##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2008
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 COMMISSION FILE NUMBER 001-31924
 
 NELNET, INC.
  NEBRASKA
    
    84-0748903(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)121 SOUTH 13TH STREET, SUITE 201
    
    68508LINCOLN, NEBRASKA
    
    (Zip Code)(Address of principal executive offices)
 (402) 458-2370
 þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o
 o þ




---



##### 



NELNET, INC.
FORM 10-Q
INDEX
September 30, 2008
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    2Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    29Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    66Item 4. Controls and Procedures
    
    
    72PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    72Item 1A. Risk Factors
    
    
    74Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    77Item 6. Exhibits
    
    
    79Signatures
    
    
    80Exhibit 10.1Exhibit 10.2Exhibit 10.3Exhibit 10.4Exhibit 10.5Exhibit 10.6Exhibit 31.1Exhibit 31.2Exhibit 32




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
 As of
    
    
    As ofSeptember 30, 2008
    
    
    December 31, 2007(unaudited)Assets:Student loans receivable (net of allowance for loan losses of
$49,070 and $45,592, respectively)
    
    $
    26,376,269
    
    
    
    26,736,122Cash and cash equivalents:Cash and cash equivalents  not held at a related party
    
    
    16,062
    
    
    
    38,305Cash and cash equivalents  held at a related party
    
    
    308,945
    
    
    
    73,441Total cash and cash equivalents
    
    
    325,007
    
    
    
    111,746Restricted cash and investments
    
    
    1,082,015
    
    
    
    927,247Restricted cash  due to customers
    
    
    47,859
    
    
    
    81,845Accrued interest receivable
    
    
    530,102
    
    
    
    593,322Accounts receivable, net
    
    
    49,204
    
    
    
    49,084Goodwill
    
    
    175,178
    
    
    
    164,695Intangible assets, net
    
    
    83,565
    
    
    
    112,830Property and equipment, net
    
    
    43,629
    
    
    
    55,797Other assets
    
    
    102,446
    
    
    
    107,624Fair value of derivative instruments
    
    
    154,741
    
    
    
    222,471Total assets
    
    $
    28,970,015
    
    
    
    29,162,783Liabilities:Bonds and notes payable
    
    $
    28,004,835
    
    
    
    28,115,829Accrued interest payable
    
    
    92,112
    
    
    
    129,446Other liabilities
    
    
    192,550
    
    
    
    220,899Due to customers
    
    
    47,859
    
    
    
    81,845Fair value of derivative instruments
    
    
    22,929
    
    
    
    5,885Total liabilities
    
    
    28,360,285
    
    
    
    28,553,904Shareholders equity:Preferred stock, $0.01 par value. Authorized 50,000,000 shares;
no shares issued or outstanding
    
    
    
    
    
    
    Common stock:Class A, $0.01 par value. Authorized 600,000,000 shares;
issued and outstanding 37,994,332 shares as of September 30,
2008 and 37,980,617 shares as of December 31, 2007
    
    
    380
    
    
    
    380Class B, convertible, $0.01 par value. Authorized 60,000,000 shares;
issued and outstanding 11,495,377 shares as of September 30,
2008 and December 31, 2007
    
    
    115
    
    
    
    115Additional paid-in capital
    
    
    101,757
    
    
    
    96,185Retained earnings
    
    
    509,524
    
    
    
    515,317Employee notes receivable
    
    
    (2,046
    )
    
    
    (3,118
    )Total shareholders equity
    
    
    609,730
    
    
    
    608,879Commitments and contingenciesTotal liabilities and shareholders equity
    
    $
    28,970,015
    
    
    
    29,162,783
   2




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##### Table of Contents



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
(unaudited)
 Three months
    
    
    Nine monthsended September 30,
    
    
    ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Interest income:Loan interest
    
    $
    284,468
    
    
    
    437,251
    
    
    
    911,140
    
    
    
    1,251,391Investment interest
    
    
    9,118
    
    
    
    21,023
    
    
    
    29,914
    
    
    
    61,231Total interest income
    
    
    293,586
    
    
    
    458,274
    
    
    
    941,054
    
    
    
    1,312,622Interest expense:Interest on bonds and notes payable
    
    
    234,016
    
    
    
    393,875
    
    
    
    791,621
    
    
    
    1,112,263Net interest income
    
    
    59,570
    
    
    
    64,399
    
    
    
    149,433
    
    
    
    200,359Less provision for loan losses
    
    
    7,000
    
    
    
    18,340
    
    
    
    18,000
    
    
    
    23,628Net interest income after provision for loan losses
    
    
    52,570
    
    
    
    46,059
    
    
    
    131,433
    
    
    
    176,731Other income (expense):Loan and guaranty servicing income
    
    
    30,633
    
    
    
    33,040
    
    
    
    81,650
    
    
    
    95,116Other fee-based income
    
    
    45,887
    
    
    
    38,025
    
    
    
    132,617
    
    
    
    116,316Software services income
    
    
    4,217
    
    
    
    5,426
    
    
    
    15,865
    
    
    
    17,022Other income
    
    
    1,242
    
    
    
    7,028
    
    
    
    4,298
    
    
    
    14,048Gain (loss) on sale of loans
    
    
    
    
    
    
    492
    
    
    
    (47,426
    )
    
    
    3,288Derivative market value, foreign currency,
and put option adjustments and derivative
settlements, net
    
    
    6,874
    
    
    
    16,113
    
    
    
    10,468
    
    
    
    18,966Total other income
    
    
    88,853
    
    
    
    100,124
    
    
    
    197,472
    
    
    
    264,756Operating expenses:Salaries and benefits
    
    
    44,739
    
    
    
    60,545
    
    
    
    142,131
    
    
    
    182,010Other operating expenses:Impairment expense
    
    
    
    
    
    
    49,504
    
    
    
    18,834
    
    
    
    49,504Advertising and marketing
    
    
    18,388
    
    
    
    14,141
    
    
    
    50,734
    
    
    
    43,590Depreciation and amortization
    
    
    10,781
    
    
    
    15,084
    
    
    
    32,218
    
    
    
    36,741Professional and other services
    
    
    10,963
    
    
    
    9,336
    
    
    
    27,548
    
    
    
    28,219Occupancy and communications
    
    
    4,194
    
    
    
    5,931
    
    
    
    14,949
    
    
    
    16,182Postage and distribution
    
    
    3,026
    
    
    
    4,123
    
    
    
    9,586
    
    
    
    14,266Trustee and other debt related fees
    
    
    2,423
    
    
    
    3,337
    
    
    
    7,277
    
    
    
    8,965Other
    
    
    9,155
    
    
    
    11,444
    
    
    
    27,151
    
    
    
    35,843Total other operating expenses
    
    
    58,930
    
    
    
    112,900
    
    
    
    188,297
    
    
    
    233,310Total operating expenses
    
    
    103,669
    
    
    
    173,445
    
    
    
    330,428
    
    
    
    415,320Income (loss) before income taxes
    
    
    37,754
    
    
    
    (27,262
    )
    
    
    (1,523
    )
    
    
    26,167Income tax expense (benefit)
    
    
    13,969
    
    
    
    (10,664
    )
    
    
    1,793
    
    
    
    9,906Income (loss) from continuing operations
    
    
    23,785
    
    
    
    (16,598
    )
    
    
    (3,316
    )
    
    
    16,261Income (loss) from discontinued operations, net of tax
    
    
    
    
    
    
    909
    
    
    
    981
    
    
    
    (2,416
    )Net income (loss)
    
    $
    23,785
    
    
    
    (15,689
    )
    
    
    (2,335
    )
    
    
    13,845Earnings (loss) per share, basic and diluted:Income (loss) from continuing operations
    
    
    0.48
    
    
    
    (0.34
    )
    
    
    (0.07
    )
    
