increase in net income before taxes	 	$	4,587	 	 	14.8	%	 	2,467	 	 	8.0	%	 	6,056	 	 	19.6	%	
Increase in basic and diluted earning per share	 	$	0.06	 	 	 	 	 	0.03	 	 	 	 	 	0.07	 	 	 	 	

 	 	Six months ended June 30, 2008	 	
 	 	Change from decrease of 100
basis points	 	Change from increase of 100
basis points	 	Change from increase of 200
basis points	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Dollar	 	Percent	 	Dollar	 	Percent	 	Dollar	 	Percent	 	
 	 	(dollars in thousands)	 	
Effect on earnings:	 	 	
Increase (decrease) in pre-tax net income before impact of derivative settlements	 	$	22,151	 	 	56.4	%	 	(22,151	)	 	(56.4)	%	 	(42,560	)	 	(108.4)	%	
Impact of derivative settlements	 	 	(14,785	)	 	(37.6	)	 	14,785	 	 	37.6	 	 	29,570	 	 	75.3	 	
Increase (decrease) in net income before taxes	 	$	7,366	 	 	18.8	%	 	(7,366	)	 	(18.8)	%	 	(12,990	)	 	(33.1)	%	
Increase (decrease) in basic and diluted earning per share	 	$	0.10	 	 	 	 	 	(0.10	)	 	 	 	 	(0.18	)	 	 	 	

 	 	Six months ended June 30, 2007	 	
 	 	Change from decrease of 100
basis points	 	Change from increase of 100
basis points	 	Change from increase of 200
basis points	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Dollar	 	Percent	 	Dollar	 	Percent	 	Dollar	 	Percent	 	
 	 	(dollars in thousands)	 	
Effect on earnings:	 	 	
Increase in pre-tax net income before impact of derivative settlements	 	$	10,733	 	 	19.7	%	 	3,558	 	 	6.5	%	 	9,357	 	 	17.1	%	
Impact of derivative settlements	 	 	(3,843	)	 	(7.1	)	 	3,843	 	 	7.1	 	 	7,686	 	 	14.1	 	
Increase in net income before taxes	 	$	6,890	 	 	12.6	%	 	7,401	 	 	13.6	%	 	17,043	 	 	31.2	%	
Increase in basic and diluted earning per share	 	$	0.08	 	 	 	 	 	0.09	 	 	 	 	 	0.21	 	 	 	 	

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. and Euro dollars. 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, foreign currency, and put option adjustments and derivative settlements, net” in the Company’s consolidated statements of operations.

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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 index based on notional amounts of €420.5 million and €352.7 million and pays a spread to the LIBOR index based on notional amounts of $500.0 million and $450.0 million, respectively. In addition, under the terms of these agreements, all principal payments on the Euro Notes will effectively be paid at the exchange rate in effect as of the issuance of the notes. The Company did not qualify these derivative instruments as hedges under SFAS No. 133; consequently, the change in fair value is included in the Company’s operating results.

For the three and six months ended June 30, 2008, the Company recorded income of $4.4 million and an expense of $88.5 million , respectively, as a result of re-measurement of the Euro Notes and a loss of $2.4 million and income of $91.7 million , respectively, for the change in the fair value of the related derivative instrument. For the three and six months ended June 30, 2007, the Company recorded expense of $11.3 million and $25.0 million, respectively, as a result of the re-measurement of the Euro Notes and income of $28.5 million and $36.2 million, respectively, for the change in the fair value of the related derivative instrument. Both of these amounts are included in “derivative market value, foreign currency, and put option adjustments and derivative settlements, net” on the Company’s consolidated statements of operations.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under supervision and with the participation of certain members of the Company’s management, including the chief executive and the chief financial officers, the Company completed an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in SEC Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, the Company’s chief executive and chief financial officers believe that the disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q with respect to timely communication to them and other members of management responsible for preparing periodic reports and material information required to be disclosed in this Quarterly Report on Form 10-Q as it relates to the Company and its consolidated subsidiaries.

