SLM (SLM) 8-K Other Events

Exhibit 99.1

EXPLANATORY NOTE

SLM Corporation (the “Company,” “Sallie Mae,” “we,” “our” and “us”) is retrospectively revising its historical financial statements to account for discontinued operations in connection with Accounting Standards Codification (ASC) 205-20, “Presentation of Financial Statements – Discontinued Operations,” due to the anticipated filing of a Form 10 registration statement in connection with the Company’s previously announced separation into two separate publicly traded companies. This retrospective revision to account for discontinued operations would have been done in any event in connection with the presentation of the Company’s historical financial statements in the upcoming Form 10-K for the fiscal year ending December 31, 2013. As previously disclosed, on May 7, 2013, the Company announced the sale of substantially all of the assets of the Company’s Campus Solutions business to Higher One Holdings, Inc. in an all cash transaction. Additionally, on September 25, 2013, the Company announced that it had entered into a definitive agreement with Ascensus, Inc. to divest the Company’s 529 college savings plan administration business, which is anticipated to close in the fourth quarter of 2013.

In compliance with ASC 205-20, the Company classified the operating results of the Campus Solutions business as discontinued operations for each of the periods presented in its Quarterly Reports on Form 10-Q for the quarterly periods ended June 30, 2013 and September 30, 2013. Additionally, as a result of the pending sale of 529 college savings plan administration business, the Company classified the operating results of its 529 college savings plan administration business as discontinued operations for the periods presented in its Quarterly Report on Form 10 Q for the quarterly period ended September 30, 2013.

This exhibit to the Company’s Current Report on Form 8-K updates the following items in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”) to reflect, retrospectively, the changes resulting from the discontinued operations discussed above for all periods presented:

• Item 6. Selected Financial Data;

• Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; and

• Item 8. Financial Statements and Supplementary Data (including revisions to Note 1 – Organization and Business, Note 2 – Significant Accounting Policies, Note 5 – Goodwill and Acquired Intangible Assets, Note 10 – Earnings (Loss) Per Common Share, Note 12 – Restructuring Activities, Note 15 – Income Taxes, Note 16 – Segment Reporting, Note 17 – Discontinued Operations and Note 19 – Quarterly Financial Information (unaudited)).

All other information in the 2012 Form 10-K remains unchanged and has not been otherwise updated for events occurring after December 31, 2012, other than certain reclassifications made to the balances as of and for the years ended December 31, 2012, 2011 and 2010, to be consistent with classifications adopted for 2013, which had no effect on net income, total assets or total liabilities. The information in this Current Report on Form 8-K should be read in conjunction with the 2012 Form 10-K, and the subsequent Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2013, June 30, 2013 and September 30, 2013.

Item 6. Selected Financial Data

Selected Financial Data 2008-2012

(Dollars in millions, except per share amounts)

The following table sets forth our selected financial and other operating information prepared in accordance with GAAP. The selected financial data in the table is derived from our consolidated financial statements. The data should be read in conjunction with the consolidated financial statements, related notes and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

	2012			2011			2010			2009			2008
Operating Data:
Net interest income	$	3,208		$	3,529		$	3,479		$	1,723		$	1,365
Net income (loss) attributable to SLM Corporation:
Continuing operations, net of tax	$	941		$	598		$	729		$	531		$	(17	)
Discontinued operations, net of tax		(2	)		35			(199	)		(207	)		(196	)
Net income (loss) attributable to SLM Corporation	$	939		$	633		$	530		$	324		$	(213	)
Basic earnings (loss) per common share attributable to SLM Corporation:
Continuing operations	$	1.93		$	1.12		$	1.35		$	.82		$	(.27	)
Discontinued operations		—			.07			(.41	)		(.44	)		(.42	)
Total	$	1.93		$	1.19		$	.94		$	.38		$	(.69	)
Diluted earnings (loss) per common share attributable to SLM Corporation:
Continuing operations	$	1.90		$	1.11		$	1.35		$	.82		$	(.27	)
Discontinued operations		—			.07			(.41	)		(.44	)		(.42	)
Total	$	1.90		$	1.18		$	.94		$	.38		$	(.69	)
Dividends per common share attributable to SLM Corporation common shareholders	$	.50		$	.30		$	—		$	—		$	—
Return on common stockholders’ equity		21	%		14	%		13	%		5	%		(9	)%
Net interest margin		1.78			1.85			1.82			1.05			.93
Return on assets		.52			.33			.28			.20			(.14	)
Dividend payout ratio		26			25			—			—			—
Average equity/average assets		2.69			2.54			2.47			2.96			3.45
Balance Sheet Data:
Student loans, net	$	162,546		$	174,420		$	184,305		$	143,807		$	144,802
Total assets		181,260			193,345			205,307			169,985			168,768
Total borrowings		172,257			183,966			197,159			161,443			160,158
Total SLM Corporation stockholders’ equity		5,060			5,243			5,012			5,279			4,999
Book value per common share		9.92			9.20			8.44			8.05			7.03
Other Data:
Off-balance sheet securitized student loans, net	$	—		$	—		$	—		$	32,638		$	35,591

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related Notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis also contains forward-looking statements and should also be read in conjunction with the disclosures and information contained in “Forward-Looking and Cautionary Statements” and Item 1A “Risk Factors” in this Annual Report on Form 10-K.

Through this discussion and analysis, we intend to provide the reader with some narrative context for how our management views our consolidated financial statements, additional context within which to assess our operating results and information on the quality and variability of our earnings, liquidity and cash flows.

Overview

Our primary business is to originate, service and collect loans we make to students and their families to finance the cost of education. The core of our marketing strategy is to generate student loan originations by promoting our products on campus through the financial aid office and through direct marketing to students and their families. We also provide servicing, loan default aversion and defaulted loan collection services for loans owned by other institutions, including ED, as well as a consumer savings network.

In addition we are the largest holder, servicer and collector of loans made under FFELP, a program that was discontinued in 2010.

We monitor and assess our ongoing operations and results based on the following four reportable segments:

(1) Consumer Lending, (2) Business Services, (3) FFELP Loans and (4) Other.

Consumer Lending Segment

In this segment, we originate, acquire, finance and service Private Education Loans. The Private Education Loans we make are primarily to bridge the gap between the cost of higher education and the amount funded through financial aid, federal loans or customers’ resources. In this segment, we earn net interest income on the Private Education Loan portfolio (after provision for loan losses) as well as servicing fees, primarily late fees.

Business Services Segment

Our Business Services segment generates the majority of its revenue from servicing our FFELP Loan portfolio. We also provide servicing, loan default aversion and defaulted loan collection services for loans on behalf of Guarantors of FFELP Loans and other institutions, including ED. We also operate a consumer savings network that provides financial rewards on everyday purchases to help families save for college.

FFELP Loans Segment

Our FFELP Loans segment consists of our $125.6 billion FFELP Loan portfolio and underlying debt and capital funding these loans. Even though FFELP Loans are no longer originated we continue to seek to acquire FFELP Loan portfolios to leverage our servicing scale to generate incremental earnings and cash flow. This segment is expected to generate significant amounts of cash as the FFELP portfolio amortizes.

Other

Our Other segment primarily consists of activities of our holding company, including the repurchase of debt, the corporate liquidity portfolio and all overhead. We also include results from smaller wind-down and discontinued operations within this segment.

Key Financial Measures

Our operating results are primarily driven by net interest income from our student loan portfolios (which include financing costs), provision for loan losses, the revenues and expenses generated by our service businesses, and gains and losses on loan sales and debt repurchases. We manage and assess the performance of each business segment separately as each is focused on different customers and each derives its revenue from different activities and services. A brief summary of our key financial measures are listed below.

Net Interest Income

The most significant portion of our earnings is generated by the spread earned between the interest income we receive on assets in our student loan portfolios and the interest expense on debt funding these loans. We report these earnings as net interest income. Net interest income in our Consumer Lending and FFELP Loans segments are driven by significantly different factors.

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Consumer Lending Segment

Net interest income in this segment is determined by the balance of Private Education Loans outstanding, Private Education Loan asset yields (determined by interest rates we establish based upon the credit of the customer and any cosigner) and the level of price competition in the Private Education Loan market less our cost of funds. As of December 31, 2012, we had $36.9 billion of Private Education Loans outstanding. In 2012, we originated $3.3 billion of Private Education Loans, up 22 percent from $2.7 billion in the prior year. The majority of our Private Education Loans earn variable rate interest and are funded primarily with variable rate liabilities. The Consumer Lending segment’s “Core Earnings” net interest margin was 4.13 percent in 2012 compared with 4.09 percent in 2011. Our cost of funds can be influenced by a number of factors including the quality of the loans in our portfolio, our corporate credit rating, general economic conditions, investor demand for Private Education Loan asset-backed securities (“ABS”) and corporate unsecured debt and competition in the deposit market. At December 31, 2012, 52 percent of our Private Education Loan portfolio was funded to term with non-recourse, long-term securitization debt.

FFELP Loans Segment

Net interest income will be the primary source of cash flow generated by this segment over the next 20 years as this portfolio amortizes. Interest earned on our FFELP Loans is indexed to one-month LIBOR rates and our cost of funds is primarily indexed to three-month LIBOR, creating the possibility of repricing risk related to these assets. The FFELP Loans segment’s “Core Earnings” net interest margin was 0.84 percent in 2012 compared with 0.98 percent in 2011.

The major source of variability in net interest income is expected to be Floor Income we earn on certain FFELP Loans. Pursuant to the terms of the FFELP, certain FFELP Loans continue to earn interest at the stated fixed rate of interest as underlying debt costs decrease. We refer to this additional spread income as “Floor Income.” Floor Income can be volatile. We frequently hedge this volatility by selling Floor Income Contracts which lock in the value of the Floor Income over the term of the contract.

At December 31, 2012, 82 percent of our FFELP Loan portfolio was funded to term with non-recourse, long-term securitization debt.

Provisions for Loan Losses

Management estimates and maintains an allowance for loan losses at a level sufficient to cover charge-offs expected over the next two years, plus an additional allowance to cover life-of-loan expected losses for loans classified as a troubled debt restructuring (“TDR”). The provision for loan losses increases the related allowance for loan losses. Generally, the allowance for loan losses rises when charge-offs are expected to increase and falls when charge-offs are expected to decline. Our loss exposure and resulting provision for losses is small for FFELP Loans because we generally bear a maximum of three percent loss exposure on them. We bear the full credit exposure on our Private Education Loans. Our provision for losses in our FFELP Loans segment was $72 million in 2012 compared with $86 million in 2011. Losses in our Consumer Lending segment are determined by risk characteristics such as school type, loan status (in-school, grace, forbearance, repayment and delinquency), loan seasoning (number of months in active repayment), underwriting criteria (e.g., credit scores), a cosigner and the current economic environment. Our provision for loan losses in our Consumer Lending segment was $1.0 billion in 2012 compared with $1.2 billion in 2011.

Charge-Offs and Delinquencies

When we conclude a loan is uncollectible, the unrecoverable portion of the loan is charged against the allowance for loan losses in the applicable segment. Charge-off data provides relevant information with respect to the performance of our loan portfolios. Management focuses on delinquencies as well as the progression of loans from early to late stage delinquency. The Consumer Lending segment’s charge-off rate was 3.37 percent of loans in repayment in 2012 compared with 3.72 percent of loans in repayment in 2011. Delinquencies are a very important indicator of the potential future credit performance. Private Education Loan delinquencies as a percentage of Private Education Loans in repayment decreased from 10.1 percent at December 31, 2011 to 9.3 percent at December 31, 2012.

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Servicing and Contingency Revenues

We earn servicing revenues from servicing student loans and contingency revenue related to default aversion and contingency collections work we perform primarily on federal loans. The fees we recognize are primarily driven by our success in collecting or rehabilitating defaulted loans, the number of transactions processed and the underlying volume of loans we are servicing on behalf of others.

Other Income / (Loss)

In managing our loan portfolios and funding sources we periodically engage in sales of loans and the repurchase of our outstanding debt. In each case, depending on market conditions, we may incur gains or losses from these transactions that affect our results from operations.

Operating Expenses

The operating expenses reported for our Consumer Lending and Business Services segments are those that are directly attributable to the generation of revenues by those segments. The operating expenses for the FFELP Loans segment primarily represent an intercompany servicing charge from the Business Services segment and do not reflect our actual underlying costs incurred to service the loans. We have included corporate overhead expenses and certain information technology costs (together referred to as “Overhead”) in our Other segment rather than allocate those expenses by segment. Overhead expenses include executive management, the board of directors, accounting, finance, legal, human resources, stock-based compensation expense and certain information technology and infrastructure costs.

Core Earnings

We report financial results on a GAAP basis and also present certain “Core Earnings” performance measures. Our management, equity investors, credit rating agencies and debt capital providers use these “Core Earnings” measures to monitor our business performance. “Core Earnings” is the basis in which we prepare our segment disclosures as required by GAAP under ASC 280 “Segment Reporting” (see “Note 16 — Segment Reporting”). For a full explanation of the contents and limitations of “Core Earnings,” see “‘Core Earnings’ — Definition and Limitations” of this Item 7.

2012 Summary of Results

We operate in a challenging economic environment marked by high unemployment and uncertainty which adds uncertainty to Private Education Loan collectibility. On July 1, 2010, the Health Care and Education Reconciliation Act of 2010 (“HCERA”) eliminated FFELP Loan originations, a major source of our net income. All federal loans to students are now made through the DSLP.

Our 2012 accomplishments are discussed below.

GAAP 2012 net income was $939 million ($1.90 diluted earnings per share), versus net income of $633 million ($1.18 diluted earnings per share) in the prior year. The changes in GAAP net income are driven by the same “Core Earnings” items discussed below as well as changes in “mark-to-market” unrealized gains and losses on derivative contracts and amortization and impairment of goodwill and intangible assets that are recognized in GAAP but not in “Core Earnings” results. In 2012 and 2011, GAAP results included losses of $194 million and $540 million, respectively, resulting from derivative accounting treatment which is excluded from “Core Earnings” results.

“Core Earnings” for the year were $1.06 billion compared with $977 million in 2011. “Core Earnings” were up due to an $81 million increase in debt repurchase gains, a $215 million lower loan loss provision and a $108 million reduction in operating expenses, offset in part by a $246 million decrease in net interest income.

During 2012, we raised $2.7 billion of unsecured debt and issued $9.7 billion of FFELP ABS and $4.2 billion of Private Education Loan ABS. We also repurchased $711 million of debt and realized “Core Earnings” gains of $145 million in 2012, compared with $894 million and $64 million, respectively, in 2011.

2012 Management Objectives

In 2012 we set out five major goals to create shareholder value. They were: (1) prudently grow Consumer Lending segment assets and revenue; (2) sustain Business Services segment revenue; (3) maximize cash flows from FFELP Loans; (4) reduce our operating expenses; and (5) improve our financial strength. We believe we achieved each of these objectives in 2012. The following describes our performance relative to each of our 2012 goals.

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Prudently Grow Consumer Lending Segment Assets and Revenues

We continued to pursue managed growth in our Private Education Loan portfolio in 2012, exceeding our target with $3.3 billion in new originations for the year compared with $2.7 billion in 2011, a 22 percent increase. The average FICO score of our 2012 originations was 748 and 90 percent of the originated loans were cosigned. We have reduced our Private Education Loan charge-off rate and provision for loan losses in the three years since 2009. For the year ended December 31, 2012 compared with the year ended December 31, 2009, “Core Earnings” charge-off rates (as a percentage of loans in repayment) and “Core Earnings” provision for loan losses declined by 43 percent and 28 percent, respectively.

“Core Earnings” net interest margin increased from 4.09 percent to 4.13 percent. Charge-offs decreased to 3.37 percent of loans in repayment from 3.72 percent in 2011. Provision for loan losses decreased to $1.01 billion from $1.18 billion in 2011.

Sustain Business Services Segment Revenue

Our Business Services segment generates the majority of its net income from servicing and collecting on our FFELP Loan portfolio and FFELP Loans for others. As a result of the elimination of FFELP in 2010, these revenues are in decline. In 2012 we worked to offset these declines through two primary means — pursuing additional growth and expansion of our non-FFELP-related servicing and collection businesses and seeking to increase the FFELP-related loan servicing and collection work we do for third parties. In 2012 we also targeted significant growth in the total assets under management in our 529 college-savings plans. For the year ended December 31, 2012, our Business Services segment revenue was down 5 percent from the year-ago period primarily due to the amortization of our FFELP Loan portfolio. While we considered several servicing acquisitions beyond the education loan market we chose not to pursue them. Nonetheless, in 2012 we did achieve meaningful growth in a number of Business Services activities:

• We are currently servicing approximately 4.3 million accounts under the ED Servicing Contract as of December 31, 2012 compared to 3.6 million accounts at December 31, 2011. Market share under the ED Servicing Contract is set annually based on the performance rankings of the four servicing companies that are parties to the contracts. For the current contract year ending August 15, 2013, our allocation of new customer loans awarded under the ED Servicing Contract is 15 percent. We are not pleased with our overall 2012 performance ranking and must remain focused on improving our performance relative to other servicers to increase our allocation for the next contract year. We plan to make these improvements by maintaining our focus on remaining a top performer in helping borrowers repay their loans and enhancing our customer experience, as further discussed below in our 2013 Management Objectives.

• We provide collection services on defaulted student loans to ED. There are 21 other collection providers, of which we compete with 16 other providers for account allocation based on quarterly performance metrics. As a consistent top performer, first in the last quarterly performance metric, our share of allocated accounts has ranged from six percent to eight percent.

Maximize Cash Flows from FFELP Loans

In 2012 we continued to purchase FFELP Loan portfolios from others. As cash flows from our existing FFELP Loans decline it becomes increasingly important that we reduce operating and overhead costs attributable to this segment. During 2012, we purchased $3.7 billion of FFELP Loans. We expect to make additional purchases during 2013. These acquisitions partially offset the approximately $5.2 billion of loans that were consolidated to ED in 2012 as part of their Special Direct Consolidation Loan Initiative (“SDCL”). See “Business Segment Earnings Summary — “Core Earnings” Basis — FFELP Loans Segment” for further discussion regarding the effect of the Special Direct Consolidation Loan Initiative.

Reduce Operating Expenses

In 2012 we remained focused on reducing operating expenses and achieved our 2012 cost-reduction goals. Our 2012 operating expenses were $897 million, a reduction from the $1.0 billion incurred in 2011.

Improve Our Financial Strength

It was management’s objective for 2012 to provide increased shareholder distributions while at the same time ending 2012 with a balance sheet and capital position as strong as or stronger than those with which we ended in 2011. We increased our regular quarterly common stock dividends to $0.125 per share in 2012, up from $0.10 per share for the last three quarters of 2011. During the year ended December 31, 2012, we repurchased 58 million shares of common stock, fully utilizing all $900 million of existing share repurchase authorizations. We did so while achieving $2.16 diluted “Core Earnings” per common share and maintaining our strong balance sheet and capital positions.

In 2012 we issued $9.7 billion in FFELP ABS, $4.2 billion in Private Education Loan ABS and $2.7 billion of unsecured bonds, while reducing our total debt to $169 billion at December 31, 2012, compared to $181 billion at December 31, 2011.

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2013 Outlook

In 2013, we expect to continue the operating strength we demonstrated in 2012. We plan to increase 2013 “Core Earnings,” including in our Consumer Lending segment primarily through increasing loan originations, improving Private Education Loan portfolio performance and reducing our unit costs. Credit losses within our Private Education Loan portfolio are primarily driven by the quality of loan originations and the general economic environment. We believe Private Education Loan charge-offs and provision for loan losses will continue their downward trend. The fourth-quarter 2012 repayment cohort, at $1.7 billion, had better FICO scores and higher cosigner rates than in previous years which should result in lower future losses. The underlying portfolio has continued to improve with 65 percent of the loans cosigned, less than 9 percent non-traditional and 79 percent of our customers currently in repayment greater than 12 months for which a scheduled monthly payment was due. In addition, the loans originated in 2012 had an average FICO score of 748 and were 90 percent cosigned; these statistics are our highest ever for an annual loan origination cohort.

We expect to remain an active participant in the capital markets in 2013. Our term ABS activity will feature multiple transactions backed by both FFELP collateral, primarily reducing the ED Conduit Program Facility (see Note 6, “Borrowings”), as well as Private Education Loan collateral. Recent transactions in all of the above mentioned categories have been met with strong demand and provide term financing which is a key component of our business model.

2013 Management Objectives

In 2013 we have set out five major goals to create shareholder value. They are: (1) prudently grow Consumer Lending segment assets and revenues; (2) maximize cash flows form FFELP Loans; (3) reduce operating expenses while improving efficiency and customer experience; (4) maintain our financial strength; and (5) expand the Bank’s capabilities. Here is how we plan to achieve these objectives:

Prudently Grow Consumer Lending Segment Assets and Revenues

We will continue to pursue managed growth in our Private Education Loan portfolio in 2013 by leveraging our Sallie Mae and Upromise brand while sustaining the credit quality of, and percentage of cosigners for, new originations. We are currently targeting at least $4 billion in new loan originations for 2013, compared with $3.3 billion in 2012. We will also continue to help our customers manage their borrowings and succeed in its payoff, which we expect will result in lower charge-offs and provision for loan losses.

Maximize Cash Flows from FFELP Loans

In 2013, we will continue to purchase additional FFELP Loan portfolios. In February 2013, we sold our ownership interest in one of our FFELP Consolidation Loan securitization trusts. We will continue to explore alternative transactions and structures that can increase our ability to maximize the value of our ownership interests in these trusts and allow us to diversify our holdings while maintaining servicing fee income. We must also continue to reduce operating and overhead costs attributable to the maintenance and management of this segment.

Reduce Operating Expenses While Improving Efficiency and Customer Experience

For 2013, we will reduce unit costs, and balance our Private Education Loan growth and the challenge of increased regulatory oversight. We also plan to improve efficiency and customer experience by replacing certain of our legacy systems and making enhancements to our self-service platform (such as an improved mobile interface) and call centers (including improved call segmentation that routes an in-bound customer call directly to the appropriate agent who can answer the customer’s inquiry).

Maintain Our Financial Strength

In January 2013, we announced an increase in our quarterly common stock dividend to $0.15 per share and a new $400 million common share repurchase program. It is management’s objective for 2013 to provide these shareholder distributions while ending 2013 with capital and reserve positions as strong as those with which we ended 2012. We also plan to continue to issue FFELP ABS primarily to refinance our remaining FFELP loans in ED’s Conduit Program prior to the Conduit Program’s January 19, 2014 maturity date.

Expand Bank Capabilities

The Bank will fund our Private Education Loan originations in 2013. We will continue to evolve the operational and enterprise risk oversight program at the Bank in preparation for expected growth and designation as a “large bank,” which will entail enhanced regulatory scrutiny. In addition, we plan to voluntarily make similar changes at SLM Corporation. See Item 1 “Business — Supervision and Regulation — Regulatory Outlook — Evolving Regulation of the Bank” for additional information about the Bank’s regulatory environment once it becomes a “large bank.”

Results of Operations

We present the results of operations first on a consolidated basis in accordance with GAAP. As discussed earlier, we have four business segments, Consumer Lending, Business Services, FFELP Loans and Other. Since these segments operate in distinct business environments, the discussion following the Consolidated Earnings Summary is presented on a segment basis and is shown on a “Core Earnings” basis. See Item 1 “Business — Business Segments” for further discussion on the components of each segment.

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GAAP Consolidated Statements of Income

	Years Ended December 31,									Increase (Decrease)
										2012 vs. 2011						2011 vs. 2010
(Dollars in millions, except per share amounts)	2012			2011			2010			$			%			$			%
Interest income
FFELP Loans	$	3,251		$	3,461		$	3,345		$	(210	)		(6	)%	$	116			3	%
Private Education Loans		2,481			2,429			2,353			52			2			76			3
Other loans		16			21			30			(5	)		(24	)		(9	)		(30	)
Cash and investments		21			19			26			2			11			(7	)		(27	)
Total interest income		5,769			5,930			5,754			(161	)		(3	)		176			3
Total interest expense		2,561			2,401			2,275			160			7			126			6
Net interest income		3,208			3,529			3,479			(321	)		(9	)		50			1
Less: provisions for loan losses		1,080			1,295			1,419			(215	)		(17	)		(124	)		(9	)
Net interest income after provisions for loan losses		2,128			2,234			2,060			(106	)		(5	)		174			8
Other income (loss):
Gains (losses) on loans and investments, net		—			(35	)		325			35			(100	)		(360	)		(111	)
Losses on derivative and hedging activities, net		(628	)		(959	)		(361	)		331			(35	)		(598	)		166
Servicing revenue		279			283			311			(4	)		(1	)		(28	)		(9	)
Contingency revenue		356			333			330			23			7			3			1
Gains on debt repurchases		145			38			317			107			282			(279	)		(88	)
Other income		92			69			5			23			33			64			1,260
Total other income (loss)		244			(271	)		927			515			190			(1,198	)		(129	)
Expenses:
Operating expenses		897			1,005			1,130			(108	)		(11	)		(125	)		(11	)
Goodwill and acquired intangible assets impairment and amortization expense		27			21			543			6			29			(522	)		(96	)
Restructuring and other reorganization expenses		11			12			85			(1	)		(8	)		(73	)		(86	)
Total expenses		935			1,038			1,758			(103	)		(10	)		(720	)		(41	)
Income from continuing operations, before income tax expense		1,437			925			1,229			512			55			(304	)		(25	)
Income tax expense		498			328			500			170			52			(172	)		(34	)
Net income from continuing operations		939			597			729			342			57			(132	)		(18	)
Income (loss) from discontinued operations, net of tax expense (benefit)		(2	)		35			(199	)		(37	)		(106	)		234			118
Net income		937			632			530			305			48			102			19
Less: net loss attributable to noncontrolling interest		(2	)		(1	)		—			(1	)		100			(1	)		(100	)
Net income attributable to SLM Corporation		939			633			530			306			48			103			19
Preferred stock dividends		20			18			72			2			11			(54	)		(75	)
Net income attributable to SLM Corporation common stock	$	919		$	615		$	458		$	304			49	%	$	157			34	%
Basic earnings (loss) per common share attributable to SLM Corporation:
Continuing operations	$	1.93		$	1.12		$	1.35		$	.81			72	%	$	(.23	)		(17	)%
Discontinued operations		—			.07			(.41	)		(.07	)		(100	)		.48			117
Total	$	1.93		$	1.19		$	.94		$	.74			62	%	$	.25			27	%
Diluted earnings (loss) per common share attributable to SLM Corporation:
Continuing operations	$	1.90		$	1.11		$	1.35		$	.79			71	%	$	(.24	)		(18	)%
Discontinued operations		—			.07			(.41	)		(.07	)		(100	)		.48			117
Total	$	1.90		$	1.18		$	.94		$	.72			61	%	$	.24			26	%
Dividends per common share	$	.50		$	.30		$	—		$	.20			67	%	$	.30			100	%

7

Consolidated Earnings Summary — GAAP-basis

Year Ended December 31, 2012 Compared with Year Ended December 31, 2011

For the years ended December 31, 2012 and 2011, net income was $939 million, or $1.90 diluted earnings per common share, and $633 million, or $1.18 diluted earnings per common share, respectively. The increase in net income was primarily due to a $331 million decrease in net losses on derivative and hedging activities, a $215 million decrease in provisions for loan losses, a $108 million decrease in operating expenses and a $107 million increase in gains on debt repurchases, which more than offset the $321 million decline in net interest income.

The primary contributors to each of the identified drivers of changes in net income for the current year-end period compared with the year-ago period are as follows:

• Net interest income declined by $321 million primarily due to an $11 billion reduction in average FFELP Loans outstanding, higher cost of funds, which were partly due to refinancing debt into longer term liabilities, as well as the impact from the acceleration of $50 million of non-cash loan premium amortization in the second-quarter 2012 related to SDCL (see “FFELP Loans Segment” for further discussion). The decline in FFELP Loans outstanding was driven by normal loan amortization as well as loans that were consolidated under SDCL.

• Provisions for loan losses decreased by $215 million primarily as a result of overall improvements in the credit quality and delinquency trends of the Private Education Loan portfolio. In second-quarter 2012, we increased our focus on encouraging our customers to enter repayment plans in lieu of additional forbearance usage to better help customers manage their overall payment obligations. This change was expected to, and resulted in, an increase in charge-offs in fourth-quarter 2012 which are expected to decline in 2013. See “Consumer Lending Segment — Private Education Loan Provision for Loan Losses and Charge-offs” for a further discussion of this change and impact.

• We did not incur any losses on loans and investments in the current year. In 2011, we recorded $26 million of impairment on certain investments in aircraft leveraged leases and a $9 million mark-to-market loss related to classifying our entire $12 million portfolio of non-U.S. dollar-denominated student loans as held-for-sale.

• Net losses on derivative and hedging activities decreased by $331 million. The primary factors affecting the change were interest rate and foreign currency fluctuations, which primarily affected the valuations of our Floor Income Contracts, basis swaps and foreign currency hedges during each period. Valuations of derivative instruments vary based upon many factors including changes in interest rates, credit risk, foreign currency fluctuations and other market factors. As a result, net gains and losses on derivative and hedging activities may continue to vary significantly in future periods.

• Gains on debt repurchases increased $107 million. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy.

• Operating expenses decreased $108 million primarily due to the current-year benefit of the cost-cutting efforts we implemented throughout 2011.

• Net income from discontinued operations decreased $37 million primarily due to the sale of our Purchased Paper — Non-Mortgage portfolio in 2011.

In addition, we repurchased 58.0 million shares and 19.1 million shares of our common stock during the years ended December 31, 2012 and 2011, respectively, as part of our common share repurchase program. Primarily as a result of these repurchases, our average outstanding diluted shares decreased by 40 million common shares.

Year Ended December 31, 2011 Compared with Year Ended December 31, 2010

For the years ended December 31, 2011 and 2010, net income was $633 million, or $1.18 diluted earnings per common share, and $530 million, or $.94 diluted earnings per common share, respectively. The increase in net income for the year ended December 31, 2011 as compared with the prior year period was primarily due to $512 million of goodwill and intangible asset impairment charges from continuing operations, which were partially non-tax deductible, recorded in the year-ago period, a $124 million decrease in the provisions for loan losses, a $234 million increase in income from discontinued operations and $125 million of lower operating expenses. These improvements were partially offset by a $598 million increase in net losses on derivative and hedging activities, a $279 million decrease in gains on debt repurchases and a $360 million decrease in net gains on loans and investments.

The primary contributors to each component of net income for 2011 compared with 2010 are as follows:

• Net interest income increased by $50 million primarily from incremental net interest income earned on $25 billion of securitized FFELP loans acquired on December 31, 2010.

• Provisions for loan losses decreased by $124 million, as a result of overall improvements in credit quality and delinquency and charge-off trends.

8

• Gains on loans and investments, net, declined $360 million as a result of a $321 million gain recognized in the fourth quarter of 2010 from the sale of FFELP Loans to ED as part of the ED’s Loan Purchase Commitment Program (the “Purchase Program”) which ended in 2010 (see also Note 6, “Borrowings”). Also, in 2011 we recorded $26 million of impairment on certain aircraft leases and a $9 million mark-to-market loss related to classifying our entire $12 million portfolio of non-U.S. dollar-denominated student loans as held-for-sale.

• Net losses on derivatives and hedging activities increased by $598 million primarily due to interest rate and foreign currency fluctuations, affecting the valuations of our Floor Income Contracts, basis swaps and foreign currency hedges during the period. Valuations of derivative instruments vary based upon many factors including changes in interest rates, credit risk, foreign currency fluctuations and other market factors. As a result, net gains and losses on derivatives and hedging activities may vary significantly in future periods.

• Servicing revenue decreased by $28 million primarily due to the end of FFELP in 2010, thereby eliminating Guarantor issuance fees we earn on new FFELP Loans. Outstanding FFELP Loans on which we earn additional fees also declined.

• Gains on debt repurchases decreased $279 million as we repurchased less debt in the current period. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy.

• Other income increased by $64 million primarily as a result of a $25 million gain from the termination and replacement of a credit card affiliation contract and $27 million from an increase in foreign currency translation gains. The foreign currency translation gains relate to a portion of our foreign currency denominated debt that does not receive hedge accounting treatment. These gains were partially offset by “losses on derivative and hedging activities, net” line item in the consolidated statements of income related to the derivatives used to economically hedge these debt investments.

• Operating expenses decreased $125 million primarily as a result of our on-going cost savings initiative.

• Goodwill and acquired intangible assets impairment and amortization expense declined $522 million compared with the prior year primarily due to the $512 million impairment from continuing operations recognized in the third quarter of 2010 in response to the passage of the HCERA, which resulted in the elimination of the FFELP and significantly reduced the future earnings for several of our reporting units.

• Restructuring and other reorganization expenses decreased $73 million primarily as a result of the substantial completion of our plan for restructuring initiated in response to legislation ending FFELP in 2010.

• The effective tax rates for the years ended December 31, 2011 and 2010 were 35 percent and 41 percent, respectively. The improvement in the effective tax rate was primarily driven by the impact of non-tax deductible goodwill impairments recorded in 2010.

• Net income from discontinued operations for the year ended December 31, 2011 was $35 million compared with a net loss from discontinued operations of $199 million for the year ended December 31, 2010. The change was primarily driven by a $23 million after-tax gain realized from the sale of our Purchased Paper — Non-Mortgage portfolio in the third quarter of 2011 compared to $190 million of after-tax impairments recognized in 2010, of which $52 million related to adjusting the value of our Purchased Paper — Non-Mortgage business to its estimated fair value and $138 million were goodwill and intangible asset impairments related to our 529 college savings plan administration business.

“Core Earnings” — Definition and Limitations

We prepare financial statements in accordance with GAAP. However, we also evaluate our business segments on a basis that differs from GAAP. We refer to this different basis of presentation as “Core Earnings.” We provide this “Core Earnings” basis of presentation on a consolidated basis for each business segment because this is what we review internally when making management decisions regarding our performance and how we allocate resources. We also refer to this information in our presentations with credit rating agencies, lenders and investors. Because our “Core Earnings” basis of presentation corresponds to our segment financial presentations, we are required by GAAP to provide “Core Earnings” disclosure in the notes to our consolidated financial statements for our business segments. For additional information, see “Note 16 — Segment Reporting.”

“Core Earnings” are not a substitute for reported results under GAAP. We use “Core Earnings” to manage each business segment because “Core Earnings” reflect adjustments to GAAP financial results for two items, discussed below, that create significant volatility mostly due to timing factors generally beyond the control of management. Accordingly, we believe that “Core Earnings” provide management with a useful basis from which to better evaluate results from ongoing operations against the business plan or against results from prior periods. Consequently, we disclose this information as we believe it provides investors with additional information regarding the operational and performance indicators that are most closely assessed by management. The two items for which we adjust our “Core Earnings” presentations are (1) our use of derivative instruments to hedge our economic risks that do not qualify for hedge accounting treatment or do qualify for hedge accounting treatment but result in ineffectiveness and (2) the accounting for goodwill and acquired intangible assets.

While GAAP provides a uniform, comprehensive basis of accounting, for the reasons described above, our “Core Earnings” basis of presentation does not. “Core Earnings” are subject to certain general and specific limitations that investors should carefully

9

consider. For example, there is no comprehensive, authoritative guidance for management reporting. Our “Core Earnings” are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. Accordingly, our “Core Earnings” presentation does not represent a comprehensive basis of accounting. Investors, therefore, may not be able to compare our performance with that of other financial services companies based upon “Core Earnings.” “Core Earnings” results are only meant to supplement GAAP results by providing additional information regarding the operational and performance indicators that are most closely used by management, our board of directors, rating agencies, lenders and investors to assess performance.

Specific adjustments that management makes to GAAP results to derive our “Core Earnings” basis of presentation are described in detail in the section entitled “‘Core Earnings’ — Definition and Limitations — Differences between ‘Core Earnings’ and GAAP” of this Item 7.

The following tables show “Core Earnings” for each business segment and our business as a whole along with the adjustments made to the income/expense items to reconcile the amounts to our reported GAAP results as required by GAAP and reported in “Note 16 — Segment Reporting.”

10

	Year Ended December 31, 2012
(Dollars in millions)	Consumer Lending			Business Services			FFELP Loans		Other			Eliminations(1)			Total “Core Earnings”			Adjustments									Total GAAP
																		Reclassifications			Additions/ (Subtractions)			Total Adjustments(2)
Interest income:
Student loans	$	2,481		$	—		$	2,744	$	—		$	—		$	5,225		$	858		$	(351	)	$	507		$	5,732
Other loans		—			—			—		16			—			16			—			—			—			16
Cash and investments		7			7			11		2			(6	)		21			—			—			—			21
Total interest income		2,488			7			2,755		18			(6	)		5,262			858			(351	)		507			5,769
Total interest expense		822			—			1,591		37			(6	)		2,444			115			2	(4)		117			2,561
Net interest income (loss)		1,666			7			1,164		(19	)		—			2,818			743			(353	)		390			3,208
Less: provisions for loan losses		1,008			—			72		—			—			1,080			—			—			—			1,080
Net interest income (loss) after provisions for loan losses		658			7			1,092		(19	)		—			1,738			743			(353	)		390			2,128
Servicing revenue		46			813			90		—			(670	)		279			—			—			—			279
Contingency revenue		—			356			—		—			—			356			—			—			—			356
Gains on debt repurchases		—			—			—		145			—			145			—			—			—			145
Other income (loss)		—			33			—		15			—			48			(743	)		159	(5)		(584	)		(536	)
Total other income (loss)		46			1,202			90		160			(670	)		828			(743	)		159			(584	)		244
Expenses:
Direct operating expenses		265			364			702		12			(670	)		673			—			—			—			673
Overhead expenses		—			—			—		224			—			224			—			—			—			224
Operating expenses		265			364			702		236			(670	)		897			—			—			—			897
Goodwill and acquired intangible assets impairment and amortization		—			—			—		—			—			—			—			27			27			27
Restructuring and other reorganization expenses		3			3			—		5			—			11			—			—			—			11
Total expenses		268			367			702		241			(670	)		908			—			27			27			935
Income (loss) from continuing operations, before income tax expense (benefit)		436			842			480		(100	)		—			1,658			—			(221	)		(221	)		1,437
Income tax expense (benefit)(3)		157			303			173		(36	)		—			597			—			(99	)		(99	)		498
Net income (loss) from continuing operations		279			539			307		(64	)		—			1,061			—			(122	)		(122	)		939
Income (loss) from discontinued operations, net of tax expense (benefit)		(2	)		—			—		1			—			(1	)		—			(1	)		(1	)		(2	)
Net income (loss)		277			539			307		(63	)		—			1,060			—			(123	)		(123	)		937
Less: net loss attributable to noncontrolling interest		—			(2	)		—		—			—			(2	)		—			—			—			(2	)
Net income (loss) attributable to SLM Corporation	$	277		$	541		$	307	$	(63	)	$	—		$	1,062		$	—		$	(123	)	$	(123	)	$	939

⁽¹⁾  The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.

⁽²⁾  “Core Earnings” adjustments to GAAP:

	Year Ended December 31, 2012
(Dollars in millions)	Net Impact of Derivative Accounting			Net Impact of Goodwill and Acquired Intangibles			Total
Net interest income after provisions for loan losses	$	390		$	—		$	390
Total other loss		(584	)		—			(584	)
Goodwill and acquired intangible assets impairment and amortization		—			27			27
Total “Core Earnings” adjustments to GAAP	$	(194	)	$	(27	)		(221	)
Income tax benefit								(99	)
Loss from discontinued operations, net of tax benefit								(1	)
Net loss							$	(123	)

⁽³⁾  Income taxes are based on a percentage of net income before tax for the individual reportable segment.

⁽⁴⁾  Represents a portion of the $42 million of “other derivative accounting adjustments.”

⁽⁵⁾  Represents the $115 million of “unrealized gains on derivative and hedging activities, net” as well as the remaining portion of the $42 million of “other derivative accounting adjustments.”

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	Year Ended December 31, 2011
(Dollars in millions)	Consumer Lending			Business Services			FFELP Loans		Other			Eliminations(1)			Total “Core Earnings”			Adjustments									Total GAAP
																		Reclassifications			Additions/ (Subtractions)			Total Adjustments(2)
Interest income:
Student loans	$	2,429		$	—		$	2,914	$	—		$	—		$	5,343		$	902		$	(355	)	$	547		$	5,890
Other loans		—			—			—		21			—			21			—			—			—			21
Cash and investments		9			8			5		5			(8	)		19			—			—			—			19
Total interest income		2,438			8			2,919		26			(8	)		5,383			902			(355	)		547			5,930
Total interest expense		801			—			1,472		54			(8	)		2,319			71			11	(4)		82			2,401
Net interest income (loss)		1,637			8			1,447		(28	)		—			3,064			831			(366	)		465			3,529
Less: provisions for loan losses		1,179			—			86		30			—			1,295			—			—			—			1,295
Net interest income (loss) after provisions for loan losses		458			8			1,361		(58	)		—			1,769			831			(366	)		465			2,234
Servicing revenue		64			872			86		—			(739	)		283			—			—			—			283
Contingency revenue		—			333			—		—			—			333			—			—			—			333
Gains on debt repurchases		—			—			—		64			—			64			(26	)		—			(26	)		38
Other income (loss)		(9	)		69			—		(6	)		—			54			(805	)		(174	)(5)		(979	)		(925	)
Total other income (loss)		55			1,274			86		58			(739	)		734			(831	)		(174	)		(1,005	)		(271	)
Expenses:
Direct operating expenses		291			393			772		19			(739	)		736			—			—			—			736
Overhead expenses		—			—			—		269			—			269			—			—			—			269
Operating expenses		291			393			772		288			(739	)		1,005			—			—			—			1,005
Goodwill and acquired intangible assets impairment and amortization		—			—			—		—			—			—			—			21			21			21
Restructuring and other reorganization expenses		3			5			1		3			—			12			—			—			—			12
Total expenses		294			398			773		291			(739	)		1,017			—			21			21			1,038
Income (loss) from continuing operations, before income tax expense (benefit)		219			884			674		(291	)		—			1,486			—			(561	)		(561	)		925
Income tax expense (benefit)(3)		81			325			248		(107	)		—			547			—			(219	)		(219	)		328
Net income (loss) from continuing operations		138			559			426		(184	)		—			939			—			(342	)		(342	)		597
Income (loss) from discontinued operations, net of tax expense (benefit)		(2	)		5			—		34			—			37			—			(2	)		(2	)		35
Net income (loss)		136			564			426		(150	)		—			976			—			(344	)		(344	)		632
Less: loss attributable to noncontrolling interest		—			(1	)		—		—			—			(1	)		—			—			—			(1	)
Net income (loss) attributable to SLM Corporation	$	136		$	565		$	426	$	(150	)	$	—		$	977		$	—		$	(344	)	$	(344	)	$	633

⁽¹⁾  The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.

⁽²⁾  “Core Earnings” adjustments to GAAP:

	Year Ended December 31, 2011
(Dollars in millions)	Net Impact of Derivative Accounting			Net Impact of Goodwill and Acquired Intangibles			Total
Net interest income after provisions for loan losses	$	465		$	—		$	465
Total other loss		(1,005	)		—			(1,005	)
Goodwill and acquired intangible assets impairment and amortization		—			21			21
Total “Core Earnings” adjustments to GAAP	$	(540	)	$	(21	)		(561	)
Income tax benefit								(219	)
Loss from discontinued operations, net of tax benefit								(2	)
Net loss							$	(344	)

⁽³⁾  Income taxes are based on a percentage of net income before tax for the individual reportable segment.

⁽⁴⁾  Represents a portion of the $(32) million of “other derivative accounting adjustments.”

⁽⁵⁾  Represents the $(153) million of “unrealized gains on derivative and hedging activities, net” as well as the remaining portion of the $(32) million of “other derivative accounting adjustments.”

12

	Year Ended December 31, 2010
(Dollars in millions)	Consumer Lending			Business Services		FFELP Loans		Other			Eliminations(1)			Total “Core Earnings”			Adjustments									Total GAAP
																	Reclassifications			Additions/ (Subtractions)			Total Adjustments(2)
Interest income:
Student loans	$	2,353		$	—	$	2,766	$	—		$	—		$	5,119		$	888		$	(309	)	$	579		$	5,698
Other loans		—			—		—		30			—			30			—			—			—			30
Cash and investments		15			12		8		3			(12	)		26			—			—			—			26
Total interest income		2,368			12		2,774		33			(12	)		5,175			888			(309	)		579			5,754
Total interest expense		753			—		1,408		44			(12	)		2,193			69			13	(4)		82			2,275
Net interest income		1,615			12		1,366		(11	)		—			2,982			819			(322	)		497			3,479
Less: provisions for loan losses		1,298			—		98		23			—			1,419			—			—			—			1,419
Net interest income after provisions for loan losses		317			12		1,268		(34	)		—			1,563			819			(322	)		497			2,060
Servicing revenue		73			818		68		—			(648	)		311			—			—			—			311
Contingency revenue		—			330		—		—			—			330			—			—			—			330
Gains on debt repurchases		—			—		—		317			—			317						—			—			317
Other income (loss)		—			50		312		22			—			384			(819	)		404	(5)		(415	)		(31	)
Total other income (loss)		73			1,198		380		339			(648	)		1,342			(819	)		404			(415	)		927
Expenses:
Direct operating expenses		352			411		699		12			(648	)		826			—			—			—			826
Overhead expenses		—			—		—		304			—			304			—			—			—			304
Operating expenses		352			411		699		316			(648	)		1,130			—			—			—			1,130
Goodwill and acquired intangible assets impairment and amortization		—			—		—		—			—			—			—			543			543			543
Restructuring and other reorganization expenses		12			6		55		12			—			85			—			—			—			85
Total expenses		364			417		754		328			(648	)		1,215			—			543			543			1,758
Income (loss) from continuing operations, before income tax expense (benefit)		26			793		894		(23	)		—			1,690			—			(461	)		(461	)		1,229
Income tax expense (benefit)(3)		9			286		322		(11	)		—			606			—			(106	)		(106	)		500
Net income (loss) from continuing operations		17			507		572		(12	)		—			1,084			—			(355	)		(355	)		729
Income (loss) from discontinued operations, net of tax benefit		(3	)		12		—		(65	)		—			(56	)		—			(143	)		(143	)		(199	)
Net income (loss)	$	14		$	519	$	572	$	(77	)	$	—		$	1,028		$	—		$	(498	)	$	(498	)	$	530

⁽¹⁾  The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.

⁽²⁾  “Core Earnings” adjustments to GAAP:

	Year Ended December 31, 2010
(Dollars in millions)	Net Impact of Derivative Accounting			Net Impact of Goodwill and Acquired Intangibles			Total
Net interest income after provisions for loan losses	$	497		$	—		$	497
Total other loss		(415	)		—			(415	)
Goodwill and acquired intangible assets impairment and amortization		—			543			543
Total “Core Earnings” adjustments to GAAP	$	82		$	(543	)		(461	)
Income tax benefit								(106	)
Loss from discontinued operations, net of tax benefit								(143	)
Net loss							$	(498	)

⁽³⁾  Income taxes are based on a percentage of net income before tax for the individual reportable segment.

⁽⁴⁾  Represents a portion of the $(63) million of “other derivative accounting adjustments.”

⁽⁵⁾ Represents the $454 million of “unrealized gains on derivative and hedging activities, net” as well as the remaining portion of the $(63) million of “other derivative accounting adjustments.”

13

Differences between “Core Earnings” and GAAP

The two adjustments required to reconcile from our “Core Earnings” results to our GAAP results of operations relate to differing treatments for: (1) our use of derivative instruments to hedge our economic risks that do not qualify for hedge accounting treatment or do qualify for hedge accounting treatment but result in ineffectiveness and (2) the accounting for goodwill and acquired intangible assets. The following table reflects aggregate adjustments associated with these areas.

	Years Ended December 31,
(Dollars in millions)	2012			2011			2010
“Core Earnings” adjustments to GAAP:
Net impact of derivative accounting	$	(194	)	$	(540	)	$	82
Net impact of goodwill and acquired intangible assets		(27	)		(21	)		(543	)
Net income tax effect		99			219			106
Net effect from discontinued operations		(1	)		(2	)		(143	)
Total “Core Earnings” adjustments to GAAP	$	(123	)	$	(344	)	$	(498	)

1) Derivative Accounting: “Core Earnings” exclude periodic unrealized gains and losses that are caused by the mark-to-market valuations on derivatives that do not qualify for hedge accounting treatment under GAAP as well as the periodic unrealized gains and losses that are a result of ineffectiveness recognized related to effective hedges under GAAP. These unrealized gains and losses occur in our Consumer Lending, FFELP Loans and Other business segments. Under GAAP, for our derivatives that are held to maturity, the cumulative net unrealized gain or loss over the life of the contract will equal $0 except for Floor Income Contracts where the cumulative unrealized gain will equal the amount for which we sold the contract. In our “Core Earnings” presentation, we recognize the economic effect of these hedges, which generally results in any net settlement cash paid or received being recognized ratably as an interest expense or revenue over the hedged item’s life.

