Nelnet (NNI) 8-K Nelnet Reports Strong Second Quarter of 2008 Results

For Release: 8/11/08

Media Contact: Ben Kiser, 402.458.3024

Investor Contact: Phil Morgan, 402.458.3038

Nelnet, Inc. supplemental financial information for the second quarter 2008

The following supplemental information should be read in connection with the second quarter 2008 earnings press release of Nelnet, Inc. (the "Company"), dated August 11, 2008 and the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2008 filed with the Securities Exchange Commission on August 11, 2008.

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

Condensed Consolidated Statements of Operations

	Three months ended									Six months ended
	June 30,			March 31,			June 30,			June 30,			June 30,
	2008			2008			2007			2008			2007
	(unaudited)			(unaudited)			(unaudited)			(unaudited)			(unaudited)
	(dollars in thousands, except share data)
Interest income:
Loan interest	$	297,601			336,572			439,720			634,173			857,833
Variable-rate floor income		21,927			18,818			—			40,745			—
Amortization of loan premiums and deferred
origination costs		(22,842	)		(25,404	)		(22,634	)		(48,246	)		(43,693	)
Investment interest		9,116			11,680			18,783			20,796			40,208
Total interest income		305,802			341,666			435,869			647,468			854,348
Interest expense:
Interest on bonds and notes payable		232,464			325,141			367,893			557,605			718,388
Net interest income		73,338			16,525			67,976			89,863			135,960
Less provision for loan losses		6,000			5,000			2,535			11,000			5,288
Net interest income after provision
for loan losses		67,338			11,525			65,441			78,863			130,672
Other income:
Loan and guaranty servicing income		24,904			26,113			31,610			51,017			62,076
Other fee-based income		40,817			45,913			38,262			86,730			78,291
Software services income		4,896			6,752			5,848			11,648			11,596
Other income		1,646			1,429			1,927			3,056			7,020
Gain (loss) on sale of loans		48			(47,493	)		1,010			(47,426	)		2,796
Derivative market value, foreign currency,
and put option adjustments		15,755			(57,361	)		5,547			(41,606	)		(6,583	)
Derivative settlements, net		4,437			40,763			5,196			45,200			9,436
Total other income		92,503			16,116			89,400			108,619			164,632
Operating expenses:
Salaries and benefits		43,549			53,843			59,761			97,392			121,465
Other expenses		47,812			49,600			54,394			97,412			107,281
Amortization of intangible assets		6,561			6,560			6,491			13,121			13,129
Impairment expense		—			18,834			—			18,834			—
Total operating expenses		97,922			128,837			120,646			226,759			241,875
Income (loss) before income taxes		61,919			(101,196	)		34,195			(39,277	)		53,429
Income tax expense (benefit)		19,195			(31,371	)		13,306			(12,176	)		20,570
Income (loss) from continuing operations		42,724			(69,825	)		20,889			(27,101	)		32,859
Income (loss) from discontinued operations, net of tax		981			—			(6,135	)		981			(3,325	)
Net income (loss)	$	43,705			(69,825	)		14,754			(26,120	)		29,534
Earnings (loss) per share, basic and diluted:
Income (loss) from continuing operations	$	0.87			(1.42	)		0.42			(0.55	)		0.66
Income (loss) from discontinued operations, net of tax		0.02			—			(0.12	)		0.02			(0.07	)
Net income (loss)	$	0.89			(1.42	)		0.30			(0.53	)		0.59
Weighted average shares outstanding		49,095,153			49,051,745			49,452,960			49,073,580			50,213,349

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Condensed Consolidated Balance Sheets and Financial Data

	As of			As of			As of
	June 30,			December 31,			June 30,
	2008			2007			2007
	(unaudited)						(unaudited)
	(dollars in thousands)
Assets:
Student loans receivable, net	$	25,993,307			26,736,122			26,174,958
Cash, cash equivalents, and investments		1,175,310			1,120,838			1,367,257
Goodwill		175,178			164,695			191,256
Intangible assets, net		90,163			112,830			146,542
Other assets		997,967			1,028,298			993,361
Total assets	$	28,431,925			29,162,783			28,873,374
Liabilities:
Bonds and notes payable	$	27,530,237			28,115,829			27,791,146
Other liabilities		317,646			438,075			471,050
Total liabilities		27,847,883			28,553,904			28,262,196
Shareholders' equity		584,042			608,879			611,178
Total liabilities and shareholders' equity	$	28,431,925			29,162,783			28,873,374
Shareholders' equity to total assets		2.05	%		2.09	%		2.12	%
Tangible equity to total assets (a)		1.65	%		1.65	%		1.47	%

(a) Includes 75% ($150 million) equity credit for $200 million hybrid securities debt per certain credit agency ratings.

