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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
|X| Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997 or
|_| Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _________________ to __________________
Commission file numbers 001-13251
SLM HOLDING CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-2013874
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(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11600 Sallie Mae Drive, Reston, Virginia 20193
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(Address of Principal Executive Offices) (Zip Code)
(703) 810 3000
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: Common Stock, par
value $.20 per share Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
The aggregate market value of voting stock held by non-affiliates of the
registrant as of February 28, 1998 was approximately $7,052,332,153 (based on
closing sale price of $41 5/16 per share as reported for the New York Stock
Exchange -- Composite Transactions). On that date there were 171,264,359 shares
of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1997 Annual Report to Shareholders are
incorporated by reference into Part II of this Report and portions of the Proxy
Statement relating to the registrant's Annual Meeting of Shareholders scheduled
to be held May 21, 1998 are incorporated by reference into Part III of this
Report.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
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1
This Report contains forward-looking statements and information that
are based on management's current expectations as of the date of this document.
When used herein, the words "anticipate," "believe," "estimate" and "expect" and
similar expressions, as they relate to the Registrant's management, are intended
to identify forward-looking statements. Such 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. Such factors include, among others, changes in the
terms of student loans and the educational credit marketplace arising from the
implementation of applicable laws and regulations and from changes in such laws
and regulations, changes in the demand for educational financing or in financing
preferences of educational institutions, students and their families and changes
in the general interest rate environment and in the securitization markets for
student loans.
PART I.
Item 1. Business
Industry data on the Federal Family Education Loan Program (the "FFELP") and
the Federal Direct Student Loan Program (the "FDSLP") contained in this report
are based on sources that the Company believes to be reliable and to represent
the best available information for these purposes, including published and
unpublished U.S. Department of Education ("DOE") data and industry publications.
GENERAL
SLM Holding Corporation, a Delaware Corporation (the "Company"), provides a
wide range of financial services, processing capabilities and information
technology to meet the needs of educational institutions, lenders, students and
guarantee agencies. The Company was formed in 1997 in connection with the
reorganization (the "Reorganization") of the Student Loan Marketing Association,
a government-sponsored enterprise (the "GSE"), pursuant to the Student Loan
Marketing Association Reorganization Act of 1996 ( the "Privatization Act"). The
Privatization Act required the GSE to propose to shareholders a plan of
reorganization under which their share ownership would convert to an equivalent
share ownership in a state-chartered holding company that would own all of the
stock of the GSE. Pursuant to the Privatization Act, the Reorganization was
approved by the GSE's shareholders on July 31, 1997 and effected on August 7,
1997. The Privatization Act requires the GSE to transfer its business to the
Company and dissolve on or before September 30, 2008. During the period prior to
the dissolution of the GSE (the "Wind-Down Period"), the GSE is subject to
various limitations on its business and activities. See "-- Operations During
the Wind-Down Period" and "Regulation -- The Privatization Act."
Chartered by an act of Congress in 1972, the GSE's stated mission was to
enhance access to post-secondary education by providing a national secondary
market and financing for guaranteed student loans. As of December 31, 1997, the
Company's managed portfolio of student loans totaled approximately $43.6 billion
(including loans owned, loans securitized and loan participations). The Company
also had commitments to purchase $17.5 billion of additional student loans or
participations therein as of December 31, 1997. While the Company continues to
be the leading purchaser of student loans, its business has expanded over its
first quarter of a century, reflecting changes in both the education sector and
the financial markets.
2
Primarily a wholesale provider of credit and a servicer of student loans,
the Company serves a diverse range of clients including over 900 financial and
educational institutions and state agencies. Through its six regional loan
servicing centers, the Company processes student loans for approximately five
million borrowers and is recognized as the nation's pre-eminent servicer of
student loans. The Company also provides and arranges infrastructure finance for
colleges and universities. See "-- Specialized Financial Services -- Academic
Facilities Financings and Student Loan Revenue Bonds."
The Company believes that it has successfully fulfilled the GSE's original
mandate by fostering a thriving, competitive student loan market and has
maintained its leadership position in the education finance industry due to its
focus on customer relationships, value-added products and services, superior
loan servicing capabilities and a sound financial management strategy. In
recognition of the increasingly important role that college and university
administrators play in the student loan process, the Company has adopted a
school-based growth strategy. The Company's core marketing strategy is to
provide schools and their students with simple, flexible and cost-effective
products and services so that schools will choose to work with the Company. This
strategy, combined with superior servicing and technology capabilities, has
helped the Company to build valuable partnerships with schools, lenders,
guarantee agencies and others.
INDUSTRY OVERVIEW
The student loan industry provides affordable financing to students and
their families to fund post-secondary education. The large majority of student
loans are made under federally sponsored programs, although many students and
parents secure education credit through private student loan programs. The
federally sponsored student loans programs are highly regulated. Under programs
sponsored by the federal government, banks and other lenders that satisfy
statutory eligibility requirements can make student loans at below-market rates
due to subsidies and guarantees. The largest student loan program, formerly
called the Guaranteed Student Loan Program and now known as the FFELP, was
created in 1965 to ensure low-cost access by families to a full range of
post-secondary educational institutions. In 1972, to encourage further bank
participation in the Guaranteed Student Loan Program, Congress established the
GSE as a for-profit, stockholder-owned national secondary market for student
loans. The FFELP industry currently includes a network of approximately 4,813
originators and 6,300 educational institutions and is collectively guaranteed
and administered by 37 state-sponsored or non-profit guarantee agencies under
contract with the DOE. In addition to the Company, a number of non-profit
entities, banks and other financial intermediaries operate as secondary markets
for student loans. The Company believes that lender participation in the FFELP
is relatively concentrated, with an estimated 93 percent of outstanding loans
held by the top 100 participants, including approximately one-third owned or
managed by the Company as of September 30, 1996. The Higher Education Act is
reauthorized by Congress approximately every six years. The next reauthorization
is required in 1998 and the FFELP is subject to change at that time. The
provisions of the FFELP are also subject to revision from time to time by
Congress.
3
Demand for student loans has risen substantially over the last several
years. Higher education tuition cost and fee increases continue to exceed the
inflation rate. Over half of all full-time college students today depend on some
form of borrowing, compared to just over 35 percent in 1985. In addition,
federal legislation enacted in late 1992 expanded loan limits and borrower
eligibility. All of these factors contributed to an increase of over 50 percent
in annual federally guaranteed student loan volume ($24 billion in FY 1994
(including FDSLP volume) from $15 billion in FY 1992). Estimated future
increases in tuition costs and college enrollments are expected to prompt
further growth in the student loan market.
In 1993, Congress expanded a previously established pilot program into the
FDSLP, which is administered by the DOE. Established as an alternative to the
private sector-based FFELP, the FDSLP accounted for approximately one-third of
all new federally sponsored student loans issued in academic year 1996-97. Under
the FDSLP, the federal government contracts with third parties for loan
administration and collections services while financing its lending activity
through U.S. Treasury borrowings.
PRODUCTS AND SERVICES
Loan Purchases. The Company's student loan purchases primarily involve two
federally sponsored programs. The Company principally purchases Stafford loans,
PLUS loans and SLS loans originated under the FFELP, all of which are insured by
state-related or non-profit guarantee agencies and are reinsured by the DOE. The
Company also purchases student loans originated under the Health Education
Assistance Loan program ("HEAL") that are insured directly by the United States
Department of Health and Human Services. As of December 31, 1997, the Company's
managed portfolio of student loans totaled $43.6 billion, including $39.4
billion of FFELP loans (including loans owned, loans securitized and loan
participations) and $2.7 billion of HEAL loans.
In order to further meet the educational credit needs of students, the
Company in 1996 sponsored the creation of the private Signature Education Loansm
program, with numerous lenders participating nationwide. Under this program, the
Company performs certain origination services on behalf of the participating
lenders. The Company insures these loans through its HEMAR Insurance Corporation
of America ("HICA") subsidiary. Most of the HICA-insured loans purchased by the
Company are part of "bundled" loan programs that include FFELP loans. The
Company also purchases loans originated under various other HICA-insured loan
programs. As of December 31, 1997, the Company owned approximately $1.5 billion
of such privately insured education loans, including HICA-insured Signature
Education Loans/sm/.
The Company purchases student loans primarily from commercial banks. The
Company also purchases student loans from other eligible FFELP lenders,
including savings and loan associations, mutual savings banks, credit unions,
certain pension funds and insurance companies, educational institutions and
state and private non-profit loan originating and secondary market agencies.
4
Most lenders using the secondary market hold loans while borrowers are in
school and sell loans shortly before conversion to repayment status, when
servicing costs increase significantly. Traditionally, the Company has purchased
most of its loans just before their conversion to repayment status, although the
Company also buys "in-school" loans and loans in repayment. The Company
purchases loans primarily through commitment contracts, but also makes "spot"
purchases. Approximately two-thirds of the Company's new loan purchases were
made pursuant to purchase commitment contracts in 1996 and 1997. The Company
enters into commitment contracts with lenders to purchase loans up to a
specified aggregate principal amount over the term of the contract, which is
usually two to three years. Under the commitment contracts, lenders have the
right, and in most cases the obligation, to sell to the Company the loans they
own over a specified period of time at a purchase price that is based on certain
loan characteristics.
In conjunction with commitment contracts, the Company frequently provides
selling institutions with operational support in the form of PortSS(R), an
automated loan administration system for the lender's use at its own offices
before loan sale, or in the form of loan origination and interim servicing
provided through one of the Company's loan servicing centers (ExportSS(R)). In
1996 and 1997, more than two-thirds of the Company's purchase commitment volume
came from users of PortSS(R) and ExportSS(R). The Company also offers commitment
clients the ability to originate loans and then transfer them to the Company for
servicing (TransportSSsm). PortSS(R), ExportSS(R) and TransportSSsm provide the
Company and the lender assurance that loans will be efficiently administered by
the Company and that borrowers will have access to the Company's repayment
options and benefits. The growth in volume generated by PortSS, ExportSS and
TransportSS demonstrates the importance of the Company's investment in these
systems in past years.
In a spot purchase, the Company competes with other secondary market
participants to purchase a portfolio of eligible loans from a selling holder
when such holder decides to offer its loans for sale. The Company made
approximately one-third of its purchases of educational loans through spot
purchases in 1996 and 1997. In general, spot purchase volume is more costly than
volume purchased under commitment contracts.
