(11) Fair Value Measurements

(a)

Financial Instruments Recorded at Fair Value on our Consolidated Balance Sheets

For financial instruments recorded at fair value on our consolidated balance sheet, we base that financial instrument’s categorization within the valuation hierarchy upon the lowest level of input that is significant to the fair value measurement. During fiscal 2013 and fiscal 2012, there were no transfers between the hierarchy levels.

The following is a description of the valuation methodologies used for financial instruments recorded at fair value on our consolidated balance sheet:

Investments Available-for-Sale

We utilize a third-party pricing vendor to provide valuations on our available-for-sale securities, which include GSE mortgage-backed securities and mortgage-backed securities issued by U.S. government agencies. Fair values as provided by the vendor are generally determined based upon available direct market data (including trades, covers, bids, offers and price talk) along with market data for similar securities (including indices and market research). Prepayment/default projections based on historical statistics of the underlying collateral and current market data are also used. Management regards the inputs and methods used by the third-party pricing vendor to be Level 2 inputs and methods in the valuation hierarchy. We periodically obtain a secondary source to assess the reasonableness of prices provided by our primary pricing vendor.

Participation Interest Account Deposits

We recorded participation account deposits at fair value using cash flow modeling techniques as they do not have available market prices. As such, we estimate fair value using the net present value of expected future cash flows. Changes in the estimated fair value of our participation account deposits are recorded in our consolidated statement of operations within administrative and other fees. At June 30, 2013 and June 30, 2012, the fair value of deposits for participation accounts was not materially different from the cash balance of the underlying interest-bearing deposits. These assets are classified within Level 3 of the valuation hierarchy.

Service Revenue Receivables

We recorded our service revenue receivables at fair value on our consolidated balance sheet. Our service revenue receivables consist of additional structural advisory fees and residual receivables and represent the estimated fair value of our service revenue receivables expected to be collected over the life of the various separate securitization trusts that have purchased education loans facilitated by us, with no further service obligations on our part. Changes in the estimated fair value of our service revenue receivables due, less any cash distributions received, are recorded in our consolidated statements of operations within the fair value changes to service revenue receivables.

In the absence of market-based transactions, we use cash flow modeling techniques to derive a Level 3 estimate of fair value for financial reporting purposes. Significant observable and unobservable inputs used to develop our fair value estimates include, but are not limited to, recovery, net default and prepayment rates, discount rates and the forward London Interbank Offered Rate (LIBOR) curve. These inputs have not changed significantly from June 30, 2012. Our significant unobservable inputs are included below.

The following table presents financial instruments carried at fair value on our consolidated balance sheet, in accordance with the valuation hierarchy described above, on a recurring basis:


	June 30,
	2013								2012
	Level 1		Level 2		Level 3		Total carrying value		Level 1		Level 2		Level 3		Total carrying value
	(dollars in thousands)
Assets:
Investments available-for-sale	$	—	$	84,782	$	—	$	84,782	$	—	$	68,598	$	—	$	68,598
Deposits for participation interest accounts		—		—		13,147		13,147		—		—		4,039		4,039
Service revenue receivables		—		—		14,817		14,817		—		—		16,341		16,341

Total assets	$	—	$	84,782	$	27,964	$	112,746	$	—	$	68,598	$	20,380	$	88,978

The following table presents activity related to our financial assets categorized as Level 3 of the valuation hierarchy, valued on a recurring basis, for fiscal 2013 and fiscal 2012. All realized and unrealized gains and losses recorded during the periods presented relate to assets still held at our consolidated balance sheet date. There have been no transfers in or out of Level 3 of the hierarchy, or between Levels 1 and 2, for the periods presented.


	Fiscal years ended June 30,
	2013						2012
	Deposits for participation interest accounts			Service revenue receivables			Deposits for participation interest accounts			Service revenue receivables
	(dollars in thousands)
Fair value, beginning of year	$	4,039		$	16,341		$	8,512		$	29,610
Realized and unrealized gains (losses)		(144	)		2,068			(14	)		947
Net contributions (distributions)(1)		9,252			(3,592	)		(4,459	)		(14,216	)

Fair value, end of year	$	13,147		$	14,817		$	4,039		$	16,341

(1)	During fiscal 2012, we recorded a settlement of our asset servicing fee receivable and additional structural advisory fee receivable of $13.0 million in connection with the sale of the rights to this revenue stream on November 14, 2011.