    
    0.32Income (loss) from discontinued
operations
    
    
    
    
    
    
    0.02
    
    
    
    0.02
    
    
    
    (0.04
    )Net income (loss)
    
    $
    0.48
    
    
    
    (0.32
    )
    
    
    (0.05
    )
    
    
    0.28
   3




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##### Table of Contents



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands, except share data)
(unaudited)
 AccumulatedPreferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Class A
    
    
    Class B
    
    
    Additional
    
    
    
    
    
    
    Employee
    
    
    other
    
    
    Totalstock
    
    
    Common stock shares
    
    
    Preferred
    
    
    common
    
    
    common
    
    
    paid-in
    
    
    Retained
    
    
    notes
    
    
    comprehensive
    
    
    shareholdersshares
    
    
    Class A
    
    
    Class B
    
    
    stock
    
    
    stock
    
    
    stock
    
    
    capital
    
    
    earnings
    
    
    receivable
    
    
    income
    
    
    equityBalance as of June 30, 2007
    
    
    
    
    
    
    37,661,381
    
    
    
    11,495,377
    
    
    $
    
    
    
    
    377
    
    
    
    115
    
    
    
    94,473
    
    
    
    518,910
    
    
    
    (2,697
    )
    
    
    
    
    
    
    611,178Comprehensive income:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,689
    )
    
    
    
    
    
    
    
    
    
    
    (15,689
    )Total comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,689
    )Cash
dividend on Class A and Class B common stock  $0.07 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,453
    )
    
    
    
    
    
    
    
    
    
    
    (3,453
    )Reserve for uncertain income tax provisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,519
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,519Issuance of common stock, net of forfeitures
    
    
    
    
    
    
    514,782
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    1,408
    
    
    
    
    
    
    
    (225
    )
    
    
    
    
    
    
    1,188Compensation expense for stock-based awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,575
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,575Repurchase of common stock
    
    
    
    
    
    
    (239,124
    )
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (5,422
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,425
    )Balance as of September 30, 2007
    
    
    
    
    
    
    37,937,039
    
    
    
    11,495,377
    
    
    $
    
    
    
    
    379
    
    
    
    115
    
    
    
    94,553
    
    
    
    499,768
    
    
    
    (2,922
    )
    
    
    
    
    
    
    591,893Balance as of June 30, 2008
    
    
    
    
    
    
    37,952,246
    
    
    
    11,495,377
    
    
    $
    
    
    
    
    380
    
    
    
    115
    
    
    
    99,854
    
    
    
    485,739
    
    
    
    (2,046
    )
    
    
    
    
    
    
    584,042Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,785
    
    
    
    
    
    
    
    
    
    
    
    23,785Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,785Issuance of common stock, net of forfeitures
    
    
    
    
    
    
    49,650
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    960
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    961Compensation expense for stock based awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,045
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,045Repurchase of common stock
    
    
    
    
    
    
    (7,564
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (102
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (103
    )Balance as of September 30, 2008
    
    
    
    
    
    
    37,994,332
    
    
    
    11,495,377
    
    
    $
    
    
    
    
    380
    
    
    
    115
    
    
    
    101,757
    
    
    
    509,524
    
    
    
    (2,046
    )
    
    
    
    
    
    
    609,730Balance as of December 31, 2006
    
    
    
    
    
    
    39,035,169
    
    
    
    13,505,812
    
    
    $
    
    
    
    
    390
    
    
    
    135
    
    
    
    177,678
    
    
    
    496,341
    
    
    
    (2,825
    )
    
    
    131
    
    
    
    671,850Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,845
    
    
    
    
    
    
    
    
    
    
    
    13,845Other comprehensive income:Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (322
    )
    
    
    (322
    )Non-pension postretirement
benefit plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    191
    
    
    
    191Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,714Cash
dividend on Class A and Class B common stock  $0.21 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,357
    )
    
    
    
    
    
    
    
    
    
    
    (10,357
    )Adjustment
to adopt provisions of FASB Interpretation No. 48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61
    )
    
    
    
    
    
    
    
    
    
    
    (61
    )Reserve for uncertain income tax provisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,519
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,519Issuance of common stock, net of forfeitures
    
    
    
    
    
    
    667,055
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    4,627
    
    
    
    
    
    
    
    (225
    )
    
    
    
    
    
    
    4,409Compensation expense for stock based awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,105Repurchase of common stock
    
    
    
    
    
    
    (3,301,194
    )
    
    
    
    
    
    
    
    
    
    
    (33
    )
    
    
    
    
    
    
    (80,874
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80,907
    )Conversion of common stock
    
    
    
    
    
    
    2,010,435
    
    
    
    (2,010,435
    )
    
    
    
    
    
    
    20
    
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Acquisition of enterprise under common control
    
    
    
    
    
    
    (474,426
    )
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    (12,502
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,507
    )Reduction of employee stock notes receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    128
    
    
    
    
    
    
    
    128Balance as of September 30, 2007
    
    
    
    
    
    
    37,937,039
    
    
    
    11,495,377
    
    
    $
    
    
    
    
    379
    
    
    
    115
    
    
    
    94,553
    
    
    
    499,768
    
    
    
    (2,922
    )
    
    
    
    
    
    
    591,893Balance as of December 31, 2007
    
    
    
    
    
    
    37,980,617
    
    
    
    11,495,377
    
    
    $
    
    
    
    
    380
    
    
    
    115
    
    
    
    96,185
    
    
    
    515,317
    
    
    
    (3,118
    )
    
    
    
    
    
    
    608,879Comprehensive income:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,335
    )
    
    
    
    
    
    
    
    
    
    
    (2,335
    )Total comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,335
    )Cash
dividend on Class A and Class B common stock  $0.07 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,458
    )
    
    
    
    
    
    
    
    
    
    
    (3,458
    )Issuance of common stock, net of forfeitures
    
    
    
    
    
    
    83,337
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    2,033
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,034Compensation expense for stock based awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,308
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,308Repurchase of common stock
    
    
    
    
    
    
    (69,622
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (769
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (770
    )Reduction of employee stock notes receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,072
    
    
    
    
    
    
    
    1,072Balance as of September 30, 2008
    
    
    
    
    
    
    37,994,332
    
    
    
    11,495,377
    
    
    $
    
    
    
    
    380
    
    
    
    115
    
    
    
    101,757
    
    
    
    509,524
    
    
    
    (2,046
    )
    
    
    
    
    
    
    609,730
   4




---



##### Table of Contents



NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
 Nine months 
ended September 30,2008
    
    
    2007Net income (loss)
    
    $
    (2,335
    )
    
    
    13,845Income (loss) from discontinued operations
    
    
    981
    
    
    
    (2,416
    )Income (loss) from continuing operations
    
    
    (3,316
    )
    
    
    16,261Adjustments to reconcile income (loss) from continuing operations to net cash provided
by operating activities, net of business acquisitions:Depreciation and amortization, including loan premiums and deferred origination costs
    
    
    107,944
    
    
    
    223,552Derivative market value adjustment
    
    
    72,399
    
    
    
    (93,031
    )Foreign currency transaction adjustment
    
    
    (40,360
    )
    
    
    79,020Change in value of put options issued in business acquisitions
    
    
    3,483
    
    
    
    2,145Proceeds from termination of derivative instruments
    
    
    15,403
    
    
    
    50,843Payments to terminate derivative instruments
    
    
    (3,679
    )
    
    
    (8,100
    )Impairment expense
    
    
    18,834
    
    
    
    49,504Loss on sale of business
    
    
    
    
    
    
    8,132Gain on sale of equity method investment
    
    
    
    
    
    
    (3,942
    )Loss (gain) on sale of student loans
    
    
    47,426
    
    
    
    (3,288
    )Non-cash compensation expense
    
    
    5,670
    
    
    
