4.	Allowance for Loan Losses

Our provisions for loan losses represent the periodic expense of maintaining an allowance sufficient to absorb incurred probable losses, net of expected recoveries, in the held-for-investment loan portfolios. The evaluation of the provisions for loan losses is inherently subjective, as it requires material estimates that may be susceptible to significant changes. We segregate our Private Education portfolio into two classes of loans in monitoring and assessing credit risk – Troubled Debt Restructurings (“TDRs”) and Non-TDRs. We believe that the allowance for loan losses is appropriate to cover probable losses incurred in the loan portfolios.

Allowance for Loan Losses Metrics

	Year Ended December 31, 2017
(Dollars in millions)	FFELP Loans			Private Education Loans			Other Loans			Total
Allowance for Loan Losses
Beginning balance	$	67		$	1,351		$	15		$	1,433
Total provision		42			382			2			426
Charge-offs⁽¹⁾		(49	)		(443	)		(7	)		(499	)
Reclassification of interest reserve⁽²⁾		—			7			—			7
Ending balance	$	60		$	1,297		$	10		$	1,367
Allowance Ending Balance:
Individually evaluated for impairment - TDR	$	—		$	1,171		$	9		$	1,180
Collectively evaluated for impairment:
Excluding Purchased Non-Credit Impaired Loans acquired at a discount and Purchased Credit Impaired Loans		60			126			1			187
Purchased Non-Credit Impaired Loans acquired at a discount⁽³⁾		—			—			—			—
Purchased Credit Impaired Loans⁽³⁾		—			—			—			—
Ending total allowance	$	60		$	1,297		$	10		$	1,367
Loans Ending Balance:
Individually evaluated for impairment - TDR	$	—		$	10,921		$	30		$	10,951
Collectively evaluated for impairment:
Excluding Purchased Non-Credit Impaired Loans acquired at a discount and Purchased Credit Impaired Loans		77,860			11,861			40			89,761
Purchased Non-Credit Impaired Loans acquired at a discount⁽³⁾		3,237			2,610			—			5,847
Purchased Credit Impaired Loans⁽³⁾		—			248			—			248
Ending total loans⁽⁴⁾	$	81,097		$	25,640		$	70		$	106,807
Charge-offs as a percentage of average loans in repayment		.07	%		1.98	%		5.39	%
Allowance coverage of charge-offs		1.2			2.9			1.5
Allowance as a percentage of the ending total loan balance⁽³⁾		.07	%		5.06	%		14.32	%
Allowance as a percentage of the ending loans in repayment⁽³⁾		.09	%		5.66	%		14.32	%
Ending total loans⁽⁴⁾	$	81,097		$	25,640		$	70
Average loans in repayment	$	68,318		$	22,342		$	130
Ending loans in repayment	$	67,853		$	22,924		$	70

⁽¹⁾

Charge-offs are reported net of expected recoveries. For Private Education Loans, the expected recovery amount is transferred to the receivable for partially charged-off loan balance. Charge-offs include charge-offs against the receivable for partially charged-off loans which represents the difference between what was expected to be recovered and any shortfalls in what was actually recovered in the period. See “Receivable for Partially Charged-Off Private Education Loans” for further discussion.

⁽²⁾

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.

⁽³⁾

See “Note 2 — Significant Accounting Policies — Allowance for Loan Losses” for a description of our policy for the $6.5 billion of loans ($3.5 billion of FFELP and $3.0 billion of Private Education) purchased in 2017 accounted for as either Purchased Credit Impaired Loans or Purchased Non-Credit Impaired Loans. The Purchased Credit Impaired Loans’ losses are not provided for by the allowance for loan losses in the above table as these loans are separately reserved for, if needed. No allowance for loan losses has been established for these loans as of December 31, 2017. The losses of the Purchased Non-Credit Impaired Loans acquired at a discount are not provided for by the allowance for loan losses in the above table as the remaining purchased discount associated with the FFELP and Private Education Loans of $43 million and $392 million, respectively, as of December 31, 2017 is greater than the incurred losses and as a result no allowance for loan losses has been established for these loans as of December 31, 2017. As a result, excluding the $6.5 billion of loans acquired in 2017, the allowance as a percentage of the ending total loan balance and the allowance as a percentage of the ending loans in repayment would be 0.08 percent and 0.09 percent for FFELP Loans and 5.69 percent and 6.42 percent for Private Education Loans, respectively.