The effectiveness of the Company’s or any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing, and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate misconduct completely. As a result, there can be no assurance that the Company’s disclosure controls and procedures will prevent all errors or fraud or ensure that all material information will be made known to appropriate management in a timely fashion. By their nature, the Company’s or any system of disclosure controls and procedures can provide only reasonable assurance regarding management’s control objectives.

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. 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.

Municipal Derivative Bid Practices Investigation

As previously reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, and the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, on February 8, 2008, Shockley Financial Corp. (“SFC”), an indirect wholly owned subsidiary of the Company with two associates that provides investment advisory services for the investment of proceeds from the issuance of municipal and corporate bonds, received a grand jury subpoena issued by the U.S. District Court for the Southern District of New York upon application of the Antitrust Division of the U.S. Department of Justice. The subpoena seeks certain information and documents from SFC in connection with the Department of Justice’s ongoing criminal investigation of the bond industry with respect to possible anti-competitive practices related to awards of guaranteed investment contracts (“GICs”) and other products for the investment of proceeds from bond issuances. The Company and SFC are cooperating with the investigation.

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In addition, on March 5, 2008, SFC received a subpoena from the Securities and Exchange Commission (the “SEC”) related to an ongoing industry-wide investigation concerning the bidding of municipal GICs. The subpoena seeks certain information and documents from SFC relating to its GIC business. The Company and SFC are cooperating with the investigation.

On or about June 6, 2008, SFC received a subpoena from the New York Attorney General (the “NYAG”) relating to the NYAG’s investigation concerning the bidding of municipal GICs and possible violations of various state and federal laws. The subpoena seeks certain information and documents from SFC relating to its GIC business. The Company and SFC are cooperating with the investigation.

On or about June 12, 2008, SFC received a subpoena from the Florida Attorney General (the “FLAG”) relating to the FLAG’s investigation concerning the bidding of municipal GICs and possible violations of various state and federal laws. The subpoena seeks certain information and documents from SFC relating to its GIC business. The Company and SFC are cooperating with the investigation.

SFC has also been named as a defendant in a total of eight substantially identical purported class action lawsuits. In each of the lawsuits, a large number of financial institutions and financial service providers, including SFC, are named as defendants. The complaints allege that the defendants engaged in a conspiracy not to compete and to fix prices and rig bids for municipal derivatives (including GICs) sold to issuers of municipal bonds. All the complaints assert claims for violations of Section 1 of the Sherman Act and fraudulent concealment, and three complaints also assert claims for unfair competition and violation of the California Cartwright Act. On June 16, 2008, the United States Judicial Panel on Multidistrict Litigation issued an order transferring the cases then before it to the U.S. District Court for the Southern District of New York which consolidated several cases under the caption Hinds County, Mississippi v. Wachovia Bank, N.A. et al. SFC intends to vigorously contest these purported class action lawsuits.

SFC, the Company, or other subsidiaries of the Company may receive subpoenas from other regulatory agencies. Due to the preliminary nature of these matters as to SFC, the Company is unable to predict the ultimate outcome of the investigations or the class action lawsuits.
 
Industry Investigations

On January 11, 2007, the Company received a letter from the NYAG requesting certain information and documents from the Company in connection with the NYAG’s investigation into preferred lender list activities. Since January 2007, a number of state attorneys general, including the NYAG, and the U.S. Senate Committee on Health, Education, Labor, and Pensions also announced or are reportedly conducting broad inquiries or investigations of the activities of various participants in the student loan industry, including activities which may involve perceived conflicts of interest. A focus of the inquiries or investigations has been on any financial arrangements among student loan lenders and other industry participants which may facilitate increased volumes of student loans for particular lenders. Like many other student loan lenders, the Company received requests for information from certain state attorneys general and the Chairman of the U.S. Senate Committee on Health, Education, Labor, and Pensions in connection with their inquiries or investigations. In addition, the Company received subpoenas for information from the NYAG, the New Jersey Attorney General, and the Ohio Attorney General. In each case the Company is cooperating with the requests and subpoenas for information that it has received.
 