The accounting for derivatives requires that changes in the fair value of derivative instruments be recognized currently in earnings, with no fair value adjustment of the hedged item, unless specific hedge accounting criteria are met. We believe that our derivatives are effective economic hedges, and as such, are a critical element of our interest rate and foreign currency risk management strategy. However, some of our derivatives, primarily Floor Income Contracts and certain basis swaps, do not qualify for hedge accounting treatment and the stand-alone derivative must be marked-to-market in the income statement with no consideration for the corresponding change in fair value of the hedged item. These gains and losses recorded in “Gains (losses) on derivative and hedging activities, net” are primarily caused by interest rate and foreign currency exchange rate volatility and changing credit spreads during the period as well as the volume and term of derivatives not receiving hedge accounting treatment.

Our Floor Income Contracts are written options that must meet more stringent requirements than other hedging relationships to achieve hedge effectiveness. Specifically, our Floor Income Contracts do not qualify for hedge accounting treatment because the pay down of principal of the student loans underlying the Floor Income embedded in those student loans does not exactly match the change in the notional amount of our written Floor Income Contracts. Additionally, the term, the interest rate index, and the interest rate index reset frequency of the Floor Income Contract can be different than that of the student loans. Under derivative accounting treatment, the upfront payment is deemed a liability and changes in fair value are recorded through income throughout the life of the contract. The change in the value of Floor Income Contracts is primarily caused by changing interest rates that cause the amount of Floor Income earned on the underlying student loans and paid to the counterparties to vary. This is economically offset by the change in value of the student loan portfolio earning Floor Income but that offsetting change in value is not recognized. We believe the Floor Income Contracts are economic hedges because they effectively fix the amount of Floor Income earned over the contract period, thus eliminating the timing and uncertainty that changes in interest rates can have on Floor Income for that period. Therefore, for purposes of “Core Earnings,” we have removed the unrealized gains and losses related to these contracts and added back the amortization of the net premiums received on the Floor Income Contracts. The amortization of the net premiums received on the Floor Income Contracts for “Core Earnings” is reflected in student loan interest income. Under GAAP accounting, the premiums received on the Floor Income Contracts are recorded as revenue in the “gains (losses) on derivative and hedging activities, net” line item by the end of the contracts’ lives.

Basis swaps are used to convert floating rate debt from one floating interest rate index to another to better match the interest rate characteristics of the assets financed by that debt. We primarily use basis swaps to hedge our student loan assets that are primarily indexed to LIBOR, Prime or Treasury bill index (for $128 billion of our FFELP assets as of April 1, 2012, we elected to change the index from commercial paper to LIBOR; see “FFELP Loans Segment — FFELP Loans Net Interest Margin” for further discussion). In addition, we use basis swaps to convert debt indexed to the Consumer Price Index to three-month LIBOR debt. The accounting for derivatives requires that when using basis swaps, the change in the cash flows of the hedge effectively offset both the change in the cash flows of the asset and the change in the cash flows of the liability. Our basis swaps hedge variable interest rate risk; however, they generally do not meet this effectiveness test because the index of the swap does not exactly match the index of the hedged assets as required for hedge accounting treatment. Additionally, some of our FFELP Loans can earn at either a variable or a fixed interest rate depending on market interest rates and therefore swaps economically hedging these FFELP Loans do not meet the criteria for hedge accounting treatment. As a result, under GAAP, these swaps are recorded at fair value with changes in fair value reflected currently in the income statement.

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The table below quantifies the adjustments for derivative accounting on our net income.

	Years Ended December 31,
(Dollars in millions)	2012			2011			2010
“Core Earnings” derivative adjustments:
Gains (losses) on derivative and hedging activities, net, included in other income(1)	$	(628	)	$	(959	)	$	(361	)
Plus: Realized losses on derivative and hedging activities, net(1)		743			806			815
Unrealized gains (losses) on derivative and hedging activities, net(2)		115			(153	)		454
Amortization of net premiums on Floor Income Contracts in net interest income for “Core Earnings”		(351	)		(355	)		(309	)
Other derivative accounting adjustments(3)		42			(32	)		(63	)
Total net impact derivative accounting(4)	$	(194	)	$	(540	)	$	82

⁽¹⁾  See “Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities” below for a detailed breakdown of the components of realized losses on derivative and hedging activities.

⁽²⁾  “Unrealized gains (losses) on derivative and hedging activities, net” comprises the following unrealized mark-to-market gains (losses):

	Years Ended December 31,
(Dollars in millions)	2012			2011			2010
Floor Income Contracts	$	412		$	(267	)	$	156
Basis swaps		(66	)		104			341
Foreign currency hedges		(199	)		(32	)		(83	)
Other		(32	)		42			40
Total unrealized gains (losses) on derivative and hedging activities, net	$	115		$	(153	)	$	454

⁽³⁾  Other derivative accounting adjustments consist of adjustments related to: (1) foreign currency denominated debt that is adjusted to spot foreign exchange rates for GAAP where such adjustment are reversed for “Core Earnings” and (2) certain terminated derivatives that did not receive hedge accounting treatment under GAAP but were economic hedges under “Core Earnings” and, as a result, such gains or losses amortized into “Core Earnings” over the life of the hedged item.

⁽⁴⁾  Negative amounts are subtracted from “Core Earnings” net income to arrive at GAAP net income and positive amounts are added to “Core Earnings” to arrive at GAAP net income.

Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities

Derivative accounting requires net settlement income/expense on derivatives and realized gains/losses related to derivative dispositions (collectively referred to as “realized gains (losses) on derivative and hedging activities”) that do not qualify as hedges to be recorded in a separate income statement line item below net interest income. Under our “Core Earnings” presentation, these gains and losses are reclassified to the income statement line item of the economically hedged item. For our “Core Earnings” net interest margin, this would primarily include: (a) reclassifying the net settlement amounts related to our Floor Income Contracts to student loan interest income and (b) reclassifying the net settlement amounts related to certain of our basis swaps to debt interest expense. The table below summarizes the realized losses on derivative and hedging activities and the associated reclassification on a “Core Earnings” basis.

	Years Ended December 31,
(Dollars in millions)	2012			2011			2010
Reclassification of realized gains (losses) on derivative and hedging activities:
Net settlement expense on Floor Income Contracts reclassified to net interest income	$	(858	)	$	(902	)	$	(888	)
Net settlement income on interest rate swaps reclassified to net interest income		115			71			69
Foreign exchange derivative gains/(losses) reclassified to other income		—			—			—
Net realized gains (losses) on terminated derivative contracts reclassified to other income		—			25			4
Total reclassifications of realized losses on derivative and hedging activities	$	(743	)	$	(806	)	$	(815	)

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Cumulative Impact of Derivative Accounting under GAAP compared to “Core Earnings”

As of December 31, 2012, derivative accounting has reduced GAAP equity by approximately $1.1 billion as a result of cumulative net unrealized net losses (after tax) recognized under GAAP, but not in “Core Earnings.” The following table rolls forward the cumulative impact to GAAP equity due to these unrealized net losses related to derivative accounting.

	Years Ended December 31,
(Dollars in millions)	2012			2011			2010
Beginning impact of derivative accounting on GAAP equity	$	(977	)	$	(676	)	$	(737	)
Net impact of net unrealized gains/(losses) under derivative accounting(1)		(103	)		(301	)		61
Ending impact of derivative accounting on GAAP equity	$	(1,080	)	$	(977	)	$	(676	)

⁽¹⁾  Net impact of net unrealized gains (losses) under derivative accounting is composed of the following:

	Years Ended December 31,
(Dollars in millions)	2012			2011			2010
Total pre-tax net impact of derivative accounting recognized in net income(a)	$	(194	)	$	(540	)	$	82
Tax impact of derivative accounting adjustment recognized in net income		82			208			(26	)
Change in unrealized gains on derivatives, net of tax recognized in Other Comprehensive Income		9			31			5
Net impact of net unrealized gains (losses) under derivative accounting	$	(103	)	$	(301	)	$	61

^(a)  See “ ‘Core Earnings’ derivative adjustments” table above.

Net Floor premiums received on Floor Income Contracts that have not been amortized into “Core Earnings” as of the respective year-ends are presented in the table below. These net premiums will be recognized in “Core Earnings” in future periods and are presented net of tax. As of December 31, 2012, the remaining amortization term of the net floor premiums was approximately 3.5 years for existing contracts. Historically, we have sold Floor Income Contracts on a periodic basis and depending upon market conditions and pricing, we may enter into additional Floor Income Contracts in the future. The balance of unamortized Floor Income Contracts will increase as we sell new contracts and decline due to the amortization of existing contracts.

	December 31,
(Dollars in millions)	2012			2011			2010
Unamortized net Floor premiums (net of tax)	$	(551	)	$	(772	)	$	(363	)

2)Goodwill and Acquired Intangible Assets: Our “Core Earnings” exclude goodwill and intangible asset impairment and the amortization of acquired intangible assets. The following table summarizes the goodwill and acquired intangible asset adjustments.

	Years Ended December 31,
(Dollars in millions)	2012			2011			2010
“Core Earnings” goodwill and acquired intangible asset adjustments(1):
Goodwill and intangible impairment of acquired intangible assets	$	(9	)	$	—		$	(512	)
Amortization of acquired intangible assets		(18	)		(21	)		(31	)
Total “Core Earnings” goodwill and acquired intangible asset adjustments(1)	$	(27	)	$	(21	)	$	(543	)

⁽¹⁾  Negative amounts are subtracted from “Core Earnings” to arrive at GAAP net income and positive amounts are added to “Core Earnings” to arrive at GAAP net income.

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Business Segment Earnings Summary — “Core Earnings” Basis

Consumer Lending Segment

The following table includes “Core Earnings” results for our Consumer Lending segment.

	Years Ended December 31,									% Increase (Decrease)
(Dollars in millions)	2012			2011			2010			2012 vs. 2011			2011 vs. 2010
“Core Earnings” interest income:
Private Education Loans	$	2,481		$	2,429		$	2,353			2	%		3	%
Cash and investments		7			9			15			(22	)		(40	)
Total “Core Earnings” interest income		2,488			2,438			2,368			2			3
Total “Core Earnings” interest expense		822			801			753			3			6
Net “Core Earnings” interest income		1,666			1,637			1,615			2			1
Less: provision for loan losses		1,008			1,179			1,298			(15	)		(9	)
Net “Core Earnings” interest income after provision for loan losses		658			458			317			44			44
Servicing revenue		46			64			73			(28	)		(12	)
Other income (loss)		—			(9	)		—			100			(100	)
Total income		46			55			73			(16	)		(25	)
Direct operating expenses		265			291			352			(9	)		(17	)
Restructuring and other reorganization expenses		3			3			12			—			(75	)
Total expenses		268			294			364			(9	)		(19	)
Income before income tax expense		436			219			26			99			742
Income tax expense		157			81			9			94			800
Net income from continuing operations		279			138			17			102			712
Loss from discontinued operations, net of tax benefit		(2	)		(2	)		(3	)		—			(33	)
“Core Earnings”	$	277		$	136		$	14			104	%		871	%

“Core Earnings” were $277 million in 2012, compared with $136 million in 2011 and $14 million in 2010. This increase was primarily the result of lower provision for loan losses and operating expenses as well as an increase in net interest income.

2012 highlights compared with 2011 included:

• Loan originations increased to $3.3 billion, up 22 percent from $2.7 billion.

• The portfolio, net of loan loss allowance, totaled $36.9 billion at December 31, 2012, compared with $36.3 billion at December 31, 2011.

• Net interest margin, before loan loss provision, improved to 4.13 percent, up from 4.09 percent.

• Provision for Private Education Loan losses decreased to 1.0 billion from 1.2 billion.

• Delinquencies of 90 days or more (as a percentage of loans in repayment) improved to 4.6 percent, compared with 4.9 percent.

• Loans in forbearance decreased to 3.5 percent of loans in repayment and forbearance, down from 4.4 percent.

• The annual charge-off rate (as a percentage of loans in repayment) improved to 3.37 percent, compared with 3.72 percent.

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Consumer Lending Net Interest Margin

The following table shows the Consumer Lending “Core Earnings” net interest margin along with reconciliation to the GAAP-basis Consumer Lending net interest margin before provision for loan losses.

	Years Ended December 31,
	2012			2011			2010
“Core Earnings” basis Private Education Loan yield		6.36	%		6.34	%		6.15	%
Discount amortization		.22			.23			.29
“Core Earnings” basis Private Education Loan net yield		6.58			6.57			6.44
“Core Earnings” basis Private Education Loan cost of funds		(2.04	)		(1.99	)		(1.79	)
“Core Earnings” basis Private Education Loan spread		4.54			4.58			4.65
“Core Earnings” basis other asset spread impact		(.41	)		(.49	)		(.80	)
“Core Earnings” basis Consumer Lending net interest margin(1)		4.13	%		4.09	%		3.85	%
“Core Earnings” basis Consumer Lending net interest margin(1)		4.13	%		4.09	%		3.85	%
Adjustment for GAAP accounting treatment(2)		(.10	)		(.08	)		.02
GAAP-basis Consumer Lending net interest margin(1)		4.03	%		4.01	%		3.87	%

⁽¹⁾  The average balances of our Consumer Lending “Core Earnings” basis interest-earning assets for the respective periods are:

	Years Ended December 31,
(Dollars in millions)	2012		2011		2010
Private Education Loans	$	37,691	$	36,955	$	36,534
Other interest-earning assets		2,572		3,015		5,204
Total Consumer Lending “Core Earnings” basis interest-earning assets	$	40,263	$	39,970	$	41,738

⁽²⁾  Represents the reclassification of periodic interest accruals on derivative contracts from net interest income to other income and other derivative accounting adjustments. For further discussion of these adjustments, see section titled “‘Core Earnings’ — Definition and Limitations — Differences between ‘Core Earnings’ and GAAP” above.

The change in the “Core Earnings” basis Consumer Lending net interest margin compared to prior-year periods is primarily due to spread impacts from changes in the average balances of our other interest-earning assets. These assets consist primarily of securitization trust restricted cash and cash held at Sallie Mae Bank (the “Bank”). Our other interest-earning asset portfolio yields a negative net interest margin and, as a result, when its relative weighting changes compared to the Private Education Loan portfolio, the overall net interest margin is impacted.

Private Education Loans Provision for Loan Losses and Charge-Offs

The following table summarizes the total Private Education Loans provision for loan losses and charge-offs.

	Years Ended December 31,
(Dollars in millions)	2012		2011		2010
Private Education Loan provision for loan losses	$	1,008	$	1,179	$	1,298
Private Education Loan charge-offs	$	1,037	$	1,072	$	1,291

In establishing the allowance for Private Education Loan losses as of December 31, 2012, we considered several factors with respect to our Private Education Loan portfolio. In particular, as compared with the year-ago periods, we continue to see improving credit quality and continuing positive delinquency and charge-off trends in connection with this portfolio. Improving credit quality is seen in higher FICO scores and cosigner rates as well as a more seasoned portfolio. Total loans delinquent (as a percentage of loans in repayment) has decreased to 9.3 percent from 10.1 percent in the year-ago period. Loans greater than 90 days delinquent (as a percentage of loans in repayment) has decreased to 4.6 percent from 4.9 percent in the year-ago period. Loans in forbearance (as a percentage of loans in repayment and forbearance) decreased to 3.5 percent from 4.4 percent in the year-ago period. The charge-off rate declined from 3.7 percent in 2011 to 3.4 percent in 2012.

Apart from these overall improvements, Private Education Loans that have defaulted between 2008 and 2011 for which we have previously charged off estimated losses have, to varying degrees, not met our post-default recovery expectations to date and may continue not to do so. Our allowance for loan losses takes into account these potential recovery uncertainties.

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The $171 million decline in the Private Education Loan provision for loan losses for the year ended December 31, 2012 compared with the prior year reflects the improving credit quality and performance trends discussed above.

For a more detailed discussion of our policy for determining the collectability of Private Education Loans and maintaining our allowance for Private Education Loan losses, see “Critical Accounting Policies and Estimates — Allowance for Loan Losses.”

Servicing Revenue and Other Income — Consumer Lending Segment

Servicing revenue for our Consumer Lending segment primarily includes late fees. For the years ended December 31, 2012, 2011 and 2010, servicing revenue for our Consumer Lending segment totaled $46 million, $64 million and $73 million, respectively. Included in other income for the year ended December 31, 2011 was a $9 million mark-to-market loss related to classifying our entire $12 million portfolio of non-U.S. dollar-denominated student loans as held-for-sale.

Operating Expenses — Consumer Lending Segment

Operating expenses for our Consumer Lending segment include costs incurred to originate Private Education Loans and to service and collect on our Private Education Loan portfolio. For the years ended December 31, 2012, 2011 and 2010, operating expenses for our Consumer Lending segment totaled $265 million, $291 million and $352 million, respectively. The decrease in operating expenses over the past two years was primarily the result of our cost-cutting initiatives. Operating expenses, excluding restructuring-related asset impairments, were 70 basis points, 79 basis points and 96 basis points of average Private Education Loans in the years ended December 31, 2012, 2011, and 2010, respectively.

Business Services Segment

The following tables include “Core Earnings” results for our Business Services segment.

	Years Ended December 31,								% Increase (Decrease)
(Dollars in millions)	2012			2011			2010		2012 vs. 2011			2011 vs. 2010
Net interest income after provision	$	7		$	8		$	12		(13	)%		(33	)%
Servicing revenue:
Intercompany loan servicing		670			739			648		(9	)		14
Third-party loan servicing		98			82			77		20			6
Guarantor servicing		44			52			93		(15	)		(44	)
Other servicing		1			(1	)		—		200			(100	)
Total servicing revenue		813			872			818		(7	)		7
Contingency revenue		356			333			330		7			1
Other Business Services revenue		33			69			50		(52	)		38
Total other income		1,202			1,274			1,198		(6	)		6
Direct operating expenses		364			393			411		(7	)		(4	)
Restructuring and other reorganization expenses		3			5			6		(40	)		(17	)
Total expenses		367			398			417		(8	)		(5	)
Income from continuing operations, before income tax expense		842			884			793		(5	)		11
Income tax expense		303			325			286		(7	)		14
Net income from continuing operations		539			559			507		(3	)		10
Income (loss) from discontinued operations, net of tax expense (benefit)		—			5			12		(100	)		(58	)
Net income		539			564			519		(4	)		9
Less: net loss attributable to noncontrolling interest		(2	)		(1	)		—		100			(100	)
“Core Earnings” attributable to SLM Corporation	$	541		$	565		$	519		(4	)%		9	%

“Core Earnings” were $541 million for the year ended December 31, 2012, compared with $565 million and $519 million in 2011 and 2010, respectively. The decrease in 2012 was primarily due to a $25 million gain recognized in 2011 related to the termination and replacement of the credit card affiliation contract and the lower balance of FFELP Loans serviced. The increase in 2011 compared with 2010 was primarily the result of the acquisition of FFELP Loans from other lenders, including $25 billion acquired in the fourth quarter of 2010.

Our Business Services segment earns intercompany loan servicing fees from servicing the FFELP Loans in our FFELP Loans segment. The average balance of this portfolio was $134 billion, $141 billion and $128 billion for the years ended December 31, 2012, 2011 and 2010, respectively. The decline in intercompany loan servicing revenue from the year-ago period is primarily the result of a lower outstanding principal balance in the underlying portfolio and the increase in 2011 compared with 2010 was due to the FFELP Loan acquisitions described above.

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We are servicing approximately 4.3 million accounts under the ED Servicing Contract as of December 31, 2012, compared with 3.6 million accounts serviced at December 31, 2011. Third-party loan servicing fees in the years ended December 31, 2012, 2011 and 2010 included $84 million, $63 million and $44 million, respectively, of servicing revenue related to the ED Servicing Contract. The increase in the third-party loan servicing fees was driven by the increase in the number of accounts serviced as well as an increase in ancillary servicing fees earned.

Guarantor Servicing revenue declined compared with the year-ago periods primarily due to the declining balance of FFELP Loans outstanding for which we earn fees.

Our contingency revenue consists of fees we receive for the collections of delinquent debt on behalf of clients performed on a contingent basis. Contingency revenue increased $23 million compared with 2011 as a result of the higher volume of collections.

The following table presents the outstanding inventory of contingent collections receivables that our Business Services segment will collect on behalf of others. We expect the inventory of contingent collections receivables to decline over time as a result of the elimination of FFELP.

	December 31,
(Dollars in millions)	2012		2011		2010
Contingency:
Student loans	$	13,189	$	11,553	$	10,362
Other		2,139		2,017		1,730
Total	$	15,328	$	13,570	$	12,092

Other Business Services revenue is primarily transaction fees that are earned in conjunction with our rewards program from participating companies based on member purchase activity, either online or in stores, depending on the contractual arrangement with the participating company. In 2011, we terminated our credit card affiliation program with a third-party bank and concurrently entered into an affiliation program with a new bank. In terminating the old program, we recognized a $25 million gain which primarily represented prior cash advances we received that were previously recorded as deferred revenue.

Revenues related to services performed on FFELP Loans accounted for 82 percent, 82 percent and 84 percent of total segment revenues for the years ended December 31, 2012, 2011 and 2010, respectively.

Operating Expenses — Business Services Segment

For the years ended December 31, 2012, 2011 and 2010, operating expenses for the Business Services segment totaled $364 million, $393 million and $411 million, respectively. The decrease in operating expenses over the past two years was primarily the result of our cost-cutting initiatives.

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FFELP Loans Segment

The following table includes “Core Earnings” results for our FFELP Loans segment.

	Years Ended December 31,						% Increase (Decrease)
(Dollars in millions)	2012		2011		2010		2012 vs. 2011			2011 vs. 2010
“Core Earnings” interest income:
FFELP Loans	$	2,744	$	2,914	$	2,766		(6	)%		5	%
Cash and investments		11		5		8		120			(38	)
Total “Core Earnings” interest income		2,755		2,919		2,774		(6	)		5
Total “Core Earnings” interest expense		1,591		1,472		1,408		8			5
Net “Core Earnings” interest income		1,164		1,447		1,366		(20	)		6
Less: provision for loan losses		72		86		98		(16	)		(12	)
Net “Core Earnings” interest income after provision for loan losses		1,092		1,361		1,268		(20	)		7
Servicing revenue		90		86		68		5			26
Other income		—		—		312		—			(100	)
Total other income		90		86		380		5			(77	)
Direct operating expenses		702		772		699		(9	)		10
Restructuring and other reorganization expenses		—		1		55		(100	)		(98	)
Total expenses		702		773		754		(9	)		3
Income from continuing operations, before income tax expense		480		674		894		(29	)		(25	)
Income tax expense		173		248		322		(30	)		(23	)
“Core Earnings”	$	307	$	426	$	572		(28	)%		(26	)%

“Core Earnings” from the FFELP Loans segment were $307 million in 2012, compared with $426 million and $572 million in 2011 and 2010, respectively. The decrease in 2012 compared with 2011 is primarily due to the declining balance of FFELP Loans and lower net interest margin as a result of an increase in the cost of funds. The decrease in 2011 compared with 2010 is primarily due to the $321 million gain from the sale of loans in 2010 that did not occur in 2011, which was partially offset by an increase in net interest margin as a result of an increase in Floor Income due to lower interest rates. Key financial measures include:

• Net interest margin of .84 percent in the year ended December 31, 2012 compared with .98 percent and .93 percent for the years ended December 31, 2011 and 2010, respectively. (See “FFELP Loans Net Interest Margin” for further discussion.)

• The provision for loan losses continued to decline over the past two years as a result of improved credit performance.

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FFELP Loans Net Interest Margin

The following table shows the FFELP Loans “Core Earnings” net interest margin along with reconciliation to the GAAP-basis FFELP Loans net interest margin.

	Years Ended December 31,
	2012			2011			2010
“Core Earnings” basis FFELP Loan yield		2.66	%		2.59	%		2.57	%
Hedged Floor Income		.26			.25			.23
Unhedged Floor Income		.11			.12			.02
Consolidation Loan Rebate Fees		(.67	)		(.65	)		(.59	)
Repayment Borrower Benefits		(.13	)		(.12	)		(.10	)
Premium amortization		(.15	)		(.15	)		(.18	)
“Core Earnings” basis FFELP Loan net yield		2.08			2.04			1.95
“Core Earnings” basis FFELP Loan cost of funds		(1.13	)		(.98	)		(.93	)
“Core Earnings” basis FFELP Loan spread		.95			1.06			1.02
“Core Earnings” basis FFELP other asset spread impact		(.11	)		(.08	)		(.09	)
“Core Earnings” basis FFELP Loans net interest margin(1)		.84	%		.98	%		.93	%
“Core Earnings” basis FFELP Loans net interest margin(1)		.84	%		.98	%		.93	%
Adjustment for GAAP accounting treatment(2)		.31			.34			.33
GAAP-basis FFELP Loans net interest margin		1.15	%		1.32	%		1.26	%

⁽¹⁾  The average balances of our FFELP “Core Earnings” basis interest-earning assets for the respective periods are:

	Years Ended December 31,
	2012		2011		2010
(Dollars in millions)
FFELP Loans	$	132,124	$	143,109	$	142,043
Other interest-earning assets		6,619		5,194		5,562
Total FFELP “Core Earnings” basis interest-earning assets	$	138,743	$	148,303	$	147,605

⁽²⁾  Represents the reclassification of periodic interest accruals on derivative contracts from net interest income to other income and other derivative accounting adjustments. For further discussion of these adjustments, see section titled “‘Core Earnings’ — Definition and Limitations — Differences between ‘Core Earnings’ and GAAP” above.

The decrease in the “Core Earnings” basis FFELP Loans net interest margin of 14 basis points for the year ended December 31, 2012 compared with the year-ago period was primarily the result of funding costs related to new unsecured and ABS debt issuances over the last year being higher than the funding costs of the debt that has matured or has been repurchased during that same period. In addition, there were increased spread impacts from increases in the average balance of our other interest-earning assets. These assets are primarily securitization trust restricted cash. Our other interest-earning asset portfolio yields a negative net interest margin and as a result, when its relative weighting increases, the overall net interest margin declines.

The increase in the “Core Earnings” basis FFELP Loans net interest margin of 5 basis points for 2011 compared with 2010 was primarily the result of an increase in Floor Income due to lower interest rates.

During the fourth-quarter 2011, the Administration announced SDCL. The initiative provided an incentive to borrowers who have at least one student loan owned by ED and at least one held by a FFELP lender to consolidate the FFELP lender’s loans into the Direct Loan Program by providing a 0.25 percentage point interest rate reduction on the FFELP Loans that are eligible for consolidation. The program was available from January 17, 2012 through June 30, 2012. As a result of the SDCL initiative, borrowers consolidated approximately $5.2 billion of our FFELP Loans to ED. The consolidation of these loans resulted in the acceleration of $42 million of non-cash loan premium amortization and $8 million of non-cash debt discount amortization during 2012. This combined $50 million acceleration of non-cash amortization related to this activity reduced the FFELP Loans net interest margin by 4 basis points for the year ended December 31, 2012.

On December 23, 2011, the President signed the Consolidated Appropriations Act of 2012 into law. This law includes changes that permit FFELP lenders or beneficial holders to change the index on which the Special Allowance Payments (“SAP”) are calculated for FFELP Loans first disbursed on or after January 1, 2000. We elected to use the one-month LIBOR rate rather than the CP rate commencing on April 1, 2012 in connection with our entire $128 billion of CP indexed loans. This change will help us to better match loan yields with our financing costs. This election did not materially affect our results for the year ended December 31, 2012.

22

On December 31, 2010, we acquired $26.1 billion of securitized federal student loans and related assets from the Student Loan Corporation (“SLC”), a subsidiary of Citibank, N.A., for approximately $1.1 billion.

As of December 31, 2012, our FFELP Loan portfolio totaled approximately $125.6 billion, comprised of $44.3 billion of FFELP Stafford and $81.3 billion of FFELP Consolidation Loans. The weighted-average life of these portfolios is 4.9 years and 9.9 years, respectively, assuming a Constant Prepayment Rate (“CPR”) of 4 percent and 3 percent, respectively.

Floor Income

The following table analyzes the ability of the FFELP Loans in our portfolio to earn Floor Income after December 31, 2012 and 2011, based on interest rates as of those dates.

	December 31, 2012									December 31, 2011
(Dollars in billions)	Fixed Borrower Rate			Variable Borrower Rate			Total			Fixed Borrower Rate			Variable Borrower Rate			Total
Student loans eligible to earn Floor Income	$	108.6		$	15.1		$	123.7		$	118.3		$	17.7		$	136.0
Less: post-March 31, 2006 disbursed loans required to rebate Floor Income		(57.3	)		(1.0	)		(58.3	)		(62.7	)		(1.2	)		(63.9	)
Less: economically hedged Floor Income Contracts		(35.2	)		—			(35.2	)		(41.5	)		—			(41.5	)
Student loans eligible to earn Floor Income	$	16.1		$	14.1		$	30.2		$	14.1		$	16.5		$	30.6
Student loans earning Floor Income	$	16.0		$	2.0		$	18.0		$	14.1		$	2.3		$	16.4

We have sold Floor Income Contracts to hedge the potential Floor Income from specifically identified pools of FFELP Consolidation Loans that are eligible to earn Floor Income.

The following table presents a projection of the average balance of FFELP Consolidation Loans for which Fixed Rate Floor Income has been economically hedged through Floor Income Contracts for the period January 1, 2013 to June 30, 2016. The hedges related to these loans do not qualify as effective hedges.

	Years Ended December 31,
(Dollars in billions)	2013		2014		2015		2016
Average balance of FFELP Consolidation Loans whose Floor Income is economically hedged	$	32.6	$	28.3	$	27.2	$	10.4

FFELP Loans Provision for Loan Losses and Charge-Offs

The following table summarizes the total FFELP Loan provision for loan losses and charge-offs.

	Years Ended December 31,
(Dollars in millions)	2012		2011		2010
FFELP Loan provision for loan losses	$	72	$	86	$	98
FFELP Loan charge-offs	$	92	$	78	$	87

Servicing Revenue and Other Income — FFELP Loans Segment

The following table summarizes the components of “Core Earnings” other income for our FFELP Loans segment.

	Years Ended December 31,
(Dollars in millions)	2012		2011		2010
Servicing revenue	$	90	$	86	$	68
Gains on loans and investments, net		—		—		325
Other		—		—		(13	)
Total other income, net	$	90	$	86	$	380

Servicing revenue for our FFELP Loans segment primarily consists of customer late fees.

The gains on loans and investments in 2010 related primarily to the sale of $20.4 billion of FFELP Loans to ED as part of the ED Purchase Program.

23

Operating Expenses — FFELP Loans Segment

Operating expenses for our FFELP Loans segment primarily include the contractual rates we pay to service loans in term asset-backed securitization trusts or a similar rate if a loan is not in a term financing facility (which is presented as an intercompany charge from the Business Services segment who services the loans), the fees we pay for third-party loan servicing and costs incurred to acquire loans. The intercompany revenue charged from the Business Services segment and included in those amounts was $670 million, $739 million and $648 million for the years ended December 31, 2012, 2011 and 2010, respectively. These amounts exceed the actual cost of servicing the loans.

2012 versus 2011

The decrease in operating expenses from the prior year was primarily the result of the reduction in the average outstanding balance of our FFELP Loans portfolio. Operating expenses, excluding restructuring-related asset impairments, were 53 basis points and 54 basis points of average FFELP Loans for the years ended December 31, 2012 and 2011, respectively.

2011 versus 2010

The increase in operating expenses from the prior year was primarily the result of the increase in servicing costs related to the $25 billion loan portfolio acquisition on December 31, 2010. Operating expenses, excluding restructuring-related asset impairments, were 54 basis points and 48 basis points of average FFELP Loans in the years ended December 31, 2011 and 2010, respectively.

Other Segment

The Other segment primarily consists of the financial results related to the repurchase of debt, the corporate liquidity portfolio and all overhead. We also include results from smaller wind-down and discontinued operations within this segment. These are the Purchased Paper businesses and mortgage and other loan businesses. The Other segment includes our remaining businesses that do not pertain directly to the primary segments identified above. Overhead expenses include costs related to executive management, the board of directors, accounting, finance, legal, human resources, stock-based compensation expense and certain information technology costs related to infrastructure and operations.

The following table includes “Core Earnings” results for our Other segment.

	Years Ended December 31,									% Increase (Decrease)
(Dollars in millions)	2012			2011			2010			2012 vs. 2011			2011 vs. 2010
Net interest loss after provision	$	(19	)	$	(58	)	$	(34	)		(67	)%		71	%
Gains on debt repurchases		145			64			317			127			(80	)
Other		15			(6	)		22			350			(127	)
Total income		160			58			339			176			(83	)
Direct operating expenses		12			19			12			(37	)		58
Overhead expenses:
Corporate overhead		116			161			181			(28	)		(11	)
Unallocated information technology costs		108			108			123			—			(12	)
Total overhead expenses		224			269			304			(17	)		(12	)
Total operating expenses		236			288			316			(18	)		(9	)
Restructuring and other reorganization expenses		5			3			12			67			(75	)
Total expenses		241			291			328			(17	)		(11	)
Income (loss) from continuing operations, before income tax expense (benefit)		(100	)		(291	)		(23	)		(66	)		1,165
Income tax expense (benefit)		(36	)		(107	)		(11	)		(66	)		873
Net income (loss) from continuing operations		(64	)		(184	)		(12	)		(65	)		1,433
Income (loss) from discontinued operations, net of tax expense (benefit)		1			34			(65	)		(97	)		152
“Core Earnings” net loss	$	(63	)	$	(150	)	$	(77	)		(58	)%		95	%

24

Net Interest Income (Loss) after Provision for Loan Losses

Net interest income (loss) after provision for loan losses includes net interest income related to our corporate liquidity portfolio as well as net interest income and provision expense related to our mortgage and consumer loan portfolios. The improvement compared with the prior-year periods was primarily the result of our not recording any provision for loan losses related to our mortgage and consumer loan portfolios in 2012. Each quarter we perform an analysis regarding the adequacy of the loan loss allowance for these portfolios and we determined that no additional allowance for loan losses was required related to this $137 million portfolio.

Gains on Debt Repurchases

We repurchased $711 million, $894 million and $4.9 billion face amount of our ABS and senior unsecured notes in 2012, 2011 and 2010, respectively.

Other Income

The year ended December 31, 2011 includes $26 million of impairment on certain investments in aircraft leveraged leases. As of December 31, 2012, our total remaining investment in airline leases is $39 million.

Purchased Paper Business

Our Purchased Paper businesses are presented as discontinued operations for the current and prior periods (see “Consolidated Earnings Summary — GAAP-basis” for a further discussion). We sold our Purchased Paper — Non-Mortgage business, resulting in a $23 million after-tax gain, in 2011.

Overhead

Corporate overhead is comprised of costs related to executive management, the board of directors, accounting, finance, legal, human resources and stock-based compensation expense. Unallocated information technology costs are related to infrastructure and operations.

2012 versus 2011

The decrease in overhead for the year ended December 31, 2012 compared with the year-ago period was primarily the result of the current-year benefit of the cost-cutting efforts we implemented throughout 2011.

2011 versus 2010

The increase in overhead from 2010 to 2011 was primarily the result of a change in the terms of our stock-based compensation plans, additional expense related to the termination of our defined benefit pension plan, and restructuring-related consulting expenses incurred in the first half of 2011. In the first quarter of 2011, we changed our stock-based compensation plans so that retirement eligible employees would not forfeit unvested stock-based compensation upon their retirement. This change had the effect of accelerating $11 million of future stock-based compensation expenses associated with these unvested stock grants into the current period for those retirement-eligible employees. We also recognized $16 million of additional expense in 2011 related to the termination of our defined benefit pension plan due to changes in estimates related to the employee termination benefits as well as changes in interest rates.

Financial Condition

This section provides additional information regarding the changes related to our loan portfolio assets and related liabilities as well as credit performance indicators related to our loan portfolio. Certain of these disclosures will show both GAAP-basis as well as “Core Earnings” basis disclosures. Because certain trusts were not consolidated prior to the adoption of the new consolidation accounting guidance on January 1, 2010, these trusts were treated as off-balance sheet for GAAP purposes but we considered them on-balance sheet for “Core Earnings” purposes. Subsequent to the adoption of the new consolidation accounting guidance on January 1, 2010, this difference no longer exists because all of our trusts are treated as on-balance sheet for GAAP purposes. Below and elsewhere in the document, “Core Earnings” basis disclosures include all historically (pre-January 1, 2010) off-balance sheet trusts as though they were on-balance sheet. We believe that providing “Core Earnings” basis disclosures is meaningful because when we evaluate the performance and risk characteristics of the Company we have always considered the effect of any off-balance sheet trusts as though they were on-balance sheet.

25

Average Balance Sheets — GAAP

The following table reflects the rates earned on interest-earning assets and paid on interest-bearing liabilities and reflects our net interest margin on a consolidated basis.

	Years Ended December 31,
	2012					2011					2010
(Dollars in millions)	Balance		Rate			Balance		Rate			Balance		Rate
Average Assets
FFELP Loans	$	132,124		2.46	%	$	143,109		2.42	%	$	142,043		2.36	%
Private Education Loans		37,691		6.58			36,955		6.57			36,534		6.44
Other loans		172		9.41			233		9.16			323		9.20
Cash and investments		10,331		.20			10,636		.18			12,729		.20
Total interest-earning assets		180,318		3.20	%		190,933		3.11	%		191,629		3.00	%
Non-interest-earning assets		4,732					5,308					5,931
Total assets	$	185,050				$	196,241				$	197,560
Average Liabilities and Equity
Short-term borrowings	$	24,831		.88	%	$	31,413		.89	%	$	38,634		.86	%
Long-term borrowings		151,397		1.55			156,151		1.36			150,768		1.29
Total interest-bearing liabilities		176,228		1.45	%		187,564		1.28	%		189,402		1.20	%
Non-interest-bearing liabilities		3,837					3,679					3,280
Equity		4,985					4,998					4,878
Total liabilities and equity	$	185,050				$	196,241				$	197,560
Net interest margin				1.78	%				1.85	%				1.82	%

Rate/Volume Analysis — GAAP

The following rate/volume analysis shows the relative contribution of changes in interest rates and asset volumes.

	Increase (Decrease)			Change Due To(1)
(Dollars in millions)				Rate			Volume
2012 vs. 2011
Interest income	$	(161	)	$	175		$	(336	)
Interest expense		160			312			(152	)
Net interest income	$	(321	)	$	(130	)	$	(191	)
2011 vs. 2010
Interest income	$	176		$	197		$	(21	)
Interest expense		126			149			(23	)
Net interest income	$	50		$	63		$	(13	)

⁽¹⁾  Changes in income and expense due to both rate and volume have been allocated in proportion to the relationship of the absolute dollar amounts of the change in each. The changes in income and expense are calculated independently for each line in the table. The totals for the rate and volume columns are not the sum of the individual lines.

26

Summary of our Student Loan Portfolio

Ending Student Loan Balances, net

	December 31, 2012
(Dollars in millions)	FFELP Stafford and Other			FFELP Consolidation Loans			Total FFELP Loans			Private Education Loans			Total Portfolio
Total student loan portfolio:
In-school(1)	$	1,506		$	—		$	1,506		$	2,194		$	3,700
Grace, repayment and other(2)		42,189			80,640			122,829			36,360			159,189
Total, gross		43,695			80,640			124,335			38,554			162,889
Unamortized premium/(discount)		691			745			1,436			(796	)		640
Receivable for partially charged-off loans		—			—			—			1,347			1,347
Allowance for loan losses		(97	)		(62	)		(159	)		(2,171	)		(2,330	)
Total student loan portfolio	$	44,289		$	81,323		$	125,612		$	36,934		$	162,546
% of total FFELP		35	%		65	%		100	%
% of total		27	%		50	%		77	%		23	%		100	%

	December 31, 2011
(Dollars in millions)	FFELP Stafford and Other			FFELP Consolidation Loans			Total FFELP Loans			Private Education Loans			Total Portfolio
Total student loan portfolio:
In-school(1)	$	3,100		$	—		$	3,100		$	2,263		$	5,363
Grace, repayment and other(2)		46,618			86,925			133,543			35,830			169,373
Total, gross		49,718			86,925			136,643			38,093			174,736
Unamortized premium/(discount)		839			835			1,674			(873	)		801
Receivable for partially charged-off loans		—			—			—			1,241			1,241
Allowance for loan losses		(117	)		(70	)		(187	)		(2,171	)		(2,358	)
Total student loan portfolio	$	50,440		$	87,690		$	138,130		$	36,290		$	174,420
% of total FFELP		37	%		63	%		100	%
% of total		29	%		50	%		79	%		21	%		100	%

⁽¹⁾  Loans for customers still attending school and are not yet required to make payments on the loan.

⁽²⁾  Includes loans in deferment or forbearance.

	December 31, 2010
(Dollars in millions)	FFELP Stafford and Other		FFELP Consolidation Loans		Total FFELP Loans		Private Education Loans		Total Portfolio
Total student loan portfolio	$	56,252	$	92,397	$	148,649	$	35,656	$	184,305

	December 31, 2009
(Dollars in millions)	FFELP Stafford and Other		FFELP Consolidation Loans		Total FFELP Loans		Private Education Loans		Total Portfolio
Total GAAP basis, net	$	52,675	$	68,379	$	121,054	$	22,753	$	143,807
Total off-balance sheet, net		5,499		14,797		20,296		12,342		32,638
Total “Core Earnings” basis	$	58,174	$	83,176	$	141,350	$	35,095	$	176,445

27

	December 31, 2008
(Dollars in millions)	FFELP Stafford and Other		FFELP Consolidation Loans		Total FFELP Loans		Private Education Loans		Total Portfolio
Total GAAP basis, net	$	52,476	$	71,744	$	124,220	$	20,582	$	144,802
Total off-balance sheet, net		7,143		15,531		22,674		12,917		35,591
Total “Core Earnings” basis	$	59,619	$	87,275	$	146,894	$	33,499	$	180,393

Average Student Loan Balances (net of unamortized premium/discount)

	Year Ended December 31, 2012
(Dollars in millions)	FFELP Stafford and Other			FFELP Consolidation Loans			Total FFELP Loans			Private Education Loans			Total Portfolio
Total	$	47,629		$	84,495		$	132,124		$	37,691		$	169,815
% of FFELP		36	%		64	%		100	%
% of total		28	%		50	%		78	%		22	%		100	%

	Year Ended December 31, 2011
(Dollars in millions)	FFELP Stafford and Other			FFELP Consolidation Loans			Total FFELP Loans			Private Education Loans			Total Portfolio
Total	$	53,163		$	89,946		$	143,109		$	36,955		$	180,064
% of FFELP		37	%		63	%		100	%
% of total		29	%		50	%		79	%		21	%		100	%

	Year Ended December 31, 2010
(Dollars in millions)	FFELP Stafford and Other			FFELP Consolidation Loans			Total FFELP Loans			Private Education Loans			Total Portfolio
Total(1)	$	61,034		$	81,009		$	142,043		$	36,534		$	178,577
% of FFELP		43	%		57	%		100	%
% of total		34	%		46	%		80	%		20	%		100	%

⁽¹⁾  On January 1, 2010, upon the adoption of the new consolidation accounting guidance, all off-balance sheet loans were consolidated on-balance sheet.

28

Student Loan Activity

	Year Ended December 31, 2012
(Dollars in millions)	FFELP Stafford and Other			FFELP Consolidation Loans			Total FFELP Loans			Private Education Loans			Total Portfolio
Beginning balance	$	50,440		$	87,690		$	138,130		$	36,290		$	174,420
Acquisitions and originations		2,764			903			3,667			3,386			7,053
Capitalized interest and premium/discount amortization		1,373			1,443			2,816			1,029			3,845
Consolidations to third parties		(5,049	)		(2,803	)		(7,852	)		(73	)		(7,925	)
Sales		(530	)		—			(530	)		—			(530	)
Repayments and other		(4,709	)		(5,910	)		(10,619	)		(3,698	)		(14,317	)
Ending balance	$	44,289		$	81,323		$	125,612		$	36,934		$	162,546

	Year Ended December 31, 2011
(Dollars in millions)	FFELP Stafford and Other			FFELP Consolidation Loans			Total FFELP Loans			Private Education Loans			Total Portfolio
Beginning balance	$	56,252		$	92,397		$	148,649		$	35,656		$	184,305
Acquisitions and originations		814			802			1,616			2,942			4,558
Capitalized interest and premium/discount amortization		1,506			1,535			3,041			1,269			4,310
Consolidations to third parties		(2,741	)		(1,058	)		(3,799	)		(69	)		(3,868	)
Sales		(754	)		—			(754	)		—			(754	)
Repayments and other		(4,637	)		(5,986	)		(10,623	)		(3,508	)		(14,131	)
Ending balance	$	50,440		$	87,690		$	138,130		$	36,290		$	174,420

	Year Ended December 31, 2010
(Dollars in millions)	FFELP Stafford and Other			FFELP Consolidation Loans			Total FFELP Loans			Private Education Loans			Total Portfolio
Beginning balance	$	52,675		$	68,379		$	121,054		$	22,753		$	143,807
Consolidation of off-balance sheet loans(1)		5,500			14,797			20,297			12,341			32,638
Beginning balance — total portfolio		58,175			83,176			141,351			35,094			176,445
Acquisitions and originations		14,349			76			14,425			2,434			16,859
Capitalized interest and premium/discount amortization		1,324			1,357			2,681			1,462			4,143
Consolidations to third parties		(2,092	)		(793	)		(2,885	)		(46	)		(2,931	)
Loan acquisition on December 31, 2010		11,237			13,652			24,889			—			24,889
Sales		(21,054	)		(71	)		(21,125	)		—			(21,125	)
Repayments and other		(5,687	)		(5,000	)		(10,687	)		(3,288	)		(13,975	)
Ending balance	$	56,252		$	92,397		$	148,649		$	35,656		$	184,305

⁽¹⁾  On January 1, 2010, upon adoption of the new consolidation accounting guidance, all off-balance sheet loans are included in the GAAP-basis.

29

Student Loan Allowance for Loan Losses Activity

	GAAP Basis
	December 31, 2012									December 31, 2011									December 31, 2010
(Dollars in millions)	FFELP Loans			Private Education Loans			Total Portfolio			FFELP Loans			Private Education Loans			Total Portfolio			FFELP Loans			Private  Education  Loans			Total Portfolio
GAAP Basis:
Beginning balance	$	187		$	2,171		$	2,358		$	189		$	2,022		$	2,211		$	161		$	1,443		$	1,604
Less:
Charge-offs(1)		(92	)		(1,037	)		(1,129	)		(78	)		(1,072	)		(1,150	)		(87	)		(1,291	)		(1,378	)
Student loan sales		(8	)		—			(8	)		(10	)		—			(10	)		(8	)		—			(8	)
Plus:
Provision for loan losses		72			1,008			1,080			86			1,179			1,265			98			1,298			1,396
Reclassification of interest reserve(2)		—			29			29			—			42			42			—			48			48
Consolidation of securitization trusts(3)		—			—			—			—			—			—			25			524			549
Ending balance	$	159		$	2,171		$	2,330		$	187		$	2,171		$	2,358		$	189		$	2,022		$	2,211

	Off-Balance Sheet
	December 31, 2012						December 31, 2011						December 31, 2010
(Dollars in millions)	FFELP Loans		Private Education Loans		Total Portfolio		FFELP Loans		Private Education Loans		Total Portfolio		FFELP Loans			Private   Education   Loans			Total Portfolio
Off-Balance Sheet:
Beginning balance	$	—	$	—	$	—	$	—	$	—	$	—	$	25		$	524		$	549
Less:
Charge-offs(1)		—		—				—		—				—			—
Student loan sales		—		—		—		—		—		—		—			—			—
Plus:
Provision for loan losses		—		—		—		—		—		—		—			—			—
Reclassification of interest reserve(2)		—		—		—		—		—		—		—			—			—
Consolidation of securitization trusts(3)		—		—		—		—		—		—		(25	)		(524	)		(549	)
Ending balance	$	—	$	—	$	—	$	—	$	—	$	—	$	—		$	—		$	—

	“Core Earnings” Basis
	December 31, 2012									December 31, 2011									December 31, 2010
(Dollars in millions)	FFELP Loans			Private Education Loans			Total Portfolio			FFELP Loans			Private Education Loans			Total Portfolio			FFELP Loans			Private Education Loans			Total Portfolio
“Core Earnings” Basis:
Beginning balance	$	187		$	2,171		$	2,358		$	189		$	2,022		$	2,211		$	186		$	1,967		$	2,153
Less:
Charge-offs(1)		(92	)		(1,037	)		(1,129	)		(78	)		(1,072	)		(1,150	)		(87	)		(1,291	)		(1,378	)
Student loan sales		(8	)		—			(8	)		(10	)		—			(10	)		(8	)		—			(8	)
Plus:
Provision for loan losses		72			1,008			1,080			86			1,179			1,265			98			1,298			1,396
Reclassification of interest reserve(2)		—			29			29			—			42			42			—			48			48
Ending balance	$	159		$	2,171		$	2,330		$	187		$	2,171		$	2,358		$	189		$	2,022		$	2,211
Percent of total		7	%		93	%		100	%		8	%		92	%		100	%		9	%		91	%		100	%
Troubled debt restructuring(4)	$	—		$	7,294		$	7,294		$	—		$	5,249		$	5,249		$	—		$	439		$	439

⁽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 collected and any shortfalls in what was actually collected 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⁾  On January 1, 2010, upon the adoption of the new consolidation accounting guidance, all off-balance sheet loans were consolidated on-balance sheet.