⁽⁴⁾

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

	Year Ended December 31, 2016
(Dollars in millions)	FFELP Loans			Private Education Loans			Other Loans			Total
Allowance for Loan Losses
Beginning balance	$	78		$	1,471		$	15		$	1,564
Total provision		43			383			3			429
Charge-offs⁽¹⁾		(54	)		(513	)		(3	)		(570	)
Reclassification of interest reserve⁽²⁾		—			10			—			10
Ending balance	$	67		$	1,351		$	15		$	1,433
Allowance Ending Balance:
Individually evaluated for impairment - TDR	$	—		$	1,190		$	11		$	1,201
Collectively evaluated for impairment		67			161			4			232
Ending total allowance	$	67		$	1,351		$	15		$	1,433
Loans Ending Balance:
Individually evaluated for impairment - TDR	$	—		$	11,165		$	32		$	11,197
Collectively evaluated for impairment		86,918			13,983			132			101,033
Ending total loans⁽³⁾	$	86,918		$	25,148		$	164		$	112,230
Charge-offs as a percentage of average loans in repayment		.07	%		2.20	%		2.10	%
Allowance coverage of charge-offs		1.2			2.6			7.0
Allowance as a percentage of the ending total loan balance		.08	%		5.37	%		9.35	%
Allowance as a percentage of the ending loans in repayment		.09	%		6.10	%		9.35	%
Ending total loans⁽³⁾	$	86,918		$	25,148		$	164
Average loans in repayment	$	72,714		$	23,275		$	104
Ending loans in repayment	$	70,557		$	22,150		$	164

⁽¹⁾

⁽²⁾

⁽³⁾

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

	Year Ended December 31, 2015
(Dollars in millions)	FFELP Loans			Private Education Loans			Other Loans			Total
Allowance for Loan Losses
Beginning balance	$	93		$	1,916		$	24		$	2,033
Total provision		46			538			(3	)		581
Net adjustment resulting from the change in the charge-off rate⁽¹⁾		—			(330	)		—			(330	)
Net charge-offs remaining⁽²⁾		(61	)		(659	)		(6	)		(726	)
Total net charge-offs		(61	)		(989	)		(6	)		(1,056	)
Reclassification of interest reserve⁽³⁾		—			11			—			11
Loan sales		—			(5	)		—			(5	)
Ending balance	$	78		$	1,471		$	15		$	1,564
Allowance Ending Balance:
Individually evaluated for impairment - TDR	$	—		$	1,209		$	12		$	1,221
Collectively evaluated for impairment		78			262			3			343
Ending total allowance	$	78		$	1,471		$	15		$	1,564
Loans Ending Balance:
Individually evaluated for impairment - TDR	$	—		$	10,965		$	37		$	11,002
Collectively evaluated for impairment		95,393			17,431			49			112,873
Ending total loans⁽⁴⁾	$	95,393		$	28,396		$	86		$	123,875
Net charge-offs as a percentage of average loans in repayment, excluding the net adjustment resulting from the change in the charge-off rate (annualized)⁽¹⁾		.08	%		2.55	%		6.17	%
Net adjustment resulting from the change in the charge-off rate as a percentage of average loans in repayment (annualized)⁽¹⁾		—	%		1.28	%		—	%
Allowance coverage of net charge-offs, excluding the net adjustment resulting from the change in the charge-off rate (annualized)⁽¹⁾		1.3			2.2			2.5
Allowance as a percentage of the ending total loan balance		.08	%		5.18	%		17.28	%
Allowance as a percentage of the ending loans in repayment		.11	%		6.00	%		17.28	%
Ending total loans⁽⁴⁾	$	95,393		$	28,396		$	86
Average loans in repayment	$	75,925		$	25,802		$	97
Ending loans in repayment	$	73,838		$	24,502		$	86

⁽¹⁾

In 2015, the portion of the loan amount charged off at default on Private Education Loans increased from 73 percent to 79 percent. This did not impact the provision for loan losses as previously this had been reserved through the allowance for loan losses. This change resulted in a $330 million reduction to the balance of the receivable for partially charged-off loans.

⁽²⁾

⁽³⁾

⁽⁴⁾

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

Key Credit Quality Indicators

FFELP Loans are substantially insured and 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.