On July 31, 2007, the Company announced that it had agreed with the NYAG to adopt the NYAG’s Code of Conduct, which is substantially similar to the Company's previously adopted Nelnet Student Loan Code of Conduct. As part of the agreement, the Company agreed to contribute $2.0 million to a national fund for educating high school seniors and their parents regarding the financial aid process.

On October 10, 2007, the Company received a subpoena from the NYAG requesting certain information and documents from the Company in connection with the NYAG’s investigation into direct-to-consumer marketing practices of student lenders. The Company is cooperating with the subpoena.

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.
 
Department of Education Review
 
The Department of Education periodically reviews participants in the FFEL Program for compliance with program provisions. On June 28, 2007, the Department of Education notified the Company that it would be conducting a review of the Company’s administration of the FFEL Program under the Higher Education Act. The Company understands that the Department of Education has selected several schools and lenders for review. Specifically, the Department is reviewing the Company’s practices in connection with the prohibited inducement provisions of the Higher Education Act and the provisions of the Higher Education Act and the associated regulations which allow borrowers to have a choice of lenders. The Company has responded to the Department of Education’s requests for information and documentation and is cooperating with their review.

While the Company cannot predict the ultimate outcome of the review, the Company believes its activities have materially complied with 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.

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Department of Justice

In connection with the Company’s settlement with the Department of Education in January 2007 to resolve the Office of Inspector General of the Department of Education (the “OIG”) audit report with respect to the Company’s student loan portfolio receiving special allowance payments at a minimum 9.5% interest rate, the Company was informed by the Department of Education that a civil attorney with the Department of Justice had opened a file regarding the issues set forth in the OIG report, which the Company understands is common procedure following an OIG audit report. The Company has engaged in discussions with and provided information to the Department of Justice in connection with the review.

While the Company is unable to predict the ultimate outcome of the review, the Company believes its practices complied with applicable law, including the provisions of 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.

ITEM 1A. RISK FACTORS
 
There have been no material changes from the risk factors described in Nelnet’s Annual Report on Form 10-K for the year ended December 31, 2007 in response to Item 1A of Part I of such Form 10-K except as set forth below.

The Company faces liquidity risks associated with financing student loan originations and acquisitions.

The Company’s primary funding needs are those required to finance its student loan portfolio and satisfy its cash requirements for new student loan originations and acquisitions. In general, the amount, type, and cost of the Company’s funding, including securitization and unsecured financing from the capital markets and borrowings from financial institutions, have a direct impact on the Company’s operating expenses and financial results and can limit the Company’s ability to grow its student loan assets. The Company has historically relied upon secured financing vehicles as its most significant source of funding for student loans. The Company’s primary secured financing vehicles have been loan warehouse facilities and asset-backed securitizations.

As previously disclosed, with respect to the Company’s loan warehouse facilities and asset-backed securitizations, the recent unprecedented disruptions in the credit markets have had and may continue to have an adverse impact on the cost and availability of financing for the Company’s student loan portfolios and, as a result, have had and may continue to have an adverse impact on the Company’s results of operations and financial condition. Such adverse credit market conditions may continue or worsen in the future.

Student loan warehousing allows the Company to buy and manage student loans prior to transferring them into more permanent financing arrangements. The majority of the Company’s operating and warehouse financings are provided by third parties, over which it has limited control. Current conditions in the debt markets have resulted in reduced liquidity and increased credit risk premiums for most market participants. These conditions can increase the cost and reduce the availability of debt in the capital markets. If warehouse financing sources are unavailable, the Company may be unable to meet its financial commitments to schools, branding partners, or forward flow lenders when due unless the Company is able to find alternative funding mechanisms. The Company attempts to mitigate the impact of debt market disruptions by obtaining adequate committed and uncommitted facilities from a variety of reliable sources. There can be no assurance, however, that the Company will be successful in these efforts, that such facilities will be adequate, or that the cost of debt will allow the Company to operate at profitable levels.