⁽⁴⁾  Represents the recorded investment of loans classified as troubled debt restructuring.

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	GAAP Basis
	December 31, 2009									December 31, 2008
(Dollars in millions)	FFELP Loans			Private Education Loans			Total Portfolio			FFELP Loans			Private Education Loans			Total Portfolio
GAAP Basis:
Beginning balance	$	138		$	1,308		$	1,446		$	89		$	1,004		$	1,093
Less:
Charge-offs(1)		(79	)		(876	)		(955	)		(58	)		(320	)		(378	)
Student loan sales		(4	)		—			(4	)		1			—			1
Plus:
Provision for loan losses		106			967			1,073			106			586			692
Reclassification of interest reserve(2)		—			44			44			—			38			38
Ending balance	$	161		$	1,443		$	1,604		$	138		$	1,308		$	1,446

	Off-Balance Sheet
	December 31, 2009									December 31, 2008
(Dollars in millions)	FFELP Loans			Private Education Loans			Total Portfolio			FFELP Loans			Private Education Loans			Total Portfolio
Off-Balance Sheet:
Beginning balance	$	27		$	505		$	532		$	29		$	362		$	391
Less:
Charge-offs(1)		(15	)		(423	)		(438	)		(21	)		(153	)		(174	)
Student loan sales		—			—			—			(2	)		—			(2	)
Plus:
Provision for loan losses		13			432			445			21			288			309
Reclassification of interest reserve(2)		—			10			10			—			8			8
Ending balance	$	25		$	524		$	549		$	27		$	505		$	532

	“Core Earnings” Basis
	December 31, 2009									December 31, 2008
(Dollars in millions)	FFELP Loans			Private Education Loans			Total Portfolio			FFELP Loans			Private  Education  Loans			Total Portfolio
“Core Earnings” Basis:
Balance at beginning of period	$	165		$	1,813		$	1,978		$	118		$	1,366		$	1,484
Less:
Charge-offs(1)		(94	)		(1,299	)		(1,393	)		(79	)		(473	)		(552	)
Student loan sales		(4	)		—			(4	)		(1	)		—			(1	)
Plus:
Provision for loan losses		119			1,399			1,518			127			874			1,001
Reclassification of interest reserve(2)		—			54			54			—			46			46
Total “Core Earnings” basis	$	186		$	1,967		$	2,153		$	165		$	1,813		$	1,978
Percent of total		9	%		91	%		100	%		8	%		92	%		100	%
Troubled debt restructuring(3)	$	—		$	223		$	223		$	—		$	—		$	—

⁽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 collected and any shortfalls in what was actually collected 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⁾  Represents the recorded investment of loans identified as troubled debt restructuring.

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Private Education Loan Originations

The following table summarizes our Private Education Loan originations.

	Years Ended December 31,
(Dollars in millions)	2012		2011		2010
Smart Option — interest only(1)	$	941	$	881	$	1,315
Smart Option — fixed pay(1)		1,005		1,118		594
Smart Option — deferred(1)		1,319		579		—
Other		80		159		398
Total Private Education Loan originations	$	3,345	$	2,737	$	2,307

⁽¹⁾  Interest only, fixed pay and deferred describe the payment option while in school or in grace period. See “Consumer Lending Portfolio Performance — Private Education Loan Repayment Options” for further discussion.

Consumer Lending Portfolio Performance

Private Education Loan Delinquencies and Forbearance

The tables below present our Private Education Loan delinquency trends.

	Private Education Loan Delinquencies
	December 31,
	2012						2011						2010
(Dollars in millions)	Balance			%			Balance			%			Balance			%
Loans in-school/grace/deferment(1)	$	5,904					$	6,522					$	8,340
Loans in forbearance(2)		1,136						1,386						1,340
Loans in repayment and percentage of each status:
Loans current		28,575			90.7	%		27,122			89.9	%		24,888			89.4	%
Loans delinquent 31-60 days(3)		1,012			3.2			1,076			3.6			1,011			3.6
Loans delinquent 61-90 days(3)		481			1.5			520			1.6			471			1.7
Loans delinquent greater than 90 days(3)		1,446			4.6			1,467			4.9			1,482			5.3
Total Private Education Loans in repayment		31,514			100	%		30,185			100	%		27,852			100	%
Total Private Education Loans, gross		38,554						38,093						37,532
Private Education Loan unamortized discount		(796	)					(873	)					(894	)
Total Private Education Loans		37,758						37,220						36,638
Private Education Loan receivable for partially charged-off loans		1,347						1,241						1,040
Private Education Loan allowance for losses		(2,171	)					(2,171	)					(2,022	)
Private Education Loans, net	$	36,934					$	36,290					$	35,656
Percentage of Private Education Loans in repayment					81.7	%					79.2	%					74.2	%
Delinquencies as a percentage of Private Education Loans in repayment					9.3	%					10.1	%					10.6	%
Loans in forbearance as a percentage of loans in repayment and forbearance					3.5	%					4.4	%					4.6	%
Loans in repayment greater than 12 months as a percentage of loans in repayment(4)					78.5	%					72.4	%					64.3	%

⁽¹⁾  Deferment includes customers who have returned to school or are engaged 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 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, 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.

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Allowance for Private Education Loan Losses

The following table summarizes changes in the allowance for Private Education Loan losses.

	Years Ended December 31,
(Dollars in millions)	2012			2011			2010
Allowance at beginning of period	$	2,171		$	2,022		$	1,443
Consolidation of securitization trusts(1)		—			—			524
Allowance at beginning of period — total portfolio		2,171			2,022			1,967
Provision for Private Education Loan losses		1,008			1,179			1,298
Charge-offs(2)		(1,037	)		(1,072	)		(1,291	)
Reclassification of interest reserve(3)		29			42			48
Allowance at end of period	$	2,171		$	2,171		$	2,022
Charge-offs as a percentage of average loans in repayment		3.37	%		3.72	%		5.04	%
Charge-offs as a percentage of average loans in repayment and forbearance		3.24	%		3.55	%		4.79	%
Allowance as a percentage of the ending total loans		5.44	%		5.52	%		5.24	%
Allowance as a percentage of ending loans in repayment		6.89	%		7.19	%		7.26	%
Average coverage of charge-offs		2.1			2.0			1.6
Ending total loans(4)	$	39,901		$	39,334		$	38,572
Average loans in repayment	$	30,750		$	28,790		$	25,596
Ending loans in repayment	$	31,514		$	30,185		$	27,852

⁽¹⁾  On January 1, 2010, upon the adoption of the new consolidation accounting guidance, all off-balance sheet loans were consolidated on-balance sheet.

⁽²⁾  Charge-offs are reported net of expected recoveries. 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 collected and any shortfalls in what was actually collected in the period. See “Receivable for Partially Charged-Off Private Education Loans” for further discussion.

⁽³⁾  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.

⁽⁴⁾  Ending total loans represents gross Private Education Loans, plus the receivable for partially charged-off loans.

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The following tables provide the detail for our traditional and non-traditional “Core Earnings” basis Private Education Loans for the respective years ended.

	December 31, 2012									December 31, 2011									December 31, 2010
(Dollars in millions)	Traditional			Non- Traditional			Total			Traditional			Non- Traditional			Total			Traditional			Non- Traditional			Total
Ending total loans(1)	$	36,144		$	3,757		$	39,901		$	35,233		$	4,101		$	39,334		$	34,177		$	4,395		$	38,572
Ending loans in repayment		28,930			2,584			31,514			27,467			2,718			30,185			25,043			2,809			27,852
Private Education Loan allowance for loan losses		1,637			534			2,171			1,542			629			2,171			1,231			791			2,022
Charge-offs as a percentage of average loans in repayment		2.7	%		10.9	%		3.4	%		2.8	%		12.3	%		3.7	%		3.6	%		16.8	%		5.0	%
Allowance as a percentage of ending total loans		4.5	%		14.2	%		5.4	%		4.4	%		15.3	%		5.5	%		3.6	%		18.0	%		5.2	%
Allowance as a percentage of ending loans in repayment		5.7	%		20.7	%		6.9	%		5.6	%		23.1	%		7.2	%		4.9	%		28.2	%		7.3	%
Average coverage of charge-offs		2.2			1.9			2.1			2.1			1.9			2.0			1.5			1.7			1.6
Delinquencies as a percentage of Private Education Loans in repayment		8.1	%		23.4	%		9.3	%		8.6	%		26.0	%		10.1	%		8.8	%		27.4	%		10.6	%
Delinquencies greater than 90 days as a percentage of Private Education Loans in repayment		3.9	%		12.6	%		4.6	%		4.0	%		13.6	%		4.9	%		4.2	%		15.0	%		5.3	%
Loans in forbearance as a percentage of loans in repayment and forbearance		3.3	%		5.1	%		3.5	%		4.2	%		6.6	%		4.4	%		4.4	%		6.1	%		4.6	%
Loans that entered repayment during the period(2)	$	3,336		$	194		$	3,530		$	4,886		$	345		$	5,231		$	6,451		$	553		$	7,004
Percentage of Private Education Loans with a cosigner		68	%		30	%		65	%		65	%		29	%		62	%		63	%		28	%		59	%
Average FICO at origination		728			624			720			726			624			717			725			623			715

⁽¹⁾  Ending total loans represent gross Private Education Loans, plus the receivable for partially charged-off loans.

⁽²⁾  Includes loans that are required to make a payment for the first time.

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	December 31, 2009									December 31, 2008
(Dollars in millions)	Traditional			Non- Traditional			Total			Traditional			Non- Traditional			Total
Ending total loans(1)	$	33,223		$	4,747		$	37,970		$	31,101		$	5,107		$	36,208
Ending loans in repayment		21,453			2,913			24,366			17,715			2,997			20,712
Private Education Loan allowance for loan losses		1,056			911			1,967			859			954			1,813
Charge-offs as a percentage of average loans in repayment		3.6	%		21.4	%		6.0	%		1.4	%		11.1	%		2.9	%
Allowance as a percentage of ending total loans		3.2	%		19.2	%		5.2	%		2.8	%		18.7	%		5.0	%
Allowance as a percentage of ending loans in repayment		4.9	%		31.3	%		8.1	%		4.8	%		31.8	%		8.8	%
Average coverage of charge-offs		1.6			1.5			1.5			4.2			3.5			3.8
Delinquencies as a percentage of Private Education Loans in repayment		9.5	%		31.4	%		12.1	%		7.1	%		28.9	%		10.2	%
Delinquencies greater than 90 days as a percentage of Private Education Loans in repayment		4.6	%		17.5	%		6.1	%		2.6	%		12.7	%		4.0	%
Loans in forbearance as a percentage of loans in repayment and forbearance		5.3	%		7.1	%		5.5	%		6.7	%		9.0	%		7.0	%
Loans that entered repayment during the period(2)	$	6,430		$	851		$	7,281		$	6,181		$	1,092		$	7,273
Percentage of Private Education Loans with a cosigner		61	%		28	%		57	%		59	%		26	%		55	%
Average FICO at origination		725			623			713			723			622			710

⁽¹⁾  Ending total loans represent gross Private Education Loans, plus the receivable for partially charged-off loans.

⁽²⁾  Includes loans that are required to make a payment for the first time.

As part of concluding on the adequacy of the allowance for loan losses, we review key allowance and loan metrics. The most significant of these metrics considered are the allowance coverage of charge-offs ratio; the allowance as a percentage of total loans and of loans in repayment; and delinquency and forbearance percentages.

Receivable for Partially Charged-Off Private Education Loans

At the end of each month, for loans that are 212 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 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. Private Education Loans which defaulted between 2008 and 2011 for which we have previously charged off estimated losses have, to varying degrees, not met our post-default recovery expectations to date and may continue not to do so. According to our policy, we have been charging off these periodic shortfalls in expected recoveries against our allowance for Private Education Loan losses and the related receivable for partially charged-off Private Education Loans and we will continue to do so. Differences in actual future recoveries on these defaulted loans could affect our receivable for partially charged-off Private Education Loans. There was $198 million and $148 million in allowance for Private Education Loan losses at December 31, 2012 and 2011, respectively, providing for possible additional future charge-offs related to the receivable for partially charged-off Private Education Loans (see “Consumer Lending Segment — Private Education Loans Provision for Loan Losses and Charge-Offs” for a further discussion).

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

	Years Ended December 31,
(Dollars in millions)	2012			2011			2010
Receivable at beginning of period	$	1,241		$	1,040		$	499
Expected future recoveries of current period defaults(1)		351			391			459
Recoveries(2)		(189	)		(155	)		(104	)
Charge-offs(3)		(56	)		(35	)		(43	)
Consolidation of securitization trusts(4)		—			—			229
Receivable at end of period		1,347			1,241			1,040
Allowance for estimated recovery shortfalls(5)		(198	)		(148	)		—
Net receivable at end of period	$	1,149		$	1,093		$	1,040

⁽¹⁾  Represents the difference between the defaulted loan balance and our estimate of the amount to be collected in the future.

⁽²⁾  Current period cash collections.

⁽³⁾  Represents the current period recovery shortfall — the difference between what was expected to be collected and what was actually collected. These amounts are included in total charge-offs as reported in the “Allowance for Private Education Loan Losses” table.

⁽⁴⁾  On January 1, 2010, upon the adoption of the new consolidation accounting guidance, all off-balance loans were consolidated on-balance sheet.

⁽⁵⁾  The allowance for estimated recovery shortfalls of the receivable for partially charged-off Private Education Loans is a component of the $2.2 billion overall allowance for Private Education Loan losses as of December 31, 2012 and 2011.

Use of Forbearance as a Private Education Loan Collection Tool

Forbearance involves granting the customer a temporary cessation of payments (or temporary acceptance of smaller than scheduled payments) for a specified period of time. Using forbearance extends the original term of the loan. Forbearance does not grant any reduction in the total repayment obligation (principal or interest). While in forbearance status, interest continues to accrue and is capitalized to principal when the loan re-enters repayment status. Our forbearance policies include limits on the number of forbearance months granted consecutively and the total number of forbearance months granted over the life of the loan. In some instances, we require good-faith payments before granting forbearance. Exceptions to forbearance policies are permitted when such exceptions are judged to increase the likelihood of collection of the loan. Forbearance as a collection tool is used most effectively when applied based on a customer’s unique situation, including historical information and judgments. We leverage updated customer information and other decision support tools to best determine who will be granted forbearance based on our expectations as to a customer’s ability and willingness to repay their obligation. This strategy is aimed at mitigating the overall risk of the portfolio as well as encouraging cash resolution of delinquent loans.

Forbearance may be granted to customers who are exiting their grace period to provide additional time to obtain employment and income to support their obligations, or to current customers who are faced with a hardship and request forbearance time to provide temporary payment relief. In these circumstances, a customer’s loan is placed into a forbearance status in limited monthly increments and is reflected in the forbearance status at month-end during this time. At the end of their granted forbearance period, the customer will enter repayment status as current and is expected to begin making their scheduled monthly payments on a go-forward basis.

Forbearance may also be granted to customers who are delinquent in their payments. In these circumstances, the forbearance cures the delinquency and the customer is returned to a current repayment status. In more limited instances, delinquent customers will also be granted additional forbearance time.

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The table below reflects the historical effectiveness of using forbearance. Our experience has shown that three years after being granted forbearance for the first time, 66 percent of the loans are current, paid in full, or receiving an in-school grace or deferment, and 20 percent have defaulted. The default experience associated with loans which utilize forbearance is considered in our allowance for loan losses. The number of loans in a forbearance status as a percentage of loans in repayment and forbearance decreased to 3.5 percent in 2012 compared with 4.4 percent in 2011. As of December 31, 2012, 2.3 percent of loans in current status were delinquent as of the end of the prior month, but were granted a forbearance that made them current as of December 31, 2012 (customers made payments on approximately 34 percent of these loans as a prerequisite to being granted forbearance).

Tracking by First Time in Forbearance Compared to All Loans Entering Repayment — Portfolio data through December 31, 2012
	Status distribution 36 months after being granted forbearance for the first time			Status distribution 36 months after entering repayment (all loans)			Status distribution 36 months after entering repayment for loans never entering forbearance
In-school/grace/deferment		9.7	%		9.1	%		5.6	%
Current		50.5			59.0			66.7
Delinquent 31-60 days		3.1			2.0			.4
Delinquent 61-90 days		1.9			1.1			.2
Delinquent greater than 90 days		4.7			2.7			.3
Forbearance		4.1			3.1			—
Defaulted		20.0			11.4			7.2
Paid		6.0			11.6			19.6
Total		100	%		100	%		100	%

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The tables below show the composition and status of the Private Education Loan portfolio aged by number of months in active repayment status (months for which a scheduled monthly payment was due). As indicated in the tables, the percentage of loans in forbearance status decreases the longer the loans have been in active repayment status. At December 31, 2012, loans in forbearance status as a percentage of loans in repayment and forbearance were 5.9 percent for loans that have been in active repayment status for less than 25 months. The percentage drops to 1.3 percent for loans that have been in active repayment status for more than 48 months. Approximately 70 percent of our Private Education Loans in forbearance status has been in active repayment status less than 25 months.

(Dollars in millions)	Monthly Scheduled Payments Due															Not Yet in Repayment
December 31, 2012	0 to 12			13 to 24			25 to 36			37 to 48			More than 48						Total
Loans in-school/grace/deferment	$	—		$	—		$	—		$	—		$	—		$	5,904		$	5,904
Loans in forbearance		602			195			149			83			107			—			1,136
Loans in repayment — current		5,591			5,366			5,405			4,403			7,810			—			28,575
Loans in repayment — delinquent 31-60 days		353			189			175			116			179			—			1,012
Loans in repayment — delinquent 61-90 days		185			95			81			49			71			—			481
Loans in repayment — delinquent greater than 90 days		640			292			227			129			158			—			1,446
Total	$	7,371		$	6,137		$	6,037		$	4,780		$	8,325		$	5,904			38,554
Unamortized discount																				(796	)
Receivable for partially charged-off loans																				1,347
Allowance for loan losses																				(2,171	)
Total Private Education Loans, net																			$	36,934
Loans in forbearance as a percentage of loans in repayment and forbearance		8.2	%		3.2	%		2.5	%		1.7	%		1.3	%		—	%		3.5	%

(Dollars in millions)	Monthly Scheduled Payments Due															Not Yet in Repayment
December 31, 2011	0 to 12			13 to 24			25 to 36			37 to 48			More than 48						Total
Loans in-school/grace/deferment	$	—		$	—		$	—		$	—		$	—		$	6,522		$	6,522
Loans in forbearance		920			194			126			66			80			—			1,386
Loans in repayment — current		6,866			6,014			5,110			3,486			5,646			—			27,122
Loans in repayment — delinquent 31-60 days		506			212			158			83			117			—			1,076
Loans in repayment — delinquent 61-90 days		245			100			78			41			56			—			520
Loans in repayment — delinquent greater than 90 days		709			317			205			102			134			—			1,467
Total	$	9,246		$	6,837		$	5,677		$	3,778		$	6,033		$	6,522			38,093
Unamortized discount																				(873	)
Receivable for partially charged-off loans																				1,241
Allowance for loan losses																				(2,171	)
Total Private Education Loans, net																			$	36,290
Loans in forbearance as a percentage of loans in repayment and forbearance		10.0	%		2.8	%		2.2	%		1.8	%		1.3	%		—	%		4.4	%

(Dollars in millions)	Monthly Scheduled Payments Due															Not Yet in Repayment
December 31, 2010	0 to 12			13 to 24			25 to 36			37 to 48			More than 48						Total
Loans in-school/grace/deferment	$	—		$	—		$	—		$	—		$	—		$	8,340		$	8,340
Loans in forbearance		980			167			92			47			54			—			1,340
Loans in repayment — current		8,342			5,855			4,037			2,679			3,975			—			24,888
Loans in repayment — delinquent 31-60 days		537			209			117			63			85			—			1,011
Loans in repayment — delinquent 61-90 days		258			92			55			27			39			—			471
Loans in repayment — delinquent greater than 90 days		815			336			156			75			100			—			1,482
Total	$	10,932		$	6,659		$	4,457		$	2,891		$	4,253		$	8,340			37,532
Unamortized discount																				(894	)
Receivable for partially charged-off loans																				1,040
Allowance for loan losses																				(2,022	)
Total Private Education Loans, net																			$	35,656
Loans in forbearance as a percentage of loans in repayment and forbearance		9.0	%		2.5	%		2.1	%		1.6	%		1.3	%		—	%		4.6	%

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The table below stratifies the portfolio of Private Education Loans in forbearance by the cumulative number of months the customer has used forbearance as of the dates indicated. As detailed in the table below, there has been a continuing decline in the average months of forbearance used in our portfolio.

	December 31,
	2012					2011					2010
(Dollars in millions)	Forbearance Balance		% of Total			Forbearance Balance		% of Total			Forbearance Balance		% of Total
Cumulative number of months customer has used forbearance:
Up to 12 months	$	883		78	%	$	887		64	%	$	958		71	%
13 to 24 months		186		16			446		32			343		26
More than 24 months		67		6			53		4			39		3
Total	$	1,136		100	%	$	1,386		100	%	$	1,340		100	%

Private Education Loan Repayment Options

Certain loan programs allow customers to select from a variety of repayment options depending on their loan type and their enrollment/loan status, which include the ability to extend their repayment term or change their monthly payment. The chart below provides the optional repayment offerings in addition to the standard level principal and interest payments as of December 31, 2012.

	Loan Program
(Dollars in millions)	Signature and Other		Smart Option		Career Training		Total
$ in repayment	$	24,261	$	5,774	$	1,479	$	31,514
$ in total	$	29,522	$	7,493	$	1,539	$	38,554
Payment method by enrollment status:
In-school/grace		Deferred(1)		Deferred(1), interest-only or fixed $25/month		Interest- only or fixed $25/month
Repayment		Level principal and interest or graduated		Level principal and interest		Level principal and interest

⁽¹⁾  “Deferred” includes loans for which no payments are required and interest charges are capitalized into the loan balance.

The graduated repayment program that is part of Signature and Other Loans includes an interest-only payment feature that may be selected at the option of the customer. Customers elect to participate in this program at the time they enter repayment following their grace period. This program is available to customers in repayment, after their grace period, who would like a temporary lower payment from the required principal and interest payment amount. Customers participating in this program pay monthly interest with no amortization of their principal balance for up to 48 payments after entering repayment (dependent on the loan product type). The maturity date of the loan is not extended when a customer participates in this program. As of December 31, 2012 and 2011, customers in repayment owing approximately $6.6 billion (21 percent of loans in repayment) and $7.2 billion (24 percent of loans in repayment), respectively, were enrolled in the interest-only program. Of these amounts, 10 percent and 11 percent were non-traditional loans as of December 31, 2012 and 2011, respectively.

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Accrued Interest Receivable

The following table provides information regarding accrued interest receivable on our Private Education Loans. 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 As of December 31,
(Dollars in millions)	Total		Greater than 90 days Past Due		Allowance for Uncollectible Interest
2012	$	904	$	55	$	67
2011	$	1,018	$	54	$	72
2010	$	1,271	$	55	$	94
2009	$	1,165	$	41	$	96
2008	$	1,135	$	29	$	106

FFELP Loan Portfolio Performance

FFELP Loan Delinquencies and Forbearance

The tables below present our FFELP Loan delinquency trends.

	FFELP Loan Delinquencies
	December 31,
	2012						2011						2010
(Dollars in millions)	Balance			%			Balance			%			Balance			%
Loans in-school/grace/deferment(1)	$	17,702					$	22,887					$	28,214
Loans in forbearance(2)		15,902						19,575						22,028
Loans in repayment and percentage of each status:
Loans current		75,499			83.2	%		77,093			81.9	%		80,026			82.8	%
Loans delinquent 31-60 days(3)		4,710			5.2			5,419			5.8			5,500			5.7
Loans delinquent 61-90 days(3)		2,788			3.1			3,438			3.7			3,178			3.3
Loans delinquent greater than 90 days(3)		7,734			8.5			8,231			8.6			7,992			8.2
Total FFELP Loans in repayment		90,731			100	%		94,181			100	%		96,696			100	%
Total FFELP Loans, gross		124,335						136,643						146,938
FFELP Loan unamortized premium		1,436						1,674						1,900
Total FFELP Loans		125,771						138,317						148,838
FFELP Loan allowance for losses		(159	)					(187	)					(189	)
FFELP Loans, net	$	125,612					$	138,130					$	148,649
Percentage of FFELP Loans in repayment					73.0	%					68.9	%					65.8	%
Delinquencies as a percentage of FFELP Loans in repayment					16.8	%					18.1	%					17.2	%
FFELP Loans in forbearance as a percentage of loans in repayment and forbearance					14.9	%					17.2	%					18.6	%

⁽¹⁾  Loans for customers 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 customers who have requested and qualify for other permitted program deferments such as military, unemployment, or economic hardship.

⁽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.

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

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Allowance for FFELP Loan Losses

The following table summarizes changes in the allowance for FFELP Loan losses.

	Years Ended December 31,
(Dollars in millions)	2012			2011			2010
Allowance at beginning of period	$	187		$	189		$	161
Consolidation of securitization trusts(1)		—			—			25
Allowance at beginning of period — total portfolio		187			189			186
Provision for FFELP Loan losses		72			86			98
Charge-offs		(92	)		(78	)		(87	)
Student loan sales		(8	)		(10	)		(8	)
Allowance at end of period	$	159		$	187		$	189
Charge-offs as a percentage of average loans in repayment		.10	%		.08	%		.11	%
Charge-offs as a percentage of average loans in repayment and forbearance		.08	%		.07	%		.09	%
Allowance as a percentage of the ending total loans, gross		.13	%		.14	%		.13	%
Allowance as a percentage of ending loans in repayment		.18	%		.20	%		.20	%
Allowance coverage of charge-offs		1.7			2.4			2.2
Ending total loans, gross	$	124,335		$	136,643		$	146,938
Average loans in repayment	$	91,653		$	94,359		$	82,255
Ending loans in repayment	$	90,731		$	94,181		$	96,696

⁽¹⁾  On January 1, 2010, upon the adoption of the new consolidation accounting guidance, all off-balance sheet loans were consolidated on-balance sheet.

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Liquidity and Capital Resources

Funding and Liquidity Risk Management

The following “Liquidity and Capital Resources” discussion concentrates on our Consumer Lending and FFELP Loans segments. Our Business Services and Other segments require minimal capital and funding.

We define liquidity risk as the potential inability to meet our obligations when they become due without incurring unacceptable losses, such as the ability to fund liability maturities and deposit withdrawals, or invest in future asset growth and business operations at reasonable market rates, as well as the potential inability to fund Private Education Loan originations. Our three primary liquidity needs include our ongoing ability to meet our funding needs for our businesses throughout market cycles, including during periods of financial stress and to avoid any mismatch between the maturity of assets and liabilities, our ongoing ability to fund originations of Private Education Loans and servicing our indebtedness and bank deposits. To achieve these objectives we analyze and monitor our liquidity needs, maintain excess liquidity and access diverse funding sources including the issuance of unsecured debt, the issuance of secured debt primarily through asset backed securitizations and/or other financing facilities and through deposits at the Bank.

We define liquidity as cash and high-quality liquid securities that we can use to meet our funding requirements. Our primary liquidity risk relates to our ability to fund new originations and raise replacement funding at a reasonable cost as our unsecured debt and bank deposits mature. In addition, we must continue to obtain funding at reasonable rates to meet our other business obligations and to continue to grow our business. Key risks associated with our liquidity relate to our ability to access the capital markets and bank deposits and access them at reasonable rates. This ability may be affected by our credit ratings, as well as the overall availability of funding sources in the marketplace. In addition, credit ratings may be important to customers or counterparties when we compete in certain markets and when we seek to engage in certain transactions, including over-the-counter derivatives.

Credit ratings and outlooks are opinions subject to ongoing review by the ratings agencies and may change from time to time based on our financial performance, industry dynamics and other factors. Other factors that influence our credit ratings include the ratings agencies’ assessment of the general operating environment, our relative positions in the markets in which we compete, reputation, liquidity position, the level and volatility of earnings, corporate governance and risk management policies, capital position and capital management practices. A negative change in our credit rating could have a negative effect on our liquidity because it would raise the cost and availability of funding and potentially require additional cash collateral or restrict cash currently held as collateral on existing borrowings or derivative collateral arrangements. It is our objective to improve our credit ratings so that we can continue to efficiently access the capital markets even in difficult economic and market conditions.

We expect to fund our ongoing liquidity needs, including the origination of new Private Education Loans and the repayment of $2.3 billion of senior unsecured notes that mature in the next twelve months, primarily through our current cash and investment portfolio, the issuance of additional bank deposits and unsecured debt, the predictable operating cash flows provided by earnings, the repayment of principal on unencumbered student loan assets and the distributions from our securitization trusts (including servicing fees which are priority payments within the trusts). We may also draw down on our FFELP ABCP Facilities and the facility with the Federal Home Loan Bank in Des Moines (the “FHLB-DM Facility”); and we may also issue term ABS.

Currently, new Private Education Loan originations are initially funded through deposits and subsequently securitized to term. We have $1.6 billion of cash at the Bank as of December 31, 2012 available to fund future originations. We no longer originate FFELP Loans and therefore no longer have liquidity requirements for new FFELP Loan originations.

We will continue to opportunistically purchase FFELP Loan portfolios from others. Additionally, we still expect to redeem all remaining FFELP Loans we currently finance in the ED Conduit Program on or before the program’s anticipated January 19, 2014, maturity date (the “ED Maturity Date”). We plan to rely primarily on securitizing these loans to term through securitization trusts. However, existing FFELP ABCP and FHLB-DM Facility capacities, as well as additional capital markets funding sources may be needed to complete our objectives on a timely basis.

Since December 31, 2010, we have refinanced approximately $9.4 billion in principal amount of our FFELP Loans previously financed through the ED Conduit Program, most being funded to term through the use of securitization trusts. As of December 31, 2012, we have $9.5 billion in principal amount of FFELP Loans remaining in the ED Conduit Program. If we cannot obtain sufficient cost-effective funding to finance any or all of the FFELP Loans remaining in the ED Conduit Program on or before the ED Maturity Date, any remaining FFELP Loans still in the program must be put to ED at 97 percent of their principal balance which results in us forfeiting three percent of the principal amount of those loans. In addition, we will also no longer collect future servicing revenues or interest income on any loans put to ED.

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Sources of Liquidity and Available Capacity

Ending Balances

	December 31,
(Dollars in millions)	2012		2011
Sources of primary liquidity:
Unrestricted cash and liquid investments:
Holding Company and other non-bank subsidiaries	$	2,376	$	1,403
Sallie Mae Bank(1)		1,598		1,462
Total unrestricted cash and liquid investments	$	3,974	$	2,865
Unencumbered FFELP Loans	$	1,656	$	994

Average Balances

	Years Ended December 31,
(Dollars in millions)	2012		2011		2010
Sources of primary liquidity:
Unrestricted cash and liquid investments:
Holding Company and other non-bank subsidiaries	$	2,386	$	2,474	$	3,877
Sallie Mae Bank(1)		913		1,244		2,295
Total unrestricted cash and liquid investments	$	3,299	$	3,718	$	6,172
Unencumbered FFELP Loans	$	1,218	$	1,399	$	1,897

⁽¹⁾  This cash will be used primarily to originate or acquire student loans at the Bank. See discussion below on restrictions on the Bank to pay dividends.

Liquidity may also be available under secured credit facilities to the extent we have eligible collateral and capacity available. Maximum borrowing capacity under the FFELP ABCP Facility and FHLB-DM Facility will vary and be subject to each agreement’s borrowing conditions, including, among others, facility size, current usage and availability of qualifying collateral from unencumbered FFELP Loans. As of December 31, 2012 and 2011, the maximum additional capacity under these facilities was $11.8 billion and $11.3 billion, respectively. For the years ended December 31, 2012, 2011 and 2010, the average maximum additional capacity under these facilities was $11.3 billion, $11.4 billion and $12.9 billion, respectively.

We also hold a number of other unencumbered assets, consisting primarily of Private Education Loans and other assets. Total unencumbered student loans, net, comprised $12.1 billion of our unencumbered assets of which $10.4 billion and $1.7 billion related to Private Education Loans, net and FFELP Loans, net, respectively. At December 31, 2012, we had a total of $21.2 billion of unencumbered assets inclusive of those described above as sources of primary liquidity and exclusive of goodwill and acquired intangible assets.

The Bank’s ability to pay dividends is subject to the laws of Utah and the regulations of the FDIC. Generally, under Utah’s industrial bank laws and regulations as well as FDIC regulations, the Bank may pay dividends from its net profits without regulatory approval if, following the payment of the dividend, the Bank’s capital and surplus would not be impaired. While applicable Utah and FDIC regulations differ in approach as to determinations of impairment of capital and surplus, neither method of determination has historically required the Bank to obtain consent to the payment of dividends. For the years ended December 31, 2012, 2011 and 2010, the Bank paid dividends of $420 million, $100 million and $400 million, respectively.

For further discussion of our various sources of liquidity, such as the ED Conduit Program, the Bank, our continued access to the ABS market, our asset-backed financing facilities, the lending agreement we entered into with the FHLB-DM and our issuance of unsecured debt, see “Note 6 — Borrowings.”

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The following table reconciles encumbered and unencumbered assets and their net impact on total tangible equity.

	December 31,
(Dollars in billions)	2012			2011
Net assets of consolidated variable interest entities (encumbered assets) — FFELP Loans	$	6.6		$	7.4
Net assets of consolidated variable interest entities (encumbered assets) — Private Education Loans		6.6			5.5
Tangible unencumbered assets(1)		21.2			20.2
Unsecured debt		(26.7	)		(24.1	)
Mark-to-market on unsecured hedged debt(2)		(1.7	)		(1.9	)
Other liabilities, net		(1.4	)		(2.3	)
Total tangible equity	$	4.6		$	4.8

⁽¹⁾  Excludes goodwill and acquired intangible assets.

⁽²⁾  At December 31, 2012 and 2011, there were $1.4 billion and $1.6 billion, respectively, of net gains on derivatives hedging this debt in unencumbered assets, which partially offset these losses.

2012 Transactions

On January 13, 2012, the FFELP ABCP Facility was amended to increase the amount available to $7.5 billion, reflecting an increase of $2.5 billion over the previously scheduled facility reduction. In addition, the amendment extends the final maturity date by one year to January 9, 2015 and increases the amount available at future step-down dates.

In 2012, we issued $9.7 billion of FFELP ABS in eight separate transactions and $4.2 billion of Private Education Loan ABS in five separate transactions.

Unsecured Financings:

• January 27, 2012 — issued $1.5 billion senior unsecured debt, consisting of a $750 million five-year term bond and a $750 million ten-year term bond.

• June 18, 2012 — issued $350 million unsecured debt with an average life of 4.5 years.

• September 12, 2012 — issued an $800 million senior unsecured bond, consisting of a $300 million three-year term bond and $500 million five-year term bond.

Shareholder Distributions

On January 26, 2012, we increased our quarterly dividend on our common stock to $0.125 per common share. We paid our quarterly dividend on March 16, 2012, June 15, 2012, September 12, 2012 and December 21, 2012. During 2012, we repurchased 58.0 million shares for an aggregate purchase price of $900 million. In 2011, we repurchased 19.1 million shares of common stock at an aggregate price of $300 million.

On February 5, 2013, we increased our quarterly dividend on our common stock from $0.125 per common share to $0.15 per common share. The next quarterly dividend will be paid on March 15, 2013 to shareholders of record at the close of business on March 1, 2013. The Board of Directors also authorized a $400 million share repurchase program for our outstanding common stock. The program does not have an expiration date.

2013 Sale of FFELP Securitization Trust Residual Interest

We sold the Residual Interest in a FFELP Consolidation Loan securitization trust to a third party in February 2013. We will continue to service the student loans in the trust under existing agreements. The sale will remove student loan assets of $3.8 billion and related liabilities of $3.7 billion from our balance sheet. A pre-tax gain of approximately $55 million from the transaction will be recognized in the first quarter of 2013.

Counterparty Exposure

Counterparty exposure related to financial instruments arises from the risk that a lending, investment or derivative counterparty will not be able to meet its obligations to us. Risks associated with our lending portfolio are discussed in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Consumer Lending Portfolio Performance” and “— FFELP Loan Portfolio Performance.”

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Our investment portfolio is composed of very short-term securities issued by a diversified group of highly rated issuers, limiting our counterparty exposure. Additionally, our investing activity is governed by Board approved limits on the amount that is allowed to be invested with any one issuer based on the credit rating of the issuer, further minimizing our counterparty exposure. Counterparty credit risk is considered when valuing investments and considering impairment.

Related to derivative transactions, protection against counterparty risk is generally provided by International Swaps and Derivatives Association, Inc. (“ISDA”) Credit Support Annexes (“CSAs”). CSAs require a counterparty to post collateral if a potential default would expose the other party to a loss. All derivative contracts entered into by SLM Corporation and the Bank are covered under such agreements and require collateral to be exchanged based on the net fair value of derivatives with each counterparty. Our securitization trusts require collateral in all cases if the counterparty’s credit rating is withdrawn or downgraded below a certain level. Additionally, securitizations involving foreign currency notes issued after November 2005 also require the counterparty to post collateral to the trust based on the fair value of the derivative, regardless of credit rating. The trusts are not required to post collateral to the counterparties. In all cases, our exposure is limited to the value of the derivative contracts in a gain position net of any collateral we are holding. We consider counterparties’ credit risk when determining the fair value of derivative positions on our exposure net of collateral.

We have liquidity exposure related to collateral movements between us and our derivative counterparties. Movements in the value of the derivatives, which are primarily affected by changes in interest rate and foreign exchange rates, may require us to return cash collateral held or may require us to access primary liquidity to post collateral to counterparties. If our credit ratings are downgraded from current levels, we may be required to segregate additional unrestricted cash collateral into restricted accounts.

The table below highlights exposure related to our derivative counterparties at December 31, 2012.

(Dollars in millions)	SLM Corporation and Sallie Mae Bank Contracts			Securitization Trust Contracts
Exposure, net of collateral(1)	$	79		$	889
Percent of exposure to counterparties with credit ratings below S&P AA- or Moody’s Aa3		87	%		37	%
Percent of exposure to counterparties with credit ratings below S&P A- or Moody’s A3		0	%		0	%

⁽¹⁾  Recent turmoil in the European markets has led to increased disclosure of exposure to those markets. Our securitization trusts had total net exposure of $764 million related to financial institutions located in France; of this amount, $555 million carries a guaranty from the French government. The total exposure relates to $6.4 billion notional amount of cross-currency interest rate swaps held in our securitization trusts, of which $3.6 billion notional amount carries a guaranty from the French government. Counterparties to the cross currency interest rate swaps are required to post collateral when their credit rating is withdrawn or downgraded below a certain level. As of December 31, 2012, no collateral was required to be posted and we are not holding any collateral related to these contracts. Adjustments are made to our derivative valuations for counterparty credit risk. The adjustments made at December 31, 2012 related to derivatives with French financial institutions (including those that carry a guaranty from the French government) decreased the derivative asset value by $94 million. Credit risks for all derivative counterparties are assessed internally on a continual basis.

45

“Core Earnings” Basis Borrowings

The following tables present the ending balances of our “Core Earnings” basis borrowings at December 31, 2012, 2011 and 2010, and average balances and average interest rates of our “Core Earnings” basis borrowings for the years ended December 31, 2012, 2011 and 2010. The average interest rates include derivatives that are economically hedging the underlying debt but do not qualify for hedge accounting treatment. (See “‘Core Earnings’ — Definition and Limitations — Differences between ‘Core Earnings’ and GAAP — Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities” of this Item 7).

Ending Balances

	December 31, 2012						December 31, 2011						December 31, 2010
(Dollars in millions)	Short Term		Long Term		Total		Short Term		Long Term		Total		Short Term		Long Term		Total
Unsecured borrowings:
Senior unsecured debt	$	2,319	$	15,446	$	17,765	$	1,801	$	15,199	$	17,000	$	4,361	$	15,742	$	20,103
Brokered deposits		979		3,088		4,067		1,733		1,956		3,689		1,387		3,160		4,547
Retail and other deposits		3,247		—		3,247		2,123		—		2,123		1,370		—		1,370
Other(1)		1,609		—		1,609		1,329		—		1,329		887		—		887
Total unsecured borrowings		8,154		18,534		26,688		6,986		17,155		24,141		8,005		18,902		26,907
Secured borrowings:
FFELP Loan securitizations		—		105,525		105,525		—		107,905		107,905		—		113,671		113,671
Private Education Loan securitizations		—		19,656		19,656		—		19,297		19,297		—		21,409		21,409
ED Conduit Program Facility		9,551		—		9,551		21,313		—		21,313		24,484		—		24,484
ED Participation Program Facility		—		—		—		—		—		—		—		—		—
FFELP ABCP Facility		—		4,154		4,154		—		4,445		4,445		—		5,853		5,853
Private Education Loan ABCP Facility		—		1,070		1,070		—		1,992		1,992		—		—		—
Acquisition financing(2)		—		673		673		—		916		916		—		1,064		1,064
FHLB-DM Facility		2,100		—		2,100		1,210		—		1,210		900		—		900
Total secured borrowings		11,651		131,078		142,729		22,523		134,555		157,078		25,384		141,997		167,381
Total “Core Earnings” basis		19,805		149,612		169,417		29,509		151,710		181,219		33,389		160,899		194,288
Hedge accounting adjustments		51		2,789		2,840		64		2,683		2,747		227		2,644		2,871
Total GAAP basis	$	19,856	$	152,401	$	172,257	$	29,573	$	154,393	$	183,966	$	33,616	$	163,543	$	197,159

⁽¹⁾  “Other” primarily consists of the obligation to return cash collateral held related to derivative exposure.

⁽²⁾  Relates to the acquisition of $25 billion of student loans at the end of 2010.

46

Secured borrowings comprised 84 percent of our “Core Earnings” basis debt outstanding at December 31, 2012 versus 87 percent at December 31, 2011.

	Years Ended December 31,
	2012					2011						2010
(Dollars in millions)	Average Balance		Average Rate			Average Balance			Average Rate			Average Balance		Average Rate
Unsecured borrowings:
Senior unsecured debt	$	18,183		2.98	%	$	19,562	��		2.34	%	$	24,480		1.70	%
Brokered deposits		3,293		1.86			3,660			2.35			5,123		2.65
Retail and other deposits		2,460		.85			1,684			1.11			644		1.16
Other(1)		1,474		.21			1,187			.17			1,159		.19
Total unsecured borrowings		25,410		2.47			26,093			2.16			31,406		1.79
Secured borrowings:
FFELP Loan securitizations		106,493		1.08			110,474			.93			100,967		.87
Private Education Loan securitizations		19,322		2.10			20,976			2.17			21,367		2.13
ED Conduit Program Facility		16,118		.82			22,869			.75			15,096		.70
ED Participation Program Facility		—		—			—			—			13,537		.81
FFELP ABCP Facility		4,733		1.03			4,989			1.05			6,623		1.24
Private Education Loan ABCP Facility		1,880		1.77			272			2.08			—		—
Acquisition financing(2)		791		4.83			998			4.81			3		5.28
FHLB-DM Facility		1,481		.34			893			.25			403		.35
Total secured borrowings		150,818		1.20			161,471			1.09			157,996		1.03
Total	$	176,228		1.39	%	$	187,564			1.24	%	$	189,402		1.16	%
“Core Earnings” average balance and rate	$	176,228		1.39	%	$	187,564			1.24	%	$	189,402		1.16	%
Adjustment for GAAP accounting treatment		—		.06			—			.04			—		.04
GAAP-basis average balance and rate	$	176,228		1.45	%	$	187,564			1.28	%	$	189,402		1.20	%

⁽¹⁾  “Other” primarily consists of the obligation to return cash collateral held related to derivative exposure.

⁽²⁾  Relates to the acquisition of $25 billion of student loans at the end of 2010.

Contractual Cash Obligations

The following table provides a summary of our contractual principal obligations associated with long-term notes at December 31, 2012. For further discussion of these obligations, see “Note 6 — Borrowings.”

(Dollars in millions)	1 Year or Less		1 to 3 Years		3 to 5 Years		Over 5 Years		Total
Long-term notes:
Senior unsecured debt	$	—	$	4,018	$	4,100	$	7,328	$	15,446
Unsecured term bank deposits		—		2,446		642		—		3,088
Secured borrowings(1)		13,655		25,056		19,950		72,417		131,078
Total contractual cash obligations(2)	$	13,655	$	31,520	$	24,692	$	79,745	$	149,612

⁽¹⁾  Includes long-term beneficial interests of $125.2 billion of notes issued by consolidated VIEs in conjunction with our securitization transactions and included in long-term notes in the consolidated balance sheet. Timing of obligations is estimated based on our current projection of prepayment speeds of the securitized assets.

⁽²⁾  The aggregate principal amount of debt that matures in each period is $13.7 billion, $31.6 billion, $24.9 billion and $80.3 billion, respectively. Specifically excludes derivative market value adjustments of $2.8 billion for long-term notes. Interest obligations on notes are predominantly variable in nature, resetting monthly and quarterly based on LIBOR.

Unrecognized tax benefits were $33 million and $40 million for the years ended December 31, 2012 and 2011, respectively. For additional information, see “Note 15 — Income Taxes.”

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America

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(“GAAP”). “Note 2 — Significant Accounting Policies” includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. 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. Actual results may differ from these estimates under varying assumptions or conditions. On a quarterly basis, management evaluates its estimates, particularly those that include the most difficult, subjective or complex judgments and are often about matters that are inherently uncertain. The most significant judgments, estimates and assumptions relate to the following critical accounting policies that are discussed in more detail below.

Allowance for Loan Losses

In determining the allowance for loan losses on our non-TDR portfolio, 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) and how much we expect to recover over time related to the defaulted amount. Expected defaults less our expected recoveries equal the allowance related to this portfolio. Our historical experience indicates that, on average, the time between the date that a customer experiences a default causing event (i.e., the loss trigger event) and the date that we charge off the unrecoverable portion of that loan is two years. Separately, for our TDR portfolio, we estimate an allowance amount sufficient to cover life-of-loan expected losses through an impairment calculation based on the difference between the loan’s basis and the present value of expected future cash flows (which would include life-of-loan default and recovery assumptions) discounted at the loan’s original effective interest rate (see “Allowance for Private Education Loan Losses” in “Note 2 — Significant Accounting Policies”). The separate allowance estimates for our TDR and non-TDR portfolios are combined into our total allowance for Private Education Loan losses.

In estimating both the non-TDR and TDR allowance amounts, we start with historical experience of customer default behavior. We make judgments about which historical period to start with and then make further judgments about whether that historical experience is representative of future expectations and whether additional adjustments may be needed to those historical default rates. We also take the economic environment into consideration when calculating the allowance for loan losses. We analyze key economic statistics and the effect we expect them to have on future defaults. Key economic statistics analyzed as part of the allowance for loan losses are unemployment rates and other asset type delinquency rates. More judgment has been required over the last several years, compared with years prior, in light of the recent downturn in the U.S. economy and high levels of unemployment and its effect on our customers’ ability to pay their obligations.

Our allowance for loan losses is estimated using an analysis of delinquent and current accounts. Our model is used to estimate the likelihood that a loan receivable may progress through the various delinquency stages and ultimately charge off. The evaluation of the allowance for loan losses is inherently subjective, as it requires material estimates that may be susceptible to significant changes. The estimate for the allowance for loan losses is subject to a number of assumptions. If actual future performance in delinquency, charge-offs and recoveries are significantly different than estimated, this could materially affect our estimate of the allowance for loan losses and the related provision for loan losses on our income statement.

We determine the collectability of our Private Education Loan portfolio by evaluating certain risk characteristics. We consider school type, credit score (FICO), existence of a cosigner, loan status and loan seasoning as the key credit quality indicators because they have the most significant effect on our determination of the adequacy of our allowance for loan losses. The type of school customers attend can have an impact on their job prospects after graduation and therefore affects their ability to make payments. Credit scores are an indicator of the credit worthiness of a customer and the higher the credit score the more likely it is the customer will be able to make all of their contractual payments. Loan status affects the credit risk because a past due loan is more likely to result in a credit loss than an up-to-date loan. Additionally, loans in a deferred payment status have different credit risk profiles compared with those in current pay status. Loan seasoning affects credit risk because a loan with a history of making payments generally has a lower incidence of default than a loan with a history of making infrequent or no payments. The existence of a cosigner lowers the likelihood of default. We monitor and update these credit quality indicators in the analysis of the adequacy of our allowance for loan losses on a quarterly basis.

To estimate the probable credit losses incurred in the loan portfolio at the reporting date, we use historical experience of customer payment behavior in connection with the key credit quality indicators and incorporate management expectations regarding macroeconomic and collection procedure factors. Our model is based upon the most recent six months of actual collection experience, adjusted for seasonality, 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 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. Similar to estimating defaults, we use historical customer payment behavior to estimate the timing and amount of future recoveries on charged-off loans. We use judgment in determining whether historical performance is representative of what we expect to collect in the future. We then apply the default and collection rate projections to each category of loans. Once the quantitative calculation is performed, we review the adequacy of the allowance for loan losses and determine if qualitative adjustments need to be considered. Additionally, we consider changes in laws and regulations that could potentially impact the allowance for loan losses. More judgment has been required over the last several years, compared with years prior, in light of the U.S. economy and its effect on our customers’ ability to pay their obligations. We believe that our model reflects recent customer behavior, loan performance, and collection performance, as well as expectations about economic factors.