	FFELP Loan Delinquencies
	December 31,
	2017						2016						2015
(Dollars in millions)	Balance			%			Balance			%			Balance			%
Loans in-school/grace/deferment⁽¹⁾	$	4,711					$	5,871					$	8,257
Loans in forbearance⁽²⁾		8,533						10,490						13,298
Loans in repayment and percentage of each status:
Loans current		59,264			87.3	%		61,977			87.8	%		62,651			84.8	%
Loans delinquent 31-60 days⁽³⁾		2,638			3.9			2,820			4.0			3,285			4.5
Loans delinquent 61-90 days⁽³⁾		1,763			2.6			1,325			1.9			1,856			2.5
Loans delinquent greater than 90 days⁽³⁾		4,188			6.2			4,435			6.3			6,046			8.2
Total FFELP Loans in repayment		67,853			100	%		70,557			100	%		73,838			100	%
Total FFELP Loans, gross		81,097						86,918						95,393
FFELP Loan unamortized premium		666						879						1,087
Total FFELP Loans		81,763						87,797						96,480
FFELP Loan allowance for losses		(60	)					(67	)					(78	)
FFELP Loans, net	$	81,703					$	87,730					$	96,402
Percentage of FFELP Loans in repayment					83.7	%					81.2	%					77.4	%
Delinquencies as a percentage of FFELP Loans in repayment					12.7	%					12.2	%					15.2	%
FFELP Loans in forbearance as a percentage of loans in repayment and forbearance					11.2	%					12.9	%					15.3	%

⁽¹⁾

Loans for customers who may still be attending school or engaging in other permitted educational activities and are not 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 customers who have requested and qualify for other permitted program deferments such as military, unemployment or economic hardships.

⁽²⁾	Loans for customers 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 full payments due to hardship or other factors such as disaster relief.

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

For Private Education Loans, the key credit quality indicators are FICO scores, school type, the existence of a cosigner, the loan status and loan seasoning. The FICO scores/school type are assessed at origination. 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
	TDR
	December 31, 2017					December 31, 2016
(Dollars in millions)	Balance⁽²⁾		% of Balance			Balance⁽²⁾		% of Balance
Credit Quality Indicators
Original Winning FICO Scores:
FICO 640 and above	$	9,647		92	%	$	9,863		91	%
FICO below 640		889		8			942		9
Total	$	10,536		100	%	$	10,805		100	%
School Type:
Not-for-profit	$	8,247		78	%	$	8,346		77	%
For-profit		2,289		22			2,459		23
Total	$	10,536		100	%	$	10,805		100	%
Cosigners:
With cosigner	$	6,441		61	%	$	6,486		60	%
Without cosigner		4,095		39			4,319		40
Total	$	10,536		100	%	$	10,805		100	%
Seasoning⁽¹⁾:
1-12 payments	$	506		5	%	$	754		7	%
13-24 payments		644		6			927		9
25-36 payments		947		9			1,289		12
37-48 payments		1,271		12			1,620		15
More than 48 payments		6,691		63			5,636		52
Not yet in repayment		477		5			579		5
Total	$	10,536		100	%	$	10,805		100	%

⁽¹⁾

Number of months in active repayment for which a scheduled payment was received.

⁽²⁾

Balance equals the gross Private Education Loans.

	Private Education Loans Credit Quality Indicators
	Non-TDR
	December 31, 2017					December 31, 2016
(Dollars in millions)	Balance⁽²⁾		% of Balance			Balance⁽²⁾		% of Balance
Credit Quality Indicators
Original Winning FICO Scores:
FICO 640 and above	$	13,752		96	%	$	13,120		97	%
FICO below 640		592		4			408		3
Total	$	14,344		100	%	$	13,528		100	%
School Type:
Not-for-profit	$	12,431		87	%	$	11,338		84	%
For-profit		1,913		13			2,190		16
Total	$	14,344		100	%	$	13,528		100	%
Cosigners:
With cosigner	$	9,193		64	%	$	9,124		67	%
Without cosigner		5,151		36			4,404		33
Total	$	14,344		100	%	$	13,528		100	%
Seasoning⁽¹⁾:
1-12 payments	$	1,424		10	%	$	586		4	%
13-24 payments		437		3			344		3
25-36 payments		466		3			619		5
37-48 payments		867		6			1,103		8
More than 48 payments		10,566		74			10,062		74
Not yet in repayment		584		4			814		6
Total	$	14,344		100	%	$	13,528		100	%

⁽¹⁾

Number of months in active repayment for which a scheduled payment was received.