In the past, the Company also has offered eligible borrowers a program for
consolidation of eligible insured loans into a single new insured loan with a
term of 10 to 30 years. The Higher Education Act of 1965, as amended (the
"Higher Education Act"), provides that borrowers may consolidate with one of
their loan holders or may consolidate with a separate lender if they cannot
obtain a consolidation loan with an income-sensitive repayment plan that they
deem acceptable from their loan holders. As of December 31, 1997, the Company
owned approximately $9.1 billion of such consolidation loans, known as SMARTsm
Loan Accounts. Following enactment of the Emergency Student Loan Consolidation
Act 1997, which made significant changes to the FFELP loan consolidation
program, the Company announced that, effective as of November 13, 1997, it had
suspended its loan consolidation program (marketed as the SMART Loan(sm)
program). The new legislation made it difficult for the Company to participate
in the FFELP consolidation loan program for profitability reasons. The Company
does, however, strongly endorse the principle of the legislation that allows
FDSLP and FFELP borrows to consolidate their loans under either program and
plans to continue to press for changes that will enable the Company to once
again participate in the FFELP consolidation loan program.
5
Borrower Benefits and Program Technology Support. To create customer
preferences and compete more effectively in the student loan marketplace, the
Company has developed a comprehensive set of loan programs and services for
borrowers, including numerous loan restructuring and repayment options and
programs that encourage and reward good repayment habits. The Company also
provides counseling and information programs (including a world wide web site)
that help borrowers and reinforce relationships with college and university
customers and lender partners.
Under the Company's Great Rewards(R) program, certain FFELP borrowers who
make their first 48 monthly payments on time receive a two percentage-point
interest rate reduction for the remaining term of the loan. Other programs
credit students an amount equal to part of the loan origination fees they pay
and modestly reduce interest costs for use of automatic debit accounts. The
Company also provides financial aid administrators at colleges and universities
with innovative products and services that simplify the lending process,
including electronic funds transfer services and loan information and management
software that enables college application data to be transferred electronically
between program participants.
Joint Venture with The Chase Manhattan Bank. In the third quarter of 1996,
the Company restructured its business relationship with The Chase Manhattan Bank
("Chase"), which, with an estimated market share of 8.0 percent, is the largest
originator of student loans under the FFELP. Under the restructured arrangement,
the Company and Chase Education Holdings, Inc., a wholly owned subsidiary of
Chase, are equal owners of Education First Finance LLC and Education First
Marketing LLC (collectively, the "Joint Venture"). Education First Marketing LLC
is responsible for marketing education loans to be made by Chase and its
affiliates to schools and borrowers. Shortly after such loans are made by Chase
and its affiliates, the loans are purchased on behalf of Education First Finance
LLC by the Chase/Sallie Mae Education Loan Trust (the "Trust"), which presently
finances these purchases through the sale of loan participations to the Company
and Chase. As of December 31, 1997, the Trust owned approximately $3.9 billion
of federally insured education loans. Substantially all loans owned by the Trust
are serviced on behalf of the Trust by Sallie Mae Servicing Corporation, the
Company's wholly owned servicing subsidiary ("SMSC"), on a fee-for-service
basis.
SERVICING
In 1980, the Company began servicing its own portfolios in order to better
control costs and manage risks. In late 1995, in connection with the
commencement of its securitization program, the Company transferred its
servicing operations to SMSC. Through SMSC, the Company is now the nation's
largest FFELP loan servicer, and management believes that the Company is
recognized as the premier service quality and technology provider in the student
loan industry. The Company believes that its processing capability and service
excellence are integral to its school-based growth strategy. As of December 31,
1997, the Company serviced approximately $49.7 billion of loans, including
approximately $27.3 billion of loans owned by the GSE and $14.1 billion owned by
nine securitization trusts sponsored by the GSE, $4.5 billion of loans currently
owned by ExportSS(R) customers and $3.8 billion owned by the Chase Joint Venture
Trust.
6
The Company currently has six loan servicing centers, located in the states
of Florida, Kansas, Massachusetts, Pennsylvania, Texas and Washington. This
geographic coverage, together with total systems integration among centers,
facilitates operations and customer service.
The DOE and the various guarantee agencies prescribe rules and regulations
that govern the servicing of federally insured student loans. The Company's
origination and servicing systems, internal procedures and highly trained staff
support compliance with these regulations, are designed to promote asset
integrity and provide superior service to borrowers. The Company uses
state-of-the-art imaging technology to further increase servicing productivity
and capacity.
SPECIALIZED FINANCIAL SERVICES
The Company, principally through the GSE, engages in a number of specialty
financial services related to higher education credit, including collateralized
financing of FFELP and other education loan portfolios (warehousing advances),
credit support for student loan revenue bonds, portfolio investments in student
loan revenue and facilities bonds, underwritings of academic facilities bonds
and surety bond support for non-federally insured student loans.
Warehousing Advances. Warehousing advances are secured loans to financial
and educational institutions to fund FFELP and HEAL loans and other forms of
education-related credit. As of December 31, 1997, the Company held
approximately $1.9 billion of warehouse loans with an average term of 4.5 years.
These loans remain assets of the GSE, but the GSE can extend new warehousing
advances during the Wind-Down Period only pursuant to financing commitments in
place as of August 7, 1997. As of December 31, 1997, the GSE had in place
approximately $3.4 billion of such commitments. The Company does not expect that
its non-GSE affiliates will continue this line of business.
Academic Facilities Financings and Student Loan Revenue Bonds. Since 1987,
the GSE has provided facilities financing and commitments for future facilities
financing to approximately 250 educational institutions. Certain of these
financings are secured either by a mortgage on the underlying facility or by
other collateral. The GSE also invests in student loan revenue obligations. In
late 1995, the GSE established a broker-dealer subsidiary, Education Securities,
Inc. ("ESI"), which manages the GSE's municipal bond portfolio and is developing
an array of specialized underwriting and financial advisory services for the
education sector. The Company anticipates that it will reduce its investment
activity in academic facilities and student loan revenue bond products during
the Wind-Down Period. As of December 31, 1997, these portfolios totaled $1.4
billion and $197 million, respectively.
Letters of Credit. In the past, the GSE has offered letters of credit to
guarantee issues of state and non-profit agency student loan revenue bonds.
Currently outstanding letters of credit have original terms of up to 17 years.
As of December 31, 1997, the GSE had approximately $4.8 billion of such
commitments outstanding. During the Wind-Down Period, letter of credit activity
by the GSE will be limited to guarantee commitments in place as of August 7,
1997.
7
Private Student Loan Insurance. In 1995, the GSE acquired HICA, a South
Dakota stock insurance company engaged exclusively in insuring lenders against
credit loss on their education-related, non-federally insured loans to students
attending post-secondary educational institutions. Loans owned by the GSE are a
significant portion of HICA's insured loan portfolio. See "-- Products and
Services -- Loan Purchases."
FINANCING/SECURITIZATION
The GSE obtains funds for its operations primarily from the sale of debt
securities in the domestic and overseas capital markets, and through public
offerings and private placements of U.S. dollar-denominated and foreign
currency-denominated debt of varying maturities and interest rate
characteristics. GSE debt securities are currently rated at the highest credit
rating level by Moody's Investors Service and Standard & Poor's. The Company
expects that the credit rating on any debt securities of the Company will be
lower than that of the GSE's debt securities.
The GSE uses interest rate and currency exchange agreements (collateralized
where appropriate), U.S. Treasury securities, interest rate futures contracts
and other hedging techniques to reduce its exposure to interest rate and
currency fluctuations arising out of its financing activities and to match the
characteristics of its assets and liabilities. The GSE has also issued preferred
stock to obtain funds, including preferred stock held by the Company. Under the
Privatization Act, the GSE may issue debt with maturity dates through September
30, 2008 to fund student loan and other permitted asset purchases. Upon the
GSE's dissolution pursuant to the Privatization Act, the GSE must transfer any
remaining GSE obligations into a defeasance trust for the benefit of the holders
of such obligations together with cash or full faith and credit obligations of
the United States, or an agency thereof, in amounts sufficient, as determined by
the Secretary of the Treasury, to pay the principal and interest on the
deposited obligations. If the GSE has insufficient assets to fully fund such GSE
debt, the Company must transfer sufficient assets to the trust to account for
this shortfall. The Privatization Act requires that upon the dissolution of the
GSE on or before September 30, 2008, the GSE shall repurchase or redeem or make
proper provisions for repurchase or redemption of the GSE's outstanding
preferred stock.
Since late 1995 the Company has further diversified its funding sources,
independent of its GSE borrower status, by securitizing a portion of its student
loan assets. Securitization is an off-balance sheet funding mechanism that the
Company effects through the sale of portfolios of student loans by the GSE to
SLM Funding Corporation, a bankruptcy-remote, special-purpose, wholly owned
subsidiary of the GSE, which in turn sells the student loans to an independent
owner trust that issues securities to fund the purchase of the student loans.
The securitization trusts typically issue several classes of debt securities
rated at the highest investment grade level. The GSE has not guaranteed such
debt securities and has no obligation to ensure their repayment. Because the
securities issued by the trusts through securitization are not GSE securities,
the Company has been and in the future expects to be able to fund its student
loans to term through securitization, even for those assets with final
maturities that extend beyond the Wind-Down Period. The DOE has concurred with
the Company's position that a 30 basis point per annum offset fee imposed on
loans held by the GSE does not apply to securitized loans. See "Legal
Proceedings." The Company anticipates that securitization will remain a primary
student loan funding mechanism for the Company when it begins to conduct student
loan purchase activity through a non-GSE subsidiary. In addition to the
foregoing, the Company obtains funding through a bank line of credit.
8
OPERATIONS DURING THE WIND-DOWN PERIOD
Privatization enables the Company to commence new business activities
without regard to restrictions in the GSE's charter. The stock of certain GSE
subsidiaries, including SMSC, HICA and ESI, has been transferred to the Company.
Accordingly, the business activities of these subsidiaries are no longer subject
to restrictions contained in the GSE's charter. In addition, the GSE's employees
have been transferred to Sallie Mae, Inc. (the "Management Company").
During the Wind-Down Period, the GSE generally is prohibited from conducting
new business except in connection with student loan purchases through September
30, 2007 or with other outstanding contractual commitments, and from issuing new
debt obligations that mature beyond September 30, 2008. The GSE has transferred
personnel and certain assets to the Company or other non-GSE affiliates. Student
loans, warehousing advances and other program-related or financial assets (such
as portfolio investments, letters of credit, swap agreements and forward
purchase commitments) have not been and are generally not expected to be
transferred. Neither the Company nor any of its non-GSE affiliates may make
secondary market purchases of FFELP loans for so long as the GSE is actively
acquiring insured student loans. During the Wind-Down Period, GSE operations
will be managed pursuant to arm's-length service agreements between the GSE and
one or more of its non-GSE affiliates. The Privatization Act also provides
certain restrictions on intercompany relations between the GSE and its
affiliates during the Wind-Down Period.
