Allowance for Loan Losses

6 Months Ended

Jun. 30, 2011

Allowance for Loan Losses [Abstract]


2.	Allowance for Loan Losses

Our provisions for loan losses represent the periodic expense of maintaining an allowance sufficient to absorb incurred losses, net of expected recoveries, in the held-for-investment loan portfolios. The evaluation of the provisions for student loan losses is inherently subjective as it requires material estimates that may be susceptible to significant changes. We believe that the allowance for student loan losses is appropriate to cover probable losses incurred in the loan portfolios. We segregate our Private Education Loan portfolio into two classes of loans — traditional and non-traditional. Non-traditional loans are loans to (i) borrowers attending for-profit schools with an original Fair Isaac and Company (“FICO”) score of less than 670 and (ii) borrowers attending not-for-profit schools with an original FICO score of less than 640. The FICO score used in determining whether a loan is non-traditional is the greater of the borrower or co-borrower FICO score at origination. Traditional loans are defined as all other Private Education Loans that are not classified as non-traditional.

In determining the allowance for loan losses, we estimate the principal amount of loans that will default over the next two years (two years being the expected period between a loss event and default). In the first quarter of 2011, we implemented a new model to estimate these Private Education Loan defaults. Both the prior model and new model are considered “migration models”. Our prior allowance model (in place through December 31, 2010) segmented the portfolio into categories of similar risk characteristics based on loan program type, school type, loan status, seasoning, underwriting criteria (credit scores) and the existence or absence of a cosigner using school type, credit scores, cosigner status, loan status and seasoning as the primary risk characteristics. Our new model uses these same primary risk characteristics but also further segments the portfolio by the number of months the loan is in its repayment period (seasoning). While our previous allowance process incorporated the impact of seasoning, the new model more directly incorporates this feature. Another change in the new allowance model relates to the historical period of experience that we use as a starting point for projecting future defaults. Our new model is based upon a seasonal average, adjusted to the most recent three to six months of actual collection experience as the starting point and applies expected macroeconomic changes and collection procedure changes to estimate expected losses caused by loss events incurred as of the balance sheet date. Our previous model primarily used a one year historical default experience period and did not include the ability to directly model an economic expectation or collection procedure change. In addition, the previous allowance process included qualitative adjustments for these factors. Our current model places a greater emphasis on the more recent default experience rather than the default experience for older historical periods, as we believe the recent default experience is more indicative of the probable losses incurred in the loan portfolio today. While the model we use as a part of the allowance for loan losses process changed in the first quarter, the overall process for calculating the appropriate amount of allowance for Private Education Loan loss as disclosed in the 2010 Form 10-K has not changed. We believe that the current model more accurately reflects recent borrower behavior, loan performance, and collection performance, as well as expectations about economic factors. There was no adjustment to our allowance for loan loss upon implementing this new default projection model in the first quarter of 2011. In addition, there was no change in how we estimate the amount we will recover over time related to these defaulted amounts.


	Allowance for Loan Losses
	Three Months Ended June 30, 2011
				Private Education			Other
	FFELP Loans			Loans			Loans			Total

Allowance for Loan Losses
Beginning balance	$	190,235		$	2,034,318		$	73,797		$	2,298,350
Total provision		22,313			264,938			3,435			290,686
Charge-offs		(20,827	)		(263,580	)		(13,665	)		(298,072	)
Loan sales		(2,697	)		—			—			(2,697	)
Reclassification of interest reserve⁽¹⁾		—			6,927			—			6,927

Ending Balance	$	189,024		$	2,042,603		$	63,567		$	2,295,194

Allowance:
Ending balance: individually evaluated for impairment	$	—		$	133,796		$	52,125		$	185,921
Ending balance: collectively evaluated for impairment	$	189,024		$	1,908,807		$	11,442		$	2,109,273
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—
Loans:
Ending balance: individually evaluated for impairment	$	—		$	563,650		$	102,310		$	665,960
Ending balance: collectively evaluated for impairment	$	141,048,220		$	38,093,353		$	192,891		$	179,334,464
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—