⁽²⁾

Balance equals the gross Private Education Loans.

	TDR Private Education Loan Delinquencies
	December 31,
	2017						2016						2015
(Dollars in millions)	Balance			%			Balance			%			Balance			%
Loans in-school/grace/deferment⁽¹⁾	$	477					$	579					$	706
Loans in forbearance⁽²⁾		681						588						694
Loans in repayment and percentage of each status:
Loans current		8,333			88.9	%		8,273			85.8	%		7,887			85.3	%
Loans delinquent 31-60 days⁽³⁾		351			3.7			412			4.3			414			4.5
Loans delinquent 61-90 days⁽³⁾		207			2.2			267			2.8			263			2.9
Loans delinquent greater than 90 days⁽³⁾		487			5.2			686			7.1			678			7.3
Total TDR loans in repayment		9,378			100	%		9,638			100	%		9,242			100	%
Total TDR loans, gross		10,536						10,805						10,642
TDR loans unamortized discount		(225	)					(237	)					(243	)
Total TDR loans		10,311						10,568						10,399
TDR loans receivable for partially charged-off loans		385						360						323
TDR loans allowance for losses		(1,171	)					(1,190	)					(1,209	)
TDR loans, net	$	9,525					$	9,738					$	9,513
Percentage of TDR loans in repayment					89.0	%					89.2	%					86.8	%
Delinquencies as a percentage of TDR loans in repayment					11.1	%					14.2	%					14.7	%
Loans in forbearance as a percentage of TDR loans in repayment and forbearance					6.8	%					5.7	%					7.0	%

⁽¹⁾	Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not 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 customers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors such as disaster relief, 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.

	Non-TDR Private Education Loan Delinquencies
	December 31,
	2017						2016						2015
(Dollars in millions)	Balance			%			Balance			%			Balance			%
Loans in-school/grace/deferment⁽¹⁾	$	584					$	814					$	1,334
Loans in forbearance⁽²⁾		214						202						279
Loans in repayment and percentage of each status:
Loans current		13,257			97.9	%		12,233			97.8	%		14,844			97.3	%
Loans delinquent 31-60 days⁽³⁾		120			.9			110			.9			163			1.1
Loans delinquent 61-90 days⁽³⁾		59			.4			54			.4			85			.6
Loans delinquent greater than 90 days⁽³⁾		110			.8			115			.9			168			1.0
Total non-TDR loans in repayment		13,546			100	%		12,512			100	%		15,260			100	%
Total non-TDR loans, gross		14,344						13,528						16,873
Non-TDR loans unamortized discount		(699	)					(220	)					(288	)
Total non-TDR loans		13,645						13,308						16,585
Non-TDR loans receivable for partially charged-off loans		375						455						558
Non-TDR loans allowance for losses		(126	)					(161	)					(262	)
Non-TDR loans, net	$	13,894					$	13,602					$	16,881
Percentage of non-TDR loans in repayment					94.4	%					92.5	%					90.4	%
Delinquencies as a percentage of non-TDR loans in repayment					2.1	%					2.2	%					2.7	%
Loans in forbearance as a percentage of non- TDR loans in repayment and forbearance					1.6	%					1.6	%					1.8	%

⁽¹⁾	Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not 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 customers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors such as disaster relief, 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.

Receivable for Partially Charged-Off Private Education Loans

At the end of each month, for loans that are 212 or more days past due, we charge off the estimated loss of a defaulted loan balance. Actual recoveries are applied against the remaining loan balance that was not charged off. We refer to this remaining loan balance as the “receivable for partially charged-off loans.” If actual periodic recoveries are less than expected, the difference is immediately charged off through the allowance for Private Education Loan losses with an offsetting reduction in the receivable for partially charged-off Private Education Loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount originally expected to be recovered. The financial crisis, which began in 2007, impacted our collections on defaulted loans and as a result, Private Education Loans which defaulted from 2007 through March 31, 2015, experienced collection performance below our pre-financial crisis experience. For that reason, until we gained enough data and experience to determine the long-term, post-default recovery rate of 21 percent in second-quarter 2015, we established a reserve for potential shortfalls in recoveries. In the second quarter of 2015, the portion of the loan amount charged off at default increased from 73 percent to 79 percent. This did not impact the provision for loan losses as previously this had been reserved through the allowance for loan losses. This change resulted in a $330 million reduction to the balance of the receivable for partially charged-off loans.