COMPETITION
The Company is the major financial intermediary for higher education credit,
but is subject to competition on a national basis from several large commercial
banks and non-profit secondary market agencies and on a state or local basis
from smaller banks and state-based secondary markets. In addition, the
availability of securitization for student loan assets has created new
competitive pressures for traditional secondary market purchasers. Based on the
most recent information from the DOE and management estimates, at the end of
fiscal year 1995, the GSE's share (in dollars) of outstanding FFELP loans was 33
percent, while banks and other financial institutions held 48 percent and state
secondary market participants held 19 percent. Although Congress establishes
loan limits and interest rates on student loans, management believes that market
share in the FFELP industry is increasingly a function of school and student
desire for borrower benefits and superior customer service. FFELP providers have
been aggressively competing on the basis of enhanced products and services in
recent years.
9
Because the GSE historically has been confined by statute to secondary
market activity, it has depended mainly on its network of lender partners and
its school-based strategy for new loan volume. Because the Company is not
subject to the same limitations as the GSE, it plans to heighten its visibility
with consumers to favorably position itself for future new product offerings.
The Company also faces competition for new and existing loan volume from the
FDSLP. Based on current DOE projections, the Company estimates that total
student loan originations for the academic years 1994-95, 1995-96 and 1996-97
were $22.2 billion, $24.7 billion and $27.4 billion, respectively, of which
FDSLP originations represented approximately 7 percent, 31 percent and 32
percent, respectively. The DOE projects that FDSLP originations will represent
35 percent of total student loan originations in the 1997-98 academic year.
The DOE has also begun to offer FFELP borrowers the opportunity to
refinance or consolidate FFELP loans into FDSLP loans upon certification that
the holder of their FFELP loans does not offer an income-sensitive payment plan
acceptable to the borrower. As of December 31, 1997, approximately $608 million
of the GSE's FFELP loans had been consolidated into the FDSLP. In early 1995,
the Company began offering an income-sensitive payment plan. The FDSLP, however,
also provides an income-contingent option not available under the FFELP program
that may be more attractive to certain borrowers. Under this repayment option,
the government will ultimately forgive student loan debt after 25 years.
Effective November 13, 1997, the Company suspended its loan consolidation
program. See "-- Products and Services -- Loan Purchases." It is not certain
what action, if any, Congress will take with regard to the FDSLP in connection
with the anticipated reauthorization of the Higher Education Act. Based on
public statements by members of Congress and the Administration, however,
management believes that the FFELP and the FDSLP will continue to coexist as
competing programs for the foreseeable future.
REGULATION
As a government-sponsored enterprise, the GSE is organized under federal law
and its operations are restricted by its government charter. Although
privatization permits the Company's private activities to expand through non-GSE
subsidiaries, the GSE's operations continue to be subject to broad federal
regulation, during the Wind-Down Period.
The Privatization Act
The Privatization Act established the basic framework for the Reorganization
and imposes certain restrictions on the operations of the Company and its
subsidiaries during the Wind-Down Period. The Privatization Act amends the GSE's
charter to require certain enhanced regulatory oversight of the GSE to ensure
its financial safety and soundness. See "-- GSE Regulation."
Reorganization. The Privatization Act required the GSE to propose to
shareholders a plan of reorganization under which their share ownership in the
GSE would be automatically converted to an equivalent share ownership in a
state-chartered holding company that would own all of the common stock of the
GSE. On July 31, 1997, the GSE's shareholders approved the Reorganization in
fulfillment of this provision. The Privatization Act requires that the GSE be
liquidated on or before September 30, 2008, upon which its federal charter will
be rescinded. During the Wind-Down Period, the Company will remain a passive
entity that supports the operations of the GSE and its other non-GSE
subsidiaries, and any new business activities will be conducted through such
subsidiaries.
10
The Privatization Act requires all personnel and certain assets to be
transferred to non-GSE subsidiaries of the Company in connection with the
Reorganization, including the transfer of the GSE's interest in certain
subsidiaries. The GSE's student loans and related contracts, warehousing
advances and other program-related or financial assets (such as portfolio
investments, letters of credit, swap agreements and forward purchase
commitments) and any non-material assets that the GSE Board determines to be
necessary for or appropriate to continued GSE operations, may be retained by the
GSE. Employees of the GSE were transferred to the Management Company at the
effective time of the Reorganization. Employees who were employed by non-GSE
subsidiaries of the GSE before the Reorganization continue to be employed by
such subsidiaries.
During the Wind-Down Period, the GSE is restricted in the new business
activities it may undertake. The GSE may continue to purchase student loans only
through September 30, 2007, and warehousing advance, letter of credit and
standby bond purchase activity by the GSE is limited to takedowns on contractual
financing and guarantee commitments in place at the effective time of the
Reorganization. In addition, the Company, and its non-GSE subsidiaries may not
make secondary market purchases of FFELP loans for so long as the GSE is
actively acquiring insured student loans.
In certain circumstances, the GSE will continue to serve as a lender of last
resort and will provide secondary market support for the FFELP upon the request
of the Secretary of Education. If and to the extent that the GSE performs such
functions, however, it will not be required to pay a statutorily imposed 30
basis point offset fee on such loans. The GSE may transfer assets and declare
dividends, from time to time, if it maintains a minimum capital ratio of at
least 2 percent until the year 2000. After that time, charter amendments
effected by the Privatization Act require that the GSE maintain a minimum
capital ratio of at least 2.25 percent. In the event that the GSE does not
maintain the required minimum capital ratio, the Company is required to
supplement the GSE's capital to achieve such minimum capital ratio.
The GSE's debt obligations, including debt obligations that were outstanding
at the time of the Reorganization, continue to be outstanding obligations of the
GSE and will not be transferred to any other entity (except in connection with
the defeasance trust described below). See "-- GSE Dissolution After
Reorganization." The Privatization Act provides that the Reorganization does not
modify the attributes accorded to the debt obligations of the GSE by the GSE's
charter. During the Wind-Down Period, the GSE can continue to issue debt in the
government agency market to finance student loans and other permissible asset
purchases. The maturity date of such issuances, however, may not extend beyond
September 30, 2008, the GSE's final dissolution date. This restriction does not
apply to debt issued to finance any lender of last resort or secondary market
purchase activity requested by the Secretary of Education. The Privatization Act
is clear that the Reorganization (and the subsequent transfer of any remaining
GSE debt to the defeasance trust described below) will not modify the legal
status of any GSE debt obligations, whether such obligations existed at the time
of Reorganization or are subsequently issued.
11
Oversight Authority. During the Wind-Down Period, the Secretary of the
Treasury has extended oversight authority to monitor the activities of the GSE
and, in certain cases, the Company and its non-GSE subsidiaries to the extent
that the activities of such entities are reasonably likely to have a material
impact on the financial condition of the GSE. The U.S. Department of the
Treasury has established the Office of Sallie Mae Oversight to perform these
functions. During this period, the Secretary of the Treasury may require that
the GSE submit periodic reports regarding any potentially material financial
risk of its associated persons and its procedures for monitoring and controlling
such risk. The Company is expressly prohibited from transferring ownership of
the GSE or causing the GSE to file bankruptcy without the approval of the
Secretary of the Treasury and the Secretary of Education. Each of the Secretary
of Education and the Secretary of the Treasury has express authority to request
that the Attorney General bring an action, or may bring an action under the
direction and control of the Attorney General, in the United States District
Court for the District of Columbia, for the enforcement of any provision of the
GSE's safety and soundness requirements or the requirements of the Privatization
Act in general.
Restrictions on Intercompany Relations. The Privatization Act restricts
intercompany relations between the GSE and its affiliates during the Wind-Down
Period. Specified corporate formalities must be followed to ensure that the
separate corporate identities of the GSE and its affiliates are maintained.
Specifically, the Privatization Act provides that the GSE must not extend credit
to, nor guarantee any debt obligations of, the Company or its subsidiaries. The
Privatization Act also provides that (i) the funds and assets of the GSE must at
all times be maintained separately from the funds and assets of the Company and
its subsidiaries, (ii) the GSE must maintain books and records that clearly
reflect the assets and liabilities of the GSE, separate from the assets and
liabilities of the Company or its subsidiaries, (iii) the GSE must maintain a
corporate office that is physically separate from any office of the Company and
its subsidiaries, (iv) no director of the GSE who is appointed by the President
may serve as a director of the Company and (v) at least one officer of the GSE
must be an officer solely of the GSE.
Furthermore, the Privatization Act mandates that transactions between the
GSE and the Company, including any loan servicing arrangements, shall be on
terms no less favorable to the GSE than the GSE could obtain from an unrelated
third party, and any amounts collected on behalf of the GSE by the Company
pursuant to a servicing contract or other arrangement between the GSE and the
Company shall be immediately deposited by the Company to an account under the
sole control of the GSE.
Limitations on Company Activities. During the Wind-Down Period, the Company
must remain a passive entity that holds the stock of its subsidiaries and
provides funding and management support to such subsidiaries. The Privatization
Act contemplates that until the GSE is dissolved, the Company's business
activities will be conducted through subsidiaries. However, the Privatization
Act extends to the Company and its subsidiaries the GSE's "eligible lender"
status for loan consolidation and secondary market purchases. See "Business."
12
The Company and its non-GSE subsidiaries generally may not begin to make
secondary market purchases of FFELP student loans for so long as the GSE is
actively acquiring insured student loans. Subject to the foregoing, the Company
may elect, at any time, to transfer new student loan purchase activity from the
GSE to one of its non-GSE subsidiaries. Under the Higher Education Act, loans
acquired after August 10, 1993 and held by the GSE are subject to a 30 basis
point per annum "offset fee." The offset fee does not apply to loans held or
securitized by the Company or its non-GSE subsidiaries.
Although the GSE may not finance the activities of the Company's non-GSE
subsidiaries, it may, subject to its minimum capital requirements, dividend
retained earnings and surplus capital to the Company, which in turn may use such
amounts to support its non-GSE subsidiaries. The GSE's charter requires that the
GSE maintain a minimum capital ratio of at least 2 percent until the year 2000,
and charter amendments effected by the Privatization Act require that the GSE
maintain a minimum capital ratio of at least 2.25 percent thereafter. In the
event that the GSE's capital falls below the applicable required level, the
Company is required to supplement the GSE's capital to achieve such required
level. The Privatization Act further directs that, unless and until distributed
as dividends by the GSE, under no circumstances shall the assets of the GSE be
available or used to pay claims or debts of or incurred by the Company.