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Similar to the rules governing FFELP payment requirements, our collection policies allow for periods of nonpayment for customers requesting additional payment grace periods upon leaving school or experiencing temporary difficulty meeting payment obligations. This is referred to as forbearance status and is considered separately in our allowance for loan losses. The loss confirmation period is in alignment with our typical collection cycle and takes into account these periods of nonpayment.

On July 1, 2011, we adopted new guidance that clarified when a loan restructuring constitutes a TDR. In applying the new guidance we determined that certain Private Education Loans for which we grant forbearance of greater than three months should be classified as troubled debt restructurings. If a loan meets the criteria for troubled debt accounting then an allowance for loan losses is established which represents the present value of the losses that are expected to occur over the remaining life of the loan. This accounting results in a higher allowance for loan losses than our previously established allowance for these loans as our previous allowance for these loans represented an estimate of charge-offs expected to occur over the next two years (two years being our loss confirmation period). The new accounting guidance was effective as of July 1, 2011 but was required to be applied retrospectively to January 1, 2011. This resulted in $124 million of additional provision for loan losses in the third quarter of 2011 from approximately $3.8 billion of student loans being classified as troubled debt restructurings. This new accounting guidance is only applied to certain customers who use their fourth or greater month of forbearance during the time period this new guidance is effective. This new accounting guidance has the effect of accelerating the recognition of expected losses related to our Private Education Loan portfolio. The increase in the provision for losses as a result of this new accounting guidance does not reflect a decrease in credit expectations of the portfolio or an increase in the expected life-of-loan losses related to this portfolio. We believe forbearance is an accepted and effective collections and risk management tool for Private Education Loans. We plan to continue to use forbearance and as a result, we expect to have additional loans classified as troubled debt restructurings in the future (see “Note 4 — Allowance for Loan Losses” for a further discussion on the use of forbearance as a collection tool).

FFELP Loans are insured as to their principal and accrued interest in the event of default subject to a Risk Sharing level based on the date of loan disbursement. These insurance obligations are supported by contractual rights against the United States. For loans disbursed after October 1, 1993, and before July 1, 2006, we receive 98 percent reimbursement on all qualifying default claims. For loans disbursed on or after July 1, 2006, we receive 97 percent reimbursement. For loans disbursed prior to October 1, 1993, we receive 100 percent reimbursement.

The allowance for FFELP Loan losses uses historical experience of customer default behavior and a two year loss confirmation period to estimate the credit losses incurred in the loan portfolio at the reporting date. We apply the default rate projections, net of applicable Risk Sharing, to each category for the current period to perform our quantitative calculation. Once the quantitative calculation is performed, we review the adequacy of the allowance for loan losses and determine if qualitative adjustments need to be considered.

Premium and Discount Amortization

The most judgmental estimate for premium and discount amortization on student loans is the Constant Prepayment Rate (“CPR”), which measures the rate at which loans in the portfolio pay down principal compared to their stated terms. Loan consolidation, default, term extension and other prepayment factors affecting our CPR estimates are affected by changes in our business strategy, changes in our competitor’s business strategies, legislative changes, interest rates and changes to the current economic and credit environment. When we determine the CPR we begin with historical prepayment rates due to consolidation activity, defaults, payoffs and term extensions from the utilization of forbearance. We make judgments about which historical period to start with and then make further judgments about whether that historical experience is representative of future expectations and whether additional adjustment may be needed to those historical prepayment rates.

In the past the consolidation of FFELP Loans and Private Education Loans significantly affected our CPRs and updating those assumptions often resulted in material adjustments to our amortization expense. As a result of the passage of HCERA, there is no longer the ability to consolidate under the FFELP. In addition, due to the current U.S. economic and credit environment, we, as well as many other industry competitors, have suspended our Private Education Loans consolidation program. As a result, we do not expect to consolidate FFELP Loans in the future and do not currently expect others to actively consolidate our FFELP loans. As a result, we expect CPRs related to our FFELP Loans to remain relatively stable over time. See “Business Segment Earnings Summary — ‘Core Earnings’ Basis — FFELP Loans Segment” of this Item 7, for discussion of the impact of a recent Special Direct Consolidation Loan Initiative in 2012. We expect that in the future both we and our competitors will begin to consolidate Private Education Loans. This is built into the CPR assumption we use for Private Education Loans. However, it is difficult to accurately project the timing and level at which this consolidation activity will begin and our assumption may need to be updated by a material amount in the future based on changes in the economy and marketplace. The level of defaults is a significant component of our FFELP Loan and Private Education Loan CPR. This component of the FFELP Loan and Private Education Loan CPR is estimated in the same manner as discussed in “Critical Accounting Policies and Estimates — Allowance for Loan Losses” of this Item 7 — the only difference is for premium and discount amortization purposes the estimate of defaults is a life-of-loan estimate whereas for allowance for loan losses it is a two-year estimate.

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Fair Value Measurement

The most significant assumptions used in fair value measurements, including those related to credit and liquidity risk, are as follows:

1. Investments— Our investments primarily consist of overnight/weekly maturity instruments with high credit quality counterparties. However, we consider credit and liquidity risk involving specific instruments in determining their fair value and, when appropriate, have adjusted the fair value of these instruments for the effect of credit and liquidity risk. These assumptions have further been validated by the successful maturity of these investments in the period immediately following the end of the reporting period.

2. Derivatives — When determining the fair value of derivatives, we take into account counterparty credit risk for positions where we are exposed to the counterparty on a net basis by assessing exposure net of collateral held. The net exposure for each counterparty is adjusted based on market information available for that specific counterparty, including spreads from credit default swaps. Additionally, when the counterparty has exposure to us related to our derivatives, we fully collateralize the exposure, minimizing the adjustment necessary to the derivative valuations for our own credit risk. Trusts that contain derivatives are not required to post collateral to counterparties as the credit quality and securitized nature of the trusts minimizes any adjustments for the counterparty’s exposure to the trusts. Adjustments related to credit risk reduced the overall value of our derivatives by $111 million as of December 31, 2012. We also take into account changes in liquidity when determining the fair value of derivative positions. We adjusted the fair value of certain less liquid positions downward by approximately $107 million to take into account a significant reduction in liquidity as of December 31, 2012, related primarily to basis swaps indexed to interest rate indices with inactive markets. A major indicator of market inactivity is the widening of the bid/ask spread in these markets. In general, the widening of counterparty credit spreads and reduced liquidity for derivative instruments as indicated by wider bid/ask spreads will reduce the fair value of derivatives. In addition, certain cross-currency interest rate swaps hedging foreign currency denominated reset rate and amortizing notes in our trusts contain extension features that coincide with the remarketing dates of the notes. The valuation of the extension feature requires significant judgment based on internally developed inputs.

3. Student Loans— Our FFELP Loans and Private Education Loans are accounted for at cost or at the lower of cost or fair value if the loan is held-for-sale. The fair values of our student loans are disclosed in “Note 13 — Fair Value Measurements.” For both FFELP Loans and Private Education Loans accounted for at cost, fair value is determined by modeling loan level cash flows using stated terms of the assets and internally-developed assumptions to determine aggregate portfolio yield, net present value and average life. The significant assumptions used to project cash flows are prepayment speeds, default rates, cost of funds, the amount funded by debt versus equity, and required return on equity. In addition, the Floor Income component of our FFELP Loan portfolio is valued through discounted cash flow and option models using both observable market inputs and internally developed inputs. Significant inputs into the models are not generally market observable. They are either derived internally through a combination of historical experience and management’s qualitative expectation of future performance (in the case of prepayment speeds, default rates, and capital assumptions) or are obtained through external broker quotes (as in the case of cost of funds). When possible, market transactions are used to validate the model. In most cases, these are either infrequent or not observable. For FFELP Loans classified as held-for-sale and accounted for at the lower of cost or market, the fair value is based on the committed sales price of the various loan purchase programs established by ED.

For further information regarding the effect of our use of fair values on our results of operations, see “Note 13 — Fair Value Measurements.”

Transfers of Financial Assets and the Variable Interest Entity (“VIE”) Consolidation Model

If we have a variable interest in a Variable Interest Entity (“VIE”) and we have determined that we are the primary beneficiary of the VIE then we will consolidate the VIE. We are considered the primary beneficiary if we have both: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses or receive benefits of the entity that could potentially be significant to the VIE. There can be considerable judgment that has to be used as it relates to determining the primary beneficiary of the VIEs with which we are associated. There are no “bright line” tests. Rather, the assessment of who has the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance and who has the obligation to absorb losses or receive benefits of the entity that could potentially be significant to the VIE can be very qualitative and judgmental in nature. However, based on our current relationship with our securitization trusts and other financing vehicles which are considered VIEs, we believe the assessment is more straightforward. As it relates to our securitized assets, we are the servicer of those securitized assets (which means we “have the power” to direct the activities of the trust) and we own the Residual

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Interest (which means we “have the loss and gain obligation that could potentially be significant to the VIE”) of the securitization trusts. As a result, we are the primary beneficiary of our securitization trusts and other financing vehicles. See “Note 2 — Significant Accounting Policies” for further details.

Derivative Accounting

The most significant judgments related to derivative accounting are: (1) concluding the derivative is an effective hedge and qualifies for hedge accounting and (2) determining the fair value of certain derivatives and hedged items. To qualify for hedge accounting a derivative must be concluded to be a highly effective hedge upon designation and on an ongoing basis. There are no “bright line” tests on what is considered a highly effective hedge. We use a historical regression analysis to prove ongoing and prospective hedge effectiveness. See previous discussion under “Critical Accounting Policies and Estimates — Fair Value Measurement” of this Item 7 for significant judgments related to the valuation of derivatives. Although some of our valuations are more judgmental than others, we compare the fair values of our derivatives that we calculate to those provided by our counterparties on a monthly basis. We view this as a critical control which helps validate these judgments. Any significant differences with our counterparties are identified and resolved appropriately.

Goodwill and Intangible Assets

In determining annually (or more frequently if required) whether goodwill is impaired, we first assess qualitative factors to determine whether it is “more-likely-than-not” that the fair value of a reporting unit, which is the same as or one level below a business segment, is less than its carrying amount as a basis for determining whether it is necessary to perform additional goodwill impairment testing. The “more-likely-than-not” threshold is defined as having a likelihood of more than 50 percent. If this “more-likely-than-not” threshold is met, then we will complete a quantitative goodwill impairment analysis which consists of a comparison of the fair value of the reporting unit to our carrying value, including goodwill. If the carrying value of the reporting unit exceeds the fair value, a goodwill impairment analysis will be performed to measure the amount of impairment loss, if any. If we determine that this event has occurred, we perform an analysis to determine the fair value of the business unit. There are significant judgments involved in determining the fair value of a business unit, including assumptions regarding estimates of future cash flows from existing and new business activities, customer relationships, the value of existing customer contracts, the value of other tangible and intangible assets, as well as assumptions regarding what we believe a third party would be willing to pay for all of the assets and liabilities of the business unit. This calculation requires us to estimate the appropriate discount and growth rates to apply to those projected cash flows and the appropriate control premium to apply to arrive at the final fair value. The business units for which we must estimate the fair value are not publicly traded and often there is not comparable market data available for that individual business to aid in its valuation. We use a third party appraisal firm to provide an opinion on the fair values we conclude upon.

Risk Management

Our Approach

The products and services we provide, as well as the financial markets in which we participate, continue to undergo dramatic competitive, operational, technological and regulatory changes. Identifying, understanding, and effectively managing the risks inherent in our business is critical to our continued success. Risk oversight, management and assessment responsibilities are clearly assigned and documented, reviewed and coordinated at various levels of our organization. We maintain comprehensive risk management practices to identify, measure, monitor, evaluate, control, and report on our significant risks.

Risk Oversight

Our Board of Directors and its standing committees oversee our overall strategic direction, including setting our risk management philosophy, tolerance and parameters; and establishing procedures for assessing the risks our businesses face as well as the risk management practices our management team develop and utilize. We escalate to our Board any significant departures from established tolerances and parameters and review new and emerging risks with them.

In 2012 our Board and senior management took significant steps to further enhance, formalize and centralize our existing enterprise risk management activities. We expect these efforts to continue into 2013 and beyond and to further evolve as our Bank achieves “large bank” status under the Dodd-Frank Act. The steps taken in 2012 included:

• The addition of a new, extended meeting of our Board focused exclusively on Sallie Mae’s strategic direction and priorities. This meeting will occur annually and in advance of management’s development and presentation of its business plan for the following fiscal year.

• The development and, then, adoption in early 2013 of a formal Risk Appetite Framework which reinforces our commitment to an organized enterprise risk management program that identifies, measures, monitors, reports and escalates risks to our senior management and Board in line with developed and agreed risk profiles, tolerances and escalation mechanisms.

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• The initial development and testing of a strategy and stress testing tool designed to overlay our previously existing, well-developed financial, credit and operational models that can evolve to provide Sallie Mae and the Bank with the capability to more rapidly analyze key risks in light of actual or assumed changes in strategy, economic conditions, and asset, liability and portfolio performance.

• Enhancement to our existing incentive compensation plan risk oversight policies and procedures which included the following: the creation of a new committee, the Corporate Incentive Compensation Plan Committee, to oversee our incentive compensation plans; enhancements to our incentive compensation plan governance policy, which among other items, require appropriate risk mitigation elements in our incentive compensation plans and annual review of the effectiveness of such plans; and increase in coverage of plans during our annual risk review.

Risk Management Philosophy

Our risk management philosophy is to do all we can to ensure all significant risks inherent in our business can be identified, measured, monitored, evaluated, controlled and reported. In furtherance of these goals, we seek to (i) maintain a comprehensive and uniform risk management framework; (ii) maintain accountability and ownership at the business segment level for risks to which they are exposed; (iii) provide appropriate reporting tools to management and the Board and its committees; and (iv) reinforce this philosophy to our employees.

Risk Management Roles and Responsibilities

Responsibility for risk management is held at several different levels of our organization, including our Board and its committees. Each business area within our organization is primarily responsible for managing its specific risks utilizing formalized processes and procedures developed in collaboration with our executive management team and internal risk management partners. Our compliance, credit, human resources, legal, information technology, finance and accounting, and information security groups, are responsible for providing our business segments with the training, systems and specialized expertise necessary to properly perform their risk management responsibilities.

Board of Directors. Our Board, directly and through its standing committees, is responsible for overseeing our overall strategic direction and risk management approach. The Board approves our annual business plan, periodically reviews our strategic approach and priorities and spends significant time considering our capital requirements and our dividend and share repurchase levels and activities. Standing committees of our Board include Executive, Audit, Compensation and Personnel, Nominations and Governance, Finance and Operations, Preferred Stock and Strategy Committees. Charters for each committee providing their specific responsibilities and areas of risk oversight are published atwww.salliemae.com under “Investors-Corporate Governance.” Additional information regarding their activities and responsibilities will also be contained in the Corporate Governance section of our Proxy Statement to be filed on Schedule 14A relating to our Annual Meeting of Shareholders scheduled to be held on May 30, 2013 and is incorporated herein by reference.

Chief Executive Officer. Our Chief Executive Officer is ultimately responsible for ensuring proper oversight, management and reporting to Board regarding our risk management practices and the timely escalation of any significant issues. Our Chief Executive Officer is responsible for establishing our risk management culture and ensuring business areas operate within directed risk parameters and in accordance with our annual business plan.

Internal Risk Oversight Committees. We have a number of standing management committees dedicated to oversight of various risks relating to our business. In 2012, we formed the Corporate Incentive Compensation Plan Committee and in 2013 we will initiate an additional senior-executive level committee, the Enterprise Risk Committee. Both committees have broader risk oversight agendas and responsibilities. Below is a description of our key internal risk management committees.

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Enterprise Risk Committee. As part of the adoption of our formal Risk Appetite Framework, we recently formed an Enterprise Risk Committee to more efficiently assist our Chief Executive Officer in the execution of his risk responsibilities. This committee is an executive management-level committee that will provide a forum for our senior management team to review and discuss our significant risks, receive periodic reports on adherence to agreed risk parameters and continue to supervise the evolution of our enterprise risk management program. Committee membership consists of our Chief Executive Officer, President and Chief Operating Officer, Executive Vice President and General Counsel, Executive Vice President and Chief Financial Officer, Executive Vice President and Chief Marketing Officer, Executive Vice President — Administration, Chief Credit Officer, Chief Compliance Officer and the Chief Audit Officer (in a non-voting capacity). The predominance of committee members are direct reports to our Chief Executive Officer. The committee will meet at least six times per year in advance of each regularly scheduled Board meeting and more frequently as may needed to address particular issues.

Corporate Incentive Compensation Plan Committee. Our Corporate Incentive Compensation Plan Committee is comprised of a cross-functional team of senior officers from human resources, risk and legal who oversee our incentive compensation plans. The committee’s responsibilities include ensuring that our incentive compensation plans do not incent our employees to take inappropriate risks which could impact our financial position and controls, reputation and operations; reviewing the annual risk assessment of our incentive compensation plans conducted by our Chief Compliance Officer and Chief Credit Officer; and developing policies and procedures for the development and approval of new incentive compensation plans in line with our business goals and within acceptable risk parameters. The committee periodically reports to the Compensation and Personnel Committee of our Board on our controls and reviews of our incentive compensation plans. We expect the committee will also work in tandem with our newly formed Enterprise Risk Committee over the course of the year. Committee membership includes our Executive Vice President — Administration, Chief Compliance Officer, Chief Credit Officer, Deputy General Counsel responsible for human resources matters, and our Chief Audit Officer (in a non-voting capacity).

Disclosure Committee. Our Disclosure Committee reviews and approves content of periodic SEC reporting documents, earnings releases and related disclosure policies and procedures.

Loan Loss Reserve Committee. Our Loan Loss Reserve Committee oversees the sufficiency of our loan loss reserves and considers current or emerging issues affecting delinquency and default trends which may result in adjustments in our allowances for loan losses.

Critical Accounting Assumptions Committee. Our Critical Accounting Assumptions Committee oversees critical accounting assumptions, as well as key judgments and estimates, utilized in preparation of our financial statements.

Asset and Liability Committee. Our Asset and Liability Committee oversees our investment portfolio and strategy and our compliance with our investment policy.

Corporate Credit Committee. Our Corporate Credit Committee oversees the overall credit and portfolio management strategy, policy review and monitoring.

Corporate Compliance Committee. Our Corporate Compliance Committee oversees regulatory compliance risk management activities for Sallie Mae and its affiliates.

ICE Steering Committee. Our ICE Steering Committee oversees our Internal Controls Excellence (“ICE”) initiative and Sarbanes-Oxley compliance and sponsors periodic forums in which the top internal control deficiencies are discussed and analyzed to ensure the control deficiencies are identified, understood by all relevant affected parties, and have established resolution plans supported by adequate resources.

Customer Products and Services Assessment Committee. Our Customer Products and Services Assessment Committee considers matters relating to risks affecting us and our wholly- and majority-owned subsidiaries associated with new, expanded, or modified products or services and makes recommendations regarding proposed products or service offerings based on their inherent risks and controls.

Risk Assessment

Our Internal Audit Department monitors our various risk management and compliance efforts, identifies areas that may require increased focus and resources, and reports significant control issues and recommendations to executive management and the Audit Committee of our Board. At least annually, the Internal Audit Department performs a risk assessment to identify our top risks used to develop their annual internal audit plan. The risk assessment focuses on those risks most relevant to us and our subsidiaries (including the Bank).

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Risk Appetite Framework

Our risk appetite framework establishes the level of risk we are willing to accept within each risk category in pursuit of our business strategy. By having a uniform risk appetite framework, it creates linkages across our businesses to ensure business decisions, monitoring and reporting are made on a consistent basis. Management and our various corporate committees monitor approved limits and escalation triggers to ensure that our businesses are operating within the approved risk limits. Risk limits are monitored and reports are provided to various corporate committees and our Board and its committees, as appropriate. Through ongoing monitoring of risk exposures, management is able to identify potential risks and develop appropriate responses and mitigation strategies. Our Board has agreed our Risk Appetite Framework with management and directed management to continue its development and evolution with the Audit Committee of our Board.

Risk Categories

We evaluate our significant risks using the following categories: (1) credit; (2) market; (3) funding & liquidity; (4) compliance; (5) legal; (6) operational; (7) reputational/political; (8) governance; and (9) strategy.

Credit Risk. Credit risk is the risk to earnings or capital resulting from an obligor’s failure to meet the terms of any contract with us or otherwise fail to perform as agreed. Credit risk is found in all activities where success depends on counterparty, issuer or borrower performance.

We have credit or counterparty risk exposure with borrowers and cosigners with whom we have made Private Education Loans, the various counterparties with whom we have entered into derivative contracts and the various issuers with whom we make investments. Credit and counterparty risks are overseen by our Chief Credit Officer, his staff and the internal Credit Committee he chairs. Our Chief Credit Officer reports regularly to our Board and Finance and Operations and Audit Committees of our Board.

The credit risk related to Private Education Loans is managed within a credit risk infrastructure which includes (i) a well-defined underwriting, asset quality and collection policy framework; (ii) an ongoing monitoring and review process of portfolio concentration and trends; (iii) assignment and management of credit authorities and responsibilities; and (iv) establishment of an allowance for loan losses that covers estimated losses based upon portfolio and economic analysis.

Credit risk related to derivative contracts is managed by reviewing counterparties for credit strength on an ongoing basis and through our credit policies, which place limits on the amount of exposure we may take with any one counterparty and, in most cases, require collateral to secure the position. The credit and counterparty risk associated with derivatives is measured based on the replacement cost should the counterparties with contracts in a gain position to the Company fail to perform under the terms of the contract.

Market Risk. Market risk is the risk to earnings or capital resulting from changes in market conditions, such as interest rates, credit spreads, commodity prices or volatilities. We are exposed to various types of market risk, in particular the risk of loss resulting in a mismatch between the maturity/duration of assets and liabilities, interest rate risk and other risks that arise through the management of our investment, debt and student loan portfolios. Market risk exposures are managed primarily through our internal Asset and Liability Committee. The responsibilities of this committee include: maintaining oversight and responsibility for all risks associated with managing our assets and liabilities, and recommending limits to be included in our risk appetite and investment structure. These activities are closely tied to those related to the management of our funding and liquidity risks. The Finance and Operations Committee of our Board periodically reviews and approves the investment and asset and liability management policies and contingency funding plan developed and administered by our internal Asset and Liability Committee. The Finance and Operations Committee of our Board as well as our Chief Financial Officer report to the full Board on matters of market risk management.

Funding & Liquidity Risk. Funding and liquidity risk is the risk to earnings, capital or the conduct of our business arising from the inability to meet our obligations when they become due without incurring unacceptable losses, such as the ability to fund liability maturities and deposit withdrawals, or invest in future asset growth and business operations at reasonable market rates, as well as the inability to fund Private Education Loan originations. Our three primary liquidity needs include our ongoing ability to meet our funding needs for our businesses throughout market cycles, including during periods of financial stress and to avoid any mismatch between the maturity of assets and liabilities, our ongoing ability to fund originations of Private Education Loans and servicing our indebtedness and bank deposits. Key objectives associated with our funding liquidity needs relate to our ability to access the capital markets at reasonable rates and to continue to maintain retail deposits and funding sources through the Bank.

Our funding and liquidity risk management activities are centralized within our Corporate Finance department, which is responsible for planning and executing our funding activities and strategies. We analyze and monitor our liquidity risk, maintain excess liquidity and access diverse funding sources depending on current market conditions. Funding and liquidity risks are overseen and recommendations approved primarily through our internal Asset and Liability Committee. The Finance and Operations Committee of our Board is responsible for periodically reviewing and approving the funding and liquidity positions and contingency funding plan developed and administered by our internal Asset and Liability Committee. The Finance and Operations Committee of our Board also receives regular reports on our performance against funding and liquidity plans at each of its meetings.

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Operational Risk. Operational risk is the risk to earnings resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk is pervasive in that it exists in all business lines, functional units, legal entities and geographic locations, and it includes information technology risk, physical security risk on tangible assets, as well as legal/compliance risk and reputational risk.

Our Board receives operations reports (which include operating metrics and performance against annual plan) from our Chief Executive Officer and Chief Operating Officer at each regularly scheduled meeting. Additionally, the Finance & Operations Committee of our Board receives business development updates regarding our various business initiatives that provide information and metrics about each key component of business operations. The Audit Committee of our Board receives periodic information security updates and reviews operational and systems-related matters to insure their implementation produces no significant internal control issues.

Operational risk exposures are managed through a combination of business line management and enterprise-wide oversight. Our Chief Operating Officer is responsible for all of our business operations (credit, servicing, collections and technology). Management committees, comprised of senior managers and subject matter experts, focus on particular aspects of operational risk. Enterprise-wide oversight is conducted by a number of our internal risk management committees. Most importantly, the Customer Products and Services Assessment Committee oversees the process, in connection with new, expanded or modified products or services it recommends for approval, for determining that significant risks are properly identified; confirming that adequate controls are in place to monitor risks to established, prudent limits; and monitors risk management activities, exposures, and issues.

Compliance, Legal and Governance Risk. Compliance risk is the current and prospective risk to earnings or capital arising from violations of, or non-conformance with, laws, rules, regulations, prescribed practices, internal policies and procedures, or ethical standards. Legal risk is the risk to earnings, capital or reputation that is manifested by claims made through the legal system and may arise from a product, a transaction, a business relationship, property (real, personal or intellectual), conduct of an employee or a change in law or regulation. Governance risk is the risk of not establishing and maintaining a control environment that aligns with stakeholder and regulatory expectations, including tone at the top and board performance. These risks are inherent in all of our businesses. Compliance, legal and governance risk are sub-sets of operational risk but are recognized as a separate and complementary risk category given their importance in our business. We can be exposed to these risks in key areas such as our private education lending, collections or loan servicing businesses if compliance with legal and regulatory requirements is not properly implemented, documented or tested, as well as when an oversight program does not include appropriate audit and control features.

The Audit Committee of our Board has oversight over the establishment of standards related to our monitoring and control of legal and compliance risks and the qualification of employees overseeing these risk management functions. The Audit Committee of our Board annually approves our Corporate Compliance Plan, has responsibility for considering significant breaches of our Code of Business Conduct and receives regular reports from executive management team members responsible for the regulatory and compliance risk management functions.

Primary ownership and responsibility for legal and compliance risk is placed with the business segments to manage their specific regulatory and compliance risks. Our Compliance group supports these activities by providing extensive training, monitoring and testing of the processes, policies and procedures utilized by our business segments, maintaining consumer lending regulatory and information security policies and procedures, and working in close coordination with our Legal group. Our Corporate Compliance Committee serves as a regular internal forum where key compliance issues and risks are discussed. At this committee, business, compliance and legal professionals review testing of existing regulatory compliance procedures and approve new or revised procedures.

Our Code of Business Conduct and the on-going training our employees receive in many compliance areas provide a framework for our employees to conduct themselves with the highest integrity. We instill a risk-conscious culture through communications, training, policies and procedures. We have strengthened the linkage between the management performance process and individual compensation to encourage employees to work toward corporate-wide compliance goals.

Reputational/Political Risk. Reputational risk is the risk to shareholder value and growth from a negative perception, whether true or not, of an organization by its key stakeholders, the changing expectations of its stakeholders and/or weak internal coordination of business decisions. This could expose us to litigation, financial loss or other damage to our business or brand. Political risk addresses political changes that may affect the probability of achieving our business objectives.

Management proactively assesses and manages political and reputation risk. Our government relations team manages our review of and response to all formal inquiries from members of Congress, state legislators, and their staff, including providing targeted messaging that reinforces our public policy goals. We review and consider political and reputational risks on an integrated basis in connection with the risk management oversight activities conducted in the various aspects of our business on matters as diverse as the launch of new products and services, our credit underwriting activities and how we fund our operations. Our public relations, marketing and media teams constantly monitor print, electronic and social media to understand how we are perceived; actively provide assistance and support to our customers and other constituencies; and maintain and promote the value of our considerable

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corporate brand. Significant political and reputation risks are reported to and monitored by the Finance and Operations Committee of our Board. Our Legal, Government Relations and Compliance groups efforts are coordinated through our General Counsel and regularly meet and collaborate with our Media and Investor Relations teams to provide more coordinated monitoring and management of our political and reputational risks.

Strategy Risk. Strategic risk is the risk to shareholder value and growth trajectory from adverse business decisions and/or improper implementation of business strategies. Management must be able to develop and implement business strategies that leverage the organization’s core competencies, are structured appropriately and are achievable. The cornerstone of our annual strategy risk management program involves our Board’s approval of our annual strategic business plan and management’s recommendations for how to grow our business while focused on managing risks to acceptable parameters. Management and the Board and its various committees continuously review how we execute on our annual business plan.

Common Stock

The following table summarizes our common share repurchases and issuances.

	Years Ended December 31,
	2012		2011		2010
Common stock repurchased(1)		58,038,239		19,054,115		—
Average purchase price per share(2)	$	15.52	$	15.77	$	—
Shares repurchased related to employee stock-based compensation plans(3)		4,547,785		3,024,662		1,097,647
Average purchase price per share	$	15.86	$	15.71	$	13.44
Common shares issued(4)		6,432,643		3,886,217		1,803,683

⁽¹⁾  Common shares purchased under our share repurchase program, of which none remained available as of December 31, 2012.

⁽²⁾  Average purchase price per share includes purchase commission costs.

⁽³⁾  Comprises shares withheld from stock option exercises and vesting of restricted stock for employees’ tax withholding obligations and shares tendered by employees to satisfy option exercise costs.

⁽⁴⁾  Common shares issued under our various compensation and benefit plans.

The closing price of our common stock on December 31, 2012 was $17.13.

Our shareholders have authorized the issuance of 1.125 billion shares of common stock (par value of $.20). At December 31, 2012, 453 million shares were issued and outstanding and 27 million shares were unissued but encumbered for outstanding stock options for employee compensation and remaining authority for stock-based compensation plans. The stock-based compensation plans are described in Note 11, “Stock-Based Compensation Plans and Arrangements.”

In March 2011, we retired 70 million shares of common stock held in treasury. This retirement decreased the balance in treasury stock by $1.9 billion, with corresponding decreases of $14 million in common stock and $1.9 billion in additional paid-in capital. There was no impact to total equity from this transaction.

On December 15, 2010, the mandatory conversion date, the remaining 810,370 shares of our Series C Preferred Stock were converted into 41 million shares of common stock.

Dividend and Share Repurchase Program

On January 26, 2012, we increased the quarterly dividend on our common stock to $.125 per share, up from $.10 per share in the prior quarter. We paid our quarterly dividend on March 16, 2012, June 15, 2012, September 21, 2012 and December 21, 2012. In 2012, we authorized the repurchase of up to $900 million of outstanding common stock in open market transactions. During 2012, we repurchased 58.0 million shares for an aggregate purchase price of $900 million. In 2011, we repurchased 19.1 million shares of common stock at an aggregate price of $300 million under our April 2011 share repurchase program that authorized up to $300 million of share repurchases.

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity Analysis

Our interest rate risk management seeks to limit the impact of short-term movements in interest rates on our results of operations and financial position. The following tables summarize the potential effect on earnings over the next 12 months and the potential effect on fair values of balance sheet assets and liabilities at December 31, 2012 and 2011, based upon a sensitivity analysis performed by management assuming a hypothetical increase in market interest rates of 100 basis points and 300 basis points while funding spreads remain constant. Additionally, as it relates to the effect on earnings, a sensitivity analysis was performed assuming the funding index increases 25 basis points while holding the asset index constant, if the funding index is different than the asset index. The earnings sensitivity is applied only to financial assets and liabilities, including hedging instruments that existed at the balance sheet date and does not take into account new assets, liabilities or hedging instruments that may arise in 2013.

	As of December 31, 2012 Impact on Annual Earnings If:								As of December 31, 2011 Impact on Annual Earnings If:
	Interest Rates:					Funding Indices			Interest Rates:				Funding Indices
(Dollars in millions, except per share amounts)	Increase 100 Basis Points			Increase 300 Basis Points		Increase 25 Basis Points(1)			Increase 100 Basis Points		Increase 300 Basis Points		Increase 25 Basis Points(1)
Effect on Earnings:
Change in pre-tax net income before unrealized gains (losses) on derivative and hedging activities	$	(20	)	$	24	$	(307	)	$	—	$	45	$	(419	)
Unrealized gains (losses) on derivative and hedging activities		463			769		(3	)		493		814		(16	)
Increase in net income before taxes	$	443		$	793	$	(310	)	$	493	$	859	$	(435	)
Increase in diluted earnings per common share	$	.92		$	1.64	$	(.64	)	$	.94	$	1.64	$	(.83	)

⁽¹⁾  If an asset is not funded with the same index/frequency reset of the asset then it is assumed the funding index increases 25 basis points while holding the asset index constant.

	At December 31, 2012
			Interest Rates:
			Change from Increase of 100 Basis Points						Change from Increase of 300 Basis Points
(Dollars in millions)	Fair Value		$			%			$			%
Effect on Fair Values
Assets
FFELP Loans	$	125,042	$	(738	)		(1	)%	$	(1,438	)		(1	)%
Private Education Loans		36,081		—			—			—			—
Other earning assets		9,994		—			—			(1	)		—
Other assets		8,721		(560	)		(6	)		(1,187	)		(14	)%
Total assets gain/(loss)	$	179,838	$	(1,298	)		(1	)%	$	(2,626	)		(1	)%
Liabilities
Interest-bearing liabilities	$	166,071	$	(829	)		—	%	$	(2,298	)		(1	)%
Other liabilities		3,937		(422	)		(11	)		(274	)		(7	)
Total liabilities (gain)/loss	$	170,008	$	(1,251	)		(1	)%	$	(2,572	)		(2	)%

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	At December 31, 2011
			Interest Rates:
			Change from Increase of 100 Basis Points						Change from Increase of 300 Basis Points
(Dollars in millions)	Fair Value		$			%			$			%
Effect on Fair Values
Assets
FFELP Loans	$	134,196	$	(665	)		—	%	$	(1,335	)		(1	)%
Private Education Loans		33,968		—			—			—			—
Other earning assets		9,871		—			—			(1	)		—
Other assets		8,943		(639	)		(7	)		(1,420	)		(16	)%
Total assets gain/(loss)	$	186,978	$	(1,304	)		(1	)%	$	(2,756	)		(1	)%
Liabilities
Interest-bearing liabilities	$	171,152	$	(730	)		—	%	$	(2,002	)		(1	)%
Other liabilities		4,128		(617	)		(15	)		(801	)		(19	)
Total liabilities (gain)/loss	$	175,280	$	(1,347	)		(1	)%	$	(2,803	)		(2	)%

A primary objective in our funding is to minimize our sensitivity to changing interest rates by generally funding our floating rate student loan portfolio with floating rate debt. However, due to the ability of some FFELP loans to earn Floor Income, we can have a fixed versus floating mismatch in funding if the student loan earns at the fixed borrower rate and the funding remains floating. In addition, we can have a mismatch in the index (including the frequency of reset) of floating rate debt versus floating rate assets.

During the years ended December 31, 2012 and 2011, certain FFELP Loans were earning Floor Income and we locked in a portion of that Floor Income through the use of Floor Income contracts. The result of these hedging transactions was to convert a portion of the fixed rate nature of student loans to variable rate, and to fix the relative spread between the student loan asset rate and the variable rate liability.

In the preceding tables, under the scenario where interest rates increase 100 and 300 basis points, the change in pre-tax net income before the unrealized gains (losses) on derivative and hedging activities is primarily due to the impact of (i) our unhedged loans being in a fixed-rate mode due to Floor Income, while being funded with variable debt in low interest rate environments; and (ii) a portion of our variable assets being funded with fixed rate liabilities and equity. Item (i) will generally cause income to decrease when interest rates increase from a low interest rate environment, whereas item (ii) will generally offset this decrease.

Under the scenario in the tables above labeled “Impact on Annual Earnings If: Funding Indices Increase by 25 Basis Points,” the main driver of the decrease in pre-tax income before unrealized gains (losses) on derivative and hedging activities in the December 31, 2012 analysis is the result of one-month LIBOR-indexed FFELP Loans (loans formerly indexed to commercial paper) being funded with three-month LIBOR and other non-discrete indexed liabilities. In the December 31, 2011 analysis, it is the result of LIBOR-based debt funding commercial paper-indexed assets. See “Asset and Liability Funding Gap” of this Item 7A for a further discussion. Increasing the spread between indices will also impact the unrealized gains (losses) on derivative and hedging activities as it relates to basis swaps that hedge the mismatch between the asset and funding indices.

In addition to interest rate risk addressed in the preceding tables, we are also exposed to risks related to foreign currency exchange rates. Foreign currency exchange risk is primarily the result of foreign currency denominated debt issued by us. When we issue foreign denominated corporate unsecured and securitization debt, our policy is to use cross currency interest rate swaps to swap all foreign currency denominated debt payments (fixed and floating) to U.S. dollar LIBOR using a fixed exchange rate. In the tables above, there would be an immaterial impact on earnings if exchange rates were to decrease or increase, due to the terms of the hedging instrument and hedged items matching. The balance sheet interest bearing liabilities would be affected by a change in exchange rates; however, the change would be materially offset by the cross currency interest rate swaps in other assets or other liabilities. In the current economic environment, volatility in the spread between spot and forward foreign exchange rates has resulted in material mark-to-market impacts to current-period earnings which have not been factored into the above analysis. The earnings impact is noncash, and at maturity of the instruments the cumulative mark-to-market impact will be zero.

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Asset and Liability Funding Gap

The tables below present our assets and liabilities (funding) arranged by underlying indices as of December 31, 2012. In the following GAAP presentation, the funding gap only includes derivatives that qualify as effective hedges (those derivatives which are reflected in net interest margin, as opposed to those reflected in the “gains (losses) on derivatives and hedging activities, net” line on the consolidated statements of income). The difference between the asset and the funding is the funding gap for the specified index. This represents our exposure to interest rate risk in the form of basis risk and repricing risk, which is the risk that the different indices may reset at different frequencies or may not move in the same direction or at the same magnitude.

Management analyzes interest rate risk and in doing so includes all derivatives that are economically hedging our debt whether they qualify as effective hedges or not (“Core Earnings” basis). Accordingly, we are also presenting the asset and liability funding gap on a “Core Earnings” basis in the table that follows the GAAP presentation.

GAAP-Basis

Index (Dollars in billions)	Frequency of Variable Resets	Assets(1)		Funding(2)		Funding Gap
3-month Treasury bill	weekly	$	7.5	$	—	$	7.5
Prime	annual		.7		—		.7
Prime	quarterly		4.3		—		4.3
Prime	monthly		19.8		—		19.8
Prime	daily		—		1.4		(1.4	)
PLUS Index	annual		.4		—		.4
3-month LIBOR	daily		—		—		—
3-month LIBOR	quarterly		—		107.1		(107.1	)
1-month LIBOR	monthly		12.4		29.9		(17.5	)
1-month LIBOR daily	daily		117.8		—		117.8
CMT/CPI Index	monthly/quarterly		—		1.5		(1.5	)
Non-Discrete reset(3)	monthly		—		20.0		(20.0	)
Non-Discrete reset(4)	daily/weekly		10.0		4.7		5.3
Fixed Rate(5)			8.4		16.7		(8.3	)
Total		$	181.3	$	181.3	$	—

⁽¹⁾  FFELP Loans of $53.2 billion ($48.0 billion LIBOR index and $5.2 billion Treasury bill index) are currently earning a fixed rate of interest as a result of the low interest rate environment.

⁽²⁾  Funding (by index) includes all derivatives that qualify as hedges.

⁽³⁾  Funding consists of auction rate securities, the ABCP Facilities, the ED Conduit Program Facility and the FHLB-DM Facility.

⁽⁴⁾  Assets include restricted and unrestricted cash equivalents and other overnight type instruments. Funding includes retail and other deposits and the obligation to return cash collateral held related to derivatives exposures.

⁽⁵⁾  Assets include receivables and other assets (including goodwill and acquired intangibles). Funding includes other liabilities and stockholders’ equity (excluding series B Preferred Stock).

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The “Funding Gaps” in the above table are primarily interest rate mismatches in short-term indices between our assets and liabilities. We address this issue typically through the use of basis swaps that typically convert quarterly reset three-month LIBOR to other indices that are more correlated to our asset indices. These basis swaps do not qualify as effective hedges and as a result the effect on the funding index is not included in our interest margin and is therefore excluded from the GAAP presentation.

“Core Earnings” Basis

Index (Dollars in billions)	Frequency of Variable Resets	Assets(1)		Funding(2)		Funding Gap
3-month Treasury bill	weekly	$	7.5	$	.8	$	6.7
Prime	annual		.7		—		.7
Prime	quarterly		4.3		—		4.3
Prime	monthly		19.8		4.5		15.3
Prime	daily		—		1.4		(1.4	)
PLUS Index	annual		.4		—		.4
3-month LIBOR	daily		—		6.0		(6.0	)
3-month LIBOR	quarterly		—		84.9		(84.9	)
1-month LIBOR	monthly		12.4		39.3		(26.9	)
1-month LIBOR	daily		117.8		5.0		112.8
Non-Discrete reset(3)	monthly		—		20.0		(20.0	)
Non-Discrete reset(4)	daily/weekly		10.0		4.7		5.3
Fixed Rate(5)			5.5		11.8		(6.3	)
Total		$	178.4	$	178.4	$	—

⁽¹⁾  FFELP Loans of $18.0 billion ($16.3 billion LIBOR index and $1.7 billion Treasury bill index) are currently earning a fixed rate of interest as a result of the low interest rate environment.

⁽²⁾  Funding (by index) includes all derivatives that management considers economic hedges of interest rate risk and reflects how we internally manage our interest rate exposure.

⁽³⁾  Funding consists of auction rate securities, the ABCP Facilities, the ED Conduit Program Facility and the FHLB-DM Facility.

⁽⁴⁾  Assets include restricted and unrestricted cash equivalents and other overnight type instruments. Funding includes retail and other deposits and the obligation to return cash collateral held related to derivatives exposures.

⁽⁵⁾  Assets include receivables and other assets (including goodwill and acquired intangibles). Funding includes other liabilities and stockholders’ equity (excluding series B Preferred Stock).

We use interest rate swaps and other derivatives to achieve our risk management objectives. Our asset liability management strategy is to match assets with debt (in combination with derivatives) that have the same underlying index and reset frequency or, when economical, have interest rate characteristics that we believe are highly correlated. The use of funding with index types and reset frequencies that are different from our assets exposes us to interest rate risk in the form of basis and repricing risk. This could result in our cost of funds not moving in the same direction or with the same magnitude as the yield on our assets. While we believe this risk is low, as all of these indices are short-term with rate movements that are highly correlated over a long period of time, market disruptions (which have occurred in recent years) can lead to a temporary divergence between indices resulting in a negative impact to our earnings.

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Weighted Average Life

The following table reflects the weighted average life for our earning assets and liabilities at December 31, 2012.

(Averages in Years)	Weighted Average Life
Earning assets
Student loans		8.0
Other loans		7.1
Cash and investments		.1
Total earning assets		7.5
Borrowings
Short-term borrowings		.3
Long-term borrowings		6.8
Total borrowings		6.0

Item 8. Financial Statements and Supplementary Data

The following consolidated financial statements of SLM Corporation and the Report of the Independent Registered Public Accounting Firm thereon are included in Item 8 above:

Report of Independent Registered Public Accounting Firm	62
Report of Independent Registered Public Accounting Firm	63
Consolidated Balance Sheets as of December 31, 2012 and 2011	64
Consolidated Statements of Income for the years ended December 31, 2012, 2011 and 2010	65
Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011 and 2010	66
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December  31, 2012, 2011 and 2010	67
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010	70
Notes to Consolidated Financial Statements	71

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

SLM Corporation:

We have audited the accompanying consolidated balance sheet of SLM Corporation and subsidiaries (the Company) as of December 31, 2012, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The accompanying consolidated financial statements of the Company as of December 31, 2011 and 2010, were audited by other auditors whose report thereon dated February 27, 2012, expressed an unqualified opinion on those statements, before the adjustments that were applied to the 2011 and 2010 consolidated financial statements to reflect the operations of Campus Solutions and Upromise Investments, Inc. as discontinued operations for all comparative prior period information.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2012, and the results of its operations and its cash flows for year then ended, in conformity with U.S. generally accepted accounting principles.

We also have audited the adjustments that were applied to the 2011 and 2010 consolidated financial statements to reflect the operations of Campus Solutions and Upromise Investments, Inc. as discontinued operations for all comparative prior period information. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2011 and 2010 consolidated financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2011 and 2010 consolidated financial statements taken as a whole.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2012, based on criteria established inInternal Control– Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 26, 2013 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

McLean, Virginia

February 26, 2013, except as to Notes 1, 2, 5, 10, 12, 15, 16, 17, and 19 which are as of November 27, 2013

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of SLM Corporation:

In our opinion, the consolidated balance sheet as of December 31, 2011 and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2011, before the effects of the adjustments to retrospectively reflect the discontinued operations described in Note 17, present fairly, in all material respects, the financial position of SLM Corporation and its subsidiaries at December 31, 2011, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America (the 2011 and 2010 financial statements before the effects of the adjustments discussed in Note 17 are not presented herein). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits, before the effects of the adjustments described above, of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively reflect the discontinued operations described in Note 17 and accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by other auditors.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

McLean, VA

February 27, 2012

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SLM CORPORATION

CONSOLIDATED BALANCE SHEETS

(In millions, except per share amounts)

	December 31, 2012			December 31, 2011
Assets
FFELP Loans (net of allowance for losses of $159 and $187, respectively)	$	125,612		$	138,130
Private Education Loans (net of allowance for losses of $2,171 and $2,171 respectively)		36,934			36,290
Investments
Available-for-sale		72			70
Other		1,010			1,052
Total investments		1,082			1,122
Cash and cash equivalents		3,900			2,794
Restricted cash and investments		5,011			5,873
Goodwill and acquired intangible assets, net		448			478
Other assets		8,273			8,658
Total assets	$	181,260		$	193,345
Liabilities
Short-term borrowings	$	19,856		$	29,573
Long-term borrowings		152,401			154,393
Other liabilities		3,937			4,128
Total liabilities		176,194			188,094
Commitments and contingencies
Equity
Preferred stock, par value $.20 per share, 20 million shares authorized
Series A: 3.3 million and 3.3 million shares issued, respectively, at stated value of $50 per share		165			165
Series B: 4 million and 4 million shares issued, respectively, at stated value of $100 per share		400			400
Common stock, par value $.20 per share, 1.125 billion shares authorized: 536 million and 529 million shares issued, respectively		107			106
Additional paid-in capital		4,237			4,136
Accumulated other comprehensive loss (net of tax benefit of $3 and $8, respectively)		(6	)		(14	)
Retained earnings		1,451			770
Total SLM Corporation stockholders’ equity before treasury stock		6,354			5,563
Less: Common stock held in treasury at cost: 83 million and 20 million shares, respectively		(1,294	)		(320	)
Total SLM Corporation stockholders’ equity		5,060			5,243
Noncontrolling interest		6			8
Total equity		5,066			5,251
Total liabilities and equity	$	181,260		$	193,345

Supplemental information — assets and liabilities of consolidated variable interest entities:

	December 31, 2012		December 31, 2011
FFELP Loans	$	121,059	$	135,536
Private Education Loans		26,072		24,962
Restricted cash and investments		4,826		5,609
Other assets		2,312		2,638
Short-term borrowings		9,551		21,313
Long-term borrowings		131,518		134,533
Net assets of consolidated variable interest entities	$	13,200	$	12,899

See accompanying notes to consolidated financial statements.

64

SLM CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share amounts)

	Years Ended December 31,
	2012			2011			2010
Interest income:
FFELP Loans	$	3,251		$	3,461		$	3,345
Private Education Loans		2,481			2,429			2,353
Other loans		16			21			30
Cash and investments		21			19			26
Total interest income		5,769			5,930			5,754
Total interest expense		2,561			2,401			2,275
Net interest income		3,208			3,529			3,479
Less: provisions for loan losses		1,080			1,295			1,419
Net interest income after provisions for loan losses		2,128			2,234			2,060
Other income (loss):
Gains (losses) on loans and investments, net		—			(35	)		325
Losses on derivative and hedging activities, net		(628	)		(959	)		(361	)
Servicing revenue		279			283			311
Contingency revenue		356			333			330
Gains on debt repurchases		145			38			317
Other		92			69			5
Total other income (loss)		244			(271	)		927
Expenses:
Salaries and benefits		457			493			535
Other operating expenses		440			512			595
Total operating expenses		897			1,005			1,130
Goodwill and acquired intangible assets impairment and amortization expense		27			21			543
Restructuring and other reorganization expenses		11			12			85
Total expenses		935			1,038			1,758
Income from continuing operations, before income tax expense		1,437			925			1,229
Income tax expense		498			328			500
Net income from continuing operations		939			597			729
Income (loss) from discontinued operations, net of tax expense (benefit)		(2	)		35			(199	)
Net income		937			632			530
Less: net loss attributable to noncontrolling interest		(2	)		(1	)		—
Net income attributable to SLM Corporation		939			633			530
Preferred stock dividends		20			18			72
Net income attributable to SLM Corporation common stock	$	919		$	615		$	458
Basic earnings (loss) per common share attributable to SLM Corporation:
Continuing operations	$	1.93		$	1.12		$	1.35
Discontinued operations		—			.07			(.41	)
Total	$	1.93		$	1.19		$	.94
Average common shares outstanding		476			517			487
Diluted earnings (loss) per common share attributable to SLM Corporation:
Continuing operations	$	1.90		$	1.11		$	1.35
Discontinued operations		—			.07			(.41	)
Total	$	1.90		$	1.18		$	.94
Average common and common equivalent shares outstanding		483			523			488
Dividends per common share attributable to SLM Corporation	$	.50		$	.30		$	—

See accompanying notes to consolidated financial statements.