The Company has historically relied upon a multi-seller bank provided conduit warehouse to fund the origination and acquisition of FFELP student loans. The facility for FFELP loans, which terminates in May 2010, was supported by 364-day liquidity which was up for renewal on May 9, 2008. The Company obtained an extension on this renewal until July 31, 2008. On July 31, 2008, the Company did not renew the liquidity provisions of this facility. Accordingly, as of July 31, 2008, the facility became a term facility with an outstanding balance of approximately $2.8 billion and a final maturity of May 9, 2010. The FFELP warehouse facility has a provision requiring the Company to refinance or remove 75% of the pledged collateral on an annual basis. Therefore the Company must refinance or remove approximately $900 million of loans by May 2009 to satisfy this provision.

The Company expects to access alternative sources of funding to originate new FFELP student loans, including the Department of Education’s Loan Participation Program (“Participation Program”), an existing facility with Union Bank and Trust Company (“Union Bank”), an entity under common control with the Company, and the Company’s $750 million unsecured operating line of credit.

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On July 1, 2008, pursuant to HR 5715, the Department of Education announced terms under which it will offer to purchase FFELP student loans and loan participations from FFELP lenders. Under the Department’s Loan Purchase Commitment Program (“Purchase Program”), the Department will purchase loans at a price equal to the sum of (i) par value, (ii) accrued interest, (iii) the one percent origination fee paid to the Department, and (iv) a fixed amount of $75 per loan. Lenders will have until September 30, 2009, to sell loans to the Department. Under the Participation Program, the Department will provide interim short-term liquidity to FFELP lenders by purchasing participation interests in pools of FFELP loans. FFELP lenders will be charged a rate of commercial paper plus 50 basis points on the principal amount of participation interests outstanding. Loans funded under the Participation Program must be either refinanced by the lender or sold to the Department pursuant to the Purchase Program prior to its expiration on September 30, 2009. To be eligible for purchase or participation under the Department’s programs, loans must be FFELP Stafford or PLUS loans made for the academic year 2008-2009, first disbursed between May 1, 2008 and July 1, 2009, with eligible borrower benefits. The Company is in the process of completing and filing all relevant documents to participate in the Department of Education’s Participation Program and expects to utilize the Participation Program to fund a significant portion of its loan originations for the 2008-2009 academic year.
 
The Company maintains an agreement with Union Bank, as trustee for various grantor trusts, under which Union Bank has agreed to purchase from the Company, participation interests in student loans (the “FFELP Participation Agreement”). The Company has the option to purchase the participation interests from the grantor trusts at the end of a 364-day term upon termination of the participation certificate. 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 on a short-term basis. The Company can participate loans to Union Bank to the extent of availability under the grantor trusts, up to $750 million.

There can be no assurance the Participation Program, the FFELP Participation Agreement, or the Company’s unsecured line of credit will be adequate to fund the Company’s origination and acquisition obligations. As such, the Company’s ability to originate and acquire student loans would be limited or could be eliminated.

The Company has historically used its warehouse facilities to pool student loans in order to maximize loan portfolio characteristics for efficient financing and to properly time market conditions for movement of the loans into an asset-backed securitization. The Company has historically relied upon, and expects to continue to rely upon, asset-backed securitizations as its most significant source of funding for student loans on a long-term basis. If this market continues to experience difficulties or worsen, the Company may be unable to securitize its student loans or to do so on favorable terms, including pricing. A number of factors could make such securitization more difficult, more expensive, or unavailable on any terms, including, but not limited to, financial results and losses, changes within the Company’s organization, specific events that have an adverse impact on the Company’s reputation, changes in the activities of the Company’s business partners, disruptions in the capital markets, specific events that have an adverse impact on the financial services industry, counter-party availability, changes affecting the Company’s assets, the Company’s corporate and regulatory structure, interest rate fluctuations, ratings agencies’ actions, general economic conditions, and the legal, regulatory, accounting, and tax environments governing the Company’s funding transactions. In addition, the Company’s ability to raise funds is strongly affected by the general state of the United States and world economies, and may become increasingly difficult due to economic and other factors. If the Company were unable to continue to securitize student loans on favorable terms, it could use alternative funding sources including the purchase program to meet liquidity needs; however, such alternatives may result in the sale of loans by the Company and a loss of the accompanying servicing rights. If the Company is unable to find cost-effective and stable funding alternatives, its funding capabilities and liquidity would be negatively impacted and its cost of funds could increase, adversely affecting the Company’s results of operations. In addition, the Company’s ability to originate and acquire student loans would be limited or could be eliminated.