In exchange for the payment of $5 million to the District of Columbia
Financial Responsibility and Management Assistance Authority (the "Control
Board"), the Company and its other subsidiaries may continue to use the name
"Sallie Mae," but not the name "Student Loan Marketing Association," as part of
their legal names or as a trademark or service mark. Interim disclosure
requirements in connection with securities offerings and promotional materials
are required to avoid marketplace confusion regarding the separateness of the
GSE and its affiliated entities. During the Wind-Down Period and until one year
after repayment of all outstanding GSE debt, the "Sallie Mae" name may not be
used by any Company unit that issues debt obligations or other securities to any
person or entity other than the Company or its subsidiaries. In addition, the
Privatization Act required the Company to issue certain warrants to purchase the
Company's Common Stock (the "Warrants") to the Control Board. These provisions
of the Privatization Act were part of the terms negotiated with the
Administration and Congress in conjunction with the GSE's privatization. The
Company issued the Warrants on August 7, 1997.
GSE Dissolution After Reorganization. The Privatization Act provides that
the GSE will liquidate and dissolve on September 30, 2008, unless an earlier
dissolution is requested by the GSE and the Secretary of Education makes no
finding that the GSE continues to be needed as a lender of last resort under the
GSE charter or to purchase loans under certain agreements with the Secretary of
Education. In connection with such dissolution, the GSE must transfer any
remaining GSE obligations into a defeasance trust for the benefit of the holders
of such obligations, along with cash or full faith and credit obligations of the
United States, or an agency thereof, in amounts sufficient, as determined by the
Secretary of the Treasury, to pay the principal and interest on the deposited
obligations. As of December 31, 1997, the GSE had $381 million in current
carrying value of debt obligations outstanding with maturities after September
30, 2008. If the GSE has insufficient assets to fully fund such GSE debt
obligations outstanding at the time of dissolution, the Company must transfer
sufficient assets to the trust to account for this shortfall. The Privatization
Act also requires that on the dissolution date, the GSE shall repurchase or
redeem, or make proper provisions for the repurchase or redemption of, any
outstanding shares of preferred stock, of which the GSE has issued Series A and
B Adjustable Rate Cumulative Preferred Stock. The Series A Preferred Stock is
carried at its liquidation value of $50.00 per share for a total of $214 million
and pays a variable dividend that has been at its minimum rate of 5 percent per
annum for the last several years. The Series B Preferred Stock is carried at its
liquidation value of $500,000 per share for a total of $100 million and pays a
variable dividend that is equal to 3-month London Interbank Offered Rate
("LIBOR") plus one percent per annum divided by 1.377. Upon dissolution, the GSE
charter will terminate, and any assets that the GSE continues to hold after
establishment of the trust or that remain in the trust after full payment of the
remaining obligations of the GSE assumed by the trust will be transferred to
the Company or its affiliates, as determined by the Company's Board of
Directors.
13
GSE Regulation
The GSE's structure and the scope of its business activities are set forth
in its charter. The charter, which is subject to review and change by Congress,
sets forth certain restrictions on the GSE's business and financing activities
and charges the federal government with certain oversight responsibilities with
respect to these activities. The GSE's charter grants the GSE certain exemptions
from federal and state laws. The GSE's charter's primary regulatory restrictions
and exemptions, including certain provisions added by the Privatization Act, are
summarized as follows:
1. Seven members of the GSE's 21-member Board of Directors are
appointed by the President of the United States. The other 14
members are elected by the Company as the holder of the GSE's
Common Stock. The Chairman of the Board is designated by the
President of the United States from among the Board's 21
members.
2. Debt obligations issued by the GSE are exempt from state
taxation to the same extent as United States government
obligations. The GSE is exempt from all taxation by any state
or by any county, municipality or local taxing authority
except with respect to real property taxes. The GSE is not
exempt from federal corporate income taxes.
3. All stock and other securities of the GSE are deemed to be
exempt securities under the laws administered by the SEC to
the same extent as obligations of the United States.
4. The GSE may conduct its business without regard to any
qualification or similar statute in any state of the United
States, including the District of Columbia, the Commonwealth
of Puerto Rico and the territories and possessions of the
United States (although the scope of the GSE's business is
generally limited by its federal charter).
5. The issuance of GSE debt obligations must be approved by the
Secretary of the Treasury.
14
6. The GSE is required to have its financial statements examined
annually by independent certified public accountants and to
submit a report of the examination to the Secretary of the
Treasury. The Department of the Treasury is also authorized to
conduct audits of the GSE and to otherwise monitor the GSE's
financial condition. The GSE is required to submit annual
reports of its operations and activities to the President of
the United States and Congress. The GSE must pay up to
$800,000 per year to the Department of the Treasury to cover
the costs of its oversight.
7. The GSE is subject to certain "safety and soundness"
regulations, including the requirement that the GSE maintain a
2.00 percent capital adequacy ratio (increasing to 2.25
percent after January 1, 2000). The GSE may pay dividends only
upon certification that, at the time of a dividend declaration
and after giving effect to the payment of such dividend, the
capital adequacy ratio is satisfied.
8. The Secretary of Education and the Secretary of the Treasury
have certain enforcement powers under the GSE's charter.
9. A 30 basis point annual offset fee, unique to the GSE, is
payable to the Secretary of Education on student loans
purchased and held by the GSE on or after August 10, 1993. See
"Legal Proceedings."
10. In certain circumstances, at the request of the Secretary of
Education, the GSE is required to act as a lender of last
resort to make FFELP loans when other private lenders are not
available. Such loans are not subject to the 30 basis point
offset fee on loans held by the GSE.
Other Regulation
Under the Higher Education Act, the GSE is an "eligible lender" for purposes
only of purchasing and holding loans made by other lenders and making
consolidation and lender of last resort loans. Like other participants in
insured student loan programs, the Company is subject, from time to time, to
review of its student loan operations by the General Accounting Office, the DOE
and certain guarantee agencies. The laws relating to insured student loan
programs are subject to revision from time to time and changes to such laws are
beyond the Company's control. In addition, SMSC, as a servicer of student loans,
is subject to certain DOE regulations regarding financial responsibility and
administrative capability that govern all third party servicers of insured
student loans. Failure to satisfy such standards may result in the loss of the
government guarantee of FFELP loans. ESI is a broker-dealer registered with the
SEC and the National Association of Securities Dealers (the "NASD") and is
licensed to do business in 50 states. ESI is subject to regulation by the SEC
and the NASD as a municipal security broker-dealer. HICA, a South Dakota stock
insurance company, is subject to the ongoing regulatory authority of the South
Dakota Division of Insurance and that of comparable governmental agencies in six
other states.
15
Non-Discrimination and Limitations on Affiliation with Depository Institutions
The Privatization Act also amended the Higher Education Act to provide that
the GSE and any successor entity (including the Company) functioning as a
secondary market for federally insured student loans may not engage, directly or
indirectly, in any pattern or practice that results in a denial of a borrower's
access to insured loans because of the borrower's race, sex, color, religion,
national origin, age, disability status, income, attendance at a particular
institution, length of a borrower's educational program or the borrower's
academic year at an eligible institution.
Pub. L. No. 104-208, the federal budget legislation of which the
Privatization Act was a part, contains amendments to the Federal Deposit
Insurance Act and the Federal Credit Union Act that prohibit all
government-sponsored enterprises from directly or indirectly sponsoring or
providing non-routine financial support to certain credit unions and depository
institutions. Depository institutions are also prohibited from being affiliates
of government-sponsored enterprises. Thus, neither the Company nor any of its
subsidiaries may be affiliated with a depository institution until the GSE is
dissolved. Most originators of insured student loans are depository institutions
that qualify as "eligible lenders" under the Higher Education Act.
As of December 31, 1997, the Company employed 4,608 employees nationwide.
Item 2. Properties
The following table lists the principal facilities owned by the Company:
APPROXIMATE
LOCATION FUNCTION SQUARE FEET
-------- -------- -----------
Reston, VA Operations/Headquarters 395,000
Wilkes Barre, PA Loan Servicing Center 135,000
Killeen, TX Loan Servicing Center 133,000
Lynn Haven, FL Loan Servicing Center 133,000
Lawrence, KS Loan Servicing Center 52,000
The Company leases approximately 36,800 square feet of office space for its loan
servicing center in Waltham, Massachusetts, 39,100 square feet of office space
for its loan servicing center in Spokane, Washington and 47,000 square feet of
additional space for its loan servicing center in Lawrence, Kansas. The GSE
leases approximately 254,000 square feet of office space in Washington, D.C. for
its former headquarters. The Company has entered into and is currently
negotiating subleases through the term of these leases, which expire in 2001,
and other arrangements to terminate the GSE's obligations under these leases.
With the exception of the Pennsylvania loan servicing center, none of the
Company's facilities is encumbered by a mortgage. The Company believes that its
headquarters and loan servicing centers are generally adequate to meet its
long-term student loan and new business goals.
The Company's principal office is located in owned space at 11600 Sallie Mae
Drive, Reston, Virginia, 20193.
16
Item 3. Legal Proceedings.
The Higher Education Act imposes a 30 basis point per annum "offset fee" to
student loans held by the GSE. The Secretary of Education initially interpreted
the Higher Education Act to apply that fee both to loans held directly by the
GSE and to loans sold by the GSE to securitization trusts. In April 1995, the
Company filed suit in the U.S. District Court for the District of Columbia to
challenge the constitutionality of the 30 basis point fee and the application of
the fee to loans securitized by the Company. On November 16, 1995, the District
Court ruled that the fee is constitutional, but that, contrary to the Secretary
of Education's interpretation, the fee does not apply to securitized loans. Both
the Company and the United States appealed this ruling. On January 10, 1997, the
U.S. Court of Appeals for the District of Columbia Circuit struck down the
Secretary of Education's interpretation, ruling that the fee applies only to
loans that the GSE owns and remanding the case to the District Court with
instructions to remand the matter to the Secretary of Education. In addition,
the Court of Appeals upheld the constitutionality of the offset fee for loans
owned by the GSE. The offset fee applies annually to the principal amount of
student loans that the GSE holds and that were acquired on or after August 10,
1993.
On April 29, 1997, U.S. District Court Judge Stanley Sporkin ordered the DOE
to decide by July 31, 1997 its final position on the application of the offset
fee to loans that the GSE has securitized. On July 23, 1997, the DOE decided
that the 30 basis point annual offset fee that the GSE is required to pay on
student loans that it owns does not apply to student loans that the GSE has
securitized. Based upon this favorable determination, a contingent gain of $97
million pre-tax that had not been recognized in income through June 30, 1997 was
released and recognized in income in the third quarter of 1997. All future
securitization gains will be calculated without consideration of the offset fee.