    4,595Deferred income tax benefit
    
    
    (23,979
    )
    
    
    (30,374
    )Provision for loan losses
    
    
    18,000
    
    
    
    23,628Other non-cash items
    
    
    1,258
    
    
    
    (2,900
    )Decrease (increase) in accrued interest receivable
    
    
    63,220
    
    
    
    (125,929
    )Decrease (increase) in accounts receivable
    
    
    445
    
    
    
    (7,045
    )Decrease in other assets
    
    
    13,928
    
    
    
    7,450(Decrease) increase in accrued interest payable
    
    
    (37,334
    )
    
    
    64,812(Decrease) increase in other liabilities
    
    
    (1,765
    )
    
    
    19,785Net cash flows from operating activities  continuing operations
    
    
    257,577
    
    
    
    275,118Net cash flows from operating activities  discontinued operations
    
    
    
    
    
    
    (3,558
    )Net cash provided by operating activities
    
    
    257,577
    
    
    
    271,560Cash flows from investing activities, net of business acquisitions:Originations, purchases, and consolidations of student loans, including loan premiums
and deferred origination costs
    
    
    (2,368,229
    )
    
    
    (4,509,308
    )Purchases of student loans, including loan premiums, from a related party
    
    
    (212,888
    )
    
    
    (232,769
    )Net proceeds from student loan repayments, claims, capitalized interest, participations, and other
    
    
    1,538,134
    
    
    
    1,740,351Proceeds from sale of student loans
    
    
    1,267,826
    
    
    
    107,673Purchases of property and equipment, net
    
    
    (5,094
    )
    
    
    (18,375
    )(Increase)
decrease in restricted cash and investments, net
    
    
    (154,768
    )
    
    
    316,415Purchases of equity method investments
    
    
    (2,988
    )
    
    
    Distributions from equity method investments
    
    
    
    
    
    
    747Sale of business, net of cash sold
    
    
    
    
    
    
    7,551Business acquisitions, net of cash acquired
    
    
    (18,000
    )
    
    
    2,211Proceeds from sale of equity method investment
    
    
    
    
    
    
    10,000Net cash flows from investing activities  continuing operations
    
    
    43,993
    
    
    
    (2,575,504
    )Net cash flows from investing activities  discontinued operations
    
    
    
    
    
    
    (294
    )Net cash provided by (used in) investing activities
    
    
    43,993
    
    
    
    (2,575,798
    )Cash flows from financing activities:Payments on bonds and notes payable
    
    
    (5,328,782
    )
    
    
    (4,496,077
    )Proceeds from issuance of bonds and notes payable
    
    
    5,225,548
    
    
    
    7,022,018Proceeds (payments) from issuance of notes payable due to a related party, net
    
    
    32,790
    
    
    
    (56,917
    )Payments of debt issuance costs
    
    
    (14,778
    )
    
    
    (13,951
    )Dividends paid
    
    
    (3,458
    )
    
    
    (10,357
    )Payment on settlement of put option
    
    
    
    
    
    
    (15,875
    )Proceeds from issuance of common stock
    
    
    566
    
    
    
    1,231Repurchases of common stock
    
    
    (770
    )
    
    
    (75,504
    )Payments received on employee stock notes receivable
    
    
    575
    
    
    
    128Net cash flows (used in) provided by financing activities  continuing operations
    
    
    (88,309
    )
    
    
    2,354,696Net cash flows from financing activities  discontinued operations
    
    
    
    
    
    
    Net cash (used in) provided by financing activities
    
    
    (88,309
    )
    
    
    2,354,696Effect of exchange rate fluctuations on cash
    
    
    
    
    
    
    548Net increase in cash and cash equivalents
    
    
    213,261
    
    
    
    51,006Cash and cash equivalents, beginning of period
    
    
    111,746
    
    
    
    106,086Cash and cash equivalents, end of period
    
    $
    325,007
    
    
    
    157,092Supplemental disclosures of cash flow information:Interest paid
    
    $
    814,469
    
    
    
    920,966Income taxes paid, net of refunds
    
    $
    24,302
    
    
    
    20,908
   5




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##### Table of Contents



NELNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 2008 and for the three months and nine months ended
September 30, 2008 and 2007 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
 1. Basis of Financial Reporting
  2. Discontinued Operations
   Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Operating income of discontinued operations
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    9,278Income tax on operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,562
    )Gain (loss) on disposal
    
    
    
    
    
    
    (6
    )
    
    
    1,966
    
    
    
    (8,157
    )Income tax on disposal
    
    
    
    
    
    
    915
    
    
    
    (985
    )
    
    
    25Income (loss) from discontinued
operations, net of tax
    
    $
    
    
    
    
    909
    
    
    
    981
    
    
    
    (2,416
    )
  Nine months endedSeptember 30, 2007Net interest income
    
    $
    124Other income
    
    
    31,511Operating expenses
    
    
    (22,357
    )Income before income taxes
    
    
    9,278Income tax expense
    
    
    3,562Operating income of discontinued
operations, net of tax
    
    $
    5,716
  6




---



##### Table of Contents



Accounting for Income Taxes
 3. Restructuring Charges
 Legislative Impact
   Employeetermination
    
    
    Leasebenefits
    
    
    terminations
    
    
    TotalRestructuring accrual as of December 31, 2007
    
    $
    1,193
    
    
    
    3,682
    
    
    
    4,875Adjustment from initial estimated charges
    
    
    (191
    )
    
    
    
    
    
    
    (191
    )Cash payments
    
    
    (868
    )
    
    
    (358
    )
    
    
    (1,226
    )Restructuring accrual as of March 31, 2008
    
    
    134
    
    
    
    3,324
    
    
    
    3,458Cash payments
    
    
    (134
    )
    
    
    (45
    )
    
    
    (179
    )Restructuring accrual as of June 30, 2008
    
    
    
    
    
    
    3,279
    
    
    
    3,279Cash payments
    
    
    
    
    
    
    (259
    )
    
    
    (259
    )Restructuring accrual as of September 30, 2008
    
    $
    
    
    
    
    3,020
    
    
    
    3,020
 Capital Markets Impact
   7




---



##### Table of Contents



Employeetermination
    
    
    Lease
    
    
    Write-downbenefits
    
    
    terminations
    
    
    of assets
    
    
    TotalRestructuring costs recognized during the
three month period ended March 31, 2008
    
    $
    6,095
    (a)
    
    
    1,573
    (b)
    
    
    18,834
    (c)
    
    
    26,502Write-down of assets to net realizable value
    
    
    
    
    
    
    
    
    
    
    (18,834
    )
    
    
    (18,834
    )Cash payments
    
    
    (4,952
    )
    
    
    
    
    
    
    
    
    
    
    (4,952
    )Restructuring accrual as of March 31, 2008
    
    
    1,143
    
    
    
    1,573
    
    
    
    
    
    
    
    2,716Adjustment from initial estimated charges
    
    
    (190
    )(a)
    
    
    (175
    )(b)
    
    
    
    
    
    
    (365
    )Cash payments
    
    
    (792
    )
    
    
    (369
    )
    
    
    
    
    
    
    (1,161
    )Restructuring accrual as of June 30, 2008
    
    
    161
    
    
    
    1,029
    
    
    
    
    
    
    
    1,190Cash payments
    
    
    (121
    )
    
    
    (265
    )
    
    
    
    
    
    
    (386
    )Restructuring accrual as of September 30, 2008
    
    $
    40
    
    
    
    764
    
    
    
    
    
    
    
    804
 (a)
    
    Employee termination benefits are included in salaries and
benefits in the consolidated statements of operations.(b)
    
    Lease termination costs are included in occupancy and
communications in the consolidated statements of operations.(c)
    