65

SLM CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

	Years Ended December 31,
	2012			2011			2010
Net income	$	937		$	632		$	530
Other comprehensive income (loss):
Unrealized losses on derivatives:
Unrealized hedging losses on derivatives		(11	)		(6	)		(55	)
Reclassification adjustments for derivative losses included in net income		25			55			63
Total unrealized losses on derivatives		14			49			8
Unrealized gains/(losses) on investments		(1	)		2			2
Defined benefit pension plans adjustment		—			(3	)		(16	)
Income tax (expense) benefit		(5	)		(17	)		2
Other comprehensive income (loss), net of tax		8			31			(4	)
Comprehensive income		945			663			526
Less: comprehensive loss attributable to noncontrolling interest		(2	)		(1	)		—
Total comprehensive income attributable to SLM Corporation	$	947		$	664		$	526

See accompanying notes to consolidated financial statements.

66

SLM CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In millions, except share and per share amounts)

	Preferred Stock Shares			Common Stock Shares								Preferred Stock			Common Stock		Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Treasury Stock			Total Stockholders’ Equity			Noncontrolling Interest		Total Equity
				Issued		Treasury			Outstanding
Balance at December 31, 2009		8,110,370			552,219,576		(67,221,942	)		484,997,634		$	1,375		$	111	$	5,092		$	(41	)	$	604		$	(1,862	)	$	5,279		$	—	$	5,279
Comprehensive income:
Net income		—			—		—			—			—			—		—			—			530			—			530			—		530
Other comprehensive income, net of tax		—			—		—			—			—			—		—			(4	)		—			—			(4	)		—		(4	)
Total comprehensive income		—			—		—			—			—			—		—			—			—			—			526			—		526
Cash dividends:
Preferred stock, series A ($3.49 per share)		—			—		—			—			—			—		—			—			(12	)		—			(12	)		—		(12	)
Preferred stock, series B ($1.05 per share)		—			—		—			—			—			—		—			—			(4	)		—			(4	)		—		(4	)
Preferred stock, series C ($72.50 per share)		—			—		—			—			—			—		—			—			(56	)		—			(56	)		—		(56	)
Issuance of common shares		—			1,803,683		—			1,803,683			—			—		16			—			—			—			16			—		16
Conversion of preferred shares		(810,370	)		41,240,215		—			41,240,215			(810	)		8		802			—			—			—			—			—		—
Tax benefit related to employee stock-based compensation plans		—			—		—			—			—			—		(9	)		—			—			—			(9	)		—		(9	)
Stock-based compensation expense		—			—		—			—			—			—		39			—			—			—			39			—		39
Cumulative effect of accounting change		—			—		—			—			—			—		—			—			(753	)		—			(753	)		—		(753	)
Shares repurchased related to employee stock-based compensation plans		—			—		(1,097,647	)		(1,097,647	)		—			—		—			—			—			(14	)		(14	)		—		(14	)
Balance at December 31, 2010		7,300,000			595,263,474		(68,319,589	)		526,943,885		$	565		$	119	$	5,940		$	(45	)	$	309		$	(1,876	)	$	5,012		$	—	$	5,012

See accompanying notes to consolidated financial statements.

67

SLM CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In millions, except share and per share amounts)

			Common Stock Shares									Preferred Stock		Common Stock			Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Treasury Stock			Total Stockholders’ Equity			Noncontrolling Interest			Total Equity
	Preferred Stock Shares		Issued			Treasury			Outstanding
Balance at December 31, 2010		7,300,000		595,263,474			(68,319,589	)		526,943,885		$	565	$	119		$	5,940		$	(45	)	$	309		$	(1,876	)	$	5,012		$	—		$	5,012
Comprehensive income:
Net income		—		—			—			—			—		—			—			—			633			—			633			(1	)		632
Other comprehensive income, net of tax		—		—			—			—			—		—			—			31			—			—			31			—			31
Total comprehensive income		—		—			—			—			—		—			—			—			—			—			664			(1	)		663
Cash dividends:
Common stock ($.30 per share)		—		—			—			—			—		—			—			—			(154	)		—			(154	)		—			(154	)
Preferred stock, series A ($3.49 per share)		—		—			—			—			—		—			—			—			(12	)		—			(12	)		—			(12	)
Preferred stock, series B ($1.59 per share)		—		—			—			—			—		—			—			—			(6	)		—			(6	)		—			(6	)
Issuance of common shares		—		3,886,217			—			3,886,217			—		1			40			—			—			—			41			—			41
Retirement of common stock in treasury		—		(70,074,369	)		70,074,369			—			—		(14	)		(1,890	)		—			—			1,904			—			—			—
Tax benefit related to employee stock-based compensation plans		—		—			—			—			—		—			(10	)		—			—			—			(10	)		—			(10	)
Stock-based compensation expense		—		—			—			—			—		—			56			—			—			—			56			—			56
Common stock repurchased		—		—			(19,054,115	)		(19,054,115	)		—		—			—			—			—			(300	)		(300	)		—			(300	)
Shares repurchased related to employee stock-based compensation plans		—		—			(3,024,662	)		(3,024,662	)		—		—			—			—			—			(48	)		(48	)		—			(48	)
Acquisition of noncontrolling interest		—		—			—			—			—		—			—			—			—			—			—			9			9
Balance at December 31, 2011		7,300,000		529,075,322			(20,323,997	)		508,751,325		$	565	$	106		$	4,136		$	(14	)	$	770		$	(320	)	$	5,243		$	8		$	5,251

See accompanying notes to consolidated financial statements.

68

SLM CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In millions, except share and per share amounts)

			Common Stock Shares								Preferred Stock		Common Stock		Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Treasury Stock			Total Stockholders’ Equity			Noncontrolling Interest			Total Equity
	Preferred Stock Shares		Issued		Treasury			Outstanding
Balance at December 31, 2011		7,300,000		529,075,322		(20,323,997	)		508,751,325		$	565	$	106	$	4,136		$	(14	)	$	770		$	(320	)	$	5,243		$	8		$	5,251
Comprehensive income:
Net income		—		—		—			—			—		—		—			—			939			—			939			(2	)		937
Other comprehensive income, net of tax		—		—		—			—			—		—		—			8			—			—			8			—			8
Total comprehensive income		—		—		—			—			—		—		—			—			—			—			947			(2	)		945
Cash dividends:
Common stock ($.50 per share)		—		—		—			—			—		—		—			—			(237	)		—			(237	)		—			(237	)
Preferred stock, series A ($3.49 per share)		—		—		—			—			—		—		—			—			(11	)		—			(11	)		—			(11	)
Preferred stock, series B ($2.22 per share)		—		—		—			—			—		—		—			—			(9	)		—			(9	)		—			(9	)
Restricted stock dividend		—		—		—			—			—		—		—			—			(1	)		—			(1	)		—			(1	)
Issuance of common shares		—		6,432,643		—			6,432,643			—		1		60			—			—			—			61			—			61
Tax benefit related to employee stock-based compensation plans		—		—		—			—			—		—		(6	)		—			—			—			(6	)		—			(6	)
Stock-based compensation expense		—		—		—			—			—		—		47			—			—			—			47			—			47
Common stock repurchased		—		—		(58,038,239	)		(58,038,239	)		—		—		—			—			—			(900	)		(900	)		—			(900	)
Shares repurchased related to employee stock-based compensation plans		—		—		(4,547,785	)		(4,547,785	)		—		—		—			—			—			(74	)		(74	)		—			(74	)
Balance at December 31, 2012		7,300,000		535,507,965		(82,910,021	)		452,597,944		$	565	$	107	$	4,237		$	(6	)	$	1,451		$	(1,294	)	$	5,060		$	6		$	5,066

See accompanying notes to consolidated financial statements.

69

SLM CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

	Years Ended December 31,
	2012			2011			2010
Operating activities
Net income	$	937		$	632		$	530
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
(Income) loss from discontinued operations, net of tax		2			(35	)		199
(Gains) losses on loans and investments, net		—			35			(6	)
(Gains) on debt repurchases		(145	)		(38	)		(317	)
Goodwill and acquired intangible assets impairment and amortization expense		27			21			543
Stock-based compensation expense		47			56			40
Unrealized (gains) losses on derivative and hedging activities		(117	)		145			(478	)
Provisions for loan losses		1,080			1,295			1,419
Student loans originated for sale, net		—			—			(9,648	)
Decrease (increase) in restricted cash — other		10			(3	)		22
Decrease (increase) in accrued interest receivable		361			463			(4	)
(Decrease) increase in accrued interest payable		(41	)		75			(77	)
Decrease in other assets		437			423			1,207
Increase (decrease) in other liabilities		38			12			(144	)
Total adjustments		1,699			2,449			(7,244	)
Cash provided by (used in) operating activities — continuing operations		2,636			3,081			(6,714	)
Cash used in operating activities — discontinued operations		—			—			22
Total net cash provided by (used in) operating activities		2,636			3,081			(6,692	)
Investing activities
Student loans acquired and originated		(6,663	)		(3,888	)		(4,611	)
Reduction of student loans:
Installment payments, claims and other		17,198			12,290			9,812
Proceeds from sales of student loans		531			753			588
Other investing activities, net		41			(210	)		(96	)
Purchases of available-for-sale securities		(63	)		(142	)		(38,303	)
Proceeds from sales and maturities of available-for-sale securities		71			193			39,465
Purchases of held-to-maturity and other securities		(245	)		(277	)		(142	)
Proceeds from maturities of held-to-maturity securities and other securities		206			265			136
Decrease in restricted cash — variable interest entities		769			376			426
Cash provided by investing activities — continuing operations		11,845			9,360			7,275
Cash provided by investing activities — discontinued operations		—			114			139
Total net cash provided by investing activities		11,845			9,474			7,414
Financing activities
Borrowings collateralized by loans in trust — issued		13,727			4,553			5,917
Borrowings collateralized by loans in trust — repaid		(15,953	)		(13,408	)		(10,636	)
Asset-backed commercial paper conduits, net		(323	)		887			(2,060	)
ED Participation Program, net		—			—			11,252
ED Conduit Program Facility, net		(12,187	)		(3,172	)		664
Other short-term borrowings issued		23			239			—
Other short-term borrowings repaid		(307	)		(38	)		(168	)
Other long-term borrowings issued		4,713			2,354			1,464
Other long-term borrowings repaid		(3,307	)		(6,498	)		(9,955	)
Other financing activities, net		272			698			(21	)
Retail and other deposits, net		1,124			753			1,166
Common stock repurchased		(900	)		(300	)		—
Common stock dividends paid		(237	)		(154	)		—
Preferred stock dividends paid		(20	)		(18	)		(72	)
Net cash (used in) financing activities		(13,375	)		(14,104	)		(2,449	)
Net increase (decrease) in cash and cash equivalents		1,106			(1,549	)		(1,727	)
Cash and cash equivalents at beginning of year		2,794			4,343			6,070
Cash and cash equivalents at end of year	$	3,900		$	2,794		$	4,343
Cash disbursements made (refunds received) for:
Interest	$	2,527		$	2,413		$	2,372
Income taxes paid	$	569		$	559		$	200
Income taxes received	$	(12	)	$	(37	)	$	(628	)
Noncash activity:
Investing activity — Student loans and other assets acquired	$	402		$	783		$	25,638
Operating activity — Other assets acquired and other liabilities assumed, net	$	23		$	19		$	376
Financing activity — Borrowings assumed in acquisition of student loans and other assets	$	425		$	802		$	26,014

See accompanying notes to consolidated financial statements.

70

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Business

SLM Corporation (“we”, “us”, “our”, or the “Company”) is a holding company that operates through a number of subsidiaries. We were formed in 1972 as the Student Loan Marketing Association, a federally chartered government-sponsored enterprise (the “GSE”), with the goal of furthering access to higher education by acting as a secondary market for federal student loans. In 2004, we completed our transformation to a private company through our wind-down of the GSE. The GSE’s outstanding obligations were placed into a Master Defeasance Trust Agreement as of December 29, 2004, which was fully collateralized by direct, noncallable obligations of the United States.

Our primary business is to originate, service and collect loans we make to students and their families to finance the cost of their education. Since July 2010 we have originated only Private Education Loans. We use “Private Education Loans” to mean education loans to students or their families that are non-federal loans and loans not insured or guaranteed under the previously existing Federal Family Education loan Program (“FFELP”). The core of our marketing strategy is to generate student loan originations by promoting our products on campus through the financial aid office and through direct marketing to students and their families. Since the beginning of 2006, virtually all of our Private Education Loans have been originated and funded by Sallie Mae Bank, a Utah industrial bank subsidiary (the “Bank”), regulated by the Utah Department of Financial Institutions (“UDFI”) and the Federal Deposit Insurance Corporation (“FDIC”). We also provide servicing, loan default aversion and defaulted loan collection services for loans owned by other institutions, including the U.S. Department of Education (“ED”). We also operate a consumer savings network that provides financial rewards on everyday purchases to help families save for college.

In addition, we are the largest holder, servicer and collector of loans made under the previously existing FFELP. The majority of our income continues to be derived, directly or indirectly, from our portfolio of FFELP Loans and servicing we provide for FFELP Loans. On July 1, 2010, the Health Care and Education Reconciliation Act of 2010 (“HCERA”), eliminated FFELP Loan originations, a major source of our income. All federal loans to students are now made through the Direct Student Loan Program (“DSLP”). The terms and conditions of existing FFELP Loans were not affected by this legislation. Our FFELP Loan portfolio will amortize over approximately 20 years. The fee income we earn from providing servicing and contingent collections services on such loans will similarly decline over time.

2. Significant Accounting Policies

Use of Estimates

Our financial reporting and accounting policies conform to generally accepted accounting principles in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Key accounting policies that include significant judgments and estimates include the allowance for loan losses, the effective interest rate method (amortization of student loan and debt premiums and discounts), fair value measurements, goodwill and acquired intangible asset impairment assessments, and derivative accounting.

Consolidation

The consolidated financial statements include the accounts of SLM Corporation and its majority-owned and controlled subsidiaries and those Variable Interest Entities (“VIEs”) for which we are the primary beneficiary, after eliminating the effects of intercompany accounts and transactions.

We consolidate any VIEs where we have determined we are the primary beneficiary. The primary beneficiary is the entity which has both: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses or receive benefits of the entity that could potentially be significant to the VIE. As it relates to our securitized assets as of December 31, 2012, we are the servicer of the securitized assets and own the Residual Interest of the securitization trusts. As a result, we are the primary beneficiary of our securitization trusts and consolidate those trusts.

71

Fair Value Measurement

We use estimates of fair value in applying various accounting standards for our financial statements. Fair value measurements are used in one of four ways:

• In the consolidated balance sheet with changes in fair value recorded in the consolidated statement of income;

• In the consolidated balance sheet with changes in fair value recorded in the accumulated other comprehensive income section of the consolidated statement of changes in stockholders’ equity;

• In the consolidated balance sheet for instruments carried at lower of cost or fair value with impairment charges recorded in the consolidated statement of income; and

• In the notes to the financial statements.

Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between willing and able market participants. In general, our policy in estimating fair value is to first look at observable market prices for identical assets and liabilities in active markets, where available. When these are not available, other inputs are used to model fair value such as prices of similar instruments, yield curves, volatilities, prepayment speeds, default rates and credit spreads (including for our liabilities), relying first on observable data from active markets. Depending on current market conditions, additional adjustments to fair value may be based on factors such as liquidity, credit, and bid/offer spreads. Transaction costs are not included in the determination of fair value. When possible, we seek 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.

We categorize our fair value estimates based on a hierarchical 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 are as follows:

• Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date. The types of financial instruments included in level 1 are highly liquid instruments with quoted prices.

• Level 2 — Inputs from active markets, other than quoted prices for identical instruments, are used to determine fair value. Significant inputs are directly observable from active markets for substantially the full term of the asset or liability being valued.

• Level 3 — Pricing inputs significant to the valuation are unobservable. Inputs are developed based on the best information available. However, significant judgment is required by us in developing the inputs.

Loans

Loans, consisting primarily of federally insured student loans and Private Education Loans, that we have the ability and intent to hold for the foreseeable future are classified as held-for-investment and are carried at amortized cost. Amortized cost includes the unamortized premiums, discounts, and capitalized origination costs and fees, all of which are amortized to interest income as further discussed below. Loans which are held-for-investment also have an allowance for loan loss as needed. Any loans we have not classified as held-for-investment are classified as held-for-sale, and carried at the lower of cost or fair value. Loans are classified as held-for-sale when we have the intent and ability to sell such loans. Loans which are held-for-sale do not have the associated premium, discount, and capitalized origination costs and fees amortized into interest income. In addition, once a loan is classified as held-for-sale, there is no further adjustment to the loan’s allowance for loan losses that existed immediately prior to the reclassification to held-for-sale.

As market conditions permit, we may securitize loans as a source of financing for those loans. If we elect to use a securitization program to finance loans, loans are selected based on the required characteristics to structure the desired transaction at the most favorable financing terms (e.g., type of loan, mix of interim vs. repayment status, credit rating and maturity dates). Due to some of the structuring terms, certain transactions may qualify for sale treatment while others do not qualify for sale treatment and are recorded as financings.

All of our student loans, except for those which were sold under ED’s Purchase Program, as defined and discussed in Note 6, “Borrowings,” are initially categorized as held-for-investment until there is certainty as to each specific loan’s ultimate financing because we do not securitize all loans and currently all of our securitizations do not qualify for sale treatment. It is only when we have selected the loans to securitize and that securitization transaction qualifies as a sale do we transfer the loans into the held-for-sale classification and carry them at the lower of cost or fair value. If we anticipate recognizing a gain related to the impending securitization, then the fair value of the loans is higher than their respective cost basis and no valuation allowance is recorded.

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Student Loan Income

For loans classified as held-for-investment, we recognize student loan interest income as earned, adjusted for the amortization of premiums and capitalized direct origination costs, accretion of discounts, and Repayment Borrower Benefits. These adjustments result in income being recognized based upon the expected yield of the loan over its life after giving effect to prepayments and extensions, and to estimates related to Repayment Borrower Benefits. The estimate of the prepayment speed includes the effect of consolidations, voluntary prepayments and student loan defaults, all of which shorten the life-of-loan. Prepayment speed estimates also consider the utilization of deferment, forbearance and extended repayment plans which lengthen the life-of-loan. For Repayment Borrower Benefits, the estimates of their effect on student loan yield are based on analyses of historical payment behavior of customers who are eligible for the incentives and its effect on the ultimate qualification rate for these incentives. We regularly evaluate the assumptions used to estimate the prepayment speeds and the qualification rates used for Repayment Borrower Benefits. In instances where there are changes to the assumptions, amortization is adjusted on a cumulative basis to reflect the change since the acquisition of the loan. We also pay an annual 105 basis point Consolidation Loan Rebate Fee on FFELP Consolidation Loans which is netted against student loan interest income. Additionally, interest earned on student loans reflects potential non-payment adjustments in accordance with our uncollectible interest recognition policy as discussed further in “Allowance for Loan Losses” of this Note 2. We do not amortize any premiums, discounts or other adjustments to the basis of student loans when they are classified as held-for-sale.

Allowance for Loan Losses

We consider a loan to be impaired when, based on current information, a loss has been incurred and it is probable that we will not receive all contractual amounts due. When making our assessment as to whether a loan is impaired, we also take into account more than insignificant delays in payment. We generally evaluate impaired loans on an aggregate basis by grouping similar loans. Impaired loans also include those loans which are individually assessed and measured for impairment at a loan level, such as in a troubled debt restructuring (“TDR”). We maintain an allowance for loan losses at an amount sufficient to absorb losses incurred in our portfolios at the reporting date based on a projection of estimated probable credit losses incurred in the portfolio.

In determining the allowance for loan losses on our non-TDR portfolio, 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) and how much we expect to recover over time related to the defaulted amount. Expected defaults less our expected recoveries equal the allowance related to this portfolio. Our historical experience indicates that, on average, the time between the date that a customer experiences a default causing event (i.e., the loss trigger event) and the date that we charge off the unrecoverable portion of that loan is two years. Separately, for our TDR portfolio, we estimate an allowance amount sufficient to cover life-of-loan expected losses through an impairment calculation based on the difference between the loan’s basis and the present value of expected future cash flows (which would include life-of-loan default and recovery assumptions) discounted at the loan’s original effective interest rate (see “Allowance for Private Education Loan Losses” to this Note 2). The separate allowance estimates for our TDR and non-TDR portfolios, are combined into our total Allowance for Private Education Loan losses.

In estimating both the non-TDR and TDR allowance amounts, we start with historical experience of customer default behavior. We make judgments about which historical period to start with and then make further judgments about whether that historical experience is representative of future expectations and whether additional adjustments may be needed to those historical default rates. We also take the economic environment into consideration when calculating the allowance for loan losses. We analyze key economic statistics and the effect we expect it to have on future defaults. Key economic statistics analyzed as part of the allowance for loan losses are unemployment rates and other asset type delinquency rates. More judgment has been required over the last several years, compared with years prior, in light of the recent downturn in the U.S. economy and high levels of unemployment and its effect on our customer’s ability to pay their obligations.

Our allowance for loan losses is estimated using an analysis of delinquent and current accounts. Our model is used to estimate the likelihood that a loan receivable may progress through the various delinquency stages and ultimately charge off. The evaluation of the allowance for loan losses is inherently subjective, as it requires material estimates that may be susceptible to significant changes. The estimate for the allowance for loan losses is subject to a number of assumptions. If actual future performance in delinquency, charge-offs and recoveries are significantly different than estimated, this could materially affect our estimate of the allowance for loan losses and the related provision for loan losses on our income statement.

Below we describe in further detail our policies and procedures for the allowance for loan losses as they relate to our Private Education Loan and FFELP Loan portfolios.

Allowance for Private Education Loan Losses

We determine the collectability of our Private Education Loan portfolio by evaluating certain risk characteristics. We consider school type, credit score (FICO), existence of a cosigner, loan status and loan seasoning as the key credit quality indicators because they have the most significant effect on our determination of the adequacy of our allowance for loan losses. The type of school customers attend can have an impact on their job prospects after graduation and therefore affects their ability to make payments.

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Credit scores are an indicator of the creditworthiness of a customer and generally the higher the credit score the more likely it is the customer will be able to make all of their contractual payments. Loan status affects the credit risk because generally a past due loan is more likely to result in a credit loss than an up-to-date loan. Additionally, loans in a deferred payment status have different credit risk profiles compared with those in current pay status. Loan seasoning affects credit risk because a loan with a history of making payments generally has a lower incidence of default than a loan with a history of making infrequent or no payments. The existence of a cosigner lowers the likelihood of default. We monitor and update these credit quality indicators in the analysis of the adequacy of our allowance for loan losses on a quarterly basis.

To estimate the probable credit losses incurred in the loan portfolio at the reporting date, we use historical experience of customer payment behavior in connection with the key credit quality indicators and incorporate management expectation regarding macroeconomic and collection procedure factors. Our model is based upon the most recent six months of actual collection experience, seasonally adjusted, 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 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. Similar to estimating defaults, we use historical customer payment behavior to estimate the timing and amount of future recoveries on charged-off loans. We use judgment in determining whether historical performance is representative of what we expect to collect in the future. We then apply the default and collection rate projections to each category of loans. Once the quantitative calculation is performed, we review the adequacy of the allowance for loan losses and determine if qualitative adjustments need to be considered. Additionally, we consider changes in laws and regulations that could potentially impact the allowance for loan losses. More judgment has been required over the last several years, compared with years prior, in light of the U.S. economy and its effect on our customer’s ability to pay their obligations. We believe that our model reflects recent customer behavior, loan performance, and collection performance, as well as expectations about economic factors.

Similar to the rules governing FFELP payment requirements, our collection policies allow for periods of nonpayment for customers requesting additional payment grace periods upon leaving school or experiencing temporary difficulty meeting payment obligations. This is referred to as forbearance status and is considered separately in our allowance for loan losses. The loss confirmation period is in alignment with our typical collection cycle and takes into account these periods of nonpayment.

On July 1, 2011, we adopted new guidance that clarified when a loan restructuring constitutes a TDR. In applying the new guidance we determined that certain Private Education Loans for which we grant forbearance of greater than three months should be classified as TDRs. If a loan meets the criteria for troubled debt accounting then an allowance for loan losses is established which represents the present value of the losses that are expected to occur over the remaining life of the loan. This accounting results in a higher allowance for loan losses than our previously established allowance for these loans as our previous allowance for these loans represented an estimate of charge-offs expected to occur over the next two years (two years being our loss confirmation period). The new accounting guidance was effective as of July 1, 2011 but was required to be applied retrospectively to January 1, 2011. This resulted in $124 million of additional provision for loan losses in the third quarter of 2011 from approximately $3.8 billion of student loans being classified as TDRs. This new accounting guidance is only applied to certain customers who use their fourth or greater month of forbearance since the time period this new guidance is effective. This new accounting guidance has the effect of accelerating the recognition of expected losses related to our Private Education Loan portfolio. The increase in the provision for losses as a result of this new accounting guidance does not reflect a decrease in credit expectations of the portfolio or an increase in the expected life-of-loan losses related to this portfolio. We believe forbearance is an accepted and effective collections and risk management tool for Private Education Loans. We plan to continue to use forbearance and as a result, we expect to have additional loans classified as TDRs in the future (see “Note 4 — Allowance for Loan Losses” for a further discussion on the use of forbearance as a collection tool).

As part of concluding on the adequacy of the allowance for loan losses, we review key allowance and loan metrics. The most relevant of these metrics considered are the allowance coverage of charge-offs ratio; the allowance as a percentage of total loans and of loans in repayment; and delinquency and forbearance percentages.

Certain Private Education Loans do not require customers to begin repayment until six months after they have graduated or otherwise left school. Consequently, our loss estimates for these programs are generally low while the customer is in school. At December 31, 2012, 15 percent of the principal balance in the higher education Private Education Loan portfolio was related to customers who are in an in-school/grace/deferment status and not required to make payments. As this population of customers leaves school, they will be required to begin payments on their loans, and the allowance for loan losses may change accordingly.

We consider a loan to be delinquent 31 days after the last payment was contractually due. We use a model to estimate the amount of uncollectible accrued interest on Private Education Loans and reserve for that amount against current period interest income.

In general, Private Education Loan principal is charged off against the allowance when at the end of the month the loan exceeds 212 days past due. The charged-off amount equals the estimated loss of the defaulted loan balance. Actual recoveries, as they are received, are applied against the remaining loan balance that was not charged off. If periodic recoveries are less than originally expected, the difference results in immediate additional provision expense and charge-off of such amount.

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Allowance for FFELP Loan Losses

FFELP Loans are insured as to their principal and accrued interest in the event of default subject to a Risk Sharing level based on the date of loan disbursement. These insurance obligations are supported by contractual rights against the United States. For loans disbursed after October 1, 1993, and before July 1, 2006, we receive 98 percent reimbursement on all qualifying default claims. For loans disbursed on or after July 1, 2006, we receive 97 percent reimbursement. For loans disbursed prior to October 1, 1993, we receive 100 percent reimbursement.

Similar to the allowance for Private Education Loan losses, the allowance for FFELP Loan losses uses historical experience of customer default behavior and a two-year loss confirmation period to estimate the credit losses incurred in the loan portfolio at the reporting date. We apply the default rate projections, net of applicable Risk Sharing, to each category for the current period to perform our quantitative calculation. Once the quantitative calculation is performed, we review the adequacy of the allowance for loan losses and determine if qualitative adjustments need to be considered.

Cash and Cash Equivalents

Cash and cash equivalents includes term federal funds, Eurodollar deposits, commercial paper, asset-backed commercial paper, treasuries, money market funds and bank deposits with original terms to maturity of less than three months.

Restricted Cash and Investments

Restricted cash primarily includes amounts held in student loan securitization trusts and other secured borrowings. This cash must be used to make payments related to trust obligations. Amounts on deposit in these accounts are primarily the result of timing differences between when principal and interest is collected on the trust assets and when principal and interest is paid on trust liabilities.

In connection with our tuition payment plan product, we receive payments from customers that in turn are owed to schools. This cash, a majority of which has been deposited at the Bank, our Utah industrial bank subsidiary, is held in escrow for the beneficial owners. In addition, the cash rebates that Upromise members earn from qualifying purchases from Upromise’s participating companies are held in trust for the benefit of the members. This cash is held pursuant to a trust document until distributed in accordance with the Upromise member’s request and/or the terms of the Upromise service agreement. Upromise, which acts as the trustee for the trust, has deposited a majority of the cash with the Bank pursuant to a money market deposit account agreement between the Bank and Upromise as trustee of the trust. Subject to capital requirements and other laws, regulations and restrictions applicable to Utah industrial banks, the cash that is deposited with the Bank in connection with the tuition payment plan and the Upromise rebates described above is not restricted and, accordingly, is not included in restricted cash and investments in our consolidated financial statements, as there is no restriction surrounding our use of the funds.

Securities pledged as collateral related to our derivative portfolio, where the counterparty has rights to replace the securities, are classified as restricted. When the counterparty does not have these rights, the security is recorded in investments and disclosed as pledged collateral in the notes. Additionally, certain counterparties require cash collateral pledged to us to be segregated and held in restricted cash accounts. Cash balances that our indentured trusts deposit in guaranteed investment contracts that are held in trust for the related note holders are classified as restricted investments. Finally, cash received from lending institutions that is invested pending disbursement for student loans is restricted and cannot be disbursed for any other purpose.

Investments

Our available-for-sale investment portfolio consists of investments that are AAA equivalent securities and are carried at fair value, with the temporary changes in fair value carried as a separate component of stockholders’ equity, net of taxes. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts, which are amortized using the effective interest rate method. Other-than-temporary impairment is evaluated by considering several factors, including the length of time and extent to which the fair value has been less than the amortized cost basis, the financial condition and near-term prospects of the security (considering factors such as adverse conditions specific to the security and ratings agency actions), and the intent and ability to retain the investment to allow for an anticipated recovery in fair value. The entire fair value loss on a security that is other-than-temporary impairment is recorded in earnings if we intend to sell the security or if it is more likely than not that we will be required to sell the security before the expected recovery of the loss. However, if the impairment is other-than-temporary, and those two conditions do not exist, the portion of the impairment related to credit losses is recorded in earnings and the impairment related to other factors is recorded in other comprehensive income. Securities classified as trading are accounted for at fair value with unrealized gains and losses included in investment income. Securities that we have the intent and ability to hold to maturity are classified as held-to-maturity and are accounted for at amortized cost unless the security is determined to have an other-than-temporary impairment. In this case it is accounted for in the same manner described above.

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We also have other investments, including a receivable for cash collateral posted to derivative counterparties and our remaining investment in leveraged aircraft leases. These investments are accounted for at amortized cost net of impairments in other investments.

Interest Expense

Interest expense is based upon contractual interest rates adjusted for the amortization of debt issuance costs and premiums and the accretion of discounts. Our interest expense may also be adjusted for net payments/receipts related to interest rate and foreign currency swap agreements and interest rate futures contracts that qualify and are designated as hedges. Interest expense also includes the amortization of deferred gains and losses on closed hedge transactions that qualified as hedges. Amortization of debt issuance costs, premiums, discounts and terminated hedge-basis adjustments are recognized using the effective interest rate method.

In addition, three Private Education Loan securitizations issued in 2009 were callable at 93 or 94 percent of the outstanding principal (depending on the terms of the note). Two of these bonds have already been called and we have concluded that it is probable we will call the remaining bond at the call date at the designated discount. Probability is based on our assessment that this bond will be refinanced at the call date at or lower than a breakeven cost of funds based on the call discount. As a result, we are accreting this call discount as a reduction to interest expense through the first call date using the effective interest rate method. The bond is first callable in August 2013. We have accreted approximately $58 million, cumulatively, as a reduction of interest expense through December 31, 2012 related to the bond. If it becomes less than probable we will call this bond at a future date, it will result in us reversing this prior accretion as a cumulative catch-up adjustment.

Transfer of Financial Assets and Extinguishments of Liabilities

We account for loan sales and debt repurchases in accordance with the applicable accounting guidance. Our securitizations, indentured trust debt, ABCP borrowings, ED Conduit Program Facility and ED Participation Program Facility are accounted for as on-balance sheet secured borrowings. See “Securitization Accounting” of this Note 2 for further discussion on the criteria assessed to determine whether a transfer of financial assets is a sale or a secured borrowing and Note 6, “Borrowings,” for further discussion on the ED Funding Programs. If a transfer of loans qualifies as a sale we derecognize the loan and recognize a gain or loss as the difference between the carry basis of the loan sold and liabilities retained and the compensation received.

We periodically repurchase our outstanding debt in the open market or through public tender offers. We record a gain or loss on the early extinguishment of debt based upon the difference between the carrying cost of the debt and the amount paid to the third party and is net of hedging gains and losses when the debt is in a qualifying hedge relationship.

We recognize the results of a transfer of loans and the extinguishment of debt based upon the settlement date of the transaction.

Securitization Accounting

Our securitizations use a two-step structure with a special purpose entity that legally isolates the transferred assets from us, even in the event of bankruptcy. Transactions receiving sale treatment are also structured to ensure that the holders of the beneficial interests issued are not constrained from pledging or exchanging their interests, and that we do not maintain effective control over the transferred assets. If these criteria are not met, then the transaction is accounted for as an on-balance sheet secured borrowing. In all cases, irrespective of whether they qualify as accounting sales our securitizations are legally structured to be sales of assets that isolate the transferred assets from us. If a securitization qualifies as a sale, we then assess whether we are the primary beneficiary of the securitization trust and are required to consolidate such trust. (See “Consolidation” of this Note 2.) If we are the primary beneficiary then no gain or loss is recognized. See “Consolidation” of this Note 2 for additional information regarding the accounting rules for consolidation when we are the primary beneficiary of these trusts.

Irrespective of whether a securitization receives sale or on-balance sheet treatment, our continuing involvement with our securitization trusts is generally limited to:

• Owning the equity certificates of certain trusts.

• The servicing of the student loan assets within the securitization trusts, on both a pre- and post-default basis.

• Our acting as administrator for the securitization transactions we sponsored, which includes remarketing certain bonds at future dates.

• Our responsibilities relative to representation and warranty violations.

• Temporarily advancing to the trust certain borrower benefits afforded the borrowers of student loans that have been securitized. These advances subsequently are returned to us in the next quarter.

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• Certain back-to-back derivatives entered into by us contemporaneously with the execution of derivatives by certain Private Education Loan securitization trusts.

• The option held by us to buy certain delinquent loans from certain Private Education Loan securitization trusts.

• The option to exercise the clean-up call and purchase the student loans from the trust when the asset balance is 10 percent or less of the original loan balance.

• The option (in certain trusts) to call rate reset notes in instances where the remarketing process has failed.

• The option (in certain trusts that were TALF eligible in 2009) to call the outstanding bonds at a discount to par at a future date

The investors of the securitization trusts have no recourse to our other assets should there be a failure of the trusts to pay when due. Generally, the only arrangements under which we have to provide financial support to the trusts are representation and warranty violations requiring the buyback of loans.

Under the terms of the transaction documents of certain trusts, we have, from time to time, exercised our options to purchase delinquent loans from Private Education Loan trusts, to purchase the remaining loans from trusts once the loan balance falls below 10 percent of the original amount, or to call rate reset notes. Certain trusts maintain financial arrangements with third parties also typical of securitization transactions, such as derivative contracts (swaps) and bond insurance policies that, in the case of a counterparty failure, could adversely impact the value of any Residual Interest.

We do not record servicing assets or servicing liabilities when our securitization trusts are accounted for as on-balance sheet secured financings. As of December 31, 2012 and 2011, all of our securitization trusts are on-balance sheet and as a result we do not have servicing assets or liabilities recorded on the consolidated balance sheet related to our securitization trusts.

Derivative Accounting

The accounting guidance for our derivative instruments, which includes interest rate swaps, cross-currency interest rate swaps, interest rate futures contracts, interest rate cap contracts and Floor Income Contracts, requires that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded at fair value on the balance sheet as either an asset or liability. Derivative positions are recorded as net positions by counterparty based on master netting arrangements (see “Note 7 — Derivative Financial Instruments — Risk Management Strategy”) exclusive of accrued interest and cash collateral held or pledged.

Many of our derivatives, mainly interest rate swaps hedging the fair value of fixed-rate assets and liabilities, and cross-currency interest rate swaps, qualify as effective hedges. For these derivatives, the relationship between the hedging instrument and the hedged items (including the hedged risk and method for assessing effectiveness), as well as the risk management objective and strategy for undertaking various hedge transactions at the inception of the hedging relationship, is documented. Each derivative is designated to either a specific (or pool of) asset(s) or liability(ies) on the balance sheet or expected future cash flows, and designated as either a “fair value” or a “cash flow” hedge. Fair value hedges are designed to hedge our exposure to changes in fair value of a fixed rate or foreign denominated asset or liability, while cash flow hedges are designed to hedge our exposure to variability of either a floating rate asset’s or liability’s cash flows or an expected fixed rate debt issuance. For effective fair value hedges, both the derivative and the hedged item (for the risk being hedged) are marked-to-market with any difference reflecting ineffectiveness and recorded immediately in the statement of income. For effective cash flow hedges, the change in the fair value of the derivative is recorded in other comprehensive income, net of tax, and recognized in earnings in the same period as the earnings effects of the hedged item. The ineffective portion of a cash flow hedge is recorded immediately through earnings. The assessment of the hedge’s effectiveness is performed at inception and on an ongoing basis, generally using regression testing. For hedges of a pool of assets or liabilities, tests are performed to demonstrate the similarity of individual instruments of the pool. When it is determined that a derivative is not currently an effective hedge, ineffectiveness is recognized for the full change in value of the derivative with no offsetting mark-to-market of the hedged item for the current period. If it is also determined the hedge will not be effective in the future, we discontinue the hedge accounting prospectively, cease recording changes in the fair value of the hedged item, and begin amortization of any basis adjustments that exist related to the hedged item.

We also have derivatives, primarily Floor Income Contracts and certain basis swaps, that we believe are effective economic hedges but do not qualify for hedge accounting treatment. These derivatives are classified as “trading” and as a result they are marked-to-market through earnings with no consideration for the fair value fluctuation of the economically hedged item.

The “gains (losses) on derivative and hedging activities, net” line item in the consolidated statements of income includes the unrealized changes in the fair value of our derivatives (except effective cash flow hedges which are recorded in other comprehensive income), the unrealized changes in fair value of hedged items in qualifying fair value hedges, as well as the realized changes in fair value related to derivative net settlements and dispositions that do not qualify for hedge accounting. Net settlement income/expense on derivatives that qualify as hedges are included with the income or expense of the hedged item (mainly interest expense).

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Servicing Revenue

Servicing revenue includes third-party loan servicing and Guarantor servicing revenue.

We perform loan servicing functions for third-parties in return for a servicing fee. Our compensation is typically based on a per-unit fee arrangement or a percentage of the loans outstanding. We recognize servicing revenues associated with these activities based upon the contractual arrangements as the services are rendered. We recognize late fees on third-party serviced loans as well as on loans in our portfolio according to the contractual provisions of the promissory notes, as well as our expectation of collectability.

We provide a full complement of administrative services to FFELP Guarantors including guarantee issuance through July 1, 2010, and account maintenance for Guarantor agencies. The fees associated with these services are recognized as the services are performed based on contractually determined rates.

Contingency Revenue

We receive fees for collections of delinquent debt on behalf of clients performed on a contingency basis. Revenue is earned and recognized upon receipt of the delinquent customer funds.

We also receive fees from Guarantor agencies for performing default aversion services on delinquent loans prior to default. The fee is received when the loan is initially placed with us and we are obligated to provide such services for the remaining life of the loan for no additional fee. In the event that the loan defaults, we are obligated to rebate a portion of the fee to the Guarantor agency in proportion to the principal and interest outstanding when the loan defaults. We recognize fees received, net of an estimate of future rebates owed due to subsequent defaults, over the service period which is estimated to be the life of the loan.

Other Income

Our Upromise subsidiary has a number of programs that encourage consumers to save for the cost of college education. We have established a consumer savings network which is designed to promote college savings by consumers who are members of this program by encouraging them to purchase goods and services from the companies that participate in the program (“Participating Companies”). Participating Companies generally pay Upromise fees based on member purchase volume, either online or in stores depending on the contractual arrangement with the Participating Company. We recognize revenue as marketing and administrative services are rendered based upon contractually determined rates and member purchase volumes.

Goodwill and Acquired Intangible Assets

We account for goodwill and acquired intangible assets in accordance with the applicable accounting guidance. Under this guidance goodwill is not amortized but is tested periodically for impairment. We test goodwill for impairment annually as of October 1 at the reporting unit level, which is the same as or one level below a business segment. Goodwill is also tested at interim periods if an event occurs or circumstances change that would indicate the carrying amount may be impaired.

We assess qualitative factors to determine whether it is “more-likely-than-not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The “more-likely-than-not” threshold is defined as having a likelihood of more than 50 percent. If, after assessing relevant qualitative factors, we conclude that it is “more-likely-than-not” that the fair value of a reporting unit as of October 1 is less than its carrying amount, we will complete Step 1 of the goodwill impairment analysis. Step 1 consists of a comparison of the fair value of the reporting unit to the reporting unit’s carrying value, including goodwill. If the carrying value of the reporting unit exceeds the fair value, Step 2 in the goodwill impairment analysis is performed to measure the amount of impairment loss, if any. Step 2 of the goodwill impairment analysis compares the implied fair value of the reporting unit’s goodwill to the carrying value of the reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner consistent with determining goodwill in a business combination. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to that excess.

Other acquired intangible assets include but are not limited to tradenames, customer and other relationships, and non-compete agreements. Acquired intangible assets with finite lives are amortized over their estimated useful lives in proportion to their estimated economic benefit. Finite-lived acquired intangible assets are reviewed for impairment using an undiscounted cash flow analysis when an event occurs or circumstances change indicating the carrying amount of a finite-lived asset or asset group may not be recoverable. If the carrying amount of the asset or asset groups exceeds the undiscounted cash flows, the fair value of the asset or asset group is determined using an acceptable valuation technique. An impairment loss would be recognized if the carrying amount of the asset (or

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asset group) exceeds the fair value of the asset or asset group. The impairment loss recognized would be the difference between the carrying amount and fair value. Indefinite-life acquired intangible assets are not amortized. We test these indefinite life acquired intangible assets for impairment annually as of October 1 or at interim periods if an event occurs or circumstances change that would indicate the carrying value of these assets may be impaired. The annual or interim impairment test of indefinite-lived acquired intangible assets is based primarily on a discounted cash flow analysis.

Restructuring Activities

From time to time we implement plans to restructure our business. In conjunction with these restructuring plans, involuntary benefit arrangements, disposal costs (including contract termination costs and other exit costs), as well as certain other costs that are incremental and incurred as a direct result of our restructuring plans, are classified as restructuring expenses in the accompanying consolidated statements of income.

We sponsor the SLM Corporation Employee Severance Plan (the “Severance Plan”) which provides severance benefits in the event of termination of our full-time employees (with the exception of certain specified levels of management) and part-time employees who work at least 24 hours per week. The Severance Plan establishes specified benefits based on base salary, job level immediately preceding termination and years of service upon termination of employment due to Involuntary Termination or a Job Abolishment, as defined in the Severance Plan. The benefits payable under the Severance Plan relate to past service and they accumulate and vest. Accordingly, we recognize severance costs to be paid pursuant to the Severance Plan when payment of such benefits is probable and reasonably estimable. Such benefits, including severance pay calculated based on the Severance Plan, medical and dental benefits, outplacement services and continuation pay, have been incurred during the years ended December 31, 2012, 2011 and 2010, as a direct result of our restructuring initiatives. Accordingly, such costs are classified as restructuring expenses in the accompanying consolidated statements of income. See “Note 12 — Restructuring Activities” for further information regarding our restructuring activities.

Contract termination costs are expensed at the earlier of (1) the contract termination date or (2) the cease use date under the contract. Other exit costs are expensed as incurred and classified as restructuring expenses if (1) the cost is incremental to and incurred as a direct result of planned restructuring activities and (2) the cost is not associated with or incurred to generate revenues subsequent to our consummation of the related restructuring activities.

Accounting for Stock-Based Compensation

We recognize stock-based compensation cost in our consolidated statements of income using the fair value based method. Under this method we determine the fair value of the stock-based compensation at the time of the grant and recognize the resulting compensation expense over the vesting period of the stock-based grant.

Income Taxes

We account for income taxes under the asset and liability approach which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and tax basis of our assets and liabilities. To the extent tax laws change, deferred tax assets and liabilities are adjusted in the period that the tax change is enacted.

“Income tax expense/(benefit)” includes (i) deferred tax expense/(benefit), which represents the net change in the deferred tax asset or liability balance during the year plus any change in a valuation allowance, and (ii) current tax expense/(benefit), which represents the amount of tax currently payable to or receivable from a tax authority plus amounts accrued for unrecognized tax benefits. Income tax expense/(benefit) excludes the tax effects related to adjustments recorded in equity.

If we have an uncertain tax position, then that tax position is recognized only if it is more likely than not to be sustained upon examination based on the technical merits of the position. The amount of tax benefit recognized in the financial statements is the largest amount of benefit that is more than fifty percent likely of being sustained upon ultimate settlement of the uncertain tax position. We recognize interest related to unrecognized tax benefits in income tax expense/(benefit), and penalties, if any, in operating expenses.

Earnings (Loss) per Common Share

We compute earnings (loss) per common share (“EPS”) by dividing net income allocated to common shareholders by the weighted average common shares outstanding. Net income allocated to common shareholders represents net income applicable to common shareholders (net income adjusted for preferred stock dividends including dividends declared, accretion of discounts on preferred stock including accelerated accretion when preferred stock is repaid early, and cumulative dividends related to the current dividend period that have not been declared as of period end). Diluted earnings per common share is computed by dividing income allocated to common shareholders by the weighted average common shares outstanding plus amounts representing the dilutive effect of stock options outstanding, restricted stock, restricted stock units, and the outstanding commitment to issue shares under the Employee Stock Purchase Plan. See “Note 10 — Earnings (Loss) per Common Share” for further discussion.

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Discontinued Operations

A “Component” of a business comprises operations and cash flows that can be clearly distinguished operationally and for financial reporting purposes from the rest of the Company. When we determine that a Component of our business has been disposed of or has met the criteria to be classified as held-for-sale, such Component is presented separately as discontinued operations if the operations of the Component have been or will be eliminated from our ongoing operations and we will have no continuing involvement with the Component after the disposal transaction is complete. If a Component is classified as held-for-sale, then it is carried at the lower of its cost basis or fair value. Included within discontinued operations are the accounting results related to our purchasing delinquent and charged-off receivables on various types of consumer debt with a primary emphasis on charged-off credit card receivables and sub-performing and non-performing mortgage loans (Purchased Paper businesses), which have all been sold as of December 31, 2012. We are also presenting our Campus Solutions business, which was sold in the second quarter of 2013, and our 529 college savings plan administration business, for which the Company has entered into a definitive agreement of sale and which is anticipated to be sold in the fourth quarter of 2013, in discontinued operations for all periods presented. See “Note 17 — Discontinued Operations” for further discussion.

Statement of Cash Flows

Included in our financial statements is the consolidated statement of cash flows. It is our policy to include all derivative net settlements, irrespective of whether the derivative is a qualifying hedge, in the same section of the statement of cash flows that the derivative is economically hedging.

As discussed in “Restricted Cash and Investments” of this Note 2, our restricted cash balances primarily relate to on-balance sheet securitizations. This balance is primarily the result of timing differences between when principal and interest is collected on the trust assets and when principal and interest is paid on the trust liabilities. As such, changes in this balance are reflected in investing activities.

Reclassifications

Certain reclassifications have been made to the balances as of and for the years ended December 31, 2011 and 2010, to be consistent with classifications adopted for 2012, which had no effect on net income, total assets or total liabilities.

3. Student Loans

There are three principal categories of FFELP Loans: Stafford, PLUS, and FFELP Consolidation Loans. Generally, Stafford and PLUS Loans have repayment periods of between five and ten years. FFELP Consolidation Loans have repayment periods of twelve to thirty years. FFELP Loans do not require repayment, or have modified repayment plans, while the customer is in-school and during the grace period immediately upon leaving school. The customer may also be granted a deferment or forbearance for a period of time based on need, during which time the customer is not considered to be in repayment. Interest continues to accrue on loans in the in-school, deferment and forbearance period. FFELP Loans obligate the customer to pay interest at a stated fixed rate or a variable rate reset annually (subject to a cap) on July 1 of each year depending on when the loan was originated and the loan type. FFELP Loans disbursed before April 1, 2006 earn interest at the greater of the borrower’s rate or a floating rate based on the SAP formula, with the interest earned on the floating rate that exceeds the interest earned from the customer being paid directly by ED. In low or certain declining interest rate environments when student loans are earning at the fixed borrower rate, and the interest on the funding for the loans is variable and declining, we can earn additional spread income that we refer to as Floor Income. For loans disbursed after April 1, 2006, FFELP Loans effectively only earn at the SAP rate, as the excess interest earned when the borrower rate exceeds the SAP rate (Floor Income) is required to be rebated to ED.