On December 19, 1996, Orange County, California filed an amended complaint
against the Company in the U.S. Bankruptcy Court for the Central District of
California. The case is currently pending in the U.S. District Court for the
Central District of California. The complaint alleges that the Company made
fraudulent representations and omitted material facts in offering circulars on
various bond offerings purchased by Orange County, which contributed to Orange
County's market losses and subsequent bankruptcy. The complaint seeks to hold
the GSE liable for losses resulting from Orange County's bankruptcy, but does
not specify the amount of damages claimed. The complaint against the Company is
one of numerous cases filed by Orange County that have been coordinated for
discovery purposes. Other defendants include Merrill Lynch, Morgan Stanley, KPMG
Peat Marwick, Standard & Poor's and Fannie Mae. The complaint includes a claim
of fraud under Section 10(b) of the Securities Exchange Act and Rule 10b-5
promulgated thereunder. The complaint also includes counts under the California
Corporations Code and a count of common law fraud. On December 24, 1997, the
Company filed a motion for partial summary judgment dismissing certain of Orange
County's claims. The Company believes that the complaint is without merit and
intends to defend the case vigorously. At this time, management believes the
impact of the lawsuit will not be material to the Company.
In September 1996, the Company obtained a declaratory judgment against the
Secretary of Education in the U.S. District Court for the District of Columbia
to the effect that the Secretary erred in refusing to allow the Company to claim
adjustments to Special Allowance Payments on certain FFELP loans that were
required to be converted retrospectively from a fixed rate to a variable rate.
On September 30, 1997 the U.S. Court of Appeals for the District of Columbia
Circuit affirmed the District Court's decision granting the declaratory
judgment.
17
Item 4. Submission of Matters to a Vote of Security-Holders
Nothing to report.
Part II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is listed and traded on the New York Stock
Exchange under the symbol SLM. The number of holders of record of the Company's
Common Stock as of March 3, 1998 was approximately 668. The following table sets
forth the high and low sales prices for the Company's Common Stock for each full
quarterly period within the two most recent fiscal years . The prices in this
table are adjusted to reflect a 7-for-2 stock split, which was effected on
January 2, 1998 as a stock dividend of five shares for every two shares
outstanding.
COMMON STOCK PRICES
1st 2d 3d 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1996 High $24 39/64 $23 55/64 $22 $28 5/64
Low 18 5/64 18 55/64 19 25/32 22 5/64
1997 High 32 41/64 39 23/64 45 55/64 47 11/64
Low 25 27/64 27 1/32 36 9/32 35 9/32
The Company paid regular quarterly dividends of $.1143 per share on the
Common Stock in each of the first three quarters of 1996, $.1257 per share for
the fourth quarter of 1996 and the first three quarters of 1997 and $.14 for the
fourth quarter of 1997 and the first quarter of 1998.
Item 6. Selected Financial Data
Reference is made to the information regarding selected financial data
for the fiscal years 1993 through 1997, under the heading "Selected Financial
Data 1993-1997" on page 68 of the Company's 1997 Annual Report to Shareholders,
which information is included as part of Exhibit 13 and is hereby incorporated
by reference in this Annual Report on Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Reference is made to the information appearing under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 23 through 38 of the Company's 1997 Annual Report to
Shareholders, which information is included as part of Exhibit 13 and is hereby
incorporated by reference in this Annual Report on Form 10-K.
18
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Reference is made to the information appearing under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 34 through 36 of the Company's 1997 Annual Report to
Shareholders, which information is included as part of Exhibit 13 and is hereby
incorporated by reference in this Annual Report on Form 10-K.
Item 8. Financial Statements and Supplementary Data
Consolidated financial statements of the Company at December 31, 1997
and December 31, 1996 and for each of the three years in the period ended
December 31, 1997 are included as part of Exhibit 13 and are incorporated by
reference in this Annual Report on Form 10-K from the Company's 1997 Annual
Report to Shareholders, on pages 39 through 64. The Report of the Independent
Public Accountants on the consolidated balance sheet of the Company and its
subsidiaries for the year ended December 31, 1997 and the related consolidated
statements of income, changes in stockholders' equity and cash flows for the
year then ended is included as part of Exhibit 13 and is hereby incorporated by
reference in this Annual Report on Form 10-K. The Report of the Independent
Public Accountants on the consolidated balance sheet of the Company and its
subsidiaries for the year ended December 31, 1996 and the related consolidated
statements of income, changes in stockholders' equity and cash flows for the two
years in the period ended December 31, 1996 is filed separately as Financial
Statement Schedule Number XX under Item 14 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
Part III.
Item 10. Directors and Executive Officers of the Registrant
The information as to the directors and executive officers of the
Company set forth under the captions "PROPOSAL 1 -- ELECTION OF DIRECTORS --
Information Concerning Nominees" and "Executive Officers" in the Proxy Statement
to be filed on Schedule 14A relating to the Company's Annual Meeting of
Stockholders scheduled to be held on May 21, 1998 (the "Proxy Statement") is
incorporated into this Report by reference.
Item 11. Executive Compensation
The information set forth under the caption "Executive Compensation" in
the Proxy Statement is incorporated into this Report by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information set forth under the caption "COMMON STOCK INFORMATION
- -- Board and Management Ownership" and "-- Principal Holders" in the Proxy
Statement is incorporated into this Report by reference thereto. There are no
arrangements known to the Company, the operation of which may at a subsequent
date result in a change in control of the Company.
19
Item 13. Certain Relationships and Related Transactions.
The information set forth under the caption "EXECUTIVE COMPENSATION --
Certain Transactions" in the Proxy Statement is incorporated into this Report by
reference.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
The financial statements listed in the accompanying index to financial
statements and financial statement schedules are filed or incorporated by
reference as part of this annual report.
2. Financial Statement Schedules
Schedule
Number Description
- ------ -----------
XX Separate Report
of Predecessor
Accountant
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
3. Exhibits
The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as part of this annual report.
(b) Reports on Form 8-K.
The Company filed the following Current Reports on Form 8-K during the
fourth quarter of 1997:
DATE ITEMS REPORTED FINANCIAL STATEMENTS
- ---- -------------- --------------------
10/21/97 Amendment to Current The financial statements of the
Report on Form 8-K filed GSE for the periods specified
by the Company on in 17 C.F.R. ss.210-3.05
August 14, 1997 (which reported
the reorganization of the GSE into a wholly
owned subsidiary of the Company pursuant to
the Privatization Act)
10/29/97 Change in the Company's None
Certifying Accountant
20
(c) Exhibits.
*2 Agreement and Plan of Reorganization by and among the Student
Loan Marketing Association, SLM Holding Corporation, and
Sallie Mae Merger Company.
**3.1 Amended and Restated Certificate of Incorporation of the
Registrant
**3.2 By-Laws of the Registrant
**4 Warrant Certificate No. W-2, dated as of August 7, 1997
*10.1 Board of Director's Restricted Stock Plan
*10.2 Board of Director's Stock Option Plan
*10.3 Deferred Compensation Plan for Directors
*10.4 Incentive Performance Plan
*10.5 Stock Compensation Plan
*10.6 1993-1998 Stock Option Plan
*10.7 Supplemental Pension Plan
*10.8 Supplemental Employees' Thrift & Savings Plan (Sallie Mae
401(K) Supplemental Savings Plan)
+13 Portions of the Annual Report to Shareholders for fiscal year
ended December 31, 1997 expressly incorporated by reference
herein.
-21 Subsidiaries of the Registrant
+23.1 Consent of Ernst & Young LLP
+23.2 Consent of Arthur Andersen LLP
+27 Financial Data Schedule
- -----------------------------------
* Incorporated by reference to the correspondingly numbered exhibits to the
Registrant's Registration Statement on Form S-4, as amended (File
No. 333-21217)
** Incorporated by reference to the correspondingly numbered exhibits to the
Registrant's Registration on Form S-1 (File No. 333-38391)
+ Filed herewith
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned hereunto duly authorized.
Dated: March 27, 1998
SLM HOLDING CORPORATION
By: /s/ ALBERT L. LORD
----------------------------
Name: Albert L. Lord
Title: Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/S/ ALBERT L. LORD Chief Executive Officer March 27, 1998
- ------------------ (Principal Executive Officer)
Albert L. Lord
/S/ MARK G. OVEREND Chief Financial Officer March 27, 1998
- ------------------- (Principal Financial and
Mark G. Overend Accounting Officer)
/S/ EDWARD A. FOX Chairman of the Board March 27, 1998
- ----------------- of Directors
Edward A. Fox
/S/ JAMES E. BRANDON Director March 27, 1998
- --------------------
James E. Brandon
/S/ CHARLES L. DALEY Director March 27, 1998
- --------------------
Charles L. Daley
/S/ THOMAS J. FITZPATRICK Director March 27, 1998
- -------------------------
Thomas J. Fitzpatrick
/S/ DIANE SUITT GILLELAND Director March 27, 1998
- -------------------------
Diane Suitt Gilleland
22
SIGNATURE TITLE DATE
- --------- ----- ----
/S/ ANN TORRE GRANT Director March 27, 1998
- -------------------
Ann Torre Grant
/S/ RONALD F. HUNT Director March 27, 1998
- ------------------
Ronald F. Hunt
/S/ BENJAMIN J. LAMBERT, III Director March 27, 1998
- ----------------------------
Benjamin J. Lambert, III
/S/ MARIE V. McDEMMOND Director March 27, 1998
- ----------------------
Marie V. McDemmond
/S/ BARRY A. MUNITZ Director March 27, 1998
- -------------------
Barry A. Munitz
/S/ A. ALEXANDER PORTER Director March 27, 1998
- -----------------------
A. Alexander Porter
/S/ WOLFGANG SCHOELLKOPF Director March 27, 1998
- ------------------------
Wolfgang Schoellkopf
/S/ STEVEN L. SHAPIRO Director March 27, 1998
- ---------------------
Steven L. Shapiro
/S/ RANDOLPH H. WATERFIELD, JR. Director March 27, 1998
- ------------------------------
Randolph H. Waterfield, Jr.
23
Schedule XX
The Board of Directors and Stockholders
SLM Holding Corporation
We have audited the accompanying consolidated balance sheets of SLM Holding
Corporation at December 31, 1996, and the related consolidated statements of
income, changes in stockholders' equity and cash flows for each of the two years
in the period ended December 31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of SLM Holding
Corporation at December 31, 1996, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 2, the Company's financial statements for 1995 have
been restated to reflect a change in its method of accounting for student loan
income.