Charge-offs as a percentage of average loans in repayment and forbearance (annualized)		.07	%		3.5	%		—	%
Charge-offs as a percentage of average loans in repayment (annualized)		.09	%		3.7	%		—	%
Allowance as a percentage of the ending total loan balance		.13	%		5.3	%		21.5	%
Allowance as a percentage of the ending loans in repayment		.20	%		7.1	%		—	%
Allowance coverage of charge-offs (annualized)		2.3			1.9			1.2
Ending total loans⁽²⁾	$	141,048,220		$	38,657,003		$	295,201
Average loans in repayment	$	94,317,705		$	28,488,734		$	—
Ending loans in repayment	$	94,282,103		$	28,871,968		$	—


⁽¹⁾		Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.

⁽²⁾		Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.


	Allowance for Loan Losses
	Three Months Ended June 30, 2010
				Private Education			Other
	FFELP Loans			Loans			Loans			Total

Allowance for Loan Losses
Beginning balance	$	186,215		$	2,018,676		$	78,664		$	2,283,555
Total provision		28,613			349,211			4,415			382,239
Charge-offs		(24,235	)		(335,766	)		(6,553	)		(366,554	)
Loan sales		(1,908	)		—			—			(1,908	)
Reclassification of interest reserve⁽¹⁾		—			10,292			—			10,292

Ending Balance	$	188,685		$	2,042,413		$	76,526		$	2,307,624

Allowance:
Ending balance: individually evaluated for impairment	$	—		$	81,867		$	60,360		$	142,227
Ending balance: collectively evaluated for impairment	$	188,685		$	1,960,546		$	16,166		$	2,165,397
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—
Loans:
Ending balance: individually evaluated for impairment	$	—		$	363,370		$	123,223		$	486,593
Ending balance: collectively evaluated for impairment	$	145,932,811		$	37,735,165		$	261,495		$	183,929,471
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—

Charge-offs as a percentage of average loans in repayment and forbearance (annualized)		.10	%		5.1	%		—	%
Charge-offs as a percentage of average loans in repayment (annualized)		.12	%		5.3	%		—	%
Allowance as a percentage of the ending total loan balance		.13	%		5.4	%		19.9	%
Allowance as a percentage of the ending loans in repayment		.23	%		7.9	%		—	%
Allowance coverage of charge-offs (annualized)		1.9			1.5			2.9
Ending total loans⁽²⁾	$	145,932,811		$	38,098,535		$	384,718
Average loans in repayment	$	82,449,191		$	25,178,957		$	—
Ending loans in repayment	$	82,978,473		$	25,721,573		$	—


⁽¹⁾		Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.

⁽²⁾		Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.


	Allowance for Loan Losses
	Six Months Ended June 30, 2011
				Private Education			Other
	FFELP Loans			Loans			Loans			Total

Allowance for Loan Losses
Beginning balance	$	188,858		$	2,021,580		$	72,516		$	2,282,954
Total provision		45,435			539,986			8,670			594,091
Charge-offs		(41,140	)		(536,582	)		(17,619	)		(595,341	)
Loan sales		(4,129	)		—			—			(4,129	)
Reclassification of interest reserve⁽¹⁾		—			17,619			—			17,619

Ending Balance	$	189,024		$	2,042,603		$	63,567		$	2,295,194

Allowance:
Ending balance: individually evaluated for impairment	$	—		$	133,796		$	52,125		$	185,921
Ending balance: collectively evaluated for impairment	$	189,024		$	1,908,807		$	11,442		$	2,109,273
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—
Loans:
Ending balance: individually evaluated for impairment	$	—		$	563,650		$	102,310		$	665,960
Ending balance: collectively evaluated for impairment	$	141,048,220		$	38,093,353		$	192,891		$	179,334,464
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—

Charge-offs as a percentage of average loans in repayment and forbearance (annualized)		.07	%		3.6	%		—	%
Charge-offs as a percentage of average loans in repayment (annualized)		.09	%		3.8	%		—	%
Allowance as a percentage of the ending total loan balance		.13	%		5.3	%		21.5	%
Allowance as a percentage of the ending loans in repayment		.20	%		7.1	%		—	%
Allowance coverage of charge-offs (annualized)		2.3			1.9			1.8
Ending total loans⁽²⁾	$	141,048,220		$	38,657,003		$	295,201
Average loans in repayment	$	94,907,800		$	28,308,899		$	—
Ending loans in repayment	$	94,282,103		$	28,871,968		$	—


⁽¹⁾		Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.