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

Stock Repurchases

The following table summarizes the repurchases of Class A common stock during the second quarter of 2008 by the Company or any “affiliated purchaser” of the Company, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934.

 	 	 	 	 	 	Total number of	 	Maximum number	 	
 	 	 	 	 	 	shares purchased	 	of shares that may	 	
 	 	Total number	 	Average	 	as part of publicly	 	yet be purchased	 	
 	 	of shares	 	price paid	 	announced plans	 	under the plans	 	
Period	 	purchased (1)	 	per share	 	or programs (2) (3)	 	or programs (4)	 	
 	 	 	 	 	 	 	 	 	 	
April 1 - April 30, 2008	 	 	11,358	 	$	12.81	 	 	11,358	 	 	7,478,139	 	
May 1 - May 31, 2008	 	 	1,162	 	 	13.83	 	 	1,162	 	 	7,390,551	 	
June 1 - June 30, 2008	 	 	1,474	 	 	11.99	 	 	1,474	 	 	7,871,390	 	
Total	 	 	13,994	 	$	12.80	 	 	13,994	 	 	 	 	

 	(1)	The total number of shares includes: (i) shares purchased pursuant to the 2006 Plan discussed in footnote (2) below; and (ii) shares purchased pursuant to the 2006 ESLP discussed in footnote (3) below, of which there were none for the months of April, May, or June 2008. Shares of Class A common stock purchased pursuant to the 2006 Plan included (i) 3,388 shares, 1,162 shares, and 1,474 shares in April, May, and June, 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, and (ii) 7,970 shares purchased in April 2008 from employees upon cancellation of loans associated with shares originally acquired pursuant to the 2006 ESLP.	

 	(2)	On May 25, 2006, the Company publicly announced that its Board of Directors had authorized a stock repurchase program to repurchase up to a total of five million shares of the Company’s Class A common stock (the “2006 Plan”). On February 7, 2007, the Company’s Board of Directors increased the total shares the Company is allowed to repurchase to 10 million. The 2006 Plan had an initial expiration date of May 24, 2008, which was extended until May 24, 2010 by the Company’s Board of Directors on January 30, 2008.	

 	(3)	On May 25, 2006, the Company publicly announced that the shareholders of the Company approved an Employee Stock Purchase Loan Plan (the “2006 ESLP”) to allow the Company to make loans to employees for the purchase of shares of the Company's Class A common stock either in the open market or directly from the Company. A total of $40 million in loans may be made under the 2006 ESLP, and a total of one million shares of Class A common stock are reserved for issuance under the 2006 ESLP. Shares may be purchased directly from the Company or in the open market through a broker at prevailing market prices at the time of purchase, subject to any conditions or restrictions on the timing, volume, or prices of purchases as determined by the Compensation Committee of the Board of Directors and set forth in the Stock Purchase Loan Agreement with the participant. The 2006 ESLP shall terminate May 25, 2016.	

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 	(4)	The maximum number of shares that may yet be purchased under the plans is calculated below. There are no assurances that any additional shares will be repurchased under either the 2006 Plan or the 2006 ESLP. Shares under the 2006 ESLP may be issued by the Company rather than purchased in open market transactions.	

As of	 	Maximum number of
shares that may yet be
purchased under the
2006 Plan
(A)	 	Approximate dollar
value of shares that
may yet be
purchased under
the 2006 ESLP
(B)	 	Closing price on
the last trading
day of the
Company's Class
A Common Stock
(C)	 	(B / C)
Approximate
number of shares
that may yet be
purchased under
the 2006 ESLP
(D)	 	(A + D)
Approximate
number of shares
that may yet be
purchased under
the 2006 Plan and
2006 ESLP	 	
April 30, 2008	 	 	4,628,256	 	 	36,450,000	 	 	12.79	 	 	2,849,883	 	 	7,478,139	 	
May 31, 2008	 	 	4,627,094	 	 	36,450,000	 	 	13.19	 	 	2,763,457	 	 	7,390,551	 	
June 30, 2008	 	 	4,625,620	 	 	36,450,000	 	 	11.23	 	 	3,245,770	 	 	7,871,390	 	

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.