Washington, D.C. /s/ Ernst & Young LLP
January 13, 1997, except as to the
eighteenth and nineteenth paragraphs of Note 2,
which is as of April 7, 1997
S-1
Appendix A
THE FEDERAL FAMILY EDUCATION LOAN PROGRAM
General
The Federal Family Education Loan Program ("FFELP") (formerly the Guaranteed
Student Loan Program ("GSLP")) under Title IV of the Higher Education Act (the
"Act") provides for loans to be made to students or parents of dependent
students enrolled in eligible institutions to finance a portion of the costs of
attending school. If a borrower defaults on a student loan, becomes totally or
permanently disabled, dies, files for bankruptcy or attends a school that closes
prior to the student earning a degree, or if the applicable education
institution falsely certifies the borrower's eligibility for a federally insured
student loan (collectively "insurance triggers"), the holder of the loan (which
must be an eligible lender) may file a claim with the applicable state or
private nonprofit guarantee agency (each a "Guarantee Agency"). Provided that
the loan has been properly originated and serviced, the Guarantee Agency pays
the holder all or a portion of the unpaid principal balance on the loan as well
as accrued interest ("Guarantee Payments"). Origination and servicing
requirements, as well as procedures to cure deficiencies, are established by the
U.S. Department of Education (the "Department") and the various Guarantee
Agencies.
Under the FFELP, payment of principal and interest with respect to the
student loans is guaranteed against default, death, bankruptcy or disability of
the applicable borrower by the applicable Guarantee Agency. As described herein,
the guarantee agencies are entitled, subject to certain conditions, to be
reimbursed for all or a portion of Guarantee Payments they make by the
Department pursuant to a program of federal reinsurance under the Act. See "--
Guarantee Agencies".
Guarantee Agencies enter into reinsurance agreements with the Secretary of
Education pursuant to which the Secretary agrees to reimburse the Guarantee
Agency for all or a portion of the amount expended by the Guarantee Agency in
discharge of its guarantee obligation with respect to default claims provided
the loans have been properly originated and serviced. Except for claims
resulting from death, disability or bankruptcy of a borrower or where the school
the borrower attended closed or the borrower's eligibility was falsely
certified, in which cases the Secretary pays the full amount of the claim, the
amount of reinsurance depends on the default experience of the Guarantee Agency.
See "-- Federal Insurance and Reinsurance of Guarantee Agencies".
In the event of a shortfall between the amounts of claims paid to holders of
defaulted loans and reinsurance payments from the federal government, Guarantee
Agencies pay the claims from their reserves. These reserves come from four
principal sources: insurance premiums they charge on student loans (currently up
to 1 percent of loan principal), administrative cost allowances from the
Department (payment of which is currently discretionary on the part of the
Department)1, debt collection activities (generally, the Guarantee Agency may
retain 27 percent of its collections on defaulted student loans), and investment
income from reserve funds. Claims which a Guarantee Agency is financially unable
to pay will be paid by the Secretary or transferred to a financially sound
Guarantee Agency, if the Secretary makes the necessary determination that the
guarantor is financially unable to pay.
A-1
Several types of guaranteed student loans are currently authorized under the
Act: (i) loans to students who pass certain financial need tests ("Subsidized
Stafford Loans"); (ii) loans to students who do not pass the Stafford need tests
or who need additional loans to supplement their Subsidized Stafford Loans
("Unsubsidized Stafford Loans"); (iii) loans to parents of students ("PLUS
Loans") who are dependents and whose need exceed the financing available from
Subsidized Stafford Loans and/or Unsubsidized Stafford Loans; and (iv) loans to
consolidate the borrower's obligations under various federally authorized
student loan programs into a single loan ("Consolidation Loans"). Prior to July
1, 1994 the Act also permitted loans to graduate and professional students and
independent undergraduate students and, under certain circumstances, dependent
undergraduate students who needed additional loans to supplement their
Subsidized Stafford Loans ("Supplemental Loans to Students" or "SLS Loans").
The FFELP is subject to statutory and regulatory revision from time to time.
The most recent significant revisions are contained in the Higher Education
Amendments of 1992 ("the 1992 Amendments"), the Omnibus Budget Reconciliation
Act of 1993 ("the 1993 Act") and the "Higher Education Technical Amendments of
1993" (the "Technical Amendments"). As part of the 1992 Amendments the name of
the Guaranteed Student Loan Program was changed to the FFELP. The 1993 Act
contains significant changes to the FFELP and creates a direct loan program
funded directly by the U.S. Department of Treasury (each loan under such
program, a "Federal Direct Student Loan").
Following enactment of the 1992 Amendments, Subsidized Stafford Loans,
Unsubsidized Stafford Loans, PLUS Loans and Consolidation Loans are officially
referred to as "Federal Stafford Loans," "Federal Unsubsidized Stafford Loans,"
"Federal PLUS Loans" and "Federal Consolidation Loans," respectively.
The description and summaries of the Act, the FFELP, the Guarantee
Agreements and the other statutes and regulations referred to in this report not
purport to be comprehensive, and are qualified in their entirety by reference to
each such statute or regulation. The Act is codified at 20 U.S.C. ss.1071 et
seq., and the regulations promulgated thereunder can be found at 34 C.F.R. Part
682. There can be no assurance that future amendments or modifications will not
materially change any of the terms or provisions of the programs described in
this report of the statutes and regulations implementing these programs.
- --------------
1 The Fiscal Year 1996 Omnibus Appropriations Act provided that for the 1995
1996 federal fiscal years, the Secretary must pay an administrative cost
allowance to guaranty agencies equal to .085 percent of each agency's loan
originations.
A-2
Legislative and Administrative Matters
The Act was amended by enactment of the 1992 Amendments, the general
provisions of which became effective on July 23, 1992 and which extend the
principal provisions of the FFELP to September 30, 1998 (or in the case of
borrowers who have received loans prior to that date, September 30, 2002, except
that authority to make Consolidation Loans expires on September 30, 1998). The
Technical Amendments became effective on December 20, 1993.
The 1993 Act, effective on August 10, 1993, implements a number of changes
to the federal guaranteed student loan programs, including imposing on lenders
or holders of guaranteed student loans certain fees, providing for 2 percent
lender risk sharing, reducing interest rates and Special Allowance Payments for
certain loans, effectively reducing the interest payable to holders of
Consolidation Loans and affecting the Department's financial assistance to
Guarantee Agencies, including by reducing the percentage of claims the
Department will reimburse Guarantee Agencies and reducing more substantially the
premiums and default collections that Guarantee Agencies are entitled to receive
and/or retain. In addition, such legislation also contemplates replacement of at
least 60 percent of the federal guaranteed student loan programs with direct
lending by the Department by the 1998-99 academic year.
Eligible Lenders, Students and Institutions
Lenders eligible to make and/or hold loans under the FFELP generally include
banks, savings and loan associations, credit unions, pension funds, insurance
companies and, under certain conditions, schools and guarantee agencies. Sallie
Mae is an eligible lender for making Consolidation Loans and as a lender of last
resort and for holding FFELP loans.
A FFELP loan may be made only to qualified borrowers. Generally a qualified
borrower is an individual or parent of an individual who (a) has been accepted
for enrollment or is enrolled and is maintaining satisfactory progress at an
eligible institution, (b) is carrying or will carry at least one-half of the
normal full-time academic workload for the course of study the student is
pursuing, as determined by such institution, (c) has agreed to notify promptly
the holder of the loan of any address change and (d) meets the applicable "need"
requirements for the particular loan program. Each loan is to be evidenced by an
unsecured promissory note signed by the qualified borrower.
Eligible institutions are post-secondary schools which meet the requirements
set forth in the Act. They include institutions of higher education, proprietary
institutions of higher education and post-secondary vocational institutions.
With specified exceptions, institutions are excluded from consideration as
eligible institutions if the institution (i) offers more than 50 percent of its
courses by correspondence; (ii) enrolls 50 percent or more of its students in
correspondence courses; (iii) has a student enrollment in which more than 25
percent of the students are incarcerated; or (iv) has a student enrollment in
which more than 50 percent of the students are admitted without a high school
diploma or its equivalent on the basis of their ability to benefit from the
education provided (as defined by statute and regulation). Further, schools are
specifically excluded from participation if (i) the institution has filed for
bankruptcy or (ii) the institution, the owner or its chief executive officer,
has been convicted or pleaded nolo contendere or guilty to a crime involving the
acquisition, use or expenditure of federal student aid funds, or has been
judicially determined to have committed fraud involving funds under the student
aid program. In order to participate in the program, the eligibility of a school
must be approved by the Department under standards established by regulation.
A-3
Financial Need Analysis
Student loans may generally be made in amounts, subject to certain limits
and conditions, to cover the student's estimated costs of attendance, including
tuition and fees, books, supplies, room and board, transportation and
miscellaneous personal expenses (as determined by the institution). Each
borrower must undergo a need analysis, which requires the borrower to submit a
need analysis form which is forwarded to the federal central processor. The
central processor evaluates the parents' and student's financial condition under
federal guidelines and calculates the amount that the student and/or the family
is expected to contribute towards the student's cost of education (the "family
contribution"). After receiving information on the family contribution, the
institution then subtracts the family contribution from its cost of attendance
to determine the student's eligibility for grants, Subsidized Stafford Loans and
work assistance. The difference between (a) the sum of the (i) amount of grants,
(ii) the amount earned through work assistance and (iii) the amount of
Subsidized Stafford Loans for which the borrower is eligible and (b) the
student's estimated cost of attendance (the "Unmet Need") may be borrowed
through Unsubsidized Stafford Loans. Parents may finance the family contribution
amount through their own resources or through PLUS Loans.
Special Allowance Payments
The Act provides for quarterly special allowance payments ("Special
Allowance Payments") to be made by the Department to holders of student loans to
the extent necessary to ensure that such holder receives at least a specified
market interest rate of return on such loans. The rates for Special Allowance
Payments are based on formulas that differ according to the type of loan and the
date the loan was originally made or insured. A Special Allowance Payment is
made for each of the 3-month periods ending March 31, June 30, September 30, and
December 31. The Special Allowance Payments equal the average unpaid principal
balance (including interest permitted to be capitalized) of all eligible loans
held by such holder during such period multiplied by the special allowance
percentage. The special allowance percentage shall be computed by (i)
determining the average of the bond equivalent rates of 91-day Treasury bills
auctioned for such 3-month period, (ii) subtracting the applicable borrower
interest rate on such loans from such average, (iii) adding the applicable
Special Allowance Margin (defined below) to the resultant percentage, and (iv)
dividing the resultant percentage by 4.
Date of Disbursement Special Allowance Margin
-------------------- ------------------------
Prior to 10/17/86.... 3.50%
10/17/86-9/30/92..... 3.25%
10/01/92-6/30/95..... 3.10%
7/1/95-6/30/98....... 2.50% (Subsidized and Unsubsidized
Stafford Loans, in school, grace or
deferment) 3.10% (Subsidized and
Unsubsidized Stafford Loans, in repayment
and all other loans)
A-4
Special Allowance Payments are available on variable rate PLUS Loans and SLS
Loans as described below under "PLUS and SLS Loan Programs" only to cover any
amount by which the variable rate, which is reset annually based on the 52-week
Treasury Bill, would exceed the applicable maximum rate.