The following table summarizes the activity in the receivable for partially charged-off loans.

	Years Ended December 31,
(Dollars in millions)	2017			2016			2015
Receivable at beginning of period	$	815		$	881		$	1,245
Expected future recoveries of current period defaults⁽¹⁾		110			128			183
Recoveries⁽²⁾		(155	)		(181	)		(191	)
Net adjustment resulting from the change in the charge-off rate⁽³⁾		—			—			(330	)
Net charge-offs remaining⁽⁴⁾		(10	)		(13	)		(26	)
Total net charge-offs⁽⁵⁾		(10	)		(13	)		(356	)
Receivable at end of period	$	760		$	815		$	881

⁽¹⁾

Represents our estimate of the amount to be collected in the future.

⁽²⁾

Current period cash collections.

⁽³⁾

In 2015, the portion of the loan amount charged off at default increased from 73 percent to 79 percent. This change resulted in a $330 million reduction to the balance of the receivable for partially charged-off loans.

⁽⁴⁾

Represents the current period recovery shortfall — the difference between what was expected to be collected and what was actually collected.

⁽⁵⁾

These amounts are included in total charge-offs as reported in the “Allowance for Private Education Loan Losses” table.

Troubled Debt Restructurings (“TDRs”)

We sometimes modify the terms of loans for certain customers when we believe such modifications may increase the ability and willingness of a customer to make payments and thus increase the ultimate overall amount collected on a loan. These modifications generally take the form of a forbearance, a temporary interest rate reduction or an extended repayment plan. For customers experiencing financial difficulty, certain Private Education Loans for which we have granted either a forbearance of greater than three months, an interest rate reduction or an extended repayment plan are classified as TDRs. Approximately 61 percent and 61 percent of the loans granted forbearance have qualified as a TDR loan at December 31, 2017, and 2016, respectively. The unpaid principal balance of TDR loans that were in an interest rate reduction plan as of December 31, 2017 and 2016 was $2.7 billion and $2.6 billion, respectively.

At December 31, 2017 and 2016, all of our TDR loans had a related allowance recorded. The following table provides the recorded investment, unpaid principal balance and related allowance for our TDR loans.

	TDR Loans
(Dollars in millions)	Recorded Investment⁽¹⁾		Total Ending Loans⁽²⁾		Related Allowance
December 31, 2017	$	10,890	$	10,921	$	1,171
December 31, 2016		11,119		11,165		1,190

⁽¹⁾

Recorded investment is equal to the unpaid principal balance (which includes the receivable for partially charged-off loans), accrued interest and unamortized discount.

⁽²⁾

Total ending loans includes the receivable for partially charged-off loans.

The following table provides the average recorded investment and interest income recognized for our TDR loans.

	Years Ended December 31,
	2017				2016				2015
(Dollars in millions)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Total	$	10,989	$	708	$	11,078	$	667	$	10,770	$	653

The following table provides the amount of loans modified in the periods presented that resulted in a TDR. Additionally, the table summarizes charge-offs occurring in the TDR portfolio, as well as TDRs for which a payment default occurred in the current period within 12 months of the loan first being designated as a TDR. We define payment default as 60 days past due for this disclosure.

	Years Ended December 31,
	2017						2016						2015
(Dollars in millions)	Modified Loans⁽¹⁾		Charge- Offs⁽²⁾		Payment- Default		Modified Loans⁽¹⁾		Charge- Offs⁽²⁾		Payment- Default		Modified Loans⁽¹⁾		Charge- Offs⁽²⁾		Payment- Default
Total	$	816	$	346	$	181	$	1,169	$	382	$	265	$	1,604	$	459	$	403

⁽¹⁾	Represents period ending balance of loans that have been modified during the period and resulted in a TDR.

⁽²⁾	Represents loans that charged off that were classified as TDRs.

Accrued Interest Receivable

The following table provides information regarding accrued interest receivable on our Private Education Loans.

	Accrued Interest Receivable As of December 31,
(Dollars in millions)	Total		Greater Than 90 Days Past Due		Allowance for Uncollectible Interest
2017
TDR	$	196	$	20	$	20
Non-TDR		187		4		6
Total	$	383	$	24	$	26
2016
TDR	$	192	$	28	$	23
Non-TDR		199		5		7
Total	$	391	$	33	$	30
2015
TDR	$	201	$	28	$	26
Non-TDR		289		7		9
Total	$	490	$	35	$	35