    Costs related to the write-down of assets are included in
impairment expense in the consolidated statements of operations.  Restructuring costsrecognized during
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjustmentthe three month
    
    
    Write-down of
    
    
    
    
    
    
    Restructuring
    
    
    from initial
    
    
    
    
    
    
    Restructuringperiod ended
    
    
    assets to net
    
    
    Cash
    
    
    accrual as of
    
    
    estimated
    
    
    Cash
    
    
    accrual as ofOperating segment
    
    March 31, 2008
    
    
    realizable value
    
    
    payments
    
    
    March 31, 2008
    
    
    charges
    
    
    payments
    
    
    June 30, 2008Student Loan and Guaranty Servicing
    
    $
    6,010
    
    
    
    (5,074
    )
    
    
    (430
    )
    
    
    506
    
    
    
    (104
    )
    
    
    (352
    )
    
    
    50Tuition Payment Processing and
Campus Commerce
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Enrollment Services and List
Management
    
    
    312
    
    
    
    
    
    
    
    (291
    )
    
    
    21
    
    
    
    (15
    )
    
    
    (19
    )
    
    
    (13
    )Software and Technical Services
    
    
    518
    
    
    
    
    
    
    
    (472
    )
    
    
    46
    
    
    
    (8
    )
    
    
    
    
    
    
    38Asset Generation and Management
    
    
    11,287
    
    
    
    (9,351
    )
    
    
    (1,806
    )
    
    
    130
    
    
    
    (52
    )
    
    
    (72
    )
    
    
    6Corporate Activity and Overhead
    
    
    8,375
    
    
    
    (4,409
    )
    
    
    (1,953
    )
    
    
    2,013
    
    
    
    (186
    )
    
    
    (718
    )
    
    
    1,109$
    26,502
    
    
    
    (18,834
    )
    
    
    (4,952
    )
    
    
    2,716
    
    
    
    (365
    )
    
    
    (1,161
    )
    
    
    1,190
 4. Legal, Industry, and Legislative Developments
 Legal Proceedings
 General
   8




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##### Table of Contents



Municipal Derivative Bid Practices Investigation
   Hinds County, Mississippi v. Wachovia Bank,
N.A. et al.
  Industry Inquiries and Investigations
     Department of Education Review
   9




---



##### Table of Contents



Department of Justice
   Internal Revenue Service
  Legislative Developments
  
    
    Increases statutory limits on annual and aggregate borrowing for FFELP loans; and
    
    Allows the Department to act as a secondary market and enter into agreements with
lenders to purchase certain FFELP loans or participation interests in those loans.
  
    
    Allows the Department to purchase certain loans from lenders for the 2008-2009
academic year and offers lenders access to short-term liquidity; and
    
    Commits to continue working with the FFELP community to explore programs to reengage
the capital markets in the long-run.
    
    
    Contains school code of conduct requirements applicable to FFELP and
private education lenders;
 
    
    Contains additional provisions and reporting requirements for lenders and schools
participating in preferred lender arrangements; and
 
    
    Contains additional disclosures that FFELP lenders must make to borrowers as well as
added FFELP loan servicing requirements for lenders.
  10




---



##### Table of Contents



5. Student Loans Receivable and Allowance for Loan Losses
  As of
    
    
    As ofSeptember 30, 2008
    
    
    December 31, 2007Federally insured loans
    
    $
    25,725,893
    
    
    
    26,054,398Non-federally insured loans
    
    
    275,520
    
    
    
    274,81526,001,413
    
    
    
    26,329,213Unamortized loan premiums and deferred origination costs
    
    
    423,926
    
    
    
    452,501Allowance for loan losses  federally insured loans
    
    
    (24,366
    )
    
    
    (24,534
    )Allowance for loan losses  non-federally insured loans
    
    
    (24,704
    )
    
    
    (21,058
    )$
    26,376,269
    
    
    
    26,736,122Federally insured allowance as a percentage of ending balance of federally insured loans
    
    
    0.09
    %
    
    
    0.09
    %Non-federally insured allowance as a percentage of ending balance of non-federally insured loans
    
    
    8.97
    %
    
    
    7.66
    %Total allowance as a percentage of ending balance of total loans
    
    
    0.19
    %
    
    
    0.17
    %
 Loan Sales
    11




---



##### Table of Contents



6. Intangible Assets and Goodwill
  Weightedaverageremaininguseful life as of
    
    
    As of
    
    
    As ofSeptember 30,
    
    
    September 30,
    
    
    December 31,2008
    
    
    2008
    
    
    2007Amortizable intangible assets:Customer relationships (net of accumulated amortization of $27,393
and $20,299, respectively)
    
    
    109
    
    
    $
    52,967
    
    
    
    60,061Trade names (net of accumulated amortization of $4,431 and
$1,258, respectively)
    
    
    45
    
    
    
    12,628
    
    
    
    1,609Covenants not to compete (net of accumulated amortization of
$13,451 and $11,815, respectively)
    
    
    22
    
    
    
    10,171
    
    
    
    15,425Database and content (net of accumulated amortization of $4,883
and $3,193, respectively)
    
    
    25
    
    
    
    4,597
    
    
    
    6,287Computer software (net of accumulated amortization of $6,839
and $4,898, respectively)
    
    
    12
    
    
    
    2,163
    
    
    
    4,189Student lists (net of accumulated amortization of $7,343 and
$5,806, respectively)
    
    
    5
    
    
    
    854
    
    
    
    2,391Other (net of accumulated amortization of $89 and $71, respectively)
    
    
    89
    
    
    
    185
    
    
    
    203Loan origination rights (net of accumulated amortization of $8,180)
    
    
    
    
    
    
    
    
    
    
    8,473Total  amortizable intangible assets
    
    81 months
    
    
    83,565
    
    
    
    98,638Unamortizable intangible assets  trade names
    
    
    
    
    
    
    
    
    
    
    14,192$
    83,565
    
    
    
    112,830
  Operating
    
    
    ImpairmentAsset
    
    segment
    
    
    chargeAmortizable intangible assets:Covenants not to compete
    
    Student Loan and Guaranty Servicing
    
    $
    4,689Covenants not to compete
    
    Asset Generation and Management
    
    
    336Loan origination rights
    
    Asset Generation and Management
    
    
    8,336Computer software
    
    Asset Generation and Management
    
    
    12Goodwill
    
    Asset Generation and Management
    
    
    667Property and equipment
    
    Student Loan and Guaranty Servicing
    
    
    385Property and equipment
    
    Corporate activities
    
    
    4,409Total impairment charge
    
    
    
    
    
    $
    18,834
    12




---



##### Table of Contents



2008
    
    $
    6,5112009
    
    
    22,3192010
    
    
    15,9852011
    
    
    10,0312012
    
    
    9,0292013 and thereafter
    
    
    19,690$
    83,565
  TuitionPayment
    
    
    Enrollment
    
    
    Software
    
    
    AssetStudent Loan
    
    
    Processing
    
    
    Services
    
    
    and
    
    
    Generationand Guaranty
    
    
    and Campus
    
    
    and List
    
    
    Technical
    
    
    andServicing
    
    
    Commerce
    
    
    Management
    
    
    Services
    
    
    Management
    
    
    TotalBalance as of December 31, 2007
    
    $
    
    
    
    
    58,086
    
    
    
    55,463
    
    
    
    8,596
    
    
    
    42,550
    
    
    
    164,695Additional
contingent
consideration paid
(a)
    
    
    
    
    
    
    
    
    
    
    11,150
    
    
    
    
    
    
    
    
    
    
    
    11,150Impairment charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (667
    )
    
    
    (667
    )Balance as of March 31, 2008 (b)
    
    $
    
    
    
    
    58,086
    
    
    
    66,613
    
    
    
    8,596
    
    
    
    41,883
    
    
    
    175,178
 (a)
    