FFELP Loans are insured as to their principal and accrued interest in the event of default subject to a Risk Sharing level based on the date of loan disbursement. These insurance obligations are supported by contractual rights against the United States. For loans disbursed after October 1, 1993 and before July 1, 2006, we receive 98 percent reimbursement on all qualifying default claims. For loans disbursed on or after July 1, 2006, we receive 97 percent reimbursement.

On December 23, 2011, the President signed the Consolidated Appropriations Act of 2012 into law. This law includes changes that permit FFELP lenders or beneficial holders to change the index on which the Special Allowance Payments (“SAP”) are calculated for FFELP Loans first disbursed on or after January 1, 2000. The law allows holders to elect to move the index from the Commercial Paper (“CP”) Rate to the one-month LIBOR rate. We elected to use the one-month LIBOR rate rather than the CP rate commencing on April 1, 2012 in connection with our entire $128 billion of CP indexed loans. This change will help us to better match loan yields with our financing costs. This election did not materially affect our results for the year ended December 31, 2012.

We offer a variety of Private Education Loans. The Private Education Loans we make are largely to bridge the gap between the cost of higher education and the amount funded through financial aid, federal loans or customers’ resources. Private Education Loans bear the full credit risk of the customer. We manage this additional risk through historical risk-performance underwriting strategies and the addition of qualified cosigners. Private Education Loans generally carry a variable rate indexed to LIBOR or Prime indices. We encourage customers to include a cosigner on the loan, and the majority of loans in our portfolio are cosigned. Similar to FFELP

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loans, Private Education Loans are generally non-dischargeable in bankruptcy. Most loans have repayment terms of 15 years or more, and payments are typically deferred until after graduation; however, in June 2009 we began to offer interest-only or fixed payment options while the customer is enrolled in school. Similar to FFELP loans, we offer payment deferment to qualifying customers during in-school periods, and offer periods of forbearance subject to maximum terms of 24 months. Forbearance may be granted to customers who are exiting their grace period to provide additional time to obtain employment and income to support their obligations, or to current customers who are faced with a hardship and request forbearance time to provide temporary payment relief. Interest continues to accrue on loans in any deferred or forbearance period.

The estimated weighted average life of student loans in our portfolio was approximately 8.0 years and 7.6 years at December 31, 2012 and 2011, respectively. The following table reflects the distribution of our student loan portfolio by program.

	December 31, 2012					Year Ended December 31, 2012
(Dollars in millions)	Ending Balance		% of Balance			Average Balance		Average Effective Interest Rate
FFELP Stafford and Other Student Loans, net(1)	$	44,289		27	%	$	47,629		1.98	%
FFELP Consolidation Loans, net		81,323		50			84,495		2.73
Private Education Loans, net		36,934		23			37,691		6.58
Total student loans, net	$	162,546		100	%	$	169,815		3.38	%

	December 31, 2011					Year Ended December 31, 2011
(Dollars in millions)	Ending Balance		% of Balance			Average Balance		Average Effective Interest Rate
FFELP Stafford and Other Student Loans, net(1)	$	50,440		29	%	$	53,163		1.92	%
FFELP Consolidation Loans, net		87,690		50			89,946		2.71
Private Education Loans, net		36,290		21			36,955		6.57
Total student loans, net	$	174,420		100	%	$	180,064		3.27	%

⁽¹⁾  The FFELP category is primarily Stafford Loans, but also includes federally guaranteed PLUS and HEAL Loans.

As of December 31, 2012 and 2011, 75 percent and 71 percent, respectively, of our student loan portfolio was in repayment.

Loan Acquisitions and Sales

In 2010, we sold to ED approximately $20.4 billion face amount of loans as part of the Purchase Program. These loan sales resulted in a $321 million gain. Outstanding debt of $20.3 billion has been paid down related to the Participation Program in connection with these loan sales. See Note 6, “Borrowings” for a discussion of the ED Purchase and Participation Programs.

Certain Collection Tools — Private Education Loans

Forbearance involves granting the customer a temporary cessation of payments (or temporary acceptance of smaller than scheduled payments) for a specified period of time. Using forbearance extends the original term of the loan. Forbearance does not grant any reduction in the total repayment obligation (principal or interest). While in forbearance status, interest continues to accrue and is capitalized to principal when the loan re-enters repayment status. Our forbearance policies include limits on the number of forbearance months granted consecutively and the total number of forbearance months granted over the life of the loan. In some instances, we require good-faith payments before granting forbearance. Exceptions to forbearance policies are permitted when such exceptions are judged to increase the likelihood of collection of the loan. Forbearance as a collection tool is used most effectively when applied based on a customer’s unique situation, including historical information and judgments. We leverage updated customer information and other decision support tools to best determine who will be granted forbearance based on our expectations as to a customer’s ability and willingness to repay their obligation. This strategy is aimed at mitigating the overall risk of the portfolio as well as encouraging cash resolution of delinquent loans.

Forbearance may be granted to customers who are exiting their grace period to provide additional time to obtain employment and income to support their obligations, or to current customers who are faced with a hardship and request forbearance time to provide temporary payment relief. In these circumstances, a customer’s loan is placed into a forbearance status in limited monthly increments and is reflected in the forbearance status at month-end during this time. At the end of the granted forbearance period, the customer will enter repayment status as current and is expected to begin making scheduled monthly payments on a go-forward basis.

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Forbearance may also be granted to customers who are delinquent in their payments. In these circumstances, the forbearance cures the delinquency and the customer is returned to a current repayment status. In more limited instances, delinquent customers will also be granted additional forbearance time.

During 2009, we instituted an interest rate reduction program to assist customers in repaying their Private Education Loans through reduced payments, while continuing to reduce their outstanding principal balance. This program is offered in situations where the potential for principal recovery, through a modification of the monthly payment amount, is better than other alternatives currently available. Along with demonstrating the ability and willingness to pay, the customer must make three consecutive monthly payments at the reduced rate to qualify for the program. Once the customer has made the initial three payments, the loan’s status is returned to current and the interest rate is reduced for the successive twelve month period.

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 believe that the allowance for 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) customers attending for-profit schools with an original Fair Isaac and Company (“FICO”) score of less than 670 and (ii) customers 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 customer or cosigner FICO score at origination. Traditional loans are defined as all other Private Education Loans that are not classified as non-traditional.

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Allowance for Loan Losses Metrics

	Allowance for Loan Losses
	Year Ended December 31, 2012
(Dollars in millions)	FFELP Loans			Private Education Loans			Other Loans			Total
Allowance for Loan Losses
Beginning balance	$	187		$	2,171		$	69		$	2,427
Total provision		72			1,008			—			1,080
Charge-offs(1)		(92	)		(1,037	)		(22	)		(1,151	)
Student loan sales		(8	)		—			—			(8	)
Reclassification of interest reserve(2)		—			29			—			29
Ending Balance	$	159		$	2,171		$	47		$	2,377
Allowance:
Ending balance: individually evaluated for impairment	$	—		$	1,126		$	35		$	1,161
Ending balance: collectively evaluated for impairment	$	159		$	1,045		$	12		$	1,216
Loans:
Ending balance: individually evaluated for impairment	$	—		$	7,560		$	69		$	7,629
Ending balance: collectively evaluated for impairment	$	124,335		$	32,341		$	116		$	156,792
Charge-offs as a percentage of average loans in repayment		.10	%		3.37	%		9.51	%
Charge-offs as a percentage of average loans in repayment and forbearance		.08	%		3.24	%		9.51	%
Allowance as a percentage of the ending total loan balance		.13	%		5.44	%		25.39	%
Allowance as a percentage of the ending loans in repayment		.18	%		6.89	%		25.39	%
Allowance coverage of charge-offs		1.7			2.1			2.1
Ending total loans(3)	$	124,335		$	39,901		$	185
Average loans in repayment	$	91,653		$	30,750		$	231
Ending loans in repayment	$	90,731		$	31,514		$	185

⁽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 collected and any shortfalls in what was actually collected 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⁾  Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.

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	Allowance for Loan Losses
	Year Ended December 31, 2011
(Dollars in millions)	FFELP Loans			Private Education Loans			Other Loans			Total
Allowance for Loan Losses
Beginning balance	$	189		$	2,022		$	72		$	2,283
Total provision		86			1,179			30			1,295
Charge-offs(1)		(78	)		(1,072	)		(33	)		(1,183	)
Student loan sales		(10	)		—			—			(10	)
Reclassification of interest reserve(2)		—			42			—			42
Ending Balance	$	187		$	2,171		$	69		$	2,427
Allowance:
Ending balance: individually evaluated for impairment	$	—		$	762		$	51		$	813
Ending balance: collectively evaluated for impairment	$	187		$	1,409		$	18		$	1,614
Loans:
Ending balance: individually evaluated for impairment	$	—		$	5,313		$	93		$	5,406
Ending balance: collectively evaluated for impairment	$	136,643		$	34,021		$	170		$	170,834
Charge-offs as a percentage of average loans in repayment		.08	%		3.72	%		11.30	%
Charge-offs as a percentage of average loans in repayment and forbearance		.07	%		3.55	%		11.30	%
Allowance as a percentage of the ending total loan balance		.14	%		5.52	%		26.26	%
Allowance as a percentage of the ending loans in repayment		.20	%		7.19	%		26.26	%
Allowance coverage of charge-offs		2.4			2.0			2.1
Ending total loans(3)	$	136,643		$	39,334		$	263
Average loans in repayment	$	94,359		$	28,790		$	294
Ending loans in repayment	$	94,181		$	30,185		$	263

⁽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 collected and any shortfalls in what was actually collected 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⁾  Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.

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	Allowance for Loan Losses
	Year Ended December 31, 2010
(Dollars in millions)	FFELP Loans			Private Education Loans			Other Loans			Total
Allowance for Loan Losses
Beginning balance	$	161		$	1,443		$	76		$	1,680
Total provision		98			1,298			23			1,419
Charge-offs(1)		(87	)		(1,291	)		(27	)		(1,405	)
Student loan sales		(8	)		—			—			(8	)
Reclassification of interest reserve(2)		—			48			—			48
Consolidation of securitization trusts(3)		25			524			—			549
Ending Balance	$	189		$	2,022		$	72		$	2,283
Allowance:
Ending balance: individually evaluated for impairment	$	—		$	114		$	59		$	173
Ending balance: collectively evaluated for impairment	$	189		$	1,908		$	13		$	2,110
Loans:
Ending balance: individually evaluated for impairment	$	—		$	444		$	114		$	558
Ending balance: collectively evaluated for impairment	$	146,938		$	38,128		$	228		$	185,294
Charge-offs as a percentage of average loans in repayment		.11	%		5.04	%		6.95	%
Charge-offs as a percentage of average loans in repayment and forbearance		.09	%		4.79	%		6.95	%
Allowance as a percentage of the ending total loan balance		.13	%		5.24	%		21.18	%
Allowance as a percentage of the ending loans in repayment		.20	%		7.26	%		21.18	%
Allowance coverage of charge-offs		2.2			1.6			2.7
Ending total loans(4)	$	146,938		$	38,572		$	342
Average loans in repayment	$	82,255		$	25,596		$	383
Ending loans in repayment	$	96,696		$	27,852		$	342

⁽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 collected and any shortfalls in what was actually collected 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⁾  On January 1, 2010, upon the adoption of the new consolidation accounting guidance all off-balance sheet loans were consolidated on-balance sheet. (See “Note 2 — Significant Accounting Policies — Consolidation.”)

⁽⁴⁾  Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.

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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.

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
	December 31, 2012					December 31, 2011
(Dollars in millions)	Balance(3)		% of Balance			Balance(3)		% of Balance
Credit Quality Indicators
School Type/FICO Scores:
Traditional	$	35,347		92	%	$	34,528		91	%
Non-Traditional(1)		3,207		8			3,565		9
Total	$	38,554		100	%	$	38,093		100	%
Cosigners:
With cosigner	$	24,907		65	%	$	23,507		62	%
Without cosigner		13,647		35			14,586		38
Total	$	38,554		100	%	$	38,093		100	%
Seasoning(2):
1-12 payments	$	7,371		19	%	$	9,246		24	%
13-24 payments		6,137		16			6,837		18
25-36 payments		6,037		16			5,677		15
37-48 payments		4,780		12			3,778		10
More than 48 payments		8,325		22			6,033		16
Not yet in repayment		5,904		15			6,522		17
Total	$	38,554		100	%	$	38,093		100	%

⁽¹⁾  Defined as loans to customers attending for-profit schools (with a FICO score of less than 670 at origination) and customers 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.

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The following tables provide information regarding the loan status and aging of past due loans.

	FFELP Loan Delinquencies
	December 31,
	2012						2011						2010
(Dollars in millions)	Balance			%			Balance			%			Balance			%
Loans in-school/grace/deferment(1)	$	17,702					$	22,887					$	28,214
Loans in forbearance(2)		15,902						19,575						22,028
Loans in repayment and percentage of each status:
Loans current		75,499			83.2	%		77,093			81.9	%		80,026			82.8	%
Loans delinquent 31-60 days(3)		4,710			5.2			5,419			5.8			5,500			5.7
Loans delinquent 61-90 days(3)		2,788			3.1			3,438			3.7			3,178			3.3
Loans delinquent greater than 90 days(3)		7,734			8.5			8,231			8.6			7,992			8.2
Total FFELP Loans in repayment		90,731			100	%		94,181			100	%		96,696			100	%
Total FFELP Loans, gross		124,335						136,643						146,938
FFELP Loan unamortized premium		1,436						1,674						1,900
Total FFELP Loans		125,771						138,317						148,838
FFELP Loan allowance for losses		(159	)					(187	)					(189	)
FFELP Loans, net	$	125,612					$	138,130					$	148,649
Percentage of FFELP Loans in repayment					73.0	%					68.9	%					65.8	%
Delinquencies as a percentage of FFELP Loans in repayment					16.8	%					18.1	%					17.2	%
FFELP Loans in forbearance as a percentage of loans in repayment and forbearance					14.9	%					17.2	%					18.6	%

⁽¹⁾  Loans for customers 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 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.

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

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	Private Education Traditional Loan Delinquencies
	December 31,
	2012						2011						2010
(Dollars in millions)	Balance			%			Balance			%			Balance			%
Loans in-school/grace/deferment(1)	$	5,421					$	5,866					$	7,419
Loans in forbearance(2)		996						1,195						1,156
Loans in repayment and percentage of each status:
Loans current		26,597			91.9	%		25,110			91.4	%		22,850			91.2	%
Loans delinquent 31-60 days(3)		837			2.9			868			3.2			794			3.2
Loans delinquent 61-90 days(3)		375			1.3			393			1.4			340			1.4
Loans delinquent greater than 90 days(3)		1,121			3.9			1,096			4.0			1,060			4.2
Total traditional loans in repayment		28,930			100	%		27,467			100	%		25,044			100	%
Total traditional loans, gross		35,347						34,528						33,619
Traditional loans unamortized discount		(713	)					(792	)					(801	)
Total traditional loans		34,634						33,736						32,818
Traditional loans receivable for partially charged-off loans		797						705						558
Traditional loans allowance for losses		(1,637	)					(1,542	)					(1,231	)
Traditional loans, net	$	33,794					$	32,899					$	32,145
Percentage of traditional loans in repayment					81.9	%					80.0	%					74.5	%
Delinquencies as a percentage of traditional loans in repayment					8.1	%					8.6	%					8.8	%
Loans in forbearance as a percentage of loans in repayment and forbearance					3.3	%					4.2	%					4.4	%

⁽¹⁾  Deferment includes customers who have returned to school or are engaged 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 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, 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.

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	Private Education Non-Traditional Loan Delinquencies
	December 31,
	2012						2011						2010
(Dollars in millions)	Balance			%			Balance			%			Balance			%
Loans in-school/grace/deferment(1)	$	483					$	656					$	921
Loans in forbearance(2)		140						191						184
Loans in repayment and percentage of each status:
Loans current		1,978			76.5	%		2,012			74.0	%		2,038			72.6	%
Loans delinquent 31-60 days(3)		175			6.8			208			7.7			217			7.7
Loans delinquent 61-90 days(3)		106			4.1			127			4.7			131			4.7
Loans delinquent greater than 90 days(3)		325			12.6			371			13.6			422			15.0
Total non-traditional loans in repayment		2,584			100	%		2,718			100	%		2,808			100	%
Total non-traditional loans, gross		3,207						3,565						3,913
Non-traditional loans unamortized discount		(83	)					(81	)					(93	)
Total non-traditional loans		3,124						3,484						3,820
Non-traditional loans receivable for partially charged-off loans		550						536						482
Non-traditional loans allowance for losses		(534	)					(629	)					(791	)
Non-traditional loans, net	$	3,140					$	3,391					$	3,511
Percentage of non-traditional loans in repayment					80.6	%					76.2	%					71.8	%
Delinquencies as a percentage of non-traditional loans in repayment					23.4	%					26.0	%					27.4	%
Loans in forbearance as a percentage of loans in repayment and forbearance					5.1	%					6.6	%					6.1	%

⁽¹⁾  Deferment includes customers who have returned to school or are engaged 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 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, 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 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 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. Private Education Loans which defaulted between 2008 and 2011 for which we have previously charged off estimated losses have, to varying degrees, not met our post-default recovery expectations to date and may continue not to do so. According to our policy, we have been charging off these periodic shortfalls in expected recoveries against our allowance for Private Education Loan losses and the related receivable for partially charged-off Private Education Loans and we will continue to do so. Differences in actual future recoveries on these defaulted loans could affect our receivable for partially charged-off Private Education Loans. There was $198 million and $148 million in allowance for Private Education Loan losses at December 31, 2012 and 2011, respectively, providing for possible additional future charge-offs related to the receivable for partially charged-off Private Education Loans.

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

	Years Ended December 31,
(Dollars in millions)	2012			2011			2010
Receivable at beginning of period	$	1,241		$	1,040		$	499
Expected future recoveries of current period defaults(1)		351			391			459
Recoveries(2)		(189	)		(155	)		(104	)
Charge-offs(3)		(56	)		(35	)		(43	)
Consolidation of securitization trusts(4)		—			—			229
Receivable at end of period		1,347			1,241			1,040
Allowance for estimated recovery shortfalls(5)		(198	)		(148	)		—
Net receivable at end of period	$	1,149		$	1,093		$	1,040

⁽¹⁾  Represents the difference between the loan balance and our estimate of the amount to be collected in the future.

⁽²⁾  Current period cash collections.

⁽³⁾  Represents the current period recovery shortfall — the difference between what was expected to be collected and what was actually collected. These amounts are included in the Private Education Loan total charge-offs as reported in the “Allowance for Loan Losses Metrics” tables.

⁽⁴⁾  On January 1, 2010, upon the adoption of the new consolidation accounting guidance all off-balance sheet loans were consolidated on-balance sheet.

⁽⁵⁾  The allowance for estimated recovery shortfalls of the receivable for partially charged-off Private Education Loans is a component of the $2.2 billion overall allowance for Private Education Loan losses as of December 31, 2012 and 2011, respectively.

Troubled Debt Restructurings (“TDRs”)

We 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. Forbearance provides customers the ability to defer payments for a period of time, but does not result in the forgiveness of any principal or interest. While in forbearance status, interest continues to accrue and is capitalized to principal when the loan re-enters repayment status. The recorded investment of loans granted a forbearance that were classified as TDRs was $6.4 billion and $4.5 billion at December 30, 2012 and 2011, respectively. The recorded investment for TDRs from loans granted interest rate reductions or extended repayment plans was $0.9 billion and $0.7 billion at December 31, 2012 and 2011, respectively. At December 31, 2012 and 2011, the percentage of loans granted forbearance that have migrated to a TDR classification due to the extension of the forbearance period was 43 percent and 33 percent, respectively.

At December 31, 2012 and 2011, 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)		Unpaid Principal Balance		Related Allowance
December 31, 2012
Private Education Loans — Traditional	$	5,999	$	6,074	$	844
Private Education Loans — Non-Traditional		1,295		1,303		282
Total	$	7,294	$	7,377	$	1,126
December 31, 2011
Private Education Loans — Traditional	$	4,201	$	4,259	$	546
Private Education Loans — Non-Traditional		1,048		1,054		216
Total	$	5,249	$	5,313	$	762

⁽¹⁾  The recorded investment is equal to the unpaid principal balance and accrued interest receivable net of unamortized deferred fees and costs.

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

	Years Ended December 31,
	2012				2011				2010
(Dollars in millions)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Private Education Loans — Traditional	$	5,243	$	333	$	1,960	$	121	$	210	$	6
Private Education Loans — Non-Traditional		1,230		106		560		48		156		7
Total	$	6,473	$	439	$	2,520	$	169	$	366	$	13

The following tables provide information regarding the loan status and aging of TDR loans that are past due.

	TDR Loan Delinquencies
	December 31,
	2012					2011					2010
(Dollars in millions)	Balance		%			Balance		%			Balance		%
Loans in deferment(1)	$	574				$	285				$	16
Loans in forbearance(2)		544					696					12
Loans in repayment and percentage of each status:
Loans current		4,619		73.8	%		3,018		69.7	%		281		67.7	%
Loans delinquent 31-60 days(3)		478		7.6			427		9.8			33		7.9
Loans delinquent 61-90 days(3)		254		4.1			215		5.0			24		5.7
Loans delinquent greater than 90 days(3)		908		14.5			672		15.5			78		18.7
Total TDR loans in repayment		6,259		100	%		4,332		100	%		416		100	%
Total TDR loans, gross	$	7,377				$	5,313				$	444

⁽¹⁾  Loans for customers who have requested and qualify for 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.

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

The following table provides the amount of modified loans that resulted in a TDR in the periods presented. 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. The majority of our loans that are considered TDRs involve a temporary forbearance of payments and do not change the contractual interest rate of the loan.

	Years Ended December 31,
	2012						2011						2010
(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
Private Education Loans — Traditional	$	2,375	$	389	$	1,351	$	4,103	$	99	$	1,036	$	171	$	18	$	50
Private Education Loans — Non-Traditional		443		152		420		951		55		414		106		25		39
Total	$	2,818	$	541	$	1,771	$	5,054	$	154	$	1,450	$	277	$	43	$	89

⁽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.

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Accrued Interest Receivable

The following table provides information regarding accrued interest receivable on our Private Education Loans. 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 As of December 31,
(Dollars in millions)	Total		Greater Than 90 Days Past Due		Allowance for Uncollectible Interest
2012
Private Education Loans — Traditional	$	798	$	39	$	45
Private Education Loans — Non-Traditional		106		16		22
Total	$	904	$	55	$	67
2011
Private Education Loans — Traditional	$	870	$	36	$	44
Private Education Loans — Non-Traditional		148		18		28
Total	$	1,018	$	54	$	72
2010
Private Education Loans — Traditional	$	1,062	$	35	$	57
Private Education Loans — Non-Traditional		209		20		37
Total	$	1,271	$	55	$	94

5. Goodwill and Acquired Intangible Assets

Goodwill

All acquisitions must be assigned to a reporting unit or units. A reporting unit is the same as, or one level below, a reportable segment. We have four reportable segments: Consumer Lending, Business Services, FFELP Loans and Other. The following table summarizes our goodwill, accumulated impairments and net goodwill for our reporting units and reportable segments.

	As of December 31, 2012							As of December 31, 2011
(Dollars in millions)	Gross		Accumulated Impairments			Net		Gross		Accumulated Impairments			Net
Total FFELP Loans reportable segment	$	194	$	(4	)	$	190	$	194	$	(4	)	$	190
Total Consumer Lending reportable segment		147		—			147		147		—			147
Business Services reportable segment:
Servicing		50		—			50		50		—			50
Contingency Services		136		(129	)		7		136		(129	)		7
Wind-down Guarantor Servicing		256		(256	)		—		256		(256	)		—
Insurance Services		9		(9	)		—		11		—			11
Upromise		140		(140	)		—		140		(140	)		—
Total Business Services reportable segment		591		(534	)		57		593		(525	)		68
Total	$	932	$	(538	)	$	394	$	934	$	(529	)	$	405

Goodwill Impairment Testing

In performing our annual goodwill impairment analysis as of October 1, 2012, we assessed relevant qualitative factors to determine whether it is “more-likely-than-not” that the fair value of an individual reporting unit is less than its carrying value. As part of our qualitative assessment, we considered the amount of excess fair value over the carrying values of the FFELP Loans, Private Education Loans and Servicing reporting units as of October 1, 2010 when we performed a step 1 goodwill impairment test and engaged an appraisal firm to estimate the fair values of these reporting units. The fair value of each reporting unit at October 1, 2010 significantly exceeded its carrying amount.

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The following table illustrates the carrying value of equity for reporting units that had remaining goodwill as of December 31, 2010, the estimated fair value determined in conjunction with Step 1 impairment testing in the fourth quarter of 2010 as determined by a third-party appraisal firm and the excess of the estimated fair value over the carrying value of equity at December 31, 2010.

	Carrying Value of Equity		Fair Value of Equity		$ Difference		% Difference
(Dollars in millions)
FFELP Loans	$	1,777	$	3,766	$	1,989		112	%
Servicing		123		1,290		1,167		949
Consumer Lending		1,920		2,914		994		52

In conjunction with our qualitative assessment, we also considered the current legislative environment, our 2012 stock price, market capitalization and EPS results as well as significant reductions in our operating expenses. During 2012, there were no significant changes to legislation that would impact current reporting unit fair values. Further, we believe the other qualitative factors we considered would indicate favorable changes to reporting unit fair values since appraised values were determined as of October 1, 2010. After assessing these relevant qualitative factors, we determined that it is more-likely-than-not that the fair values of the FFELP Loans, Private Education Loans and Servicing reporting units exceed their carrying amounts. Accordingly, we did not perform the Step 1 impairment analysis as of October 1, 2012 for these reporting units.

During 2012, we finalized the purchase accounting for two 2011 acquisitions in the Business Services reportable segment which resulted in goodwill of $16 million, $7 million of which is attributed to the Contingency Services reporting unit and $9 million of which is attributed to the Insurance Services reporting unit. We performed Step 1 impairment testing for the Contingency Services and Insurance Services reporting units. The fair value of the Contingency Services and Insurance Services reporting units in the Step 1 impairment analysis was determined using the income approach. The income approach measures the value of each reporting unit’s future economic benefit determined by its discounted cash flows derived from our projections plus an assumed terminal growth rate adjusted for what it believes a market participant would assume in an acquisition. These projections are generally five-year projections that reflect the inherent risk a willing buyer would consider when valuing these businesses.

Based on the annual Step 1 impairment testing, there was no indicated impairment for the Contingency Services reporting unit. The Step 1 impairment testing for the Insurance Services reporting unit indicated potential impairment of goodwill. Under the second step of the analysis, determining the implied fair value of goodwill requires valuation of a reporting unit’s identifiable tangible and intangible assets and liabilities in a manner similar to the allocation of purchase price in a business combination. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, goodwill is deemed impaired and is written down to the extent of the difference. In conjunction with the second step of the impairment analysis, the $9 million of goodwill attributed to this reporting unit was fully impaired.

Continued weakness in the economy coupled with changes in legislation could adversely affect the operating results of our reporting units. If the forecasted performance of our reporting units is not achieved, or if our stock price declines to a depressed level resulting in deterioration in our total market capitalization, the fair value of the FFELP Loans, Servicing, Private Education Loans and Contingency Services reporting units could be significantly reduced, and we may be required to record a charge to our earnings, which could be material, for an impairment of goodwill.

Acquired Intangible Assets

Acquired intangible assets include the following:

	As of December 31, 2012							As of December 31, 2011
(Dollars in millions)	Cost Basis(1)		Accumulated Impairment and Amortization(1)			Net		Cost Basis(1)		Accumulated Impairment and Amortization(1)			Net
Intangible assets subject to amortization:
Customer, services and lending relationships	$	303	$	(270	)	$	33	$	303	$	(253	)	$	50
Software and technology		93		(93	)		—		93		(93	)		—
Trade names and trademarks		54		(34	)		20		54		(31	)		23
Total acquired intangible assets	$	450	$	(397	)	$	53	$	450	$	(377	)	$	73

⁽¹⁾  Accumulated impairment and amortization includes impairment amounts only if the acquired intangible asset has been deemed partially impaired. When an acquired intangible asset is considered fully impaired, and no longer in use, the cost basis and any accumulated amortization related to the asset is written off.

⁽²⁾  Intangible assets not subject to amortization include tradenames and trademarks totaling $10 million, net of accumulated impairment and amortization.

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We recorded amortization of acquired intangible assets from continuing operations totaling $18 million, $21 million, and $31 million for the years ended December 31, 2012, 2011 and 2010, respectively. We will continue to amortize our intangible assets with definite useful lives over their remaining estimated useful lives. We estimate amortization expense associated with these intangible assets will be $12 million, $9 million, $6 million, $4 million and $1 million for the years ended December 31, 2013, 2014, 2015, 2016 and 2017, respectively.

As discussed in “Note 2 — Significant Accounting Policies,” we test our indefinite life intangible assets annually as of October 1 or during the course of the year if an event occurs or circumstances change which indicate potential impairment of these assets. As of October 1, 2012, the fair values of the indefinite life intangible assets exceed their carrying values. Accordingly, we recorded no impairment. We also assess whether an event or circumstance has occurred which may indicate impairment of our definite life (amortizing) intangible assets quarterly. During 2012, no such events or circumstances occurred that indicated our definite life intangible assets may be impaired.

6. Borrowings

Borrowings consist of secured borrowings issued through our securitization program, borrowings through secured facilities and participation programs, unsecured notes issued by us, term and other deposits at the Bank, and other interest-bearing liabilities related primarily to obligations to return cash collateral held. To match the interest rate and currency characteristics of our borrowings with the interest rate and currency characteristics of our assets, we enter into interest rate and foreign currency swaps with independent parties. Under these agreements, we make periodic payments, generally indexed to the related asset rates or rates which are highly correlated to the asset rates, in exchange for periodic payments which generally match our interest obligations on fixed or variable rate notes (see “Note 7 — Derivative Financial Instruments”). Payments and receipts on our interest rate and currency swaps are not reflected in the following tables.

The following table summarizes our borrowings.

	December 31, 2012						December 31, 2011
(Dollars in millions)	Short Term		Long Term		Total		Short Term		Long Term		Total
Unsecured borrowings:
Senior unsecured debt	$	2,319	$	15,446	$	17,765	$	1,801	$	15,199	$	17,000
Brokered deposits		979		3,088		4,067		1,733		1,956		3,689
Retail and other deposits		3,247		—		3,247		2,123		—		2,123
Other(1)		1,609		—		1,609		1,329		—		1,329
Total unsecured borrowings		8,154		18,534		26,688		6,986		17,155		24,141
Secured borrowings:
FFELP Loan securitizations		—		105,525		105,525		—		107,905		107,905
Private Education Loan securitizations		—		19,656		19,656		—		19,297		19,297
ED Conduit Program Facility		9,551		—		9,551		21,313		—		21,313
FFELP ABCP Facility		—		4,154		4,154		—		4,445		4,445
Private Education Loan ABCP Facility		—		1,070		1,070		—		1,992		1,992
Acquisition financing(2)		—		673		673		—		916		916
FHLB-DM Facility		2,100		—		2,100		1,210		—		1,210
Total secured borrowings		11,651		131,078		142,729		22,523		134,555		157,078
Total before hedge accounting adjustments		19,805		149,612		169,417		29,509		151,710		181,219
Hedge accounting adjustments		51		2,789		2,840		64		2,683		2,747
Total	$	19,856	$	152,401	$	172,257	$	29,573	$	154,393	$	183,966

⁽¹⁾  “Other” primarily consists of the obligation to return cash collateral held related to derivative exposures.

⁽²⁾  Relates to the acquisition of $25 billion of student loans at the end of 2010.

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Short-term Borrowings

Short-term borrowings have a remaining term to maturity of one year or less. The following tables summarize outstanding short-term borrowings (secured and unsecured), the weighted average interest rates at the end of each period, and the related average balances and weighted average interest rates during the periods. Rates reflect stated interest of borrowings and related discounts and premiums.

	December 31, 2012					Year Ended December 31, 2012
(Dollars in millions)	Ending Balance		Weighted Average Interest Rate			Average Balance		Weighted Average Interest Rate
Brokered deposits	$	979		3.24	%	$	1,077		3.10	%
Retail and other deposits		3,247		.84			2,460		.85
FHLB-DM Facility		2,100		.33			1,481		.34
ED Conduit Program Facility		9,551		.81			16,118		.82
FFELP ABCP Facility		—		—			7		.95
Senior unsecured debt		2,369		4.24			2,214		4.49
Other interest bearing liabilities		1,610		.31			1,474		.21
Total short-term borrowings	$	19,856		1.25	%	$	24,831		1.19	%
Maximum outstanding at any month end	$	29,160

		December 31, 2011					Year Ended December 31, 2011
(Dollars in millions)	��	Ending Balance		Weighted Average Interest Rate			Average Balance		Weighted Average Interest Rate
Brokered deposits		$	1,733		2.80	%	$	1,489		3.17	%
Retail and other deposits			2,123		1.00			1,684		1.11
FHLB-DM Facility			1,210		.24			893		.25
ED Conduit Program Facility			21,313		.67			22,869		.75
FFELP ABCP Facility			—		—			221		1.01
Senior unsecured debt			1,865		4.37			3,070		2.97
Other interest bearing liabilities			1,329		.04			1,187		.10
Total short-term borrowings		$	29,573		1.01	%	$	31,413		1.06	%
Maximum outstanding at any month end		$	33,100

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Long-term Borrowings

The following tables summarize outstanding long-term borrowings (secured and unsecured), the weighted average interest rates at the end of the periods, and the related average balances during the periods. Rates reflect stated interest rate of borrowings and related discounts and premiums.

	December 31, 2012					Year Ended December 31, 2012
	Ending Balance(1)		Weighted Average Interest Rate(2)
(Dollars in millions)						Average Balance
Floating rate notes:
U.S. dollar-denominated:
Interest bearing, due 2014-2048	$	112,408		1.04	%	$	113,236
Non-U.S. dollar-denominated:
Interest bearing, due 2021-2041		10,819		.53			11,463
Total floating rate notes		123,227		1.00			124,699
Fixed rate notes:
U.S. dollar-denominated:
Interest bearing, due 2014-2046		16,096		5.57			14,203
Non-U.S.-dollar denominated:
Interest bearing, due 2014-2039		4,061		3.39			2,882
Total fixed rate notes		20,157		5.13			17,085
Brokered deposits — U.S. dollar-denominated, due 2014-2017		3,120		1.77			2,216
FFELP ABCP Facility		4,154		.74			4,726
Private Education Loan ABCP Facility		1,070		1.45			1,880
SLC acquisition financing		673		4.71			791
Total long-term borrowings	$	152,401		1.57	%	$	151,397

	December 31, 2011					Year Ended December 31, 2011
	Ending Balance(1)		Weighted Average Interest Rate(2)
(Dollars in millions)						Average Balance
Floating rate notes:
U.S. dollar-denominated:
Interest bearing, due 2013-2047	$	114,861		1.21	%	$	120,045
Non-U.S. dollar-denominated:
Interest bearing, due 2013-2041		11,838		1.77			11,872
Total floating rate notes		126,699		1.26			131,917
Fixed rate notes:
U.S. dollar-denominated:
Interest bearing, due 2013-2044		14,406		5.63			12,363
Non-U.S.-dollar denominated:
Interest bearing, due 2013-2039		3,934		3.58			3,662
Total fixed rate notes		18,340		5.18			16,025
Brokered deposits — U.S. dollar-denominated, due 2013-2014		2,001		3.15			2,171
FFELP ABCP Facility		4,445		.81			4,768
Private Education Loan ABCP Facility		1,992		1.40			272
SLC acquisition financing		916		4.79			998
Total long-term borrowings	$	154,393		1.75	%	$	156,151

⁽¹⁾  Ending balance is expressed in U.S. dollars using the spot currency exchange rate. Includes fair value adjustments under ASC 815 for notes designated as the hedged item in a fair value hedge.

⁽²⁾  Weighted average interest rate is stated rate relative to currency denomination of debt.

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At December 31, 2012, we had outstanding long-term borrowings with call features totaling $3.6 billion. In addition, we have $5.9 billion of pre-payable debt related to our ABCP and acquisition financing facilities. Generally, these instruments are callable at the par amount. As of December 31, 2012, the stated maturities and maturities if accelerated to the call dates are shown in the following table.

	December 31, 2012
	Stated Maturity(1)								Maturity to Call Date(1)
(Dollars in millions)	Senior Unsecured Debt		Brokered Deposits		Secured Borrowings		Total(2)		Senior Unsecured Debt		Brokered Deposits		Secured Borrowings		Total
Year of Maturity
2013	$	—	$	—	$	13,655	$	13,655	$	1,563	$	—	$	18,881	$	20,444
2014		3,021		1,738		14,893		19,652		3,158		1,738		10,515		15,411
2015		997		708		10,163		11,868		1,086		708		9,939		11,733
2016		2,277		235		9,781		12,293		2,276		235		9,781		12,292
2017		1,823		407		10,169		12,399		1,801		407		10,169		12,377
2018-2047		7,328		—		72,417		79,745		5,562		—		71,793		77,355
		15,446		3,088		131,078		149,612		15,446		3,088		131,078		149,612
Hedge accounting adjustments		1,644		32		1,113		2,789		1,644		32		1,113		2,789
Total	$	17,090	$	3,120	$	132,191	$	152,401	$	17,090	$	3,120	$	132,191	$	152,401

⁽¹⁾  We view our securitization trust debt as long-term based on the contractual maturity dates and projecting the expected principal paydowns based on our current estimates regarding loan prepayment speeds. The projected principal paydowns in year 2013 include $13.7 billion related to the securitization trust debt.

⁽²⁾  The aggregate principal amount of debt that matures in each period is $13.7 billion in 2013, $19.7 billion in 2014, $11.9 billion in 2015, $12.4 billion in 2016, $12.5 billion in 2017, and $80.3 billion in 2018-2047.

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Secured Borrowings

We currently consolidate all of our financing entities that are VIEs as a result of being the entities’ primary beneficiary. As a result, these financing VIEs are accounted for as secured borrowings. We consolidate the following financing VIEs as of December 31, 2012 and 2011:

	December 31, 2012
	Debt Outstanding						Carrying Amount of Assets Securing Debt Outstanding
(Dollars in millions)	Short Term		Long Term		Total		Loans		Cash		Other Assets		Total
Secured Borrowings — VIEs:
ED Conduit Program Facility	$	9,551	$	—	$	9,551	$	9,645	$	410	$	134	$	10,189
FFELP ABCP Facility		—		4,154		4,154		4,405		77		63		4,545
Private Education Loan ABCP Facility		—		1,070		1,070		1,454		302		33		1,789
Securitizations — FFELP Loans		—		105,525		105,525		107,009		3,652		608		111,269
Securitizations — Private Education Loans		—		19,656		19,656		24,618		385		545		25,548
Total before hedge accounting adjustments		9,551		130,405		139,956		147,131		4,826		1,383		153,340
Hedge accounting adjustments		—		1,113		1,113		—		—		929		929
Total	$	9,551	$	131,518	$	141,069	$	147,131	$	4,826	$	2,312	$	154,269

	December 31, 2011
	Debt Outstanding						Carrying Amount of Assets Securing Debt Outstanding
(Dollars in millions)	Short Term		Long Term		Total		Loans		Cash		Other Assets		Total
Secured Borrowings — VIEs:
ED Conduit Program Facility	$	21,313	$	—	$	21,313	$	21,445	$	621	$	442	$	22,508
FFELP ABCP Facility		—		4,445		4,445		4,834		86		54		4,974
Private Education Loan ABCP Facility		—		1,992		1,992		2,595		401		76		3,072
Securitizations — FFELP Loans		—		107,905		107,905		109,257		3,783		529		113,569
Securitizations — Private Education Loans		—		19,297		19,297		22,367		718		582		23,667
Total before hedge accounting adjustments		21,313		133,639		154,952		160,498		5,609		1,683		167,790
Hedge accounting adjustments		—		894		894		—		—		955		955
Total	$	21,313	$	134,533	$	155,846	$	160,498	$	5,609	$	2,638	$	168,745

ED Funding Programs

ED Purchase and Participation Programs

In August 2008, ED implemented the Purchase Program and the Participation Program pursuant to The Ensuring Continued Access to Student Loans Act of 2008 (“ECASLA”). Under the Purchase Program, ED purchased eligible FFELP Loans at a price equal to the sum of (i) par value, (ii) accrued interest, (iii) the one percent origination fee paid to ED, and (iv) a fixed amount of $75 per loan. Under the Participation Program, ED provided short-term liquidity to FFELP lenders by purchasing participation interests in pools of FFELP Loans. FFELP lenders were charged a rate equal to the preceding quarter commercial paper rate plus 0.50 percent on the principal amount of participation interests outstanding. Loans eligible for the Participation or Purchase Programs were limited to FFELP Stafford or PLUS Loans, first disbursed on or after May 1, 2008 but no later than July 1, 2010, with no ongoing borrower benefits other than permitted rate reductions of 0.25 percent for automatic payment processing. In October 2010, we sold $20.4 billion of loans to ED and paid off $20.3 billion of advances outstanding under the Participation Program. This program is no longer in effect and is not available as a source of funding.

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ED Conduit Program

Pursuant to ECASLA, on January 15, 2009, ED announced they would purchase eligible FFELP Stafford and PLUS Loans from a conduit vehicle established to provide funding for eligible student lenders (the “ED Conduit Program”). Loans eligible for the ED Conduit Program must be first disbursed on or after October 1, 2003, but not later than July 1, 2009, and fully disbursed before September 30, 2009, and meet certain other requirements, including those relating to borrower benefits. The ED Conduit Program was launched on May 11, 2009 and accepted eligible loans through July 1, 2010. The ED Conduit Program expires on January 19, 2014. Funding for the ED Conduit Program is provided by the capital markets at a cost based on market rates, with us being advanced 97 percent of the student loan face amount. If the conduit does not have sufficient funds to make the required payments on the notes issued by the conduit, then the notes will be repaid with funds from the Federal Financing Bank (“FFB”). The FFB will hold the notes for a short period of time and, if at the end of that time, the notes still cannot be paid off, the underlying FFELP Loans that serve as collateral to the ED Conduit will be sold to ED through a put agreement at a price of 97 percent of the face amount of the loans. Our intent is to term securitize the loans in the facility before the facility expires. Any loans that remain in the facility as of the expiration date will be sold to ED at a price of 97 percent of the face amount of the loans. At December 31, 2012 and 2011, we had $9.5 billion and $21.2 billion, respectively, in principal amount of FFELP Loans remaining in the ED Conduit Program.

Asset-Backed Financing Facilities

FFELP ABCP Facility

The maximum facility amount is $7.5 billion. The scheduled maturity date of the facility is January 9, 2015. The usage fee for the facility is 0.50 percent over the applicable funding rate. The amended facility features two contractual step-down reductions on the amount available for borrowing. The first reduction was on January 11, 2013, to $6.5 billion. The second reduction is on January 10, 2014, to $5.5 billion.

Our borrowings under the FFELP ABCP Facility are non-recourse. The maximum amount we may borrow under the FFELP ABCP Facility is limited based on certain factors, including market conditions and the fair value of student loans in the facility. In addition to the funding limits described above, funding under the FFELP ABCP Facility is subject to usual and customary conditions. The FFELP ABCP Facility is subject to termination under certain circumstances. In addition, the facility has financial covenants that if not maintained, will cause the facility to become an amortizing facility. The covenants are, however, curable. The principal financial covenants require us to maintain consolidated tangible net worth of at least $1.38 billion at all times. Consolidated tangible net worth as calculated for purposes of this covenant was $3.4 billion as of December 31, 2012. The covenants also require us to meet either a minimum interest coverage ratio or a minimum net adjusted revenue test based on the four preceding quarters’ adjusted “Core Earnings” financial performance. We were compliant with both of the minimum interest coverage ratio and the minimum net adjusted revenue tests as of the quarter ended December 31, 2012. Increases in the borrowing rate of up to LIBOR plus 4.50 percent could occur if certain asset coverage ratio thresholds are not met. If liquidity agreements are not renewed on the trigger dates, the usage fee increases to 1.00 percent over the applicable funding rate on January 10, 2014. Failure to pay off the FFELP ABCP Facility on the maturity date or to reduce amounts outstanding below the annual maximum step downs will result in a 90-day extension of the facility with the interest rate increasing from LIBOR plus 1.00 percent to LIBOR plus 2.00 percent over that period. If, at the end of the 90-day extension, these required paydown amounts have not been made, the collateral can be foreclosed upon. As of December 31, 2012, there was approximately $4.2 billion outstanding in this facility. The book basis of the assets securing this facility at December 31, 2012 was $4.5 billion.

Private Education Loan ABCP Facility

On October 5, 2011, we closed on a $3.4 billion asset-backed commercial paper facility, which matures in January 2014, to fund the call of certain Private Education Loan trust securities issued under the TALF program. The cost of borrowing under the facility is commercial paper issuance cost plus 1.10 percent, excluding up-front commitment and unused fees. The maximum amount that can be financed steps down to $2.5 billion on July 25, 2012, $1.7 billion on January 25, 2013 and $0.8 billion on July 25, 2013 with final maturity on January 27, 2014. If the amount outstanding is greater than the maximum amount at any step down, the cost increases to commercial paper issuance cost plus 1.95 percent. Our borrowings under the facility are non-recourse. On November 15, 2011, the facility provided the financing to call the outstanding securities issued by SLM Private Education Loan Trust 2009-B ($2.5 billion principal) at its call price of 93 percent of par. On January 17, 2012 the facility was also used to call the outstanding securities issued by SLM Private Education Loan Trust 2009-C ($1.0 billion principal) at its call price of 94 percent of par. At December 31, 2012, there was $1.1 billion outstanding in this facility. The book basis of the assets securing the facility at December 31, 2012 was $1.8 billion.

SLC Acquisition Financing

On December 31, 2010, we closed on our agreement to purchase an interest in $26.1 billion of securitized federal student loans and related assets from the Student Loan Corporation (“SLC”), a subsidiary of Citibank, N.A. The purchase price was approximately $1.1 billion. The transaction was funded by a 5-year term loan provided by Citibank in an amount equal to the purchase price. The

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loan is secured by the purchased assets and guaranteed by us. The loan bears interest at a rate of LIBOR plus 4.50 percent, and is subject to scheduled quarterly principal payments of the lesser of (i) 2.5 percent of the original principal amount of the term loan or (ii) the residual cash flow derived from the assets securing the loan. In addition, the remaining balance is due on December 31, 2015. Residual cash flow in excess of that needed to make quarterly principal payments is restricted but we are permitted, at our option, to prepay the obligation, in whole or in part, at any time without penalty.

Securitizations

The following table summarizes the securitization transactions issued in 2011 and 2012.

(Dollars in millions)					AAA-rated bonds
Issue	Date Issued	Total Issued			Weighted Average Interest Rate	Weighted Average Life
FFELP:
2011-1	March 2011	$	812		1 month LIBOR plus 0.85%	5.5 years
2011-2	May 2011		821		1 month LIBOR plus 0.90%	5.5 years
2011-3	November 2011		812	(1)	1 month LIBOR plus 1.25%	7.8 years
Total bonds issued in 2011		$	2,445
Total loan amount securitized in 2011		$	2,344
2012-1	January 2012	$	765		1 month LIBOR plus 0.91%	4.6 years
2012-2	March 2012		824		1 month LIBOR plus 0.70%	4.7 years
2012-3	May 2012		1,252		1 month LIBOR plus 0.65%	4.6 years
2012-4	June 2012		1,491	(2)	1 month LIBOR plus 1.10%	8.2 years
2011-3	July 2012		24		N/A (Retained B Notes sold)
2012-4	July 2012		45		N/A (Retained B Notes sold)
2012-5	July 2012		1,252		1 month LIBOR plus 0.67%	4.5 years
2012-6	September 2012		1,249		1 month LIBOR plus 0.62%	4.6 years
2012-7	November 2012		1,251		1 month LIBOR plus 0.55%	4.5 years
2012-8	December 2012		1,527		1 month LIBOR plus 0.90%	7.8 years
Total bonds issued in 2012		$	9,680
Total loan amount securitized in 2012		$	9,565
Private Education:
2011-A	April 2011	$	562		1 month LIBOR plus 1.89%	3.8 years
2011-B	June 2011		825		1 month LIBOR plus 1.80%	4.0 years
2011-C	November 2011		721		1 month LIBOR plus 2.87%	3.4 years
Total bonds issued in 2011		$	2,108
Total loan amount securitized in 2011		$	2,674
2012-A	February 2012	$	547		1 month LIBOR plus 2.17%	3.0 years
2012-B	April 2012		891		1 month LIBOR plus 2.12%	2.9 years
2012-C	May 2012		1,135		1 month LIBOR plus 1.77%	2.6 years
2012-D	July 2012		640		1 month LIBOR plus 1.69%	2.5 years
2012-E	October 2012		976		1 month LIBOR plus 1.22%	2.6 years
Total bonds issued in 2012		$	4,189
Total loan amount securitized in 2012		$	5,557

⁽¹⁾  Total size excludes subordinated tranche that was retained at issuance totaling $24 million.