Discontinued Operations

On May 25, 2007, the Company sold EDULINX Canada Corporation (“EDULINX”), a Canadian student loan service provider and a subsidiary of the Company, for initial proceeds of $19.0 million. The Company recognized an initial net loss of $9.0 million related to this transaction. During the three months ended June 30, 2008, the Company earned $2.0 million ($1.0 million net of tax) in additional consideration as a result of the sale of EDULINX. This payment represented contingent consideration earned by the Company based on EDULINX meeting certain performance measures. As a result of the sale of EDULINX, the results of operations for EDULINX, including the contingent payment earned during the current period, are reported as discontinued operations in the attached consolidated statements of operations.

Non-GAAP Performance Measures

In accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”), the Company prepares financial statements in accordance with generally accepted accounting principles (“GAAP”). In addition to evaluating the Company’s GAAP-based financial information, management also evaluates the Company on a non-GAAP performance measure referred to as base net income. While base net income is not a substitute for reported results under GAAP, the Company provides base net income as additional information regarding its financial results.

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Base net income is the primary financial performance measure used by management to develop financial plans, allocate resources, track results, evaluate performance, establish corporate performance targets, and determine incentive compensation. The Company’s board of directors utilizes base net income to set performance targets and evaluate management’s performance. The Company also believes analysts, rating agencies, and creditors use base net income in their evaluation of the Company’s results of operations. While base net income is not a substitute for reported results under GAAP, the Company utilizes base net income in operating its business because base net income permits management to make meaningful period-to-period comparisons by eliminating the temporary volatility in the Company’s performance that arises from certain items that are primarily affected by factors beyond the control of management. Management believes base net income provides additional insight into the financial performance of the core business activities of the Company’s operations.

The following table provides a reconciliation of GAAP net income (loss) to base net income (loss).

	Three months ended									Six months ended
	June 30,			March 31,			June 30,			June 30,			June 30,
	2008			2008			2007			2008			2007
	(dollars in thousands, except share data)
GAAP net income (loss)	$	43,705			(69,825	)		14,754			(26,120	)		29,534
Base adjustments:
Derivative market value, foreign currency,
and put option adjustments		(15,755	)		57,827			(5,547	)		42,072			6,583
Amortization of intangible assets		6,561			6,560			6,491			13,121			13,129
Compensation related to business combinations		750			1,296			476			2,046			953
Variable-rate floor income, net of settlements on derivatives		(14,726	)		(16,054	)		-			(30,780	)		-
Total base adjustments before income taxes		(23,170	)		49,629			1,420			26,459			20,665
Net tax effect (a)		7,183			(15,385	)		(568	)		(8,202	)		(7,099	)
Total base adjustments		(15,987	)		34,244			852			18,257			13,566
Base net income (loss)		27,718			(35,581	)		15,606			(7,863	)		43,100
Discontinued operations, net of tax		(981	)		-			6,135			(981	)		3,325
Base net income (loss), excluding discontinued operations	$	26,737			(35,581	)		21,741			(8,844	)		46,425
Earnings (loss) per share, basic and diluted:
GAAP net income (loss)	$	0.89			(1.42	)		0.30			(0.53	)		0.59
Total base adjustments		(0.33	)		0.69			0.02			0.37			0.26
Base net income (loss)		0.56			(0.73	)		0.32			(0.16	)		0.85
Discontinued operations, net of tax		(0.02	)		0.00			0.12			(0.02	)		0.07
Base net income (loss), excluding discontinued operations	$	0.54			(0.73	)		0.44			(0.18	)		0.92

(a) Beginning in 2008, tax effect is computed using the Company’s consolidated effective tax rate for each applicable period. In prior periods, tax effect was computed at 38%. The change in the value of the put options for prior periods was not tax effected as this is not deductible for income tax purposes.

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Limitations of Base Net Income

While GAAP provides a uniform, comprehensive basis of accounting, for the reasons discussed above, management believes that base net income is an important additional tool for providing a more complete understanding of the Company’s results of operations. Nevertheless, base net income is subject to certain general and specific limitations that investors should carefully consider. For example, unlike financial accounting, there is no comprehensive, authoritative guidance for management reporting. The Company’s base net income is not a defined term within GAAP and may not be comparable to similarly titled measures reported by other companies. Investors, therefore, may not be able to compare the Company’s performance with that of other companies based upon base net income. Base net income results are only meant to supplement GAAP results by providing additional information regarding the operational and performance indicators that are most closely monitored and used by the Company’s management and board of directors to assess performance and information which the Company believes is important to analysts, rating agencies, and creditors.