    In January 2008, the Company paid $18.0 million (of which $6.8 million was
accrued as of December 31, 2007) of additional consideration related to its 2005
acquisitions of Student Marketing Group, Inc. and National Honor Roll, L.L.C. This
payment satisfies all of the Companys obligations related to the contingencies per the
terms of the purchase agreement.(b)
    
    During the quarters ended June 30, 2008 and September 30, 2008, there was no
change in goodwill.  13




---



##### Table of Contents



7. Bonds and Notes Payable
  As of September 30, 2008Carrying
    
    
    Interest rateamount
    
    
    range
    
    
    Final maturityVariable-rate bonds and notes (a):Bonds and notes based on indices
    
    $
    20,891,535
    
    
    
    2.79% - 5.07%
    
    
    
    09/25/13 - 06/25/41Bonds and notes based on auction or remarketing (b)
    
    
    2,771,445
    
    
    
    0.00% - 9.01%
    
    
    
    11/01/09 - 07/01/43Total variable-rate bonds
and notes
    
    
    23,662,980Commercial paper  FFELP facility (c)
    
    
    2,525,410
    
    
    
    2.54% - 3.94%
    
    
    
    05/09/10Commercial paper  private loan facility (c)
    
    
    132,020
    
    
    
    3.14%
    
    
    
    03/14/09Fixed-rate bonds and notes (a)
    
    
    205,435
    
    
    
    5.30% - 6.68%
    
    
    
    11/01/09 - 05/01/29Unsecured fixed rate debt
    
    
    475,000
    
    
    5.13% and 7.40%
    
    06/01/10 and 09/15/61Unsecured line of credit
    
    
    645,000
    
    
    
    2.90% - 3.65%
    
    
    
    05/08/12Department of Education Participation
    
    
    263,920
    
    
    
    3.25%
    
    
    
    09/30/09Other borrowings
    
    
    95,070
    
    
    
    4.09% - 5.10%
    
    
    
    05/22/09 - 11/01/15$
    28,004,835
 As of December 31, 2007Carrying
    
    
    Interest rateamount
    
    
    range
    
    
    Final maturityVariable-rate bonds and notes (a):Bonds and notes based on indices
    
    $
    17,508,810
    
    
    
    4.73% - 5.78%
    
    
    
    09/25/12 - 06/25/41Bonds and notes based on auction or remarketing
    
    
    2,905,295
    
    
    
    2.96% - 7.25%
    
    
    
    11/01/09 - 07/01/43Total variable-rate bonds and notes
    
    
    20,414,105Commercial paper  FFELP facility (c)
    
    
    6,629,109
    
    
    
    5.22% - 5.98%
    
    
    
    05/09/10Commercial paper  private loan facility (c)
    
    
    226,250
    
    
    
    5.58%
    
    
    
    03/14/09Fixed-rate bonds and notes (a)
    
    
    214,476
    
    
    
    5.20% - 6.68%
    
    
    
    11/01/09 - 05/01/29Unsecured fixed rate debt
    
    
    475,000
    
    
    5.13% and 7.40%
    
    06/01/10 and 09/15/61Unsecured line of credit
    
    
    80,000
    
    
    
    5.40% - 5.53%
    
    
    
    05/08/12Other borrowings
    
    
    76,889
    
    
    
    4.65% - 5.20%
    
    
    
    09/28/08 - 11/01/15$
    28,115,829
 (a)
    
    Issued in asset-backed securitizations.(b)
    
    As of September 30, 2008, the Company had $165 million of
bonds based on an auction rate of 0%, due to the Maximum Rate auction
provisions in the underlying documents for such financings. The Maximum
Rate provisions include multiple components, one of which is based on
T-bill rates. The T-bill component calculation for these bonds produced
negative rates, which resulted in auction rates of zero percent for the
applicable period.(c)
    
    Loan warehouse facilities. Secured Financing Transactions
    14




---



##### Table of Contents



Loan warehouse facilities
  FFELP Warehouse facility
       Private Loan Warehouse Facility
  Commercial Paper Warehouse Program
   15




---



##### Table of Contents



Department of Educations Loan Participation and Purchase Commitment Programs
    Union Bank Participation Agreement
 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
 Asset-backed Securitizations
  
  16




---



##### Table of Contents



Unsecured Lines of Credit
   (i)
    
    A minimum consolidated net worth;(ii)
    
    A minimum adjusted EBITDA to corporate debt interest (over the last four rolling quarters);(iii)
    
    A limitation on subsidiary indebtedness; and(iv)
    
    A limitation on the percentage of non-guaranteed loans in the Companys portfolio.
  17




---



##### Table of Contents



Other Borrowings
  8. Derivative Financial Instruments
  Interest Rate Swaps
  variable-rate
   18




---



##### Table of Contents



Weightedaverage fixedNotional
    
    
    rate paid byMaturity
    
    Amount
    
    
    the Company (a)2009
    
    $
    500,000
    
    
    
    4.08
    %2010
    
    
    500,000
    
    
    
    3.84$
    1,000,000
    
    
    
    3.96
    %
 (a)
    
    For all interest rate derivatives for which the Company pays a fixed rate, the
Company receives discrete three-month LIBOR.  Basis Swaps
  NotionalMaturity
    
    Amounts2008
    
    $
    1,000,0002009
    
    
    1,000,0002010
    
    
    5,500,0002011
    
    
    2,700,0002012
    
    
    2,400,000$
    12,600,000
  Cross-Currency Interest Rate Swaps
  
 Accounting for Derivative Financial Instruments
   19




---



##### Table of Contents



As of
    
    
    As ofSeptember 30, 2008
    
    
    December 31, 2007Interest rate swaps
    
    $
    (5,579
    )
    
    
    (2,695
    )Basis swaps
    
    
    (17,082
    )
    
    
    27,525Cross-currency interest rate
swaps
    
    
    154,473
    
    
    
    191,756Net fair value
    
    $
    131,812
    
    
    
    216,586
   Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Interest rate swaps
    
    $
    (3,176
    )
    
    
    1,729
    
    
    
    (14,194
    )
    
    
    16,803Basis swaps
    
    
    (3,999
    )
    
    
    (2,608
    )
    
    
    41,605
    
    
    
    (2,489
    )Cross-currency interest rate swaps
    
    
    7,963
    
    
    
    (1,457
    )
    
    
    18,577
    
    
    
    (7,214
    )Derivative settlements received (paid), net
    
    $
    788
    
    
    
    (2,336
    )
    
    
    45,988
    
    
    
    7,100
   9. Fair Value
 Fair Value Measurements
   20




---



##### Table of Contents




    
    Level 1: Quoted prices for identicalinstruments in active markets. The types of
financial instruments included in Level 1 are highly liquid instruments with quoted prices.
 
    
    Level 2: Quoted prices for similarinstruments in active markets, quoted prices for
identical or similar instruments in markets that are not active; and model derived
valuations whose inputs are observable or whose primary value drivers are observable.
 