As part of the amendments made to the Act by the Omnibus Budget
Reconciliation Act of 1993, the method for calculating borrower interest and
special allowance payment is scheduled to be altered for loans made on or after
July 1, 1998. As of that date, the borrower interest rate on Stafford Loans and
Unsubsidized Stafford Loans will be established annually at the "bond equivalent
rate of the securities with the comparable maturity", as determined by the
Secretary of Education, plus 1.0 percent. This rate will apply for loans both
during the in-school and repayment periods. For PLUS loans, the rate will be the
same, except that 2.10 percent will be added to the rate basis. Special
allowance payments on these loans will be paid at the "bond equivalent rate of
the securities with comparable maturities" plus 1.0 percent and reset at
intervals established by the Secretary of Education. The Secretary of Education
has yet to issue formal guidance on the rate basis or on the method or timing of
special allowance payments for these loans.
Origination Fees
The eligible lender charges borrowers an origination fee, which in turn is
passed on to the federal government, on Subsidized and Unsubsidized Stafford
Loans and PLUS Loans equal to 3 percent of the principal balance of each loan.
The amount of the origination fee may be deducted from each disbursement
pursuant to a loan on a pro rata basis. No origination fee is paid on
Consolidation Loans.
Lenders must refund all origination fees attributable to a disbursement that
was returned to the lender by the school or repaid or not delivered within 120
days of the disbursement. Such origination fees must be refunded by crediting
the borrower's loan balance with the applicable lender.
Stafford Loans
The Act provides for (i) federal insurance or reinsurance of Subsidized
Stafford Loans made by eligible lenders to qualified students, (ii) federal
interest subsidy payments on certain eligible Subsidized Stafford Loans to be
paid by the Department to holders of the loans in lieu of the borrower making
interest payments ("Interest Subsidy Payments"), and (iii) Special Allowance
Payments representing an additional subsidy paid by the Department to the
holders of eligible Subsidized Stafford Loans (collectively referred to herein
as "Federal Assistance").
Subsidized Stafford Loans are loans under the FFELP that may be made, based
on need, only to post-secondary students accepted or enrolled in good standing
at an eligible institution who are carrying at least one-half the normal
full-time course load at that institution. The Act limits the amount a student
can borrow in any academic year and the amount he or she can have outstanding in
the aggregate. The following chart sets forth the historic loan limits.
A-5
MAXIMUM LOAN AMOUNTS
Federal Stafford Loan Program
All
Students(1) Independent
-------------- Students(3)
------------------------
Base Amount
Subsidized and Additional
Subsidized Unsubsidized Unsubsidized
Subsidized on or after on or after only on or Total
Borrower's Academic Level Pre-1/1/87 1/1/87 7/7/93(2) after 7/1/94 Amount
------------------------- ---------- ------ --------- ------------ ------
Undergraduate (per year)
1st year................... $ 2,500 $ 2,625 $ 2,625 $ 4,000 $ 6,625
2nd year................... $ 2,500 $ 2,625 $ 3,500 $ 4,000 $ 7,500
3rd year & above........... $ 2,500 $ 4,000 $ 5,500 $ 5,000 $ 10,500
Graduate (per year)........ $ 5,000 $ 7,500 $ 8,500 $ 10,000 $ 18,500
Aggregate Limit
Undergraduate............ $ 12,500 $17,250 $ 23,000 $ 23,000 $ 46,000
Graduate (including
undergraduate)........ $ 25,000 $54,750 $ 65,500 $ 73,000 $138,500
- ----------
(1) The loan limits are inclusive of both Federal Stafford Loans and Federal
Direct Student Loans.
(2) These amounts represent the combined maximum loan amount per year for
Subsidized and Unsubsidized Stafford Loans. Accordingly, the maximum amount
that a student may borrow under an Unsubsidized Loan is the difference
between the combined maximum loan amount and the amount the student received
in the form of a Subsidized Loan.
(3) Independent undergraduate students, graduate students or professional
students may borrow these additional amounts. In addition, dependent
undergraduate students may also receive these additional loan amounts if the
parents of such students are unable to provide the family contribution
amount and it is unlikely that the student's parents will qualify for a
Federal PLUS Loan.
(4) Some graduate health profession students otherwise eligible to borrow under
HEAL may be entitled to increase unsubsidized loan limits not to exceed HEAL
statutory limits for each course of study per academic year.
The interest rate paid by borrowers on a Subsidized Stafford Loan is
dependent on the date of the loan except for loans made prior to October 1,
1992, whose interest rate depends on any outstanding borrowings of that borrower
as of such date. The rate for variable rate Subsidized Stafford Loans applicable
for any 12-month period beginning on July 1 and ending on June 30, is determined
on the preceding June 1 and is equal to the lesser of (a) the applicable Maximum
Rate or, (b) the sum of (i) the bond equivalent rate of 91-day Treasury bills
auctioned at the final auction held prior to such June 1, and (ii) the
applicable Interest Rate Margin.
Subsidized Stafford Loans
Date of Disbursement Borrower Rate Maximum Rate Interest Rate Margin
--------------------- ------------------ ----------------------- ---------------------------
09/13/83-06/30/88.... 8% 8.00%
07/01/88-09/30/92.... 8% for 48 months; 8.00% for 48 months, 3.25%
thereafter, 91-Day then 10%
Treasury +
Interest Rate Margin
10/01/92-06/30/94.... 91-Day Treasury + 9.00% 3.10%
Interest Rate Margin
A-6
Date of Disbursement Borrower Rate Maximum Rate Interest Rate Margin
--------------------- ------------------ ----------------------- ---------------------------
07/01/94-06/30/95.... 91-Day Treasury + 8.25% 3.10%
Interest Rate Margin
07/01/95-06/30/98.... 91-Day Treasury + 8.25% 2.50% (in school,
Interest Rate Margin grace, or deferment)
3.10% (in repayment)
After 07/01/98....... The bond equivalent 8.25% 1.0%
rate of the
securities with a
comparable maturity
as established by
the Secretary +
Interest Rate Margin
The Technical Amendments provide that, for fixed rate loans made on or after
July 23, 1992 and for certain loans made to new borrowers on or after July 1,
1988, the lender must convert the loan to a variable rate loan capped at the
interest rate existing prior to the conversion. This conversion must have been
completed by January 1, 1995.
Holders of Subsidized Stafford Loans are eligible to receive Special
Allowance Payments. The Department is responsible for paying interest on
Subsidized Stafford Loans while the borrower is a qualified student, during a
grace period or during certain deferment periods. The Department makes quarterly
Interest Subsidy Payments to the owner of Subsidized Stafford Loans in the
amount of interest accruing on the unpaid balance thereof prior to the
commencement of repayment or during any deferment periods. The Act provides that
the owner of an eligible Subsidized Stafford Loan shall be deemed to have a
contractual right against the United States to receive Interest Subsidy Payments
(and Special Allowance Payments) in accordance with its provisions. Receipt of
Interest Subsidy Payments and Special Allowance Payments is conditioned on
compliance with the requirements of the Act and continued eligibility of such
loan for federal reinsurance.
Interest Subsidy Payments and Special Allowance Payments are generally
received within 45 days to 60 days after the end of any given calendar quarter
(provided that the applicable claim form is properly filed with the Department),
although there can be no assurance that such payments will in fact be received
from the Department within that period.
Repayment of principal on a Subsidized or Unsubsidized Stafford Loan
typically does not commence while a student remains a qualified student, but
generally begins upon expiration of the applicable grace period, as described
below. Any borrower may voluntarily prepay without premium or penalty any loan
and in connection therewith may waive any grace period or deferment period. In
general, each loan must be scheduled for repayment over a period of not more
than ten years after the commencement of repayment. The Act currently requires
minimum annual payments of $600 including principal and interest, unless the
borrower and the lender agree to lesser payments. As of July 1, 1995, lenders
are required to offer borrowers a choice among standard, graduated and
income-sensitive repayment schedules. These repayment options must be offered to
all new borrowers who enter repayment on or after July 1, 1995. If a borrower
fails to elect a particular repayment schedule or fails to submit the
documentation necessary for the option the borrower chooses, the standard
repayment schedule is used.
A-7
Repayment of principal on a Subsidized Stafford Loan must generally commence
following a period of (a) not less than 9 months or more than 12 months (with
respect to loans for which the applicable interest rate is 7 percent per annum)
and (b) not more than 6 months (with respect to loans for which the applicable
interest rate is 9 percent per annum or 8 percent per annum and for loans to
first time borrowers on or after July 1, 1988) after the borrower ceases to
pursue at least a half-time course of study (a "Grace Period"). However, during
certain other periods (each a "Deferment Period") and subject to certain
conditions, no principal repayments need be made, including periods when the
student has returned to an eligible educational institution on a full-time (or
in certain cases half time) basis or is pursuing studies pursuant to an approved
graduate fellowship program, or when the student is a member of the Armed Forces
or a volunteer under the Peace Corps Act or the Domestic Volunteer Service Act
of 1973, or when the borrower is temporarily or totally disabled, or periods
during which the borrower may defer principal payments because of temporary
financial hardship. For new borrowers to whom loans are first disbursed on or
after July 1, 1993, payment of principal may be deferred only while the borrower
is at least a half-time student or is in an approved graduate fellowship program
or is enrolled in a rehabilitation program, or when the borrower is seeking but
unable to find full-time employment, or when for any reason the lender
determines that payment of principal will cause the borrower economic hardship;
in the case of unemployment or economic hardship the deferment is subject to a
maximum deferment period of three years. The 1992 Amendments also require
forbearance of loans in certain circumstances and permit forbearance of loans in
certain other circumstances (each such period, a "Forbearance Period").
The Unsubsidized Stafford Loan program created under the 1992 Amendments is
designed for students who do not qualify for Subsidized Stafford Loans and for
independent graduate and professional students whose Unmet Need exceeds what
they can borrow under the Subsidized Stafford Loan Program. The basic
requirements for Unsubsidized Stafford Loans are essentially the same as those
for the Subsidized Stafford Loans, including with respect to provisions
governing the interest rate, the annual loan limits and the Special Allowance
Payments. The terms of the Unsubsidized Stafford Loans, however, differ in some
respects. The federal government does not make Interest Subsidy Payments on
Unsubsidized Stafford Loans. The borrower must either pay interest on a periodic
basis beginning 60 days after the time the loan is disbursed or capitalize the
interest that accrues until repayment begins. Effective July 1, 1994, the
maximum insurance premium was set at 1 percent. Subject to the same loan limits
established for Subsidized Stafford Loans, the student may borrow up to the
amount of such student's Unmet Need. Lenders are authorized to make Unsubsidized
Stafford Loans applicable for periods of enrollment beginning on or after
October 1, 1992.