Other limitations of base net income arise from the specific adjustments that management makes to GAAP results to derive base net income results. These differences are described below.

Differences between GAAP and Base Net Income

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

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

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

“Base net income” also excludes the change in fair value of put options issued by the Company for certain business acquisitions. The put options are valued by the Company each reporting period using a Black-Scholes pricing model. Therefore, the fair value of these options is primarily affected by the strike price and term of the underlying option, the Company’s current stock price, and the dividend yield and volatility of the Company’s stock. The Company believes these point-in-time estimates of value that are subject to fluctuations make it difficult to evaluate the ongoing results of operations against the Company’s business plans and affects the period-to-period comparability of the results of operations.

The gains and/or losses included in “Derivative market value, foreign currency, and put option adjustments” on the attached consolidated statements of operations are primarily caused by interest rate and currency volatility, changes in the value of put options based on the inputs used in the Black-Scholes pricing model, as well as the volume and terms of put options and of derivatives not receiving hedge treatment. “Base net income” excludes these unrealized gains and losses and isolates the effect of interest rate, currency, and put option volatility on the fair value of such instruments during the period. Under GAAP, the effects of these factors on the fair value of the put options and the derivative instruments (but not the underlying hedged item) tend to show more volatility in the short term.

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

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

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

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

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

Impact of Restructuring Charges and Loan Sales to Base Net Income

The following table summarizes the impact of the September 2007 and January 2008 restructuring charges, as well as the loss on the sale of loans from the first quarter of 2008, recognized by the Company to the Company’s non-GAAP performance measure referred to as base net income (see “Non-GAAP Performance Measures.”) Additional detail related to the September 2007 and January 2008 restructuring charges and the loss on the sale of loans can be found in the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2008.

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	Three months ended								Six months ended
	June 30,			March 31,			June 30,		June 30,			June 30,
	2008			2008			2007		2008			2007
	(dollars in thousands, except share data)
Base net income (loss), excluding discontinued operations	$	26,737			(35,581	)		21,741		(8,844	)		46,425
Restructuring charges, net of tax		(244	)		18,154			—		17,910			—
Loss on sale of loans, net of tax (a)		—			32,770			—		32,770			—
Base net income (loss), excluding discontinued operations, restructuring
charges (net of tax), and loss on sale of loans (net of tax)	$	26,493			15,343			21,741		41,836			46,425
Earnings (loss) per share, basic and diluted:
Base net income (loss), excluding discontinued operations	$	0.54			(0.73	)		0.44		(0.18	)		0.92
Restructuring charges, net of tax		—			0.37			—		0.36			—
Loss on sale of loans, net of tax (a)		—			0.67			—		0.67			—
Base net income (loss), excluding discontinued operations, restructuring
charges (net of tax), and loss on sale of loans (net of tax)	$	0.54			0.31			0.44		0.85			0.92

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

Operating Segments

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

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

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

Fee-based Operating Segments

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

Student Loan and Guaranty Servicing

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

· Origination and servicing of FFELP loans;

· Servicing of non-federally insured student loans; and

· Servicing and support outsourcing for guaranty agencies.

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Tuition Payment Processing and Campus Commerce

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

Enrollment Services and List Management

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

Software and Technical Services

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

Asset Generation and Management Operating Segments

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

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Segment Operating Results

The tables below reflect base net income for each of the Company’s operating segments. Reconciliation of the segment totals to the Company’s operating results in accordance with GAAP is also included in the tables below.

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

11

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

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

12

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

13

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

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

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

· Income earned on certain investment activities;

· Interest expense incurred on unsecured debt transactions;

· Other products and service offerings that are not considered operating segments; and

· Corporate activities and overhead functions such as executive management, human resources, accounting and finance, legal, marketing, and corporate technology support.

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

14

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

(a) Beginning in 2008, tax effect is computed using the Company’s consolidated effective tax rate for each applicable period. In prior periods, tax effect was computed at 38%. The change in the value of the put options for prior periods (included in Corporate Activity and Overhead) was not tax effected as this is not deductible for income tax purposes.