    
    Level 3: Instruments whose primary value drivers are unobservable. Inputs are developed
based on the best information available; however, significant judgment is required by
management in developing the inputs.
  As of September 30, 2008Level 1
    
    
    Level 2
    
    
    TotalAssets:Other assets (a)
    
    $
    5,477
    
    
    
    5,129
    
    
    
    10,606Fair value of derivative instruments (b)
    
    
    
    
    
    
    154,741
    
    
    
    154,741Total assets
    
    $
    5,477
    
    
    
    159,870
    
    
    
    165,347Liabilities:Fair value of derivative instruments (b)
    
    $
    
    
    
    
    22,929
    
    
    
    22,929Other liabilities (c)
    
    
    
    
    
    
    9,600
    
    
    
    9,600Total liabilities
    
    $
    
    
    
    
    32,529
    
    
    
    32,529
 As of December 31, 2007Level 1
    
    
    Level 2
    
    
    TotalAssets:Fair value of derivative instruments (b)
    
    $
    
    
    
    
    222,471
    
    
    
    222,471Total assets
    
    $
    
    
    
    
    222,471
    
    
    
    222,471Liabilities:Fair value of derivative instruments (b)
    
    $
    
    
    
    
    5,885
    
    
    
    5,885Other liabilities (c)
    
    
    
    
    
    
    6,117
    
    
    
    6,117Total liabilities
    
    $
    
    
    
    
    12,002
    
    
    
    12,002
 (a)
    
    Other assets includes investments recorded at fair value on a recurring basis.
Fair value measurement is based upon quoted prices. Level 1 investments include
investments traded on an active exchange, such as the New York Stock Exchange, and U.S.
Treasury securities that are traded by dealers or brokers in active over-the-counter
markets. Level 2 investments include corporate debt securities.(b)
    
    All derivatives are accounted for at fair value in the financial statements. The
fair values of derivative financial instruments are determined by derivative pricing
models using the stated terms of the contracts and observable yield curves, forward
foreign currency exchange rates, and volatilities from active markets. It is the
Companys policy to compare its derivative fair values to those received by its
counterparties in order to validate the models outputs. Fair value of derivative
instruments is comprised of market value less accrued interest and excludes collateral.(c)
    
    Other liabilities includes put options valued using a Black-Scholes pricing model
using the stated terms of the contracts and observable inputs including the Companys
common stock volatility and dividend yield and a risk-free interest rate over the
expected term of the option. 10. Earnings per Common Share
 Earnings
Per Share
  21




---



##### Table of Contents



Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Weighted average shares outstanding
    
    
    49,525,674
    
    
    
    49,320,629
    
    
    
    49,472,020
    
    
    
    49,912,506Less: Nonvested restricted stock 
vesting solely upon continued service
    
    
    349,238
    
    
    
    302,538
    
    
    
    362,680
    
    
    
    101,954Weighted average shares outstanding used
to compute basic EPS
    
    
    49,176,436
    
    
    
    49,018,091
    
    
    
    49,109,340
    
    
    
    49,810,552Dilutive effect of nonvested restricted stock
    
    
    21,366
    
    
    
    
    
    
    
    
    
    
    
    500Weighted average shares used to compute diluted EPS
    
    
    49,197,802
    
    
    
    49,018,091
    
    
    
    49,109,340
    
    
    
    49,811,052
  11. Segment Reporting
 Disclosures about Segments of
an Enterprise and Related Information
     22




---



##### Table of Contents



Fee-Based Operating Segments
 Student Loan and Guaranty Servicing
  
    
    Origination and servicing of FFELP loans;
 
    
    Servicing of non-federally insured student loans; and
 
    
    Servicing and support outsourcing for guaranty agencies.
 Tuition Payment Processing and Campus Commerce
  Enrollment Services and List Management
  Software and Technical Services
  Asset Generation and Management Operating Segment
  Segment Operating Results  Base Net Income
   23




---



##### Table of Contents



Segment Results and Reconciliations to GAAP
 Three months ended September 30, 2008Fee-BasedStudent
    
    
    Tuition
    
    
    Enrollment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Base netLoan
    
    
    Payment
    
    
    Services
    
    
    Software
    
    
    
    
    
    
    Asset
    
    
    Corporate
    
    
    
    
    
    
    incomeand
    
    
    Processing
    
    
    and
    
    
    and
    
    
    Total
    
    
    Generation
    
    
    Activity
    
    
    Eliminations
    
    
    Adjustments
    
    
    GAAPGuaranty
    
    
    and Campus
    
    
    List
    
    
    Technical
    
    
    Fee-
    
    
    and
    
    
    and
    
    
    and
    
    
    to GAAP
    
    
    Results ofServicing
    
    
    Commerce
    
    
    Management
    
    
    Services
    
    
    Based
    
    
    Management
    
    
    Overhead
    
    
    Reclassifications
    
    
    Results
    
    
    OperationsTotal interest income
    
    $
    304
    
    
    
    396
    
    
    
    6
    
    
    
    
    
    
    
    706
    
    
    
    290,039
    
    
    
    2,010
    
    
    
    (749
    )
    
    
    1,580
    
    
    
    293,586Interest expense
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    224,272
    
    
    
    10,492
    
    
    
    (749
    )
    
    
    
    
    
    
    234,016Net interest income (loss)
    
    
    304
    
    
    
    396
    
    
    
    5
    
    
    
    
    
    
    
    705
    
    
    
    65,767
    
    
    
    (8,482
    )
    
    
    
    
    
    
    1,580
    
    
    
    59,570Less provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,000Net interest income (loss) after provision
for loan losses
    
    
    304
    
    
    
    396
    
    
    
    5
    
    
    
    
    
    
    
    705
    
    
    
    58,767
    
    
    
    (8,482
    )
    
    
    
    
    
    
    1,580
    
    
    
    52,570Other income (expense):Loan and guaranty servicing income
    
    
    30,769
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,769
    
    
    
    (136
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,633Other fee-based income
    
    
    
    
    
    
    11,861
    
    
    
    29,859
    
    
    
    
    
    
    
    41,720
    
    
    
    4,167
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,887Software services income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,217
    
    
    
    4,217
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,217Other income
    
    
    6
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    (88
    )
    
    
    1,323
    
    
    
    
    
    
    
    
    
    
    
    1,242Intersegment revenue
    
    
    18,402
    
    
    
    58
    
    
    
    2
    
    
    
    1,660
    
    
    
    20,122
    
    
    
    
    
    
    
    15,671
    
    
    
    (35,793
    )
    
    
    
    
    
    
    Derivative market value, foreign currency,
and put option adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,085
    
    
    
    6,085Derivative settlements, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    789
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    789Total other income (expense)
    
    
    49,177
    
    
    
    11,920
    
    
    
    29,861
    
    
    
    5,877
    
    
    
    96,835
    
    
    
    4,732
    
    
    
    16,994
    
    
    
    (35,793
    )
    
    
    6,085
    
    
    
    88,853Operating expenses:Salaries and benefits
    
    
    13,876
    
    
    
    6,236
    
    
    
    5,805
    
    
    
    4,138
    
    
    
    30,055
    
    
    
    1,980
    
    
    
    14,179
    
    
    
    (1,952
    )
    
    
    477
    
    
    
    44,739Other expenses
    
    
    10,632
    
    
    
    2,132
    
    
    
    20,416
    
    
    
    568
    
    
    
    33,748
    
    
    
    5,354
    
    
    
    13,477
    
    
    
    (247
    )
    
    
    6,598
    
    
    
    58,930Intersegment expenses
    
    
    11,940
    
    
    
    288
    
    
    
    1,509
    
    
    
    826
    
    
    
    14,563
    
    
    
    18,200
    
    
    
    831
    
    
    
    (33,594
    )
    
    
    
    
    
    
    Total operating expenses
    
    
    36,448
    
    
    
    8,656
    
    
    
    27,730
    
    
    
    5,532
    
    
    
    78,366
    
    
    
    25,534
    
    
    
    28,487
    
    
    
    (35,793
    )
    
    
    7,075
    
    
    
    103,669Income (loss) before income taxes
    
    
    13,033
    
    
    
    3,660
    
    
    
    2,136
    
    
    
    345
    
    
    
    19,174
    
    
    
    37,965
    
    
    
    (19,975
    )
    
    
    
    
    
    
    590
    
    
    
    37,754Income tax expense (benefit) (a)
    
    
    4,823
    
    
    
    1,354
    
    
    
    790
    
    
    
    128
    
    
    
    7,095
    
    
    
    14,047
    
    
    
    (7,391
    )
    
    
    
    
    