⁽²⁾		Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.


	Allowance for Loan Losses
	Six Months Ended June 30, 2010
				Private Education			Other
	FFELP Loans			Loans			Loans			Total

Allowance for Loan Losses
Beginning balance	$	161,168		$	1,443,440		$	76,261		$	1,680,869
Total provision		51,609			674,233			15,517			741,359
Charge-offs		(45,639	)		(620,244	)		(15,252	)		(681,135	)
Loan sales		(3,602	)		—			—			(3,602	)
Reclassification of interest reserve⁽¹⁾		—			20,934			—			20,934
Consolidation of securitization trusts⁽²⁾		25,149			524,050			—			549,199

Ending Balance	$	188,685		$	2,042,413		$	76,526		$	2,307,624

Allowance:
Ending balance: individually evaluated for impairment	$	—		$	81,867		$	60,360		$	142,227
Ending balance: collectively evaluated for impairment	$	188,685		$	1,960,546		$	16,166		$	2,165,397
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—
Loans:
Ending balance: individually evaluated for impairment	$	—		$	363,370		$	123,223		$	486,593
Ending balance: collectively evaluated for impairment	$	145,932,811		$	37,735,165		$	261,495		$	183,929,471
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—

Charge-offs as a percentage of average loans in repayment and forbearance (annualized)		.09	%		4.8	%		—	%
Charge-offs as a percentage of average loans in repayment (annualized)		.11	%		5.0	%		—	%
Allowance as a percentage of the ending total loan balance		.13	%		5.4	%		19.9	%
Allowance as a percentage of the ending loans in repayment		.23	%		7.9	%		—	%
Allowance coverage of charge-offs (annualized)		2.1			1.6			2.5	%
Ending total loans⁽³⁾	$	145,932,811		$	38,098,535		$	384,718
Average loans in repayment	$	82,443,391		$	24,913,768		$	—
Ending loans in repayment	$	82,978,473		$	25,721,573		$	—


⁽¹⁾		Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.

⁽²⁾		Upon the adoption of the new consolidation accounting guidance on January 1, 2010, we consolidated all of our previously off-balance sheet securitization trusts.

⁽³⁾		Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.

The following tables provide information regarding the loan status and aging of past due loans as of June 30, 2011 and December 31, 2010.


	FFELP Loan Delinquencies
	June 30,						December 31,
	2011						2010
(Dollars in millions)	Balance			%			Balance			%

Loans in-school/grace/deferment⁽¹⁾	$	25,718					$	28,214
Loans in forbearance⁽²⁾		21,048						22,028
Loans in repayment and percentage of each status:
Loans current		78,201			82.9	%		80,026			82.8	%
Loans delinquent 31-60 days⁽³⁾		5,149			5.5			5,500			5.7
Loans delinquent 61-90 days⁽³⁾		2,909			3.1			3,178			3.3
Loans delinquent greater than 90 days⁽³⁾		8,023			8.5			7,992			8.2

Total FFELP Loans in repayment		94,282			100	%		96,696			100	%

Total FFELP Loans, gross		141,048						146,938
FFELP Loan unamortized premium		1,776						1,900

Total FFELP Loans		142,824						148,838
FFELP Loan allowance for losses		(189	)					(189	)

FFELP Loans, net	$	142,635					$	148,649

Percentage of FFELP Loans in repayment					66.8	%					65.8	%

Delinquencies as a percentage of FFELP Loans in repayment					17.1	%					17.2	%

FFELP Loans in forbearance as a percentage of loans in repayment and forbearance					18.2	%					18.6	%


⁽¹⁾		Loans for borrowers who may still 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, as well as loans for borrowers who have requested extension of grace period during employment transition.