On September 27, 2006 the Company consummated a debt offering of $200.0 million aggregate principal amount of Junior Subordinated Hybrid Securities (“Hybrid Securities”). So long as any Hybrid Securities remain outstanding, if the Company gives notice of its   election to defer interest payments but the related deferral period has not yet commenced or a deferral period is continuing, then the Company will not, and will not permit any of its subsidiaries to:

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

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

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

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

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

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

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

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the Company’s annual meeting of shareholders held on May 22, 2008, the following proposals were submitted to a vote of shareholders and were approved by the margins indicated:

 	1.	To elect nine directors to serve on the Company’s Board of Directors for one-year terms or until their successors are elected and qualified. All directors seeking election were in attendance at the annual meeting.	

 	 	Number of Shares	 	
 	 	Votes For	 	Votes Against	 	Abstain	 	
James P. Abel	 	 	149,084,383	 	 	1,000,456	 	 	107,672	 	
Stephen F. Butterfield	 	 	149,907,990	 	 	186,362	 	 	98,158	 	
Michael S. Dunlap	 	 	149,157,652	 	 	936,646	 	 	98,213	 	
Kathleen A. Farrell	 	 	149,150,104	 	 	935,965	 	 	106,442	 	
Thomas E. Henning	 	 	149,158,969	 	 	925,302	 	 	108,240	 	
Brian J. O'Connor	 	 	149,155,801	 	 	928,320	 	 	108,390	 	
Kimberly K. Rath	 	 	149,156,683	 	 	927,092	 	 	108,736	 	
Michael D. Reardon	 	 	149,881,696	 	 	202,574	 	 	108,240	 	
James H. Van Horn	 	 	149,965,815	 	 	120,736	 	 	105,960	 	
 
	2.	To   ratify the appointment of KPMG LLP as independent auditors for 2008.	
 
Number of Shares	 	
Votes For	 	Votes Against	 	Abstain	 	
149,965,815	 	 	120,736	 	 	105,960	 	

 	3.	To approve an amendment to the Directors Stock Compensation Plan to increase the authorized number of shares of Class A common stock that may be issued under the plan from a total of 100,000 shares to a total of 400,000 shares.	

Number of Shares	 	
Votes For	 	Votes Against	 	Abstain	 	
145,532,849	 	 	1,073,119	 	 	111,764	 	

A shareholder proposal described in the Company’s proxy statement for the meeting was not properly introduced at the meeting by the shareholder, and thus was not submitted to a vote of shareholders.

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ITEM 6. EXHIBITS

 	4.1	Indenture of Trust by and between Nelnet Student Loan Trust 2008-2 and Zions First National Bank, dated as of April 1, 2008, filed as Exhibit 4.1 to Nelnet Student Loan Trust 2008-2’s Current Report on Form 8-K filed on April 9, 2008 and incorporated herein by reference.	
 	 	 	
 	4.2	Indenture of Trust by and between Nelnet Student Loan Trust 2008-3 and Zions First National Bank, dated as of April 15, 2008, filed as Exhibit 4.1 to Nelnet Student Loan Trust 2008-3’s Current Report on Form 8-K filed on April 30, 2008 and incorporated herein by reference.	
 	 	 	
 	4.3	Indenture of Trust by and between Nelnet Student Loan Trust 2008-4 and Zions First National Bank, dated as of May 1, 2008, filed as Exhibit 4.1 to Nelnet Student Loan Trust 2008-4’s Current Report on Form 8-K filed on May 23, 2008 and incorporated herein by reference.	
 	 	 	
 	10.1+	Nelnet, Inc. Directors Stock Compensation Plan, as amended through April 18, 2008, filed as Exhibit 99.1 to Nelnet, Inc.’s Registration Statement on Form S-8 filed on June 27, 2008 and incorporated herein by reference.	
 	 	 	