    
    218
    
    
    
    13,969Net income (loss) from
continuing operations
    
    
    8,210
    
    
    
    2,306
    
    
    
    1,346
    
    
    
    217
    
    
    
    12,079
    
    
    
    23,918
    
    
    
    (12,584
    )
    
    
    
    
    
    
    372
    
    
    
    23,785Income from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    8,210
    
    
    
    2,306
    
    
    
    1,346
    
    
    
    217
    
    
    
    12,079
    
    
    
    23,918
    
    
    
    (12,584
    )
    
    
    
    
    
    
    372
    
    
    
    23,785
 (a)
    
    Beginning in 2008, the consolidated effective tax rate for each applicable quarterly period is used to calculate income taxes for each operating segment.  24




---



##### Table of Contents



Three months ended September 30, 2007Fee-BasedStudent
    
    
    Tuition
    
    
    Enrollment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Base netLoan
    
    
    Payment
    
    
    Services
    
    
    Software
    
    
    
    
    
    
    Asset
    
    
    Corporate
    
    
    
    
    
    
    incomeand
    
    
    Processing
    
    
    and
    
    
    and
    
    
    Total
    
    
    Generation
    
    
    Activity
    
    
    Eliminations
    
    
    Adjustments
    
    
    GAAPGuaranty
    
    
    and Campus
    
    
    List
    
    
    Technical
    
    
    Fee-
    
    
    and
    
    
    and
    
    
    and
    
    
    to GAAP
    
    
    Results ofServicing
    
    
    Commerce
    
    
    Management
    
    
    Services
    
    
    Based
    
    
    Management
    
    
    Overhead
    
    
    Reclassifications
    
    
    Results
    
    
    OperationsTotal interest income
    
    $
    1,182
    
    
    
    990
    
    
    
    110
    
    
    
    
    
    
    
    2,282
    
    
    
    454,053
    
    
    
    1,875
    
    
    
    (533
    )
    
    
    597
    
    
    
    458,274Interest expense
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    384,793
    
    
    
    9,614
    
    
    
    (533
    )
    
    
    
    
    
    
    393,875Net interest income (loss)
    
    
    1,182
    
    
    
    990
    
    
    
    109
    
    
    
    
    
    
    
    2,281
    
    
    
    69,260
    
    
    
    (7,739
    )
    
    
    
    
    
    
    597
    
    
    
    64,399Less provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,340
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,340Net interest income (loss) after provision
for loan losses
    
    
    1,182
    
    
    
    990
    
    
    
    109
    
    
    
    
    
    
    
    2,281
    
    
    
    50,920
    
    
    
    (7,739
    )
    
    
    
    
    
    
    597
    
    
    
    46,059Other income (expense):Loan and guaranty servicing income
    
    
    32,870
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,870
    
    
    
    170
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,040Other fee-based income
    
    
    
    
    
    
    10,316
    
    
    
    23,471
    
    
    
    
    
    
    
    33,787
    
    
    
    3,526
    
    
    
    712
    
    
    
    
    
    
    
    
    
    
    
    38,025Software services income
    
    
    
    
    
    
    
    
    
    
    169
    
    
    
    5,257
    
    
    
    5,426
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,426Other income
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    1,181
    
    
    
    5,816
    
    
    
    
    
    
    
    
    
    
    
    7,028Gain on sale of loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    492
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    492Intersegment revenue
    
    
    22,237
    
    
    
    168
    
    
    
    (37
    )
    
    
    4,805
    
    
    
    27,173
    
    
    
    
    
    
    
    1,492
    
    
    
    (28,665
    )
    
    
    
    
    
    
    Derivative market value, foreign currency,
and put option adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,449
    
    
    
    18,449Derivative settlements, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,065
    )
    
    
    1,729
    
    
    
    
    
    
    
    
    
    
    
    (2,336
    )Total other income (expense)
    
    
    55,107
    
    
    
    10,515
    
    
    
    23,603
    
    
    
    10,062
    
    
    
    99,287
    
    
    
    1,304
    
    
    
    9,749
    
    
    
    (28,665
    )
    
    
    18,449
    
    
    
    100,124Operating expenses:Salaries and benefits
    
    
    21,961
    
    
    
    5,312
    
    
    
    8,095
    
    
    
    6,537
    
    
    
    41,905
    
    
    
    6,154
    
    
    
    9,691
    
    
    
    2,292
    
    
    
    503
    
    
    
    60,545Restructure expense- severance and contract
termination costs
    
    
    1,231
    
    
    
    
    
    
    
    737
    
    
    
    58
    
    
    
    2,026
    
    
    
    1,921
    
    
    
    1,009
    
    
    
    (4,956
    )
    
    
    
    
    
    
    Impairment expense
    
    
    
    
    
    
    
    
    
    
    11,401
    
    
    
    
    
    
    
    11,401
    
    
    
    28,291
    
    
    
    9,812
    
    
    
    
    
    
    
    
    
    
    
    49,504Other expenses
    
    
    8,565
    
    
    
    2,029
    
    
    
    13,809
    
    
    
    689
    
    
    
    25,092
    
    
    
    7,429
    
    
    
    19,822
    
    
    
    168
    
    
    
    10,885
    
    
    
    63,396Intersegment expenses
    
    
    1,613
    
    
    
    (15
    )
    
    
    67
    
    
    
    147
    
    
    
    1,812
    
    
    
    20,924
    
    
    
    3,433
    
    
    
    (26,169
    )
    
    
    
    
    
    
    Total operating expenses
    
    
    33,370
    
    
    
    7,326
    
    
    
    34,109
    
    
    
    7,431
    
    
    
    82,236
    
    
    
    64,719
    
    
    
    43,767
    
    
    
    (28,665
    )
    
    
    11,388
    
    
    
    173,445Income (loss) before income taxes
    
    
    22,919
    
    
    
    4,179
    
    
    
    (10,397
    )
    
    
    2,631
    
    
    
    19,332
    
    
    
    (12,495
    )
    
    
    (41,757
    )
    
    
    
    
    
    
    7,658
    
    
    
    (27,262
    )Income tax expense (benefit) (a)
    
    
    8,709
    
    
    
    1,588
    
    
    
    (3,951
    )
    
    
    1,000
    
    
    
    7,346
    
    
    
    (4,748
    )
    
    
    (16,233
    )
    
    
    
    
    
    
    2,971
    
    
    
    (10,664
    )Net income (loss) from
continuing operations
    
    
    14,210
    
    
    
    2,591
    
    
    
    (6,446
    )
    
    
    1,631
    
    
    
    11,986
    
    
    
    (7,747
    )
    
    
    (25,524
    )
    
    
    
    
    
    
    4,687
    
    
    
    (16,598
    )Loss from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    909
    
    
    
    909Net income (loss)
    
    $
    14,210
    
    
    
    2,591
    
    
    
    (6,446
    )
    
    
    1,631
    
    
    
    11,986
    
    
    
    (7,747
    )
    
    
    (25,524
    )
    
    
    
    
    
    
    5,596
    
    
    
    (15,689
    )
 (a)
    
    Income taxes are based on 38% of net income (loss) before tax for the individual operating segment.  25




---



##### Table of Contents



Nine months ended September 30, 2008Fee-BasedStudent
    
    
    Tuition
    
    
    Enrollment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Base netLoan
    
    
    Payment
    
    
    Services
    
    
    Software
    
    
    
    
    
    
    Asset
    
    
    Corporate
    
    
    