⁽²⁾		Loans for borrowers who have used their allowable deferment time or do not qualify for deferment, that need additional time to obtain employment or who have temporarily ceased making payments due to hardship or other factors.

⁽³⁾		The period of delinquency is based on the number of days scheduled payments are contractually past due.


	Private Education Traditional Loan Delinquencies
	June 30,						December 31,
	2011						2010
(Dollars in millions)	Balance			%			Balance			%

Loans in-school/grace/deferment⁽¹⁾	$	6,431					$	7,419
Loans in forbearance⁽²⁾		1,225						1,156
Loans in repayment and percentage of each status:
Loans current		23,964			91.7	%		22,850			91.2	%
Loans delinquent 31-60 days⁽³⁾		759			2.9			794			3.2
Loans delinquent 61-90 days⁽³⁾		433			1.7			340			1.4
Loans delinquent greater than 90 days⁽³⁾		978			3.7			1,060			4.2

Total traditional loans in repayment		26,134			100	%		25,044			100	%

Total traditional loans, gross		33,790						33,619
Traditional loans unamortized discount		(775	)					(801	)

Total traditional loans		33,015						32,818
Traditional loans receivable for partially charged-off loans		629						558
Traditional loans allowance for losses		(1,363	)					(1,231	)

Traditional loans, net	$	32,281					$	32,145

Percentage of traditional loans in repayment					77.3	%					74.5	%

Delinquencies as a percentage of traditional loans in repayment					8.3	%					8.8	%

Loans in forbearance as a percentage of loans in repayment and forbearance					4.5	%					4.4	%

Loans in repayment greater than 12 months as a percentage of loans in repayment⁽⁴⁾					66.7	%					65.2	%


⁽¹⁾		Loans for borrowers who may still 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.

⁽²⁾		Loans for borrowers who have requested extension of grace period generally during employment transition or who have temporarily ceased making payments due to hardship or other factors, consistent with established loan program servicing policies and procedures.

⁽³⁾		The period of delinquency is based on the number of days scheduled payments are contractually past due.

⁽⁴⁾		Based on number of months in an active repayment status for which a scheduled monthly payment was due.


	Private Education Non-Traditional Loan
	Delinquencies
	June 30,						December 31,
	2011						2010
(Dollars in millions)	Balance			%			Balance			%

Loans in-school/grace/deferment⁽¹⁾	$	785					$	921
Loans in forbearance⁽²⁾		205						184
Loans in repayment and percentage of each status:
Loans current		2,030			74.1	%		2,038			72.6	%
Loans delinquent 31-60 days⁽³⁾		204			7.5			217			7.7
Loans delinquent 61-90 days⁽³⁾		142			5.2			131			4.7
Loans delinquent greater than 90 days⁽³⁾		361			13.2			422			15.0

Total non-traditional loans in repayment		2,737			100	%		2,808			100	%

Total non-traditional loans, gross		3,727						3,913
Non-traditional loans unamortized discount		(86	)					(93	)

Total non-traditional loans		3,641						3,820
Non-traditional loans receivable for partially charged-off loans		511						482
Non-traditional loans allowance for losses		(680	)					(791	)

Non-traditional loans, net	$	3,472					$	3,511

Percentage of non-traditional loans in repayment					73.5	%					71.8	%

Delinquencies as a percentage of non-traditional loans in repayment					25.9	%					27.4	%

Loans in forbearance as a percentage of loans in repayment and forbearance					7.0	%					6.1	%

Loans in repayment greater than 12 months as a percentage of loans in repayment⁽⁴⁾					60.0	%					55.9	%


⁽¹⁾		Loans for borrowers who may still 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.

⁽²⁾		Loans for borrowers who have requested extension of grace period generally during employment transition or who have temporarily ceased making payments due to hardship or other factors, consistent with established loan program servicing policies and procedures.