15

Student Loans Receivable

Student loans receivable includes all student loans owned by or on behalf of the Company and includes the unamortized cost of acquisition or origination less an allowance for loan losses. The following table describes the components of the Company’s loan portfolio:

	As of June 30, 2008						As of December 31, 2007						As of June 30, 2007
	Dollars			Percent			Dollars			Percent			Dollars			Percent
Federally insured: (a)	(dollars in thousands)
Stafford
Originated prior to 10/1/07	$	6,668,100			25.6	%	$	6,624,009			24.8	%	$	6,630,133			25.3	%
Originated on or after 10/1/07		386,669			1.5			101,901			0.4			—			0.0
PLUS/SLS
Originated prior to 10/1/07		424,609			1.6			414,708			1.5			426,540			1.6
Originated on or after 10/1/07		47,133			0.2			15,233			0.1			—			0.0
Consolidation
Originated prior to 10/1/07		17,683,114			68.0			18,646,993			69.8			18,454,304			70.6
Originated on or after 10/1/07		122,548			0.5			251,554			0.9			—			0.0
Non-federally insured		279,953			1.1			274,815			1.0			235,023			0.9
Total		25,612,126			98.5			26,329,213			98.5			25,746,000			98.4
Unamortized premiums and deferred origination costs		429,090			1.7			452,501			1.7			456,098			1.7
Allowance for loan losses:
Allowance - federally insured		(24,084	)		(0.1	)		(24,534	)		(0.1	)		(8,194	)		(0.0	)
Allowance - non-federally insured		(23,825	)		(0.1	)		(21,058	)		(0.1	)		(18,946	)		(0.1	)
Net	$	25,993,307			100.0	%	$	26,736,122			100.0	%	$	26,174,958			100.0	%

(a) The College Cost Reduction Act reduced the yield on the federally insured loans originated on or after October 1, 2007. As of June 30, 2008, December 31, 2007, and June 30, 2007, $228.7 million, $278.9 million, and $57.8 million, respectively, of federally insured student loans are excluded from the above table as these loans are accounted for as participation interests sold under an agreement with Union Bank which is further discussed in note 7 of the Company’s consolidated financial statements included in its Quarterly Report on Form 10-Q for the period ended June 30, 2008. As of June 30, 2008, $197.5 million of the loans accounted for as participation interests sold under this agreement were originated on or after October 1, 2007.

16

Origination and Acquisition

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

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

	Three months ended									Six months ended
	June 30,			March 31,			June 30,			June 30,			June 30,
	2008			2008			2007			2008			2007
	(dollars in thousands)
Beginning balance	$	26,347,354			26,329,213			24,617,030			26,329,213			23,414,468
Direct channel:
Consolidation loan originations		3,284			65,745			836,711			69,029			1,900,949
Less consolidation of existing portfolio		(988	)		(27,459	)		(438,993	)		(28,447	)		(912,788	)
Net consolidation loan originations		2,296			38,286			397,718			40,582			988,161
Stafford/PLUS loan originations		114,228			421,101			141,882			535,329			496,709
Branding partner channel		127,929			473,378			255,703			601,307			457,993
Forward flow channel		84,216			318,844			392,174			403,060			768,115
Other channels		-			55,922			560,796			55,922			766,714
Total channel acquisitions		328,669			1,307,531			1,748,273			1,636,200			3,477,692
Repayments, claims, capitalized interest, participations, and other		(585,443	)		(299,800	)		(397,556	)		(885,243	)		(633,363	)
Consolidation loans lost to external parties		(46,849	)		(129,418	)		(187,350	)		(176,267	)		(426,754	)
Loans sold		(431,605	)		(860,172	)		(34,397	)		(1,291,777	)		(86,043	)
Ending balance	$	25,612,126			26,347,354			25,746,000			25,612,126			25,746,000

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

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

17

Student Loan Spread

The following table analyzes the student loan spread on the Company’s portfolio of student loans and represents the spread on assets earned in conjunction with the liabilities and derivative instruments used to fund the assets.

	Three months ended									Six months ended
	June 30,			March 31,			June 30,			June 30,			June 30,
	2008			2008			2007			2008			2007
Student loan yield		5.65	%		6.05	%		7.93	%		5.85	%		7.90
Consolidation rebate fees		(0.74	)		(0.74	)		(0.78	)		(0.74	)		(0.78	)
Premium and deferred origination costs amortization		(0.36	)		(0.38	)		(0.37	)		(0.37	)		(0.36	)
Student loan net yield		4.55			4.93			6.78			4.74			6.76
Student loan cost of funds (a)		(3.25	)		(3.96	)		(5.50	)		(3.61	)		(5.48	)
Student loan spread		1.30			0.97			1.28			1.13			1.28
Variable-rate floor income, net of settlements on derivatives (b)		(0.23	)		(0.24	)		—			(0.24	)		—
Core student loan spread		1.07	%		0.73	%		1.28	%		0.89	%		1.28
Average balance of student loans	$	25,767,123			26,859,328			24,687,280			26,313,226			24,266,048
Average balance of debt outstanding		26,767,459			27,828,890			26,158,525			27,297,445			25,770,551

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

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

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

Excluded from student loan spread was income recognized by the Company in the second quarter of 2008 of $4.6 million related to a change in estimate on certain liabilities initially established by the Company during its purchase price allocation related to a 2005 business acquisition.

18