 	10.2*	Seventh Amendment of Amended and Restated Participation Agreement, dated as of July 1, 2008 by and between Union Bank and Trust Company and Nelnet, Inc. (f/k/a/ NELnet, Inc.) (subsequently renamed National Education Loan Network, Inc.).	
 	 	 	
 	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.	

* Filed herewith
** Furnished herewith
+ Indicates a compensatory plan or arrangement

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 	NELNET, INC.	
 	 	 	
Date: August 11, 2008	By:	/s/ MICHAEL S. DUNLAP	
 	Name:	Michael S. Dunlap	
 	Title:	Chairman and Chief Executive Officer	
 	 	 	
 	By:	/s/ TERRY J. HEIMES	
 	Name:	Terry J. Heimes	
 	Title:	Chief Financial Officer	

78

SEVENTH AMENDMENT OF
AMENDED AND RESTATED PARTICIPATION AGREEMENT

This Seventh Amendment of the Amended and Restated Participation Agreement (the “Seventh Amendment”) is made and entered into as of this 1 st day of July, 2008, by and between and Union Bank and Trust Company, a Nebraska banking corporation and trust company, solely in its capacity as trustee of various grantor trusts known as Short Term Federal Investment Trusts or other grantor trusts (“Trustee”) and National Education Loan Network, Inc., a Nevada corporation (“Nelnet”).

WHEREAS , the parties hereto entered into that certain Amended and Restated Participation Agreement dated as of June 1, 2001, as amended (the “Agreement”), and the parties hereto wish to amend the Agreement under the terms set forth herein.

NOW, THEREFORE , in consideration of the foregoing premises and the mutual covenants herein contained, the parties hereto agree as follows:

1.   Definitions . Unless otherwise expressly stated herein, capitalized terms in this Seventh Amendment shall have the same meanings given to them in the Agreement.

2.   Adjustment of Participation Amount . For purposes of the Agreement and this Seventh Amendment, the maximum aggregate total of participation interests sold to Union Bank shall be $750 million, or such other amount as the parties may mutually agree upon from time to time.

3.   Applicability of Agreement to Nelnet Affiliates . The terms of the Agreement applicable to Nelnet shall be fully applicable not only to Nelnet, but also Nelnet’s parent, Nelnet, Inc., and all direct or indirect subsidiaries of Nelnet, Inc., without necessity of those entities’ execution of this Amendment.

4.   Change in Sixth Amendment . Effective as of July 1, 2008, the second sentence of Section 2 of the Sixth Amendment of Amended and Restated Participation Agreement dated as of December 12, 2005 between the parties is hereby deleted.

5.   Effect of Amendment . This Seventh Amendment shall be effective as of the date first set forth above. Unless expressly modified or amended by this Amendment, all terms and provision contained in the Agreement shall remain in full force and effect without modification.

 

 
   Union Bank and Trust Company,  solely as in its capacity as trustee	 	National Education Loan Network, Inc.	

By:	 	 	 By:	 	
Title:	 	 	  Title:	 	

 

 

Exhibit 31.1
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

Date: August 11, 2008	/s/ MICHAEL S. DUNLAP	
 	Michael S. Dunlap	
 	Chairman and Chief Executive Officer	
 	Principal Executive Officer	

 

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

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

Date: August 11, 2008	/s/ TERRY J. HEIMES	
 	Terry J. Heimes	
 	Chief Financial Officer	
 	Principal Financial Officer and Principal Accounting Officer	

 

Exhibit 32

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

In connection with the Quarterly Report of Nelnet, Inc. and subsidiaries (the “Company”) on Form 10-Q for the quarter ended June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 
 	1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and	
 
 	2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	
 
Date: August 11, 2008	By:	/s/ MICHAEL S. DUNLAP	
 	Name: 	Michael S. Dunlap	
 	Title:	Chairman and Chief Executive Officer	
 	 	 	
 	By:	/s/ TERRY J. HEIMES	
 	Name:	Terry J. Heimes	
 	Title:	Chief Financial Officer