The following table presents additional quantitative information about the assets measured at fair value on a recurring basis for which we have utilized Level 3 inputs to determine fair value at June 30, 2013:


Asset	Fair Value		Valuation Techniques	Significant Unobservable Inputs	Range
	(dollars in thousands)
Deposits for participation interest accounts	$	13,147	Discounted cash flows	Discount rate		8-15	%
				Annual prepayment rates		5-12	%
				Annual net recovery rates		2.67	%
				Annual default rates		0-2.25	%

Service revenue receivables	$	14,817	Discounted cash flows	Discount rate		10-16	%
				Annual prepayment rates		3-9	%
				Annual net recovery rates		2-2.5	%
				Annual default rates		1-10	%

(b)

Level 3 Inputs Used to Determine Fair Value

The unobservable inputs used to determine the fair value of our service revenue receivables and participation accounts include, but are not limited to, discount rates, prepayment rates, recovery rates and default rates. The forward LIBOR curve is a key observable input utilized in determining the fair value of expected future cash flows from these assets. There have been no significant changes in these inputs from June 30, 2012.

Sensitivity to Changes in Assumptions

The service revenue receivables recorded at June 30, 2013 and June 30, 2012 were related to the GATE Trusts and other securitization trusts we previously facilitated. Substantially all of the loans held by these securitization trusts have guarantees from schools, and, in some cases, from a third party bank. These guarantees help to partially mitigate the overall impact of defaults and sensitivity to changes in default activity to the residual interest holder. In addition, the recoveries on guaranteed defaults are returned back to the schools or bank, as applicable, not the residual interest holder, therefore, limiting the impact and sensitivity of the residual interest holder to recoveries. Further, due to the seasoning of these trusts, many of the residual interests have relatively short weighted-average lives and are currently cash-flowing, and, as such, are not significantly impacted by other assumptions, such as discount rates.

(c)

Fair Values of Other Financial Instruments

Fair value estimates for financial instruments not carried at fair value on our consolidated balance sheets are generally subjective in nature, and are made as of a specific point in time based on the characteristics of the financial instruments and relevant available market information. The fair value estimates for the financial instruments disclosed below does not necessarily incorporate the exit price concept used to record financial instruments at fair value on our consolidated balance sheet.

Cash and Cash Equivalents, Short-Term Investments, Restricted Cash and Restricted Funds Due to Clients

The carrying amount approximates fair value principally due to the short maturities of these instruments.

Mortgages

The fair value of the fixed-rate mortgage portfolio was determined by discounting the cash flows using rates obtained from a third party as of our consolidated balance sheet date. The fair value of the variable rate portfolio was determined by discounting the scheduled cash flows through the estimated maturity of the loans using the interest rates offered as of our consolidated balance sheet date that reflect the current interest rate inherent in the loans. This method of estimating fair value does not incorporate the exit price concept of fair value. Mortgage loans were classified within Level 3 of the fair value hierarchy.

Education Loans

The fair value of education loans was determined by discounting the scheduled cash flows through the estimated maturity of the loans using interest rates offered as of our consolidated balance sheet date that reflect the credit and interest rate risk inherent in the loans. The estimate of maturity was based on our historical repayment experience. Since the education loans held were principally variable rate, carrying value approximates fair value. This method of estimating fair value does not incorporate the exit price concept of fair value. Education loans were classified within Level 3 of the fair value hierarchy.

Time Deposits

The fair value of time deposits was determined by discounting the scheduled cash flows using the rates we offered as of our consolidated balance sheet date for deposits with similar remaining maturities or rates of our competitors. In determining our offering rates, we compare our rates on a continuous basis to other banks and competitors. As such, time-deposits were classified within Level 2 of the fair value hierarchy.

Savings, Checking and Money Market Deposits

The fair value of our savings, checking and money market deposits with no stated maturity, were equal to the amounts payable upon demand.

The following tables present the carrying amount, estimated fair value and placement in the fair value hierarchy for our financial instruments not measured at fair value on our consolidated balance sheets at June 30, 2013 and June 30, 2012:


June 30, 2013	Carrying Amount		Estimated Fair Value		Fair Value Measurements
June 30, 2013	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	81,910	$	81,910	$	81,910	$	—	$	—
Short-term investments		55,179		55,179		55,179		—		—
Restricted cash		87,338		87,338		87,338		—		—
Mortgage loans, net of allowance		12,629		12,538		—		—		12,538
Educations loans, net of allowance		62,996		63,197		—		—		63,197
Financial liabilities:
Time deposits	$	38,922	$	39,273	$	—	$	39,273	$	—
Savings, checking and money market deposits		125,055		125,055		125,055		—		—
Restricted funds due to clients		86,994		86,994		86,994		—		—


June 30, 2012	Carrying Amount		Estimated Fair Value		Fair Value Measurements
June 30, 2012	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	123,497	$	123,497	$	123,497	$	—	$	—
Short-term investments		85,007		85,007		85,007		—		—
Restricted cash		65,401		65,401		65,401		—		—
Mortgage loans, net of allowance		7,811		7,811		—		—		7,811
Educations loans, net of allowance		33,095		33,280		—		—		33,280
Financial liabilities:
Time deposits	$	43,155	$	43,248	$	—	$	43,248	$	—
Savings, checking and money market deposits		40,273		40,273		40,273		—		—
Restricted funds due to clients		104,981		104,981		104,981		—		—