⁽²⁾  Total size excludes subordinated tranche that was retained at issuance totaling $45 million.

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Auction Rate Securities

At December 31, 2012, we had $3.1 billion of auction rate securities outstanding in securitizations. Since February 2008, problems in the auction rate securities market as a whole led to failures of the auctions pursuant to which certain of our auction rate securities’ interest rates are set. As a result, $1.4 billion of our auction rate securities as of December 31, 2012 bore interest at the maximum rate allowable under their terms. The maximum allowable interest rate on our taxable auction rate securities is generally LIBOR plus 1.50 percent to 3.50 percent, dependant on the security’s credit rating. The maximum allowable interest rate on many of our tax-exempt auction rate securities is a formula driven rate, which produced various maximum rates up to 0.63 percent during the fourth quarter of 2012. As of December 31, 2012, $1.7 billion of auction rate securities have had successful auctions, resulting in an average rate of 2.12 percent.

Reset Rate Notes

Certain tranches of our term asset-backed securities (“ABS”) are reset rate notes. Reset rate notes are subject to periodic remarketing, at which time the interest rates on the notes are reset. We also have the option to repurchase a reset rate note upon a failed remarketing and hold it as an investment until such time it can be remarketed. In the event a reset rate note cannot be remarketed on the remarketing date, and is not repurchased, the interest rate generally steps up to and remains at LIBOR plus 0.75 percent until such time as the bonds are successfully remarketed or repurchased. Our repurchase of a reset rate note requires additional funding, the availability and pricing of which may be less favorable to us than it was at the time the reset rate note was originally issued. Unlike the repurchase of a reset rate note, the occurrence of a failed remarketing does not require additional funding. As a result of the ongoing dislocation in the capital markets, at December 31, 2012, $6.0 billion of our reset rate notes bore interest at, or were swapped to LIBOR plus 0.75 percent due to a failed remarketing. Until capital markets conditions improve, it is possible these and additional reset rate notes will experience failed remarketings. As of December 31, 2012, we had $7.5 billion and $1.5 billion of reset rate notes due to be remarketed in 2013 and 2014, respectively, and an additional $2.7 billion to be newly remarketed thereafter.

Federal Home Loan Bank of Des Moines (“FHLB-DM”)

On January 15, 2010, HICA Education Loan Corporation (“HICA”), our subsidiary, entered into a borrowing agreement with the FHLB-DM. Under the agreement, the FHLB-DM will provide advances backed by Federal Housing Finance Agency approved collateral which includes FFELP Loans (but does not include Private Education Loans). The facility is available as long as we maintain membership with FHLB-DM. The amount, price and tenor of future advances will vary and be subject to the agreement’s borrowing conditions, including, among others, facility size, current usage, and availability of qualifying collateral from unencumbered FFELP Loans, as then in effect and determined at the time of each borrowing. The maximum amount that can be borrowed, as of December 31, 2012, subject to available collateral, is approximately $8.5 billion. As of December 31, 2012, borrowing under the facility totaled $2.1 billion, matures by March 18, 2013, and was secured by $2.7 billion of FFELP Loans. We have provided a guarantee to the FHLB-DM for the performance and payment of HICA’s obligations.

Other Funding Sources

Sallie Mae Bank

During the fourth quarter of 2008, the Bank, our Utah industrial bank subsidiary, began expanding its deposit base to fund new Private Education Loan originations. The Bank raises deposits through intermediaries in the brokered Certificate of Deposit (“CD”) market and through direct retail deposit channels. As of December 31, 2012, bank deposits totaled $7.8 billion of which $4.1 billion were brokered term deposits, $3.2 billion were retail and other deposits and $0.4 billion were deposits from affiliates that eliminate in our consolidated balance sheet. Cash and liquid investments totaled $1.6 billion as of December 31, 2012.

In addition to its deposit base, the Bank has borrowing capacity with the Federal Reserve Bank (“FRB”) through a collateralized lending facility. FRB is not obligated to lend; however, in general we can borrow as long as the Bank is generally in sound financial condition. Borrowing capacity is limited by the availability of acceptable collateral. As of December 31, 2012, borrowing capacity was approximately $945 million and there were no outstanding borrowings.

Senior Unsecured Debt

We issued $2.7 billion, $2.0 billion and $1.5 billion of unsecured debt in the years ended December 31, 2012, 2011 and 2010, respectively.

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Debt Repurchases

The following table summarizes activity related to our senior unsecured debt and ABS repurchases. “Gains on debt repurchases” is shown net of hedging-related gains and losses.

	Years Ended December 31,
(Dollars in millions)	2012		2011		2010
Debt principal repurchased	$	711	$	894	$	4,868
Gains on debt repurchases		145		38		317

7. Derivative Financial Instruments

Risk Management Strategy

We maintain an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize the economic effect of interest rate changes. Our goal is to manage interest rate sensitivity by modifying the repricing frequency and underlying index characteristics of certain balance sheet assets and liabilities so the net interest margin is not, on a material basis, adversely affected by movements in interest rates. We do not use derivative instruments to hedge credit risk associated with debt we issued. As a result of interest rate fluctuations, hedged assets and liabilities will appreciate or depreciate in market value. Income or loss on the derivative instruments that are linked to the hedged assets and liabilities will generally offset the effect of this unrealized appreciation or depreciation for the period the item is being hedged. We view this strategy as a prudent management of interest rate sensitivity. In addition, we utilize derivative contracts to minimize the economic impact of changes in foreign currency exchange rates on certain debt obligations that are denominated in foreign currencies. As foreign currency exchange rates fluctuate, these liabilities will appreciate and depreciate in value. These fluctuations, to the extent the hedge relationship is effective, are offset by changes in the value of the cross-currency interest rate swaps executed to hedge these instruments. Management believes certain derivative transactions entered into as hedges, primarily Floor Income Contracts, basis swaps and Eurodollar futures contracts, are economically effective; however, those transactions generally do not qualify for hedge accounting under GAAP (as discussed below) and thus may adversely impact earnings.

Although we use derivatives to offset (or minimize) the risk of interest rate and foreign currency changes, the use of derivatives does expose us to both market and credit risk. Market risk is the chance of financial loss resulting from changes in interest rates, foreign exchange rates and market liquidity. Credit risk is the risk that a counterparty will not perform its obligations under a contract and it is limited to the loss of the fair value gain in a derivative that the counterparty owes us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, have no credit risk exposure to the counterparty; however, the counterparty has exposure to us. We minimize the credit risk in derivative instruments by entering into transactions with highly rated counterparties that are reviewed regularly by our Credit Department. We also maintain a policy of requiring that all derivative contracts be governed by an International Swaps and Derivative Association Master Agreement. Depending on the nature of the derivative transaction, bilateral collateral arrangements generally are required as well. When we have more than one outstanding derivative transaction with the counterparty, and there exists legally enforceable netting provisions with the counterparty (i.e., a legal right to offset receivable and payable derivative contracts), the “net” mark-to-market exposure, less collateral the counterparty has posted to us, represents exposure with the counterparty. When there is a net negative exposure, we consider our exposure to the counterparty to be zero. At December 31, 2012 and 2011, we had a net positive exposure (derivative gain positions to us less collateral which has been posted by counterparties to us) related to SLM Corporation and the Bank derivatives of $79 million and $113 million, respectively.

Our on-balance sheet securitization trusts have $13.0 billion of Euro and British Pound Sterling denominated bonds outstanding as of December 31, 2012. To convert these non-U.S. dollar denominated bonds into U.S dollar liabilities, the trusts have entered into foreign-currency swaps with highly–rated counterparties. In addition, the trusts have entered into $14.2 billion of interest rates swaps which are primarily used to convert Prime received on securitized student loans to LIBOR paid on the bonds. At December 31, 2012, the net positive exposure on swaps in securitization trusts is $889 million.

Recent turmoil in the European markets has led to increased disclosure of exposure to those markets. Our securitization trusts had total net exposure of $764 million related to financial institutions located in France; of this amount, $555 million carries a guaranty from the French government. The total exposure relates to $6.4 billion notional amount of cross-currency interest rate swaps held in our securitization trusts, of which $3.6 billion notional amount carries a guaranty from the French government. Counterparties to the cross currency interest rate swaps are required to post collateral when their credit rating is withdrawn or downgraded below a certain level. As of December 31, 2012, no collateral was required to be posted and we are not holding any collateral related to these contracts. Adjustments are made to our derivative valuations for counterparty credit risk. The adjustments made at December 31, 2012 related to derivatives with French financial institutions (including those that carry a guaranty from the French government) decreased the derivative asset value by $94 million. Credit risks for all derivative counterparties are assessed internally on a continual basis.

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Accounting for Derivative Instruments

Derivative instruments that are used as part of our interest rate and foreign currency risk management strategy include interest rate swaps, basis swaps, cross-currency interest rate swaps, interest rate futures contracts, and interest rate floor and cap contracts with indices that relate to the pricing of specific balance sheet assets and liabilities. The accounting for derivative instruments requires that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded on the balance sheet as either an asset or liability measured at its fair value. As more fully described below, if certain criteria are met, derivative instruments are classified and accounted for by us as either fair value or cash flow hedges. If these criteria are not met, the derivative financial instruments are accounted for as trading.

Fair Value Hedges

Fair value hedges are generally used by us to hedge the exposure to changes in fair value of a recognized fixed rate asset or liability. We enter into interest rate swaps to economically convert fixed rate assets into variable rate assets and fixed rate debt into variable rate debt. We also enter into cross-currency interest rate swaps to economically convert foreign currency denominated fixed and floating debt to U.S. dollar denominated variable debt. For fair value hedges, we generally consider all components of the derivative’s gain and/or loss when assessing hedge effectiveness and generally hedge changes in fair values due to interest rates or interest rates and foreign currency exchange rates or the total change in fair values.

Cash Flow Hedges

We use cash flow hedges to hedge the exposure to variability in cash flows for a forecasted debt issuance and for exposure to variability in cash flows of floating rate debt. This strategy is used primarily to minimize the exposure to volatility from future changes in interest rates. Gains and losses on the effective portion of a qualifying hedge are recorded in accumulated other comprehensive income and ineffectiveness is recorded immediately to earnings. In the case of a forecasted debt issuance, gains and losses are reclassified to earnings over the period which the stated hedged transaction affects earnings. If we determine it is not probable that the anticipated transaction will occur, gains and losses are reclassified immediately to earnings. In assessing hedge effectiveness, generally all components of each derivative’s gains or losses are included in the assessment. We generally hedge exposure to changes in cash flows due to changes in interest rates or total changes in cash flow.

Trading Activities

When derivative instruments do not qualify as hedges, they are accounted for as trading instruments where all changes in fair value are recorded through earnings. We sell interest rate floors (Floor Income Contracts) to hedge the embedded Floor Income options in student loan assets. The Floor Income Contracts are written options which have a more stringent hedge effectiveness hurdle to meet. Specifically, our Floor Income Contracts do not qualify for hedge accounting treatment because the pay down of principal of the student loans underlying the Floor Income embedded in those student loans does not exactly match the change in the notional amount of our written Floor Income Contracts. Additionally, the term, the interest rate index and the interest rate index reset frequency of the Floor Income Contracts are different from that of the student loans. Therefore, Floor Income Contracts do not qualify for hedge accounting treatment, and are recorded as trading instruments. Regardless of the accounting treatment, we consider these contracts to be economic hedges for risk management purposes. We use this strategy to minimize our exposure to changes in interest rates.

We use basis swaps to minimize earnings variability caused by having different reset characteristics on our interest-earning assets and interest-bearing liabilities. These swaps possess a term of up to 14 years indexed to 91-day Treasury bill, LIBOR, Prime, Consumer Price Index or 10-year constant maturity Treasury rates. The specific terms and notional amounts of the swaps are determined based on a review of our asset/liability structure, our assessment of future interest rate relationships, and on other factors such as short-term strategic initiatives. Hedge accounting requires that when using basis swaps, the change in the cash flows of the hedge effectively offset both the change in the cash flows of the asset and the change in the cash flows of the liability. Our basis swaps hedge variable interest rate risk; however, they generally do not meet this effectiveness criterion because the index of the swap does not exactly match the index of the hedged assets. Additionally, some of our FFELP Loans can earn at either a variable or a fixed interest rate depending on market interest rates and, therefore, swaps economically hedging these FFELP Loans do not meet the criteria for hedge accounting treatment. As a result, these swaps are recorded at fair value with changes in fair value reflected currently in the statement of income.

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Summary of Derivative Financial Statement Impact

The following tables summarize the fair values and notional amounts or number of contracts of all derivative instruments at December 31, 2012 and 2011, and their impact on other comprehensive income and earnings for the years ended December 31, 2012, 2011 and 2010.

Impact of Derivatives on Consolidated Balance Sheet

		Cash Flow						Fair Value						Trading						Total
(Dollars in millions)	Hedged Risk Exposure	Dec. 31, 2012			Dec. 31, 2011			Dec. 31, 2012			Dec. 31, 2011			Dec. 31, 2012			Dec. 31, 2011			Dec. 31, 2012			Dec. 31, 2011
Fair Values(1)
Derivative Assets:
Interest rate swaps	Interest rate	$	—		$	—		$	1,396		$	1,471		$	150		$	262		$	1,546		$	1,733
Cross-currency interest rate swaps	Foreign currency and interest rate		—			—			1,165			1,229			70			130			1,235			1,359
Other(2)	Interest rate		—			—			—			—			4			1			4			1
Total derivative assets(3)			—			—			2,561			2,700			224			393			2,785			3,093
Derivative Liabilities:
Interest rate swaps	Interest rate		(11	)		(26	)		(1	)		—			(197	)		(244	)		(209	)		(270	)
Floor Income Contracts	Interest rate		—			—			—			—			(2,154	)		(2,544	)		(2,154	)		(2,544	)
Cross-currency interest rate swaps	Foreign currency and interest rate		—			—			(136	)		(243	)		—			—			(136	)		(243	)
Total derivative liabilities(3)			(11	)		(26	)		(137	)		(243	)		(2,351	)		(2,788	)		(2,499	)		(3,057	)
Net total derivatives		$	(11	)	$	(26	)	$	2,424		$	2,457		$	(2,127	)	$	(2,395	)	$	286		$	36

⁽¹⁾  Fair values reported are exclusive of collateral held and pledged and accrued interest. Assets and liabilities are presented without consideration of master netting agreements. Derivatives are carried on the balance sheet based on net position by counterparty under master netting agreements, and classified in other assets or other liabilities depending on whether in a net positive or negative position.

⁽²⁾  “Other” includes embedded derivatives bifurcated from securitization debt as well as derivatives related to our Total Return Swap Facility.

⁽³⁾  The following table reconciles gross positions with the impact of master netting agreements to the balance sheet classification:

	Other Assets						Other Liabilities
(Dollar in millions)	December 31, 2012			December 31, 2011			December 31, 2012			December 31, 2011
Gross position	$	2,785		$	3,093		$	(2,499	)	$	(3,057	)
Impact of master netting agreements		(544	)		(891	)		544			891
Derivative values with impact of master netting agreements (as carried on balance sheet)		2,241			2,202			(1,955	)		(2,166	)
Cash collateral (held) pledged		(1,423	)		(1,326	)		973			1,018
Net position	$	818		$	876		$	(982	)	$	(1,148	)

The above fair values include adjustments for counterparty credit risk for both when we are exposed to the counterparty, net of collateral postings, and when the counterparty is exposed to us, net of collateral postings. The net adjustments decreased the overall net asset positions at December 31, 2012 and 2011 by $111 million and $190 million, respectively. In addition, the above fair values reflect adjustments for illiquid derivatives as indicated by a wide bid/ask spread in the interest rate indices to which the derivatives are indexed. These adjustments decreased the overall net asset positions at December 31, 2012 and 2011 by $107 million and $111 million, respectively.

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	Cash Flow				Fair Value				Trading				Total
(Dollars in billions)	Dec. 31, 2012		Dec. 31, 2011		Dec. 31, 2012		Dec. 31, 2011		Dec. 31, 2012		Dec. 31, 2011		Dec. 31, 2012		Dec. 31, 2011
Notional Values:
Interest rate swaps	$	0.7	$	1.1	$	15.8	$	14.0	$	56.9	$	73.6	$	73.4	$	88.7
Floor Income Contracts		—		—		—		—		51.6		57.8		51.6		57.8
Cross-currency interest rate swaps		—		—		13.7		15.5		0.3		.3		14.0		15.8
Other(1)		—		—		—		—		1.4		1.4		1.4		1.4
Total derivatives	$	0.7	$	1.1	$	29.5	$	29.5	$	110.2	$	133.1	$	140.4	$	163.7

⁽¹⁾  “Other” includes embedded derivatives bifurcated from securitization debt, as well as derivatives related to our Total Return Swap Facility.

Impact of Derivatives on Consolidated Statements of Income

	Years Ended December 31,
	Unrealized Gain (Loss) on Derivatives(1)(2)									Realized Gain (Loss) on Derivatives(3)									Unrealized Gain (Loss) on Hedged Item(1)									Total Gain (Loss)
(Dollars in millions)	2012			2011			2010			2012			2011			2010			2012			2011			2010			2012			2011			2010
Fair Value Hedges:
Interest rate swaps	$	(75	)	$	503		$	289		$	449		$	481		$	487		$	41		$	(554	)	$	(334	)	$	415		$	430		$	442
Cross-currency interest rate swaps		42			(723	)		(1,871	)		167			314			348			(182	)		664			1,732			27			255			209
Total fair value derivatives		(33	)		(220	)		(1,582	)		616			795			835			(141	)		110			1,398			442			685			651
Cash Flow Hedges:
Interest rate swaps		(1	)		(1	)		—			(26	)		(39	)		(58	)		—			—			—			(27	)		(40	)		(58	)
Total cash flow derivatives		(1	)		(1	)		—			(26	)		(39	)		(58	)		—			—			—			(27	)		(40	)		(58	)
Trading:
Interest rate swaps		(66	)		183			412			108			69			11			—			—			—			42			252			423
Floor Income Contracts		412			(267	)		156			(859	)		(903	)		(888	)		—			—			—			(447	)		(1,170	)		(732	)
Cross-currency interest rate swaps		(59	)		29			57			7			8			7			—			—			—			(52	)		37			64
Other		5			22			37			(1	)		11			31			—			—			—			4			33			68
Total trading derivatives		292			(33	)		662			(745	)		(815	)		(839	)		—			—			—			(453	)		(848	)		(177	)
Total		258			(254	)		(920	)		(155	)		(59	)		(62	)		(141	)		110			1,398			(38	)		(203	)		416
Less: realized gains (losses) recorded in interest expense		—			—			—			590			756			777			—			—			—			590			756			777
Gains (losses) on derivative and hedging activities, net	$	258		$	(254	)	$	(920	)	$	(745	)	$	(815	)	$	(839	)	$	(141	)	$	110		$	1,398		$	(628	)	$	(959	)	$	(361	)

⁽¹⁾  Recorded in “Gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.

⁽²⁾  Represents ineffectiveness related to cash flow hedges.

⁽³⁾  For fair value and cash flow hedges, recorded in interest expense. For trading derivatives, recorded in “Gains (losses) on derivative and hedging activities, net.”

Impact of Derivatives on Consolidated Statements of Changes in Stockholders’ Equity (net of tax)

	Years Ended December 31,
(Dollars in millions)	2012			2011			2010
Total losses on cash flow hedges	$	(7	)	$	(4	)	$	(35	)
Realized losses recognized in interest expense(1)(2)(3)		16			35			40
Total change in stockholders’ equity for unrealized gains on derivatives	$	9		$	31		$	5

⁽¹⁾  Amounts included in “Realized gain (loss) on derivatives” in the “Impact of Derivatives on Consolidated Statements of Income” table above.

⁽²⁾  Includes net settlement income/expense.

⁽³⁾  We expect to reclassify $0.3 million of after-tax net losses from accumulated other comprehensive income to earnings during the next 12 months related to net settlement accruals on interest rate swaps.

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Collateral

The following table details collateral held and pledged related to derivative exposure between us and our derivative counterparties.

(Dollars in millions)	December 31, 2012		December 31, 2011
Collateral held:
Cash (obligation to return cash collateral is recorded in short-term borrowings)(1)	$	1,423	$	1,326
Securities at fair value — on-balance sheet securitization derivatives (not recorded in financial statements)(2)		613		841
Total collateral held	$	2,036	$	2,167
Derivative asset at fair value including accrued interest	$	2,570	$	2,607
Collateral pledged to others:
Cash (right to receive return of cash collateral is recorded in investments)	$	973	$	1,018
Total collateral pledged	$	973	$	1,018
Derivative liability at fair value including accrued interest and premium receivable	$	1,204	$	1,223

⁽¹⁾  At December 31, 2012 and 2011, $9 million and $26 million, respectively, were held in restricted cash accounts.

⁽²⁾  The trusts do not have the ability to sell or re-pledge securities they hold as collateral.

Our corporate derivatives contain credit contingent features. At our current unsecured credit rating, we have fully collateralized our corporate derivative liability position (including accrued interest and net of premiums receivable) of $1.0 billion with our counterparties. Further downgrades would not result in any additional collateral requirements, except to increase the frequency of collateral calls. Two counterparties have the right to terminate the contracts with further downgrades. We currently have a liability position with these derivative counterparties (including accrued interest and net of premiums receivable) of $272 million and have posted $273 million of collateral to these counterparties. If the credit contingent feature was triggered for these two counterparties and the counterparties exercised their right to terminate, we would not be required to deliver additional assets to settle the contracts. Trust related derivatives do not contain credit contingent features related to our or the trusts’ credit ratings.

8. Other Assets

The following table provides the detail of our other assets.

	December 31, 2012					December 31, 2011
(Dollars in millions)	Ending Balance		% of Balance			Ending Balance		% of Balance
Derivatives at fair value	$	2,241		27	%	$	2,202		25	%
Accrued interest receivable, net		2,147		26			2,484		29
Income tax asset, net current and deferred		1,478		18			1,427		17
Accounts receivable		1,111		13			1,392		16
Benefit and insurance-related investments		474		6			466		5
Fixed assets, net		215		3			214		3
Other loans, net		137		2			193		2
Other		470		5			280		3
Total	$	8,273		100	%	$	8,658		100	%

The “Derivatives at fair value” line in the above table represents the fair value of our derivatives in a gain position by counterparty, exclusive of accrued interest and collateral. At December 31, 2012 and 2011, these balances included $2.4 billion and $2.5 billion, respectively, of cross-currency interest rate swaps and interest rate swaps designated as fair value hedges that were offset by an increase in interest-bearing liabilities related to the hedged debt. As of December 31, 2012 and 2011, the cumulative mark-to-market adjustment to the hedged debt was $(2.8) billion and $(2.7) billion, respectively.

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9. Stockholders’ Equity

Preferred Stock

At December 31, 2012, we had outstanding 3.3 million shares of 6.97 percent Cumulative Redeemable Preferred Stock, Series A (the “Series A Preferred Stock”) and 4.0 million shares of Floating-Rate Non-Cumulative Preferred Stock, Series B (the “Series B Preferred Stock”). Neither series has a maturity date but can be redeemed at our option. Redemption would include any accrued and unpaid dividends up to the redemption date. The shares have no preemptive or conversion rights and are not convertible into or exchangeable for any of our other securities or property. Dividends on both series are not mandatory and are paid quarterly, when, as, and if declared by the Board of Directors. Holders of Series A Preferred Stock are entitled to receive cumulative, quarterly cash dividends at the annual rate of $3.485 per share. Holders of Series B Preferred Stock are entitled to receive quarterly dividends based on 3-month LIBOR plus 170 basis points per annum in arrears. Upon liquidation or dissolution of the Company, holders of the Series A and Series B Preferred Stock are entitled to receive $50 and $100 per share, respectively, plus an amount equal to accrued and unpaid dividends for the then current quarterly dividend period, if any, pro rata, and before any distribution of assets are made to holders of our common stock.

No shares of our 7.25 percent Mandatory Convertible Preferred Stock, Series C (the “Series C Preferred Stock”) remain outstanding. On December 15, 2010, the mandatory conversion date, all remaining 810,370 shares of the Series C Preferred Stock were converted into 41 million shares of our common stock.

Common Stock

Our shareholders have authorized the issuance of 1.125 billion shares of common stock (par value of $.20). At December 31, 2012, 453 million shares were issued and outstanding and 40 million shares were unissued but encumbered for outstanding stock options, restricted stock units and dividend equivalent units for employee compensation and remaining authority for stock-based compensation plans. The stock-based compensation plans are described in “Note 11 — Stock-Based Compensation Plans and Arrangements.”

In March 2011, we retired 70 million shares of common stock held in treasury. This retirement decreased the balance in treasury stock by $1.9 billion, with corresponding decreases of $14 million in common stock and $1.9 billion in additional paid-in capital. There was no impact to total equity from this transaction.

Dividend and Share Repurchase Program

In 2012, we increased the quarterly dividend on our common stock to $.125 per share, up from $.10 per share in the prior year. In 2012, we authorized the repurchase of up to $900 million of outstanding common stock in open market transactions and we repurchased 58.0 million shares for an aggregate purchase price of $900 million. In 2011, we repurchased 19.1 million shares of common stock at an aggregate price of $300 million under our April 2011 share repurchase program that authorized up to $300 million of share repurchases.

The following table summarizes our common share repurchases and issuances.

	Years Ended December 31,
	2012		2011		2010
Common stock repurchased(1)		58,038,239		19,054,115		—
Average purchase price per share(2)	$	15.52	$	15.77	$	—
Shares repurchased related to employee stock-based compensation plans(3)		4,547,785		3,024,662		1,097,647
Average purchase price per share	$	15.86	$	15.71	$	13.44
Common shares issued(4)		6,432,643		3,886,217		1,803,683

⁽¹⁾  Common shares purchased under our share repurchase program, of which none remained available as of December 31, 2012.

⁽²⁾  Average purchase price per share includes purchase commission costs.

⁽³⁾  Comprises shares withheld from stock option exercises and vesting of restricted stock for employees’ tax withholding obligations and shares tendered by employees to satisfy option exercise costs.

⁽⁴⁾  Common shares issued under our various compensation and benefit plans.

The closing price of our common stock on December 31, 2012 was $17.13.

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10. Earnings (Loss) per Common Share

Basic earnings (loss) per common share (“EPS”) are calculated using the weighted average number of shares of common stock outstanding during each period. A reconciliation of the numerators and denominators of the basic and diluted EPS calculations follows.

	Years Ended December 31,
(In millions, except per share data)	2012		2011		2010
Numerator:
Net income attributable to SLM Corporation	$	939	$	633	$	530
Preferred stock dividends		20		18		72
Net income attributable to SLM Corporation common stock	$	919	$	615	$	458
Denominator:
Weighted average shares used to compute basic EPS		476		517		487
Effect of dilutive securities:
Dilutive effect of stock options, non-vested deferred compensation and restricted stock, restricted stock units and Employee Stock Purchase Plan (“ESPP”)(1)		7		6		1
Dilutive potential common shares(2)		7		6		1
Weighted average shares used to compute diluted EPS		483		523		488
Basic earnings (loss) per common share attributable to SLM Corporation:
Continuing operations	$	1.93	$	1.12	$	1.35
Discontinued operations		—		.07		(.41	)
Total	$	1.93	$	1.19	$	.94
Diluted earnings (loss) per common share attributable to SLM Corporation:
Continuing operations	$	1.90	$	1.11	$	1.35
Discontinued operations		—		.07		(.41	)
Total	$	1.90	$	1.18	$	.94

⁽¹⁾  Includes the potential dilutive effect of additional common shares that are issuable upon exercise of outstanding stock options, non-vested deferred compensation and restricted stock, restricted stock units, and the outstanding commitment to issue shares under the ESPP, determined by the treasury stock method.

⁽²⁾  For the years ended December 31, 2012, 2011 and 2010, securities covering approximately 12 million, 16 million and 15 million shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive.

11. Stock-Based Compensation Plans and Arrangements

As of December 31, 2012, we have one active stock-based compensation plan that provides for grants of equity awards to our employees and non-employee directors. We also maintain the ESPP. Shares issued under these stock-based compensation plans may be either shares reacquired by us or shares that are authorized but unissued.

Our SLM Corporation 2012 Omnibus Incentive Plan was approved by shareholders on May 24, 2012. At December 31, 2012, 20 million shares were authorized to be issued from this plan.

An amendment to our ESPP was approved by our shareholders on May 24, 2012 that authorized the issuance of 6 million shares under the plan and kept the terms of the plan substantially the same.

The total stock-based compensation cost recognized in the consolidated statements of income for the years ended December 31, 2012, 2011 and 2010 was $47 million, $56 million and $40 million, respectively. As of December 31, 2012, there was $18 million of total unrecognized compensation expense related to unvested stock awards net of estimated forfeitures, which is expected to be recognized over a weighted average period of 1.8 years. We amortize compensation expense on a straight-line basis over the related vesting periods of each tranche of each award.

In the first quarter of 2011, we changed our stock-based compensation plans so that retirement eligible employees would not forfeit unvested stock-based compensation upon their retirement. This change had the effect of accelerating $11 million of future stock-based compensation expenses associated with these unvested stock grants into the first quarter of 2011 for those employees who are retirement eligible or who will become retirement eligible prior to the vesting date.

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Stock Options

Stock options granted prior to 2012 expire 10 years after the grant date, and those granted in 2012 expire in 5 years. The exercise price must be equal to or greater than the market price of our common stock on the grant date. We have granted time-vested, price-vested and performance-vested options to our employees and non-employee directors. Time-vested options granted to management and non-management employees generally vest over three years. Price-vested options granted to management employees vest upon our common stock reaching a targeted closing price for a set number of days. Performance-vested options granted to management employees vest one-third per year for three years based on corporate earnings-related performance targets. Options granted to non-employee directors vest upon the director’s election to the Board.

The fair values of the options granted in the years ended December 31, 2012, 2011 and 2010 were estimated as of the grant date using a Black-Scholes option pricing model with the following weighted average assumptions:

	Years Ended December 31,
	2012			2011			2010
Risk-free interest rate		.60	%		1.57	%		1.60	%
Expected volatility		44	%		54	%		60	%
Expected dividend rate		3.13	%		2.58	%		0.00	%
Expected life of the option		2.8 years			4.1 years			3.3 years
Weighted average fair value of options granted	$	4.12		$	5.18		$	4.40

The expected life of the options is based on observed historical exercise patterns. Groups of employees (and non-employee directors) that have received similar option grant terms are considered separately for valuation purposes. The expected volatility is based on implied volatility from publicly-traded options on our stock at the grant date and historical volatility of our stock consistent with the expected life of the option. The risk-free interest rate is based on the U.S. Treasury spot rate at the grant date consistent with the expected life of the option. The dividend yield is based on the projected annual dividend payment per share based on the dividend amount at the grant date, divided by the stock price at the grant date.

The following table summarizes stock option activity for the year ended December 31, 2012.

(Dollars in millions, except per share data)	Number of Options			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value(1)
Outstanding at December 31, 2011		32,671,065		$	19.78
Granted		2,821,847			15.99
Exercised(2)(3)		(5,221,677	)		10.78
Canceled		(4,278,488	)		27.92
Outstanding at December 31, 2012(4)(5)		25,992,747		$	19.84		5.0 yrs	$	86
Exercisable at December 31, 2012		17,653,379		$	22.25		4.5 yrs	$	59

⁽¹⁾  The aggregate intrinsic value represents the total intrinsic value (the aggregate difference between our closing stock price on December 31, 2012 and the exercise price of in-the-money options) that would have been received by the option holders if all in-the-money options had been exercised on December 31, 2012.

⁽²⁾  The total intrinsic value of options exercised was $27 million, $14 million and $1 million for the years ended December 31, 2012, 2011 and 2010, respectively.

⁽³⁾  No cash was received from option exercises for the year ended December 31, 2012. The actual tax benefit realized for the tax deductions from option exercises totaled $10 million for the year ended December 31, 2012.

⁽⁴⁾  As of December 31, 2012, there was $4 million of unrecognized compensation cost related to stock options net of estimated forfeitures, which is expected to be recognized over a weighted average period of 1.4 years.

⁽⁵⁾  For net-settled options, gross number is reflected.

Restricted Stock

Restricted stock awards generally vest over three years and in some cases based on corporate earnings-related performance targets. Outstanding restricted stock is entitled to dividend equivalent units that vest subject to the same vesting requirements or lapse of transfer restrictions, as applicable, as the underlying restricted stock award. The fair value of restricted stock awards is based on our stock price at the grant date.

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The following table summarizes restricted stock activity for the year ended December 31, 2012.

	Number of Shares			Weighted Average Grant Date Fair Value
Non-vested at December 31, 2011		412,862		$	12.07
Granted		60,652			15.99
Vested(1)		(285,722	)		13.24
Canceled		—			—
Non-vested at December 31, 2012(2)		187,792		$	11.55

⁽¹⁾  The total fair value of shares that vested during the years ended December 31, 2012, 2011 and 2010 was $4 million, $6 million and $9 million, respectively.

⁽²⁾  As of December 31, 2012, there was $.2 million of unrecognized compensation cost related to restricted stock net of estimated forfeitures, which is expected to be recognized over a weighted average period of .8 years.

Restricted Stock Units and Performance Stock Units

Restricted stock units (“RSUs”) and performance stock units (“PSUs”) are equity awards granted to employees that entitle the holder to shares of our common stock when the award vests. RSUs may be time-vested over three years or vested at grant but subject to transfer restrictions, while PSUs vest based on corporate earnings-related performance targets over a three-year period. Outstanding RSUs and PSUs are entitled to dividend equivalent units that vest subject to the same vesting requirements or lapse of transfer restrictions, as applicable, as the underlying award. The fair value of RSUs and PSUs is based on our stock price at the grant date.

The following table summarizes RSU and PSU activity for the year ended December 31, 2012.

	Number of RSUs/ PSUs			Weighted Average Grant Date Fair Value
Outstanding at December 31, 2011		2,730,690		$	14.67
Granted		2,746,912			16.00
Vested and converted to common stock(1)		(920,332	)		14.60
Canceled		(83,806	)		15.41
Outstanding at December 31, 2012(2)		4,473,464		$	15.49

⁽¹⁾  The total fair value of RSUs/PSUs that vested and converted to common stock during the years ended December 31, 2012, 2011 and 2010 was $13 million, $.4 million and $.4 million, respectively.

⁽²⁾  As of December 31, 2012, there was $14 million of unrecognized compensation cost related to RSUs/PSUs net of estimated forfeitures, which is expected to be recognized over a weighted average period of 1.9 years.

Employee Stock Purchase Plan

Under the ESPP, employees can purchase shares of our common stock at the end of a 12-month offering period at a price equal to the share price at the beginning of the 12-month period, less 15 percent, up to a maximum purchase price of $7,500 plus accrued interest. The purchase price for each offering is determined at the beginning of the offering period.

The fair values of the stock purchase rights of the ESPP offerings were calculated using a Black-Scholes option pricing model with the following weighted average assumptions.

	Years Ended December 31,
	2012			2011			2010
Risk-free interest rate		.13	%		.27	%		.33	%
Expected volatility		29	%		42	%		61	%
Expected dividend rate		3.27	%		1.87	%		0.00	%
Expected life of the option		1 year			1 year			1 year
Weighted average fair value of stock purchase rights	$	3.01		$	3.63		$	3.30

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The expected volatility is based on implied volatility from publicly-traded options on our stock at the grant date and historical volatility of our stock consistent with the expected life. The risk-free interest rate is based on the U.S. Treasury spot rate at the grant date consistent with the expected life. The dividend yield is based on the projected annual dividend payment per share based on the current dividend amount at the grant date divided by the stock price at the grant date.

The fair values were amortized to compensation cost on a straight-line basis over a one-year vesting period. As of December 31, 2012, there was $.1 million of unrecognized compensation cost related to the ESPP net of estimated forfeitures, which is expected to be recognized in January 2013.

During the years ended December 31, 2012, 2011 and 2010, plan participants purchased 192,755 shares, 278,266 shares and 205,528 shares, respectively, of our common stock.

12. Restructuring Activities

Restructuring and other reorganization expenses of $15 million, $11 million and $91 million were recorded in the years ended December 31, 2012, 2011 and 2010, respectively. Of these amounts, $11 million, $12 million and $85 million was recognized in continuing operations and $4 million, $(1) million and $6 million was recognized in discontinued operations, respectively. The following details our restructuring efforts:

• On March 30, 2010, President Obama signed into law H.R. 4872, HCERA, which included the SAFRA Act. Effective July 1, 2010, the legislation eliminated the authority to provide new loans under FFELP and required all new federal loans to be made through the DSLP. The new law did not alter or affect the terms and conditions of existing FFELP Loans. We have restructured our operations in response to this change in law which resulted in a significant reduction of operating costs due to the elimination of positions and facilities associated with the origination of FFELP Loans. Restructuring expenses associated with this plan were $12 million, $9 million, and $84 million for the years ended December 31, 2012, 2011, and 2010. Restructuring costs under this plan are substantially complete at this time.

• In response to the College Cost Reduction and Access Act of 2007 (“CCRAA”) and challenges in the capital markets, we initiated a restructuring plan in the fourth quarter of 2007. This plan focused on conforming our lending activities to the economic environment, exiting certain customer relationships and product lines, winding down or otherwise disposing of our debt Purchased Paper businesses, and significantly reducing our operating expenses. This restructuring plan was essentially completed in the fourth quarter of 2009. Under this plan, there were $1 million, $0 and $7 million of restructuring expenses for the years ended December 31, 2012, 2011, and 2010.

• Other reorganization expenses were $2 million, $2 million and $0 for the years ended December 31, 2012, 2011, and 2010.

The following table summarizes the restructuring expenses incurred to date.

(Dollars in millions)	Years Ended December 31,							Cumulative Expense as of December 31,
	2012		2011			2010		2012
Severance costs	$	6	$	7		$	80	$	183
Lease and other contract termination costs		2		—			1		12
Exit and other costs		3		5			4		23
Total restructuring expenses from continuing operations(1)		11		12			85		218
Total restructuring expenses from discontinued operations		4		(1	)		6		26
Total	$	15	$	11		$	91	$	244

⁽¹⁾  Aggregate restructuring expenses from continuing operations incurred across our reportable segments are disclosed in “Note 16 — Segment Reporting.”

Since the fourth quarter of 2007 through December 31, 2012, cumulative severance costs were incurred in conjunction with aggregate completed and planned position eliminations of approximately 5,500 positions. Position eliminations were across all of our reportable segments, ranging from senior executives to servicing center personnel. Lease and other contract termination costs and exit and other costs incurred during 2012, 2011 and 2010 related primarily to terminated or abandoned facility leases and consulting costs incurred in conjunction with various cost reduction and exit strategies.

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13. Fair Value Measurements

We use estimates of fair value in applying various accounting standards for our financial statements.

We categorize our fair value estimates based on a hierarchical framework associated with three levels of price transparency utilized in measuring financial instruments at fair value. For additional information regarding our policies for determining fair value and the hierarchical framework, see “Note 2 — Significant Accounting Policies — Fair Value Measurement.”

During the year ended December 31, 2012, there were no significant transfers of financial instruments between levels.

Student Loans

Our FFELP Loans and Private Education Loans are accounted for at cost or at the lower of cost or market if the loan is held-for-sale. FFELP Loans classified as held-for-sale are those which we have the ability and intent to sell under various ED loan purchase programs. In these instances, the FFELP Loans are valued using the committed sales price under the programs. For all other FFELP Loans and Private Education Loans, fair values were determined by modeling loan cash flows using stated terms of the assets and internally-developed assumptions to determine aggregate portfolio yield, net present value and average life. The significant assumptions used to determine fair value are prepayment speeds, default rates, cost of funds, required return on equity, and expected Repayment Borrower Benefits to be earned. In addition, the Floor Income component of our FFELP Loan portfolio is valued with option models using both observable market inputs and internally developed inputs. A number of significant inputs into the models are internally derived and not observable to market participants.

Cash and Investments (Including “Restricted Cash and Investments”)

Cash and cash equivalents are carried at cost. Carrying value approximates fair value. Investments classified as trading or available-for-sale are carried at fair value in the financial statements. Investments in mortgage-backed securities are valued using observable market prices. These securities are primarily collateralized by real estate properties in Utah and are guaranteed by either a government sponsored enterprise or the U.S. government. Other investments (primarily municipal bonds) for which observable prices from active markets are not available were valued through standard bond pricing models using observable market yield curves adjusted for credit and liquidity spreads. These valuations are immaterial to the overall investment portfolio. The fair value of investments in commercial paper, asset-backed commercial paper, or demand deposits that have a remaining term of less than 90 days when purchased are estimated to equal their cost and, when needed, adjustments for liquidity and credit spreads are made depending on market conditions and counterparty credit risks. No additional adjustments were deemed necessary.

Borrowings

Borrowings are accounted for at cost in the financial statements except when denominated in a foreign currency or when designated as the hedged item in a fair value hedge relationship. When the hedged risk is the benchmark interest rate and not full fair value, the cost basis is adjusted for changes in value due to benchmark interest rates only. Foreign currency-denominated borrowings are re-measured at current spot rates in the financial statements. The full fair value of all borrowings is disclosed. Fair value was determined through standard bond pricing models and option models (when applicable) using the stated terms of the borrowings, observable yield curves, foreign currency exchange rates, volatilities from active markets or from quotes from broker-dealers. Fair value adjustments for unsecured corporate debt are made based on indicative quotes from observable trades and spreads on credit default swaps specific to the Company. Fair value adjustments for secured borrowings are based on indicative quotes from broker-dealers. These adjustments for both secured and unsecured borrowings are material to the overall valuation of these items and, currently, are based on inputs from inactive markets.

Derivative Financial Instruments

All derivatives are accounted for at fair value in the financial statements. The fair value of a majority of derivative financial instruments was determined by standard derivative pricing and option models using the stated terms of the contracts and observable market inputs. In some cases, we utilized internally developed inputs that are not observable in the market, and as such, classified these instruments as level 3 fair values. Complex structured derivatives or derivatives that trade in less liquid markets require significant estimates and judgment in determining fair value that cannot be corroborated with market transactions. It is our policy to compare our derivative fair values to those received by our counterparties in order to validate the model’s outputs. Any significant differences are identified and resolved appropriately.

When determining the fair value of derivatives, we take into account counterparty credit risk for positions where it is exposed to the counterparty on a net basis by assessing exposure net of collateral held. The net exposures for each counterparty are adjusted based on market information available for the specific counterparty, including spreads from credit default swaps. When the counterparty has exposure to us under derivatives with us, we fully collateralize the exposure, minimizing the adjustment necessary to the derivative

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valuations for our credit risk. While trusts that contain derivatives are not required to post collateral, when the counterparty is exposed to the trust the credit quality and securitized nature of the trusts minimizes any adjustments for the counterparty’s exposure to the trusts. The net credit risk adjustment (adjustments for our exposure to counterparties net of adjustments for the counterparties’ exposure to us) decreased the valuations by $111 million at December 31, 2012.

Inputs specific to each class of derivatives disclosed in the table below are as follows:

• Interest rate swaps — Derivatives are valued using standard derivative cash flow models. Derivatives that swap fixed interest payments for LIBOR interest payments (or vice versa) and derivatives swapping quarterly reset LIBOR for daily reset LIBOR or one-month LIBOR were valued using the LIBOR swap yield curve which is an observable input from an active market. These derivatives are level 2 fair value estimates in the hierarchy. Other derivatives swapping LIBOR interest payments for another variable interest payment (primarily T-Bill or Prime) or swapping interest payments based on the Consumer Price Index for LIBOR interest payments are valued using the LIBOR swap yield curve and observable market spreads for the specified index. The markets for these swaps are generally illiquid as indicated by a wide bid/ask spread. The adjustment made for liquidity decreased the valuations by $107 million at December 31, 2012. These derivatives are level 3 fair value estimates.

• Cross-currency interest rate swaps — Derivatives are valued using standard derivative cash flow models. Derivatives hedging foreign-denominated bonds are valued using the LIBOR swap yield curve (for both USD and the foreign-denominated currency), cross-currency basis spreads, and forward foreign currency exchange rates. The derivatives are primarily British Pound Sterling and Euro denominated. These inputs are observable inputs from active markets. Therefore, the resulting valuation is a level 2 fair value estimate. Amortizing notional derivatives (derivatives whose notional amounts change based on changes in the balance of, or pool of, assets or debt) hedging trust debt use internally derived assumptions for the trust assets’ prepayment speeds and default rates to model the notional amortization. Management makes assumptions concerning the extension features of derivatives hedging rate-reset notes denominated in a foreign currency. These inputs are not market observable; therefore, these derivatives are level 3 fair value estimates.

• Floor Income Contracts — Derivatives are valued using an option pricing model. Inputs to the model include the LIBOR swap yield curve and LIBOR interest rate volatilities. The inputs are observable inputs in active markets and these derivatives are level 2 fair value estimates.

The carrying value of borrowings designated as the hedged item in a fair value hedge is adjusted for changes in fair value due to benchmark interest rates and foreign-currency exchange rates. These valuations are determined through standard bond pricing models and option models (when applicable) using the stated terms of the borrowings, and observable yield curves, foreign currency exchange rates, and volatilities.

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The following table summarizes the valuation of our financial instruments that are marked-to-market on a recurring basis.

	Fair Value Measurements on a Recurring Basis
	December 31, 2012											December 31, 2011
(Dollars in millions)	Level 1		Level 2			Level 3			Total			Level 1		Level 2			Level 3			Total
Assets
Available-for-sale investments:
Agency residential mortgage-backed securities	$	—	$	63		$	—		$	63		$	—	$	59		$	—		$	59
Guaranteed investment contracts		—		9			—			9			—		20			—			20
Other		—		9			—			9			—		11			—			11
Total available-for-sale investments		—		81			—			81			—		90			—			90
Derivative instruments:(1)
Interest rate swaps		—		1,444			102			1,546			—		1,550			183			1,733
Cross currency interest rate swaps		—		48			1,187			1,235			—		139			1,220			1,359
Other		—		—			4			4			—		—			1			1
Total derivative assets(3)		—		1,492			1,293			2,785			—		1,689			1,404			3,093
Total	$	—	$	1,573		$	1,293		$	2,866		$	—	$	1,779		$	1,404		$	3,183
Liabilities(2)
Derivative instruments(1)
Interest rate swaps	$	—	$	(34	)	$	(175	)	$	(209	)	$	—	$	(47	)	$	(223	)	$	(270	)
Floor Income Contracts		—		(2,154	)		—			(2,154	)		—		(2,544	)		—			(2,544	)
Cross currency interest rate swaps		—		(2	)		(134	)		(136	)		—		(44	)		(199	)		(243	)
Other		—		—			—			—			—		—			—			—
Total derivative liabilities(3)		—		(2,190	)		(309	)		(2,499	)		—		(2,635	)		(422	)		(3,057	)
Total	$	—	$	(2,190	)	$	(309	)	$	(2,499	)	$	—	$	(2,635	)	$	(422	)	$	(3,057	)

⁽¹⁾  Fair value of derivative instruments excludes accrued interest and the value of collateral.

⁽²⁾  Borrowings which are the hedged items in a fair value hedge relationship and which are adjusted for changes in value due to benchmark interest rates only are not carried at full fair value and are not reflected in this table.

⁽³⁾  See “Note 7 — Derivative Financial Instruments” for a reconciliation of gross positions without the impact of master netting agreements to the balance sheet classification.

The following tables summarize the change in balance sheet carrying value associated with level 3 financial instruments carried at fair value on a recurring basis.

	Year Ended December 31, 2012
	Derivative Instruments
(Dollars in millions)	Interest Rate Swaps			Cross Currency Interest Rate Swaps			Other		Total Derivative Instruments
Balance, beginning of period	$	(40	)	$	1,021		$	1	$	982
Total gains/(losses) (realized and unrealized):
Included in earnings(1)		(5	)		159			3		157
Included in other comprehensive income		—			—			—		—
Settlements		(28	)		(127	)		—		(155	)
Transfers in and/or out of level 3		—			—			—		—
Balance, end of period	$	(73	)	$	1,053		$	4	$	984
Change in unrealized gains/(losses) relating to instruments still held at the reporting date(2)	$	(31	)	$	55		$	4	$	28

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	Year Ended December 31, 2011
	Derivative Instruments
(Dollars in millions)	Interest Rate Swaps			Cross Currency Interest Rate Swaps			Other			Total Derivative Instruments
Balance, beginning of period	$	(90	)	$	1,427		$	26		$	1,363
Total gains/(losses) (realized and unrealized):
Included in earnings(1)		69			(176	)		33			(74	)
Included in other comprehensive income		—			—			—			—
Settlements		(19	)		(230	)		(58	)		(307	)
Transfers in and/or out of level 3		—			—			—			—
Balance, end of period	$	(40	)	$	1,021		$	1		$	982
Change in unrealized gains/(losses) relating to instruments still held at the reporting date(2)	$	6		$	(408	)	$	11		$	(391	)

	Year Ended December 31, 2010
				Derivative instruments
(Dollars in millions)	Residual Interests			Interest Rate Swaps			Floor Income Contracts			Cross Currency Interest Rate Swaps			Other			Total Derivative Instruments			Total
Balance, beginning of period	$	1,828		$	(272	)	$	(54	)	$	1,596		$	(18	)	$	1,252		$	3,080
Total gains/(losses) (realized and unrealized):
Included in earnings(1)		—			234			3			(834	)		34			(563	)		(563	)
Included in other comprehensive income		—			—			—			—			—			—			—
Settlements		—			4			51			(208	)		10			(143	)		(143	)
Cumulative effect of accounting change(3 )		(1,828	)		(56	)		—			873			—			817			(1,011	)
Transfers in and/or out of level 3		—			—			—			—			—			—			—
Balance, end of period	$	—		$	(90	)	$	—		$	1,427		$	26		$	1,363		$	1,363
Change in unrealized gains/(losses) relating to instruments still held at the reporting date(2)	$	—		$	111		$	—		$	(1,010	)	$	36		$	(863	)	$	(863	)

⁽¹⁾  “Included in earnings” is comprised of the following amounts recorded in the specified line item in the consolidated statements of income:

	Years Ended December 31,
(Dollars in millions)	2012		2011			2010
Gains (losses) on derivative and hedging activities, net	$	37	$	(298	)	$	(732	)
Interest expense		120		224			169
Total	$	157	$	(74	)	$	(563	)

⁽²⁾  Recorded in “gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.