PLUS and SLS Loan Programs
The Act also provides for the PLUS Program. The Act authorizes PLUS Loans to
be made to parents of eligible dependent students. The 1993 Act eliminated the
SLS Program after July 1, 1994.
A-8
The PLUS program permits parents of dependent students to borrow an amount
equal to each student's Unmet Need. Under the former SLS program, independent
graduate or professional school students and certain dependent undergraduate
students were permitted to borrow subject to the same loan limitations.
The first payment of principal and interest is due within 60 days of full
disbursement of the loan except for borrowers eligible for deferment who may
defer principal and interest payments while eligible for deferment; deferred
interest is then capitalized periodically or at the end of the deferment period
under specific arrangements with the borrower. The maximum repayment term is 10
years. PLUS and SLS loans carry no in-school interest subsidy.
The interest rate determination for a PLUS or SLS loan is dependent on when
the loan was originally made or disbursed. Some PLUS or SLS loans carry a
variable rate. The rate varies annually for each 12-month period beginning on
July 1 and ending on June 30. The variable rate is determined on the preceding
June 1 and is equal to the lesser of (a) the applicable Maximum Rate or (b) the
sum of (i) the bond equivalent rate of 52-week Treasury bills auctioned at the
final auction held prior to such June 1, and (ii) the applicable Interest Rate
Margin as set forth below.
PLUS/SLS Loans
Date of Disbursement Borrower Rate Maximum Rate Interest Rate Margin
----------------------- ------------------ -------------- --------------------
Prior to 10/01/81...... 9% 9%
10/01/81-10/31/82...... 14% 14%
11/01/82-06/30/87...... 12% 12%
07/01/87-09/30/92...... 52-Week Treasury + 12% 3.25%
Interest Rate Margin
10/01/92-06/30/94...... 52-Week Treasury + PLUS 10% 3.10%
Interest Rate Margin SLS 11%
After 06/30/94
(SLS repealed 07/01/94 52-Week Treasury + 9% 3.10%
Interest Rate Margin
A holder of a PLUS or SLS loan is eligible to receive Special Allowance
Payments during any such 12-month period if (a) the sum of (i) the bond
equivalent rate of 52-week Treasury bills auctioned at the final auction held
prior to such June 1, and (ii) the Interest Rate Margin, exceeds (b) the Maximum
Rate.
The Consolidation Loan Program
The Act authorizes a program under which certain borrowers may consolidate
their various student loans into Consolidation Loans which will be insured and
reinsured to the same extent as other loans made under the FFELP. Under this
program, a lender may make a Consolidation Loan only if (a) such lender holds
one of the borrower's outstanding student loans that is selected for
consolidation, or (b) the borrower has unsuccessfully sought a Consolidation
Loan from the holders of the Student Loans selected for consolidation.
A-9
Consolidation Loans are made in an amount sufficient to pay outstanding
principal and accrued unpaid interest and late charges on all FFELP loans, as
well as loans made pursuant to various other federal student loan programs,
which were selected by the borrower for consolidation. The unpaid principal
balance of a Consolidation Loan made prior to July 1, 1994 bears interest at a
rate not less than 9 percent. The interest rate on a Consolidation Loan made on
or after July 1, 1994 is equal to the weighted average of the interest rates on
the loans selected for consolidation, rounded upward to the nearest whole
percent. The holder of a Consolidation Loan made on or after October 1, 1993
must pay the Secretary a monthly rebate fee calculated on an annual basis equal
to 1.05 percent of the principal plus accrued unpaid interest on any such loan.
The repayment term under a Consolidation Loan varies depending upon the
aggregate amount of the loans being consolidated. In no case may the repayment
term exceed 30 years. A Consolidation Loan is evidenced by an unsecured
promissory note and entitles the borrower to prepay the loan, in whole or in
part, without penalty.
Guarantee Agencies
The Act authorizes Guarantee Agencies to support education financing and
credit needs of students at post-secondary schools. Under various programs
throughout the United States, Guarantee Agencies insure student loans. The
Guarantee Agencies are reinsured by the federal government for 80 percent to 100
percent of claims paid, depending on their claims experience for loans disbursed
prior to October 1, 1993 and for 78 percent to 98 percent of claims paid for
loans disbursed on or after October 1, 1993.
Guarantee Agencies collect a one-time insurance fee of up to 1 percent of
the principal amount of each loan, other than Consolidation Loans, that the
agency guarantees.
The Guarantee Agencies generally guarantee loans for students attending
institutions in their particular state or region or for residents of their
particular state or region attending schools in another state. Certain Guarantee
Agencies have been designated as the Guarantee Agency for more than one state.
Some Guarantee Agencies contract with other entities to administer their
guarantee agency programs.
Federal Insurance and Reinsurance of Guarantee Agencies
A student loan is considered to be in default for purposes of the Act when
the borrower fails to make an installment payment when due, or to comply with
other terms of the loan, and if the failure persists for 180 days in the case of
a loan repayable in monthly installments or for 240 days in the case of a loan
repayable in less frequent installments.
If the loan is guaranteed by a Guarantee Agency, the eligible lender is
reimbursed by the Guarantee Agency for 100 percent (98 percent for loans
disbursed on or after October 1, 1993) of the unpaid principal balance of the
loan plus accrued interest on any loan defaulted so long as the eligible lender
has properly originated and serviced such loan. Under certain circumstances a
loan deemed ineligible for reimbursement may be restored to eligibility.
A-10
Under the Act, the Department enters into a reinsurance agreement with each
Guarantee Agency, which provides for federal reinsurance of amounts paid to
eligible lenders by the Guarantee Agency. Pursuant to such agreements, the
Department agrees to reimburse a Guarantee Agency for 100 percent of the amounts
expended in connection with a claim resulting from the death, bankruptcy, or
total and permanent disability of a borrower, the death of a student whose
parent is the borrower of a PLUS Loan, or claims by borrowers who received loans
on or after January 1, 1986 and who are unable to complete the programs in which
they are enrolled due to school closure, or borrowers whose borrowing
eligibility was falsely certified by the eligible institution; such claims are
not included in calculating a Guaranty Agency's claims experience for federal
reinsurance purposes, as set forth below. The Department is also required to
repay the unpaid balance of any loan if collection is stayed under the
Bankruptcy Code, and is authorized to acquire the loans of borrowers who are at
high risk of default and who request an alternative repayment option from the
Department.
With respect to FFELP loans in default, the Department is required to pay
the applicable Guarantee Agency a certain percentage ("Reinsurance Rate") of the
amount such agency paid pursuant to default claims filed by the lender on a
reinsured loan. The amount of such Reinsurance Rate is subject to specified
reductions when the total reinsurance claims paid by the Department to a
Guarantee Agency during a fiscal year equals or exceeds 5 percent of the
aggregate original principal amount of FFELP loans guaranteed by such agency
that are in repayment on the last day of the prior fiscal year. Accordingly, the
amount of the reinsurance payment received by the Guarantee Agency may vary. The
Reinsurance Rates are set forth in the following table.
Guarantee Agency's
claims experience Applicable Reinsurance Rate
-------------------- -------------------------------------------------
0% up to 5%........ 98% (100% for loans disbursed before Oct. 1, 1993)
5% up to 9%........ 88% (90% for loans disbursed before Oct. 1, 1993)
9% and over........ 78% (80% for loans disbursed before Oct. 1, 1993)
- ----------
The claims experience is not cumulative. Rather, the claims experience for
any given Guarantee Agency is determined solely on the basis of claims for any
one federal fiscal year compared with the original principal amount of loans in
repayment at the beginning of that year.
The 1992 Amendments addressed industry concerns regarding the Department's
commitment to providing support in the event of Guarantee Agency failures.
Pursuant to the 1992 Amendments, Guarantee Agencies are required to maintain
specified reserve fund levels. Such levels are defined as 0.5 percent of the
total attributable amount of all outstanding loans guaranteed by the agency for
the fiscal year of the agency that begins in 1993, 0.7 percent for the agency's
fiscal year beginning in 1994, 0.9 percent for the agency's fiscal year
beginning in 1995, and 1.1 percent for the agency's fiscal year beginning on or
after January 1, 1996. If (i) the Guarantee Agency fails to achieve the minimum
reserve level in any two consecutive years, (ii) the Guarantee Agency's federal
reimbursements are reduced to 80 percent (or 78 percent after October 1, 1993)
or (iii) the Department determines the Guarantee Agency's administrative or
financial condition jeopardizes its continued ability to perform its
responsibilities, the Department must require the Guarantee Agency to submit and
implement a management plan to address the deficiencies. The Department may
terminate the Guarantee Agency's agreements with the Department if the Guarantee
Agency fails to submit the required plan, or fails to improve its administrative
or financial condition substantially, or if the Department determines the
Guarantee Agency is in danger of financial collapse. In such event, the
Department is authorized to undertake specified actions to assure the continued
payment of claims, including making advances to guarantee agencies to cover
immediate cash needs, transferring of guarantees to another Guarantee Agency, or
transfer of guarantees to the Department itself.
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The Act provides that, subject to compliance with the Act, the full faith
and credit of the United States is pledged to the payment of federal reinsurance
claims. It further provides that Guarantee Agencies are deemed to have a
contractual right against the United States to receive reinsurance in accordance
with its provisions. In addition, the 1992 Amendments provide that if the
Department determines that a Guarantee Agency is unable to meet its insurance
obligations, holders of loans may submit insurance claims directly to the
Department until such time as the obligations are transferred to a new Guarantee
Agency capable of meeting such obligations or until a successor Guarantee Agency
assumes such obligations. There can be no assurance that the Department would
under any given circumstances assume such obligation to assure satisfaction of a
guarantee obligation by exercising its right to terminate a reimbursement
agreement with a Guarantee Agency or by making a determination that such
Guarantee Agency is unable to meet its guarantee obligations.
Lastly, the 1993 Act provides the Secretary of Education with broad
authority to manage the finances and affairs of Guarantee Agencies. In general,
the Act provides that agency reserve funds are federal property and may be taken
by the Secretary if he determines such action is in the best interests of the
loan program. Also, the Secretary has broad authority to terminate a Guarantee
Agency's reinsurance agreement with the Department.
Within each fiscal year, the applicable Reinsurance Rate steps down
incrementally with respect to claims made only after the claims experience
thresholds are reached.
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