⁽³⁾		The period of delinquency is based on the number of days scheduled payments are contractually past due.

⁽⁴⁾		Based on number of months in an active repayment status for which a scheduled monthly payment was due.

The following table provides information regarding accrued interest receivable on our Private Education Loans at June 30, 2011 and December 31, 2010. The table also discloses the amount of accrued interest on loans greater than 90 days past due as compared to our allowance for uncollectible interest. The allowance for uncollectible interest exceeds the amount of accrued interest on our 90 days past due portfolio for all periods presented.


	Accrued Interest Receivable
			Greater than		Allowance for
			90 days		Uncollectible
	Total		Past Due		Interest

June 30, 2011
Private Education Loans — Traditional	$	970,674	$	33,319	$	50,718
Private Education Loans — Non-Traditional		178,013		17,990		36,412

Total	$	1,148,687	$	51,309	$	87,130

December 31, 2010
Private Education Loans — Traditional	$	1,062,289	$	34,644	$	56,755
Private Education Loans — Non-Traditional		208,587		20,270		37,057

Total	$	1,270,876	$	54,914	$	93,812

FFELP Loans are substantially guaranteed as to their principal and accrued interest in the event of default; therefore, the key credit quality indicator for this portfolio is loan status. The impact of changes in loan status is incorporated quarterly into the allowance for loan losses calculation. For Private Education Loans, the key credit quality indicators are school type, FICO scores, the existence of a cosigner, the loan status and loan seasoning. The school type/FICO score are assessed at origination and maintained through the traditional/non-traditional loan designation. The other Private Education Loan key quality indicators can change and are incorporated quarterly into the allowance for loan losses calculation. The following table highlights the principal balance (excluding the receivable for partially charged-off loans) of our Private Education Loan portfolio stratified by the key credit quality indicators.


	Private Education Loans
	Credit Quality Indicators
	June 30, 2011					December 31, 2010
(Dollars in millions)	Balance⁽³⁾		% of Balance			Balance⁽³⁾		% of Balance

Credit Quality Indicators
School Type/FICO Scores:
Traditional	$	33,790		90	%	$	33,619		90	%
Non-Traditional⁽¹⁾		3,727		10			3,913		10

Total	$	37,517		100	%	$	37,532		100	%

Cosigners:
With cosigner	$	22,650		60	%	$	22,259		59	%
Without cosigner		14,867		40			15,273		41

Total	$	37,517		100	%	$	37,532		100	%

Seasoning⁽²⁾:
1-12 payments	$	10,793		29	%	$	10,932		29	%
13-24 payments		6,625		18			6,659		18
25-36 payments		4,592		12			4,457		12
37-48 payments		3,267		9			2,891		8
More than 48 payments		5,024		13			4,253		11
Not yet in repayment		7,216		19			8,340		22

Total	$	37,517		100	%	$	37,532		100	%


⁽¹⁾		Defined as loans to borrowers attending for-profit schools (with a FICO score of less than 670 at origination) and borrowers attending not-for-profit schools (with a FICO score of less than 640 at origination).

⁽²⁾		Number of months in active repayment for which a scheduled payment was due.

⁽³⁾		Balance represents gross Private Education Loans.

We offer temporary interest rate reductions to Private Education Loan borrowers who are both experiencing financial difficulties and meet other criteria. At June 30, 2011 and December 31, 2010, approximately $564 million and $444 million, respectively, had qualified at some point for an interest rate reduction modification since the inception of the program in May 2009. These modifications met the criteria of a troubled debt restructuring in accordance with ASC 310-40 Receivables — Troubled Debt Restructurings by Creditors and were individually evaluated for impairment. The allowance for loan losses associated with these loans was $134 million and $114 million at June 30, 2011 and December 31, 2010, respectively. Subsequent to modification, $89 million and $53 million defaulted through June 30, 2011 and December 31, 2010, respectively. At June 30, 2011 and December 31, 2010, approximately $284 million and $257 million, respectively, had qualified for the program and were currently receiving a reduction in their interest rate.