⁽³⁾  On January 1, 2010, upon adoption of new consolidation accounting guidance, all off-balance sheet loans were consolidated on-balance sheet (see “Note 2 — Significant Accounting Policies — Consolidation”). This resulted in the removal of the Residual Interest and the recording of the fair value of swaps previously not in our consolidated results.

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The following table presents the significant inputs that are unobservable or from inactive markets used in the recurring valuations of the level 3 financial instruments detailed above.

(Dollars in millions)	Fair Value at December 31, 2012			Valuation Technique	Input	Range (Weighted Average)
Derivatives
Consumer Price Index/LIBOR basis swaps	$	92		Discounted cash flow	Bid/ask adjustment to discount rate	0.02% — 0.04% (0.05%)
Prime/LIBOR basis swaps		(165	)	Discounted cash flow	Constant prepayment rate	4.3%
					Bid/ask adjustment to discount rate	0.08% — 0.08% (0.08%)
Cross-currency interest rate swaps		1,053		Discounted cash flow	Constant prepayment rate	2.6%
Other		4
Total	$	984

The significant inputs that are unobservable or from inactive markets related to our level 3 derivatives detailed in the table above would be expected to have the following impacts to the valuations:

• Consumer Price Index/LIBOR basis swaps — These swaps do not actively trade in the markets as indicated by a wide bid/ask spread. A wider bid/ask spread will result in a decrease in the overall valuation.

• Prime/LIBOR basis swaps — These swaps do not actively trade in the markets as indicated by a wide bid/ask spread. A wider bid/ask spread will result in a decrease in the overall valuation. In addition, the unobservable inputs include constant prepayment rates of the underlying securitization trust the swap references. A decrease in this input will result in a longer weighted average life of the swap which will increase the value for swaps in a gain position and decrease the value for swaps in a loss position, everything else equal. The opposite is true for an increase in the input.

• Cross-currency interest rate swaps — The unobservable inputs used in these valuations are constant prepayment rates of the underlying securitization trust the swap references. A decrease in this input will result in a longer weighted average life of the swap. All else equal in a typical currency market, this will result in a decrease to the valuation due to the delay in the cash flows of the currency exchanges as well as diminished liquidity in the forward exchange markets as you increase the term. The opposite is true for an increase in the input.

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The following table summarizes the fair values of our financial assets and liabilities, including derivative financial instruments.

	December 31, 2012									December 31, 2011
(Dollars in millions)	Fair Value			Carrying Value			Difference			Fair Value			Carrying Value			Difference
Earning assets
FFELP Loans	$	125,042		$	125,612		$	(570	)	$	134,196		$	138,130		$	(3,934	)
Private Education Loans		36,081			36,934			(853	)		33,968			36,290			(2,322	)
Cash and investments(1)		9,994			9,994			—			9,789			9,789			—
Total earning assets		171,117			172,540			(1,423	)		177,953			184,209			(6,256	)
Interest-bearing liabilities
Short-term borrowings		19,861			19,856			(5	)		29,547			29,573			26
Long-term borrowings		146,210			152,401			6,191			141,605			154,393			12,788
Total interest-bearing liabilities		166,071			172,257			6,186			171,152			183,966			12,814
Derivative financial instruments
Floor Income Contracts		(2,154	)		(2,154	)		—			(2,544	)		(2,544	)		—
Interest rate swaps		1,337			1,337			—			1,463			1,463			—
Cross currency interest rate swaps		1,099			1,099			—			1,116			1,116			—
Other		4			4			—			1			1			—
Excess of net asset fair value over carrying value							$	4,763								$	6,558

⁽¹⁾  “Cash and investments” includes available-for-sale investments that consist of investments that are primarily agency securities whose cost basis is $78 million and $85 million at December 31, 2012 and 2011, respectively, versus a fair value of $81 million and $90 million at December 31, 2012 and 2011, respectively.

The following includes a discussion of financial instruments whose fair value is included for disclosure purposes only in the table above along with their level in the fair value hierarchy.

Student Loans

FFELP Loans

Fair values for FFELP Loans were determined by modeling loan cash flows using stated terms of the loans and internally-developed assumptions. The significant assumptions used to determine fair value are prepayment speeds, default rates, cost of funds, capital levels, and expected Repayment Borrower Benefits to be earned. In addition, the Floor Income component of our FFELP Loan portfolio is valued with option models using both observable market inputs and internally developed inputs. A number of significant inputs into the models are internally derived and not observable to market participants. While the resulting fair value can be validated against market transactions where we are a participant, these markets are not considered active. As such, these are level 3 valuations.

Private Education Loans

Fair values for Private Education Loans were determined by modeling loan cash flows using stated terms of the loans and internally-developed assumptions. The significant assumptions used to determine fair value are prepayment speeds, default rates, recovery rates, cost of funds and capital levels. A number of significant inputs into the models are internally derived and not observable to market participants nor can the resulting fair values be validated against market transactions. As such, these are level 3 valuations.

Cash and Investments (Including “Restricted Cash and Investments”)

Cash and cash equivalents are carried at cost. Carrying value approximated fair value. These are level 2 valuations.

Borrowings

The full fair value of all borrowings is disclosed. Fair value was determined through standard bond pricing models and option models (when applicable) using the stated terms of the borrowings, observable yield curves, foreign currency exchange rates, volatilities from active markets or from quotes from broker-dealers. Fair value adjustments for unsecured corporate debt are made based on indicative quotes from observable trades and spreads on credit default swaps specific to the Company. Fair value adjustments for secured borrowings are based on indicative quotes from broker-dealers. These fair value adjustments are based on inputs from inactive markets. As such, these are level 3 valuations.

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14. Commitments, Contingencies and Guarantees

Investor Litigation

In Re SLM Corporation ERISA Litigation.On May 8, 2008, a class action complaint was filed in U.S. District Court for the Southern District of New York against the Company, certain current and former officers, retirement plan fiduciaries, and the Board of Directors of the Company, formerly in the U.S. District Court for the Southern District of New York. The complaint alleged breaches of fiduciary duties and prohibited transactions in violation of the Employee Retirement Income Security Act arising out of alleged false and misleading public statements regarding our business made during the 401K Class Period and investments in our common stock by plan participants in the 401K Plans. The class consists of participants in or beneficiaries of the Sallie Mae 401(K) Retirement Savings Plan and Sallie Mae 401(k) Savings Plan (together, the “401K Plans”) between January 18, 2007 and “the present” whose accounts included investments in our common stock (“401K Class Period”). On September 24, 2010, the District Court dismissed the complaint. The Plaintiffs appealed to the U.S. Court of Appeals for the Second Circuit, however, on December 26, 2012, the Second Circuit affirmed the District Court’s dismissal of the complaint.

Lending and Collection Litigation and Investigations

Mark A. Arthur et al. v. Sallie Mae, Inc. On February 2, 2010, a class action lawsuit was filed by a borrower in U.S. District Court for the Western District of Washington alleging that we contacted consumers on their cellular telephones via autodialer without their consent in violation of the Telephone Consumer Protection Act, 47 U.S.C. § 227 et seq. (“TCPA”). On October 7, 2011, we entered into an amended settlement agreement under which the Company agreed to a settlement fund of $24.15 million. On December 5, 2012, the U.S. Court of Appeals for the Ninth Circuit dismissed an appeal filed by two individual objectors. We have denied vigorously all claims asserted against us, but agreed to settle to avoid the burden, expense, risk and uncertainty of continued litigation. As of December 31, 2011, we had accrued the entire $24.15 million related to this matter.

We and our subsidiaries and affiliates also are subject to various claims, lawsuits and other actions that arise in the normal course of business. Most of these matters are claims by borrowers disputing the manner in which their loans have been processed or the accuracy of our reports to credit bureaus. In addition, our collections subsidiaries are routinely named in individual plaintiff or class action lawsuits in which the plaintiffs allege that those subsidiaries have violated a federal or state law in the process of collecting their accounts. We believe that these claims, lawsuits and other actions will not have a material adverse effect on our business, financial condition or results of operations. Finally, from time to time, we and our subsidiaries and affiliates receive information and document requests from state attorneys general, legislative committees and administrative agencies concerning certain business practices. Our practice has been and continues to be to cooperate with these bodies and to be responsive to any such requests.

Contingencies

In the ordinary course of business, we and our subsidiaries are routinely defendants in or parties to pending and threatened legal actions and proceedings including actions brought on behalf of various classes of claimants. These actions and proceedings may be based on alleged violations of consumer protection, securities, employment and other laws. In certain of these actions and proceedings, claims for substantial monetary damage are asserted against us and our subsidiaries.

In the ordinary course of business, we and our subsidiaries are subject to regulatory examinations, information gathering requests, inquiries and investigations. In connection with formal and informal inquiries in these cases, we and our subsidiaries receive numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of our regulated activities.

In view of the inherent difficulty of predicting the outcome of such litigation and regulatory matters, we cannot predict what the eventual outcome of the pending matters will be, what the timing or the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be.

We are required to establish reserves for litigation and regulatory matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, we do not establish reserves.

Based on current knowledge, reserves have been established for certain litigation or regulatory matters where the loss is both probable and estimable. Based on current knowledge, management does not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our consolidated financial position, liquidity, results of operations or cash flows.

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15. Income Taxes

Reconciliations of the statutory U.S. federal income tax rates to our effective tax rate for continuing operations follow:

	Years Ended December 31,
	2012			2011			2010
Statutory rate		35.0	%		35.0	%		35.0	%
State tax, net of federal benefit		0.1			.8			1.6
Non-deductible goodwill		—			—			4.7
Other, net		(0.5	)		(.5	)		(.7	)
Effective tax rate		34.6	%		35.3	%		40.6	%

The effective tax rates for discontinued operations for the years ended December 31, 2012, 2011 and 2010 are 40.7 percent, 37.7 percent, and 13.5 percent, respectively. The effective tax rate varies from the statutory U.S. federal rate of 35 percent primarily due to the establishment of valuation allowances against capital loss carryforwards and the impact of non-tax deductible goodwill impairments for the year ended December 31, 2010, and due to the impact of state taxes, net of federal benefit, for the years ended December 31, 2012, 2011 and 2010.

Income tax expense consists of:

	December 31,
(Dollars in millions)	2012			2011			2010
Continuing operations current provision/(benefit):
Federal	$	474		$	436		$	248
State		27			38			36
Foreign		—			—			—
Total continuing operations current provision/(benefit)		501			474			284
Continuing operations deferred provision/(benefit):
Federal		23			(121	)		225
State		(26	)		(25	)		(9	)
Foreign		—			—			—
Total continuing operations deferred provision/(benefit)		(3	)		(146	)		216
Continuing operations provision for income tax expense/(benefit)		498			328			500
Discontinued operations current provision/(benefit):
Federal	$	1		$	(49	)	$	34
State		—			(5	)		8
Foreign		—			—			—
Total discontinued operations current provision/(benefit)		1			(54	)		42
Discontinued operations deferred provision/(benefit):
Federal		(2	)		68			(67	)
State		—			6			(6	)
Foreign		—			—			—
Total discontinued operations deferred provision/(benefit)		(2	)		74			(73	)
Discontinued operations provision for income tax expense/(benefit)		(1	)		20			(31	)
Provision for income tax expense/(benefit)	$	497		$	348		$	469

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The tax effect of temporary differences that give rise to deferred tax assets and liabilities include the following:

	December 31,
(Dollars in millions)	2012		2011
Deferred tax assets:
Loan reserves	$	940	$	959
Market value adjustments on student loans, investments and derivatives		671		595
Stock-based compensation plans		77		78
Deferred revenue		60		62
Operating loss and credit carryovers		38		49
Accrued expenses not currently deductible		34		51
Other		4		48
Total deferred tax assets		1,824		1,842
Deferred tax liabilities:
Gains/(losses) on repurchased debt		306		297
Other		65		74
Total deferred tax liabilities		371		371
Net deferred tax assets	$	1,453	$	1,471

Included in other deferred tax assets is a valuation allowance of $29 million and $31 million as of December 31, 2012 and 2011, respectively, against a portion of the Company’s federal, state and international deferred tax assets. The valuation allowance is primarily attributable to deferred tax assets for federal and state capital loss carryovers and state and international net operating loss carryovers that management believes it is more likely than not will expire prior to being realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income of the appropriate character (i.e. capital or ordinary) during the period in which the temporary differences become deductible. Management considers, among other things, the economic slowdown, the scheduled reversals of deferred tax liabilities, and the history of positive taxable income available for net operating loss carrybacks in evaluating the realizability of the deferred tax assets.

As of December 31, 2012, we have federal capital loss carryovers of $45 million which begin to expire in 2016, apportioned state net operating loss carryforwards of $384 million which begin to expire in 2016, state capital loss carryovers of $32 million which begin to expire in 2015, and international net operating loss carryforwards of $.4 million which begin to expire in 2032.

Accounting for Uncertainty in Income Taxes

The following table summarizes changes in unrecognized tax benefits:

	December 31,
(Dollars in millions)	2012			2011			2010
Unrecognized tax benefits at beginning of year	$	45.9		$	41.7		$	104.4
Increases resulting from tax positions taken during a prior period		20.0			20.5			13.1
Decreases resulting from tax positions taken during a prior period		(18.0	)		(2.1	)		(47.5	)
Increases/(decreases) resulting from tax positions taken during the current period		11.3			(9.1	)		(2.5	)
Decreases related to settlements with taxing authorities		(14.7	)		—			(87.6	)
Increases related to settlements with taxing authorities		—			0.4			69.1
Reductions related to the lapse of statute of limitations		(3.3	)		(5.5	)		(7.3	)
Unrecognized tax benefits at end of year	$	41.2		$	45.9		$	41.7

As of December 31, 2012, the gross unrecognized tax benefits are $41.2 million. Included in the $41.2 million are $27.5 million of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate.

The Company or one of its subsidiaries files income tax returns at the U.S. federal level, in most U.S. states, and various foreign jurisdictions. U.S. federal income tax returns filed for years 2010 and prior have either been audited or surveyed and are now resolved. Various combinations of subsidiaries, tax years, and jurisdictions remain open for review, subject to statute of limitations periods (typically 3 to 4 prior years). We do not expect the resolution of open audits to have a material impact on our unrecognized tax benefits.

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16. Segment Reporting

We monitor and assess our ongoing operations and results by three primary operating segments — the Consumer Lending operating segment, the Business Services operating segment and the FFELP Loan operating segment. These three operating segments meet the quantitative thresholds for reportable segments. Accordingly, the results of operations of our Consumer Lending, Business Services and FFELP Loans segments are presented separately. We have smaller operating segments that consist of business operations that have either been discontinued or are winding down. These operating segments do not meet the quantitative thresholds to be considered reportable segments. As a result, the results of operations for these operating segments (Purchased Paper business and mortgage and other loan business) are combined with gains/losses from the repurchase of debt, the financial results of our corporate liquidity portfolio and all overhead within the Other reportable segment. The management reporting process measures the performance of our operating segments based on our management structure, as well as the methodology we used to evaluate performance and allocate resources. Management, including our chief operating decision makers, evaluates the performance of our operating segments based on their profitability. As discussed further below, we measure the profitability of our operating segments based on “Core Earnings.” Accordingly, information regarding our reportable segments is provided based on a “Core Earnings” basis.

Consumer Lending Segment

In this segment, we originate, acquire, finance and service Private Education Loans. The Private Education Loans we make are primarily to bridge the gap between the cost of higher education and the amount funded through financial aid, federal loans or customers’ resources. We will continue to offer loan products to parents and graduate students where we believe we are competitive with similar federal education loan products. In this segment, we earn net interest income on the Private Education Loan portfolio (after provision for loan losses) as well as servicing fees, consisting primarily of late fees. Operating expenses for this segment include costs incurred to acquire and service our loans.

Private Education Loans bear the full credit risk of the customer and cosigner. We manage this risk by underwriting and pricing based upon customized credit scoring criteria and the addition of qualified cosigners. For the year ended December 31, 2012, our annual charge-off rate for Private Education Loans (as a percentage of loans in repayment) was 3.4 percent, as compared to 3.7 percent for the prior year.

In 2012, we originated $3.3 billion of Private Education Loans, an increase of 22 percent and 45 percent from years ended December 31, 2011 and 2010, respectively. As of December 31, 2012 and 2011, we had $36.9 billion and $36.3 billion of Private Education Loans outstanding, respectively. At December 31, 2012, 52 percent of our Private Education Loan portfolio was funded to term with non-recourse, long-term securitization debt.

Since the beginning of 2006, virtually all of our Private Education Loans have been originated and funded by the Bank, a Utah industrial bank subsidiary regulated by the UDFI and the FDIC. At December 31, 2012, the Bank had total assets of $9.1 billion including $5.5 billion in Private Education Loans. As of the same date, the Bank had total deposits of $7.8 billion. The Bank relies on both retail and brokered deposits to fund its assets and periodically sells originated Private Education Loans to affiliates for inclusion in securitization trusts or collection. The Bank is also a key component of our Upromise Rewards business. Sallie Mae and its affiliates provide services and technology support to the Bank through various service level agreements.

We face competition for Private Education Loans from a group of the nation’s larger banks and local credit unions.

The following table includes asset information for our Consumer Lending segment.

	December 31,
(Dollars in millions)	2012		2011
Private Education Loans, net	$	36,934	$	36,290
Cash and investments(1)		2,731		3,113
Other		3,275		3,595
Total assets	$	42,940	$	42,998

⁽¹⁾  Includes restricted cash and investments.

Business Services Segment

Our Business Services segment generates the majority of its revenue from servicing our FFELP Loan portfolio and from performing servicing default aversion and contingency collections work on behalf of Guarantors of FFELP Loans and other institutions. With the elimination of FFELP in July 2010, these FFELP-related revenue sources will continue to decline.

• Servicing revenues from the FFELP Loans we own and manage represent intercompany charges to the FFELP Loans segment at rates paid to us by the trusts which own the loans. These fees are legally the first payment priority of the trusts

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and exceed the actual cost of servicing the loans. Intercompany loan servicing revenues were $670 million in 2012 compared with $739 million in 2011. Intercompany loan servicing revenues will decline as the FFELP Loan portfolio amortizes. Prepayments of FFELP Loans could further accelerate the rate of decline.

• In 2012, we earned account maintenance fees and default aversion fees on FFELP Loans serviced for Guarantors of $41 million, down from $46 million in 2011. These fees will continue to decline as the portfolio amortizes. Prepayments of FFELP Loans could further accelerate the rate of decline.

• In 2012, contingency collection revenue from Guarantor clients totaled $264 million, compared to $246 million from the prior year. We anticipate these revenues will begin to decline steadily in 2013.

Our primary Business Services activities that are not directly related to the FFELP include:

Upromise

Upromise generates transaction fees through our Upromise consumer savings network; through December 31, 2012, members have earned approximately $730 million in rewards by purchasing products at hundreds of online retailers, booking travel, purchasing a home, dining out, buying gas and groceries, using the Upromise World MasterCard, or completing other qualified transactions. We earn a fee for the marketing and administrative services we provide to companies that participate in the Upromise savings network. We also compete with other loyalty shopping services and companies.

ED Collection and Servicing Contracts

Since 1997, we have provided collection services on defaulted student loans to ED. The current contract runs through December 31, 2013, with one six-month renewal option by ED. There are 21 other collection providers, of which we compete with 16 providers for account allocation based on quarterly performance metrics. The remaining five providers are small businesses who are ensured a particular allocation of business. As a consistent top performer, our share of allocated accounts has ranged from six percent to eight percent for this contract period. In addition, we were ranked first in the last quarterly performance metric and have been ranked first in the long-term performance metric, which is based on the past seven quarterly performance metrics, since the commencement of this contract.

In the second quarter of 2009, ED named Sallie Mae as one of four servicers awarded a servicing contract (the “ED Servicing Contract”) to service all newly disbursed federal loans owned by ED. The ED Servicing Contract covers, among other things, all new Direct Loans disbursed by, or sold to, ED since the contract award date and may extend to Direct Loans originated prior to that date. The contract spans five years with one, five-year renewal at the option of ED. We compete for Direct Loan servicing volume from ED with the three other servicing companies with whom we share the contract. New account allocations for the upcoming contract year are awarded annually based on each company’s performance on five different metrics over the most recently ended contract year: defaulted borrower count, defaulted borrower dollar amount, a survey of borrowers, a survey of schools and a survey of ED personnel (the “ED Scorecard”). Pursuant to the contract terms related to annual volume allocation of new loans, the maximum any servicer could be awarded is 40 percent of net new borrowers in that contract year. Our share of new loans serviced for ED under the ED Servicing Contract decreased to 15 percent in 2012 from 26 percent in the prior contract year as a result of our decrease in our relative standing, as compared to other servicing companies, on the ED Scorecard. We are servicing approximately 4.3 million accounts under the ED Servicing Contract as of December 31, 2012 and generated $84 million of revenue under the contracts for the year ended December 31, 2012.

At December 31, 2012 and 2011, the Business Services segment had total assets of $867 million and $912 million, respectively.

FFELP Loans Segment

Our FFELP Loans segment consists of our FFELP Loan portfolio and the underlying debt and capital funding the loans. FFELP Loans are insured or guaranteed by state or not-for-profit agencies and are also protected by contractual rights to recovery from the United States pursuant to guaranty agreements among ED and these agencies. These guarantees generally cover at least 97 percent of a FFELP Loan’s principal and accrued interest for loans disbursed. In the case of death, disability or bankruptcy of the borrower, these guarantees cover 100 percent of the loan’s principal and accrued interest.

At December 31, 2012, we held $125.6 billion of FFELP Loans, of which 82 percent were funded to term with non-recourse, long-term securitization debt. As a result of the long-term funding used in the FFELP Loan portfolio and the insurance and guarantees provided on these loans, the net interest margin recorded in the FFELP Loans segment is relatively stable and the capital we choose to retain with respect to the segment is modest. In addition to the net interest margin, we earn fee income largely from late fees on the loans.

Our FFELP Loan portfolio will amortize over approximately 20 years. Our goal is to maximize the cash flow generated by the portfolio. We will seek to acquire other third-party FFELP Loan portfolios to add net interest income and servicing revenue.

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The Higher Education Act (the “HEA”) continues to regulate every aspect of the FFELP, including ongoing communications with borrowers and default aversion requirements. Failure to service a FFELP Loan properly could jeopardize the insurance and guarantees and federal support on these loans. The insurance and guarantees on our existing loans were not affected by the July 2010 termination of the FFELP program.

The following table includes asset information for our FFELP Loans segment.

	December 31,
(Dollars in millions)	2012		2011
FFELP Loans, net	$	125,612	$	138,130
Cash and investments(1)		5,766		6,067
Other		4,286		4,415
Total assets	$	135,664	$	148,612

⁽¹⁾  Includes restricted cash and investments.

Other Segment

The Other segment consists primarily of the financial results related to activities of our holding company, including the repurchase of debt, the corporate liquidity portfolio and all overhead. We also include results from smaller wind-down and discontinued operations within this segment. Overhead expenses include costs related to executive management, the board of directors, accounting, finance, legal, human resources, stock-based compensation expense and information technology costs related to infrastructure and operations.

At December 31, 2012 and 2011, the Other segment had total assets of $1.8 billion and $823 million, respectively.

Measure of Profitability

The tables below include the condensed operating results for each of our reportable segments. Management, including the chief operating decision makers, evaluates the Company on certain performance measures that we refer to as “Core Earnings” performance measures for each operating segment. We use “Core Earnings” to manage each business segment because “Core Earnings” reflect adjustments to GAAP financial results for two items, discussed below, that create significant volatility mostly due to timing factors generally beyond the control of management. Accordingly, we believe that “Core Earnings” provide management with a useful basis from which to better evaluate results from ongoing operations against the business plan or against results from prior periods. Consequently, we disclose this information as we believe it provides investors with additional information regarding the operational and performance indicators that are most closely assessed by management. The two items adjusted for in our “Core Earnings” presentations are (1) our use of derivative instruments to hedge our economic risks that do not qualify for hedge accounting treatment or do qualify for hedge accounting treatment but result in ineffectiveness and (2) the accounting for goodwill and acquired intangible assets. The tables presented below reflect “Core Earnings” operating measures reviewed and utilized by management to manage the business. Reconciliation of the “Core Earnings” segment totals to our consolidated operating results in accordance with GAAP is also included in the tables below.

Our “Core Earnings” performance measures are not defined terms 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. The management reporting process measures the performance of the operating segments based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. Our 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. Intersegment revenues and expenses are netted within the appropriate financial statement line items 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.

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Segment Results and Reconciliations to GAAP

	Year Ended December 31, 2012
(Dollars in millions)	Consumer Lending			Business Services			FFELP Loans		Other			Eliminations(1)			Total “Core Earnings”			Adjustments									Total GAAP
																		Reclassifications			Additions/ (Subtractions)			Total Adjustments(2)
Interest income:
Student loans	$	2,481		$	—		$	2,744	$	—		$	—		$	5,225		$	858		$	(351	)	$	507		$	5,732
Other loans		—			—			—		16			—			16			—			—			—			16
Cash and investments		7			7			11		2			(6	)		21			—			—			—			21
Total interest income		2,488			7			2,755		18			(6	)		5,262			858			(351	)		507			5,769
Total interest expense		822			—			1,591		37			(6	)		2,444			115			2	(4)		117			2,561
Net interest income (loss)		1,666			7			1,164		(19	)		—			2,818			743			(353	)		390			3,208
Less: provisions for loan losses		1,008			—			72		—			—			1,080			—			—			—			1,080
Net interest income (loss) after provisions for loan losses		658			7			1,092		(19	)		—			1,738			743			(353	)		390			2,128
Servicing revenue		46			813			90		—			(670	)		279			—			—			—			279
Contingency revenue		—			356			—		—			—			356			—			—			—			356
Gains on debt repurchases		—			—			—		145			—			145			—			—			—			145
Other income (loss)		—			33			—		15			—			48			(743	)		159	(5)		(584	)		(536	)
Total other income (loss)		46			1,202			90		160			(670	)		828			(743	)		159			(584	)		244
Expenses:
Direct operating expenses		265			364			702		12			(670	)		673			—			—			—			673
Overhead expenses		—			—			—		224			—			224			—			—			—			224
Operating expenses		265			364			702		236			(670	)		897			—			—			—			897
Goodwill and acquired intangible assets impairment and amortization		—			—			—		—			—			—			—			27			27			27
Restructuring expenses		3			3			—		5			—			11			—			—			—			11
Total expenses		268			367			702		241			(670	)		908			—			27			27			935
Income (loss) from continuing operations, before income tax expense (benefit)		436			842			480		(100	)		—			1,658			—			(221	)		(221	)		1,437
Income tax expense (benefit)(3)		157			303			173		(36	)		—			597			—			(99	)		(99	)		498
Net income (loss) from continuing operations		279			539			307		(64	)		—			1,061			—			(122	)		(122	)		939
Income (loss) from discontinued operations, net of tax expense (benefit)		(2	)		—			—		1			—			(1	)		—			(1	)		(1	)		(2	)
Net income (loss)		277			539			307		(63	)		—			1,060			—			(123	)		(123	)		937
Less: net loss attributable to noncontrolling interest		—			(2	)		—		—			—			(2	)		—			—			—			(2	)
Net income (loss) attributable to SLM Corporation	$	277		$	541		$	307	$	(63	)	$	—		$	1,062		$	—		$	(123	)	$	(123	)	$	939

⁽¹⁾  The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.

⁽²⁾  “Core Earnings” adjustments to GAAP:

	Year Ended December 31, 2012
(Dollars in millions)	Net Impact of Derivative Accounting			Net Impact of Goodwill and Acquired Intangibles			Total
Net interest income after provisions for loan losses	$	390		$	—		$	390
Total other loss		(584	)		—			(584	)
Goodwill and acquired intangible assets impairment and amortization		—			27			27
Total “Core Earnings” adjustments to GAAP	$	(194	)	$	(27	)		(221	)
Income tax benefit								(99	)
Loss from discontinued operations, net of tax benefit								(1	)
Net loss							$	(123	)

⁽³⁾  Income taxes are based on a percentage of net income before tax for the individual reportable segment.

⁽⁴⁾  Represents a portion of the $42 million of “other derivative accounting adjustments.”

⁽⁵⁾  Represents the $115 million of “unrealized gains on derivative and hedging activities, net” as well as the remaining portion of the $42 million of “other derivative accounting adjustments.”

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	Year Ended December 31, 2011
(Dollars in millions)	Consumer Lending			Business Services			FFELP Loans		Other			Eliminations(1)			Total “Core Earnings”			Adjustments										Total GAAP
																		Reclassifications				Additions/ (Subtractions)			Total Adjustments(2)
Interest income:
Student loans	$	2,429		$	—		$	2,914	$	—		$	—		$	5,343		$	902			$	(355	)	$	547		$	5,890
Other loans		—			—			—		21			—			21			—				—			—			21
Cash and investments		9			8			5		5			(8	)		19			—				—			—			19
Total interest income		2,438			8			2,919		26			(8	)		5,383			902				(355	)		547			5,930
Total interest expense		801			—			1,472		54			(8	)		2,319			71				11	(4)		82			2,401
Net interest income (loss)		1,637			8			1,447		(28	)		—			3,064			831				(366	)		465			3,529
Less: provisions for loan losses		1,179			—			86		30			—			1,295			—				—			—			1,295
Net interest income (loss) after provisions for loan losses		458			8			1,361		(58	)		—			1,769			831				(366	)		465			2,234
Servicing revenue		64			872			86		—			(739	)		283			—				—			—			283
Contingency revenue		—			333			—		—			—			333			—				—			—			333
Gains on debt repurchases		—			—			—		64			—			64			(26	)			—			(26	)		38
Other income (loss)		(9	)		69			—		(6	)		—			54			(805	)			(174	)(5)		(979	)		(925	)
Total other income (loss)		55			1,274			86		58			(739	)		734			(831	)			(174	)		(1,005	)		(271	)
Expenses:
Direct operating expenses		291			393			772		19			(739	)		736			—				—			—			736
Overhead expenses		—			—			—		269			—			269			—				—			—			269
Operating expenses		291			393			772		288			(739	)		1,005			—				—			—			1,005
Goodwill and acquired intangible assets impairment and amortization		—			—			—		—			—			—			—				21			21			21
Restructuring expenses		3			5			1		3			—			12			—				—			—			12
Total expenses		294			398			773		291			(739	)		1,017			—				21			21			1,038
Income (loss) from continuing operations, before income tax expense (benefit)		219			884			674		(291	)		—			1,486			—				(561	)		(561	)		925
Income tax expense (benefit)(3)		81			325			248		(107	)		—			547			—				(219	)		(219	)		328
Net income (loss) from continuing operations		138			559			426		(184	)		—			939			—				(342	)		(342	)		597
Income (loss) from discontinued operations, net of tax expense (benefit)		(2	)		5			—		34			—			37			—				(2	)		(2	)		35
Net income (loss)		136			564			426		(150	)		—			976			—				(344	)		(344	)		632
Less: loss attributable to noncontrolling interest		—			(1	)		—		—			—			(1	)		—				—			—			(1	)
Net income (loss) attributable to SLM Corporation	$	136		$	565		$	426	$	(150	)	$	—		$	977		$	—		��	$	(344	)	$	(344	)	$	633

⁽¹⁾  The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.

⁽²⁾  “Core Earnings” adjustments to GAAP:

	Year Ended December 31, 2011
(Dollars in millions)	Net Impact of Derivative Accounting			Net Impact of Goodwill and Acquired Intangibles			Total
Net interest income after provisions for loan losses	$	465		$	—		$	465
Total other loss		(1,005	)		—			(1,005	)
Goodwill and acquired intangible assets impairment and amortization		—			21			21
Total “Core Earnings” adjustments to GAAP	$	(540	)	$	(21	)		(561	)
Income tax benefit								(219	)
Loss from discontinued operations, net of tax benefit								(2	)
Net loss							$	(344	)

⁽³⁾  Income taxes are based on a percentage of net income before tax for the individual reportable segment.

⁽⁴⁾  Represents a portion of the $(32) million of “other derivative accounting adjustments.”

⁽⁵⁾  Represents the $(153) million of “unrealized gains on derivative and hedging activities, net” as well as the remaining portion of the $(32) million of “other derivative accounting adjustments.”

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	Year Ended December 31, 2010
(Dollars in millions)	Consumer Lending			Business Services		FFELP Loans		Other			Eliminations(1)			Total “Core Earnings”			Adjustments									Total GAAP
																	Reclassifications			Additions/ (Subtractions)			Total Adjustments(2)
Interest income:
Student loans	$	2,353		$	—	$	2,766	$	—		$	—		$	5,119		$	888		$	(309	)	$	579		$	5,698
Other loans		—			—		—		30			—			30			—			—			—			30
Cash and investments		15			12		8		3			(12	)		26			—			—			—			26
Total interest income		2,368			12		2,774		33			(12	)		5,175			888			(309	)		579			5,754
Total interest expense		753			—		1,408		44			(12	)		2,193			69			13	(4)		82			2,275
Net interest income (loss)		1,615			12		1,366		(11	)		—			2,982			819			(322	)		497			3,479
Less: provisions for loan losses		1,298			—		98		23			—			1,419			—			—			—			1,419
Net interest income (loss) after provisions for loan losses		317			12		1,268		(34	)		—			1,563			819			(322	)		497			2,060
Servicing revenue		73			818		68		—			(648	)		311			—			—			—			311
Contingency revenue		—			330		—		—			—			330			—			—			—			330
Gains on debt repurchases		—			—		—		317			—			317						—			—			317
Other income (loss)		—			50		312		22			—			384			(819	)		404	(5)		(415	)		(31	)
Total other income (loss)		73			1,198		380		339			(648	)		1,342			(819	)		404			(415	)		927
Expenses:
Direct operating expenses		352			411		699		12			(648	)		826			—			—			—			826
Overhead expenses		—			—		—		304			—			304			—			—			—			304
Operating expenses		352			411		699		316			(648	)		1,130			—			—			—			1,130
Goodwill and acquired intangible assets impairment and amortization		—			—		—		—			—			—			—			543			543			543
Restructuring expenses		12			6		55		12			—			85			—			—			—			85
Total expenses		364			417		754		328			(648	)		1,215			—			543			543			1,758
Income (loss) from continuing operations, before income tax expense (benefit)		26			793		894		(23	)		—			1,690			—			(461	)		(461	)		1,229
Income tax expense (benefit)(3)		9			286		322		(11	)		—			606			—			(106	)		(106	)		500
Net income (loss) from continuing operations		17			507		572		(12	)		—			1,084			—			(355	)		(355	)		729
Income (loss) from discontinued operations, net of tax expense (benefit)		(3	)		12		—		(65	)		—			(56	)		—			(143	)		(143	)		(199	)
Net income (loss)	$	14		$	519	$	572	$	(77	)	$	—		$	1,028		$	—		$	(498	)	$	(498	)	$	530

⁽¹⁾  The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.

⁽²⁾  “Core Earnings” adjustments to GAAP:

	Year Ended December 31, 2010
(Dollars in millions)	Net Impact of Derivative Accounting			Net Impact of Goodwill and Acquired Intangibles			Total
Net interest income after provisions for loan losses	$	497		$	—		$	497
Total other loss		(415	)		—			(415	)
Goodwill and acquired intangible assets impairment and amortization		—			543			543
Total “Core Earnings” adjustments to GAAP	$	82		$	(543	)		(461	)
Income tax benefit								(106	)
Loss from discontinued operations, net of tax benefit								(143	)
Net loss							$	(498	)

⁽³⁾  Income taxes are based on a percentage of net income before tax for the individual reportable segment.

⁽⁴⁾  Represents a portion of the $(63) million of “other derivative accounting adjustments.”

⁽⁵⁾  Represents the $454 million of “unrealized gains on derivative and hedging activities, net” as well as the remaining portion of the $(63) million of “other derivative accounting adjustments.”

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Summary of “Core Earnings” Adjustments to GAAP

The two adjustments required to reconcile from our “Core Earnings” results to our GAAP results of operations relate to differing treatments for: (1) our use of derivative instruments to hedge our economic risks that do not qualify for hedge accounting treatment or do qualify for hedge accounting treatment but result in ineffectiveness and (2) the accounting for goodwill and acquired intangible assets. The following table reflects aggregate adjustments associated with these areas.

	Years Ended December 31,
(Dollars in millions)	2012			2011			2010
“Core Earnings” adjustments to GAAP:
Net impact of derivative accounting(1)	$	(194	)	$	(540	)	$	82
Net impact of goodwill and acquired intangible assets(2)		(27	)		(21	)		(543	)
Net tax effect(3)		99			219			106
Net effect from discontinued operations		(1	)		(2	)		(143	)
Total “Core Earnings” adjustments to GAAP	$	(123	)	$	(344	)	$	(498	)

⁽¹⁾ Derivative accounting: “Core Earnings” exclude periodic unrealized gains and losses that are caused by the mark-to-market valuations on derivatives that do not qualify for hedge accounting treatment under GAAP as well as the periodic unrealized gains and losses that are a result of ineffectiveness recognized related to effective hedges under GAAP. These unrealized gains and losses occur in our Consumer Lending, FFELP Loans and Other business segments. Under GAAP, for our derivatives that are held to maturity, the cumulative net unrealized gain or loss over the life of the contract will equal $0 except for Floor Income Contracts where the cumulative unrealized gain will equal the amount for which we sold the contract. In our “Core Earnings” presentation, we recognize the economic effect of these hedges, which generally results in any net settlement cash paid or received being recognized ratably as an interest expense or revenue over the hedged item’s life.

⁽²⁾ Goodwill and acquired intangible assets: Our “Core Earnings” exclude goodwill and intangible asset impairment and amortization of acquired intangible assets.

⁽³⁾ Net Tax Effect: Such tax effect is based upon our “Core Earnings” effective tax rate for the year.

17. Discontinued Operations

Our Purchased Paper businesses are presented in discontinued operations for the current and prior periods. In 2009, we sold our Purchased Paper — Mortgage/Properties business for $280 million which resulted in an after-tax loss of $95 million. As a result of this sale, the results of operations of this business were required to be presented in discontinued operations beginning in 2009.

In the fourth quarter of 2010, we began actively marketing for sale our Purchased Paper — Non-Mortgage business and concluded it was probable this business would be sold within one year at which time we would exit the business. The Purchased Paper — Non-Mortgage business comprises operations and cash flows that can be clearly distinguished operationally and for financial reporting purposes from the rest of the Company. As a result, we have classified the business as held-for-sale, and, as such, the results of operations of this business were required to be presented in discontinued operations beginning in the fourth quarter of 2010. In connection with this classification, we were required to carry this business at the lower of fair value or historical cost basis. This resulted in us recording an after-tax loss of $52 million from discontinued operations in the fourth quarter of 2010, primarily due to adjusting the value of this business to its estimated fair value. We sold the Purchased Paper — Non-Mortgage business in 2011 which resulted in a $23 million after-tax gain.

The Purchased Paper — Mortgage/Properties business and the Purchased Paper — Non-Mortgage business comprise operations and cash flows that can be clearly distinguished operationally and for financial reporting purposes, from the rest of the Company. Accordingly, this Component is presented as discontinued operations as (1) the operations and cash flows of the Component have been eliminated from our ongoing operations as of December 31, 2010, and (2) we will have no continuing involvement in the operations of this Component subsequent to the sale of the Purchased Paper-Non Mortgage business.

In the second quarter of 2013, we sold our Campus Solutions business and recorded an after-tax gain of $38 million. This business provided processing capabilities to educational institutions. The Campus Solutions business comprises operations and cash flows that can be clearly distinguished operationally and for financial reporting purposes from the rest of the Company and we will have no continuing involvement. As a result, our Campus Solutions business is presented in discontinued operations for all periods presented.

On September 25, 2013, we announced the sale of our 529 college savings plan administration business. Upon the transaction’s closing, which is anticipated to occur in the fourth-quarter 2013, we expect to recognize a gain of approximately $0.14 per diluted share. Due to the pending sale, the results of this business were moved to discontinued operations for all periods presented.

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The following table summarizes the discontinued assets and liabilities at December 31, 2012 and 2011.

	At December 31,
(Dollars in millions)	2012		2011
Assets:
Cash and equivalents	$	33	$	28
Other assets		202		221
Assets of discontinued operations	$	235	$	249
Liabilities:
Liabilities of discontinued operations	$	168	$	179

At December 31, 2012 and 2011, other assets of our discontinued operations consisted primarily of restricted cash. Liabilities of our discontinued operations consist primarily of escrow liabilities which represent restricted cash equivalent amounts held on behalf of students and their families or client institutions in connection with the administration of certain products and services.

The following table summarizes the discontinued operations.

	Years Ended December 31,
(Dollars in millions)	2012			2011		2010
Operations:
Income (loss) from discontinued operations before income taxes	$	(3	)	$	55	$	(230	)
Income tax expense (benefit)		(1	)		20		(31	)
Income (loss) from discontinued operations, net of taxes	$	(2	)	$	35	$	(199	)

Included in the $199 million loss from discontinued operations, net of taxes, for the year ended December 31, 2010 was $52 million after-tax impairment related to our Purchased Paper – Non-Mortgage business discussed above, and $138 million after-tax goodwill and intangible asset impairment related to our 529 college savings plan administration business. The impairment related to our 529 college savings plan administration business was recognized in the third quarter of 2010 as a result of our determination that pricing pressures and certain risks associated with growing this business, as well as the likelihood that a market participant would demand a higher discount rate and assume lower future expected cash flows than our own assumptions, resulted in a decline in the fair value of this reporting unit.

18. Concentrations of Risk

Our business is primarily focused in providing and/or servicing to help students and their families save, plan and pay for college. We primarily originate, service and/or collect loans made to students and their families to finance the cost of their education. We provide funding, delivery and servicing support for education loans in the United States, through our Private Education Loan programs and as a servicer and collector of loans for ED. In addition we are the largest holder, servicer and collector of loans under the discontinued FFELP. Because of this concentration in one industry, we are exposed to credit, legislative, operational, regulatory, and liquidity risks associated with the student loan industry.

Concentration Risk in the Revenues Associated with Private Education Loans

We compete in the private credit lending business with banks and other consumer lending institutions, many with strong consumer brand name recognition and greater financial resources. We compete based on our products, origination capability and customer service. To the extent our competitors compete aggressively or more effectively, we could lose market share to them or subject our existing loans to refinancing risk. Our product offerings may not prove to be profitable and may result in higher than expected losses.

We are a leading provider of saving- and paying-for-college products and programs. This concentration gives us a competitive advantage in the marketplace. This concentration also creates risks in our business, particularly in light of our concentrations as a Private Education Loan lender and as a servicer for the FFELP and DSLP. If population demographics result in a decrease in college-age individuals, if demand for higher education decreases, if the cost of attendance of higher education decreases, if public resistance to higher education costs increases, or if the demand for higher education loans decreases, our consumer lending business could be negatively affected. In addition, the federal government, through the DSLP, poses significant competition to our private credit loan products. If loan limits under the DSLP increase, DSLP loans could be more widely available to students and their families and DSLP loans could increase, resulting in further decreases in the size of the Private Education Loan market and demand for our Private Education Loan products.

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Concentration Risk in the Revenues Associated with FFELP Loans

On July 1, 2010, the HCERA legislation eliminated FFELP Loan originations, a major source of our net income. All federal loans to students are now made through the DSLP. The terms and conditions of existing FFELP Loans were not affected by this legislation. Despite the end of FFELP, Congress, ED and the Administration still exercise significant authority over the servicing and administration of existing FFELP Loans. Because of the ongoing uncertainty around efforts to reduce the federal budget deficit, the timing, method and manner of implementation of various education lending initiatives has become less predictable.

The net interest margin we earn on our FFELP Loans portfolio, which totaled $1.6 billion in 2012, will decline over time as the portfolio amortizes.

We also earn maintenance fees for the life of the loan for servicing the Guarantor’s portfolio of loans. The portfolio that generates the maintenance fee is now in runoff, and the maintenance fees we earn will decline ratably with the portfolio. We earned maintenance fees of $41 million in 2012.

Our student loan contingent collection business is also affected by HCERA. We currently have 15 Guarantors as clients. We earn revenue from Guarantors for collecting defaulted loans as well as for managing their portfolios of defaulted loans. In 2012, collection revenue from Guarantor clients totaled $264 million. We anticipate that revenue from Guarantors will begin to steadily decline as the portfolio of defaulted loans we manage is resolved and amortizes.

Concentration Risk in the Servicing of Direct Loans

The DSLP is serviced by four private sector institutions, including Sallie Mae. Defaulted Direct Loans are collected by 22 private sector companies, including Sallie Mae. Because of the concentration of our business in servicing and collecting on Direct Loans, we are exposed to risks associated with ED reducing the amount of new loan servicing and collections allocated to us or the termination of our servicing or collections contracts.

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19. Quarterly Financial Information (unaudited)

	2012
(Dollars in millions, except per share data)	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Net interest income	$	811		$	746		$	819		$	832
Less: provisions for loan losses		253			243			270			314
Net interest income after provisions for loan losses		558			503			549			518
Gains (losses) on derivative and hedging activities, net		(372	)		6			(233	)		(28	)
Other income		238			176			202			256
Operating expenses		236			216			220			226
Goodwill and acquired intangible assets amortization expense		5			5			5			14
Restructuring and other reorganization expenses		4			3			2			1
Income tax expense		68			169			104			157
Net income from continuing operations		111			292			187			348
Income (loss) from discontinued operations, net of taxes		—			(1	)		—			—
Net income		111			291			187			348
Less: net loss attributable to noncontrolling interest		(1	)		(1	)		(1	)		—
Net income attributable to SLM Corporation		112			292			188			348
Preferred stock dividends		5			5			5			5
Net income attributable to SLM Corporation common stock	$	107		$	287		$	183		$	343
Basic earnings per common share attributable to SLM Corporation:
Continuing operations	$	.21		$	.59		$	.39		$	.75
Discontinued operations		—			—			—			—
Total	$	.21		$	.59		$	.39		$	.75
Diluted earnings per common share attributable to SLM Corporation:
Continuing operations	$	.21		$	.59		$	.39		$	.74
Discontinued operations		—			—			—			—
Total	$	.21		$	.59		$	.39		$	.74

	2011
(Dollars in millions, except per share data)	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Net interest income	$	898		$	868		$	885		$	879
Less: provisions for loan losses		303			291			409			292
Net interest income after provisions for loan losses		595			577			476			587
Gains (losses) on derivative and hedging activities, net		(242	)		(510	)		(480	)		272
Other income		210			161			156			161
Operating expenses		280			247			261			217
Goodwill and acquired intangible assets amortization expense		5			5			5			5
Restructuring and other reorganization expenses		4			2			3			4
Income tax expense (benefit)		98			(10	)		(47	)		285
Net income (loss) from continuing operations		176			(16	)		(70	)		509
Income (loss) from discontinued operations, net of taxes		(1	)		10			23			2
Net income (loss)		175			(6	)		(47	)		511
Preferred stock dividends		4			4			5			5
Net income (loss) attributable to SLM Corporation common stock	$	171		$	(10	)	$	(52	)	$	506
Basic earnings (loss) per common share attributable to SLM Corporation:
Continuing operations	$	.32		$	(.04	)	$	(.15	)	$	1.00
Discontinued operations		—			.02			.05			—
Total	$	.32		$	(.02	)	$	(.10	)	$	1.00
Diluted earnings (loss) per common share attributable to SLM Corporation:
Continuing operations	$	.32		$	(.04	)	$	(.15	)	$	.99
Discontinued operations		—			.02			.05			—
Total	$	.32		$	(.02	)	$	(.10	)	$	.99

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20. Subsequent Event

On February 13, 2013, we sold the Residual Interest in a FFELP Consolidation Loan securitization trust to a third party while retaining the servicing rights. Prior to the sale we consolidated the trust as we were the primary beneficiary of the trust. As a result of this sale, we are no longer the primary beneficiary and as a result we deconsolidated the Trust by removing from our balance sheet $3.8 billion and $3.7 billion of trust assets and liabilities, respectively.

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