    
    
    
    incomeand
    
    
    Processing
    
    
    and
    
    
    and
    
    
    Total
    
    
    Generation
    
    
    Activity
    
    
    Eliminations
    
    
    Adjustments
    
    
    GAAPGuaranty
    
    
    and Campus
    
    
    List
    
    
    Technical
    
    
    Fee-
    
    
    and
    
    
    and
    
    
    and
    
    
    to GAAP
    
    
    Results ofServicing
    
    
    Commerce
    
    
    Management
    
    
    Services
    
    
    Based
    
    
    Management
    
    
    Overhead
    
    
    Reclassifications
    
    
    Results
    
    
    OperationsTotal interest income
    
    $
    1,160
    
    
    
    1,471
    
    
    
    16
    
    
    
    
    
    
    
    2,647
    
    
    
    892,690
    
    
    
    4,781
    
    
    
    (1,389
    )
    
    
    42,325
    
    
    
    941,054Interest expense
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    3
    
    
    
    762,689
    
    
    
    30,318
    
    
    
    (1,389
    )
    
    
    
    
    
    
    791,621Net interest income (loss)
    
    
    1,160
    
    
    
    1,471
    
    
    
    13
    
    
    
    
    
    
    
    2,644
    
    
    
    130,001
    
    
    
    (25,537
    )
    
    
    
    
    
    
    42,325
    
    
    
    149,433Less provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,000Net interest income (loss) after provision
for loan losses
    
    
    1,160
    
    
    
    1,471
    
    
    
    13
    
    
    
    
    
    
    
    2,644
    
    
    
    112,001
    
    
    
    (25,537
    )
    
    
    
    
    
    
    42,325
    
    
    
    131,433Other income (expense):Loan and guaranty servicing income
    
    
    81,624
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,624
    
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,650Other fee-based income
    
    
    
    
    
    
    35,975
    
    
    
    83,148
    
    
    
    
    
    
    
    119,123
    
    
    
    13,494
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    132,617Software services income
    
    
    
    
    
    
    
    
    
    
    37
    
    
    
    15,828
    
    
    
    15,865
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,865Other income
    
    
    44
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    49
    
    
    
    293
    
    
    
    3,956
    
    
    
    
    
    
    
    
    
    
    
    4,298Loss on sale of loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47,426
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47,426
    )Intersegment revenue
    
    
    57,008
    
    
    
    242
    
    
    
    2
    
    
    
    4,993
    
    
    
    62,245
    
    
    
    
    
    
    
    46,844
    
    
    
    (109,089
    )
    
    
    
    
    
    
    Derivative market value, foreign currency,
and put option adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    466
    
    
    
    
    
    
    
    
    
    
    
    (35,987
    )
    
    
    (35,521
    )Derivative settlements, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,954
    
    
    
    
    
    
    
    
    
    
    
    (9,965
    )
    
    
    45,989Total other income (expense)
    
    
    138,676
    
    
    
    36,222
    
    
    
    83,187
    
    
    
    20,821
    
    
    
    278,906
    
    
    
    22,807
    
    
    
    50,800
    
    
    
    (109,089
    )
    
    
    (45,952
    )
    
    
    197,472Operating expenses:Salaries and benefits
    
    
    40,365
    
    
    
    17,450
    
    
    
    18,701
    
    
    
    14,031
    
    
    
    90,547
    
    
    
    6,157
    
    
    
    41,581
    
    
    
    1,323
    
    
    
    2,523
    
    
    
    142,131Restructure expense  severance and contract
termination costs
    
    
    747
    
    
    
    
    
    
    
    282
    
    
    
    487
    
    
    
    1,516
    
    
    
    1,845
    
    
    
    3,746
    
    
    
    (7,107
    )
    
    
    
    
    
    
    Impairment expense
    
    
    5,074
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,074
    
    
    
    9,351
    
    
    
    4,409
    
    
    
    
    
    
    
    
    
    
    
    18,834Other expenses
    
    
    27,130
    
    
    
    6,743
    
    
    
    55,863
    
    
    
    1,901
    
    
    
    91,637
    
    
    
    15,793
    
    
    
    42,263
    
    
    
    51
    
    
    
    19,719
    
    
    
    169,463Intersegment expenses
    
    
    35,040
    
    
    
    1,045
    
    
    
    4,936
    
    
    
    1,562
    
    
    
    42,583
    
    
    
    57,754
    
    
    
    3,019
    
    
    
    (103,356
    )
    
    
    
    
    
    
    Total operating expenses
    
    
    108,356
    
    
    
    25,238
    
    
    
    79,782
    
    
    
    17,981
    
    
    
    231,357
    
    
    
    90,900
    
    
    
    95,018
    
    
    
    (109,089
    )
    
    
    22,242
    
    
    
    330,428Income (loss) before income taxes
    
    
    31,480
    
    
    
    12,455
    
    
    
    3,418
    
    
    
    2,840
    
    
    
    50,193
    
    
    
    43,908
    
    
    
    (69,755
    )
    
    
    
    
    
    
    (25,869
    )
    
    
    (1,523
    )Income tax expense (benefit) (a)
    
    
    10,542
    
    
    
    4,081
    
    
    
    1,187
    
    
    
    902
    
    
    
    16,712
    
    
    
    15,889
    
    
    
    (22,824
    )
    
    
    
    
    
    
    (7,984
    )
    
    
    1,793Net income (loss) from
continuing operations
    
    
    20,938
    
    
    
    8,374
    
    
    
    2,231
    
    
    
    1,938
    
    
    
    33,481
    
    
    
    28,019
    
    
    
    (46,931
    )
    
    
    
    
    
    
    (17,885
    )
    
    
    (3,316
    )Income from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    981
    
    
    
    981Net income (loss)
    
    $
    20,938
    
    
    
    8,374
    
    
    
    2,231
    
    
    
    1,938
    
    
    
    33,481
    
    
    
    28,019
    
    
    
    (46,931
    )
    
    
    
    
    
    
    (16,904
    )
    
    
    (2,335
    )
 (a)
    
    Beginning in 2008, the consolidated effective tax rate for each applicable quarterly period is used to calculate income taxes for each operating segment.  26




---



##### Table of Contents



Nine months ended September 30, 2007Fee-BasedStudent
    
    
    Tuition
    
    
    Enrollment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Base netLoan
    
    
    Payment
    
    
    Services
    
    
    Software
    
    
    
    
    
    
    Asset
    
    
    Corporate
    
    
    
    
    
    
    incomeand
    
    
    Processing
    
    
    and
    
    
    and
    
    
    Total
    
    
    Generation
    
    
    Activity
    
    
    Eliminations
    
    
    Adjustments
    
    
    GAAPGuaranty
    
    
    and Campus
    
    
    List
    
    
    Technical
    
    
    Fee-
    
    
    and
    
    
    and
    
    
    and
    
    
    to GAAP
    
    
    Results ofServicing
    
    
    Commerce
    
    
    Management
    
    
    Services
    
    
    Based
    
    
    Management
    
    
    Overhead
    
    
    Reclassifications
    
    
    Results
    
    
    OperationsTotal interest income
    
    $
    4,607
    
    
    
    2,670
    
    
    
    290
    
    
    
    18
    
    
    
    7,585
    
    
    
    1,301,947
    
    
    
    6,230
    
    
    
    (3,737
    )
    
    
    597
    
    
    
    1,312,622Interest expense
    
    
    
    
    
    
    7
    
    
    
    5
    
    
    
    
    
    
    
    12
    
    
    
    1,084,792
    
    
    
    31,196
    
    
    
    (3,737
    )
    
    
    
    
    
    
    1,112,263Net interest income (loss)
    
    
    4,607
    
    
    
    2,663
    
    
    
    285
    
    
    
    18
    
    
    
    7,573
    
    
    
    217,155
    
    
    
    (24,966
    )
    
    
    
    
    
    
    597
    
    
    
    200,359Less provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,628
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,628Net interest income (loss) after provision
for loan losses
    
    
    4,607
    
    
    
    2,663
    
    
    
    285
    
    
    
    18
    
    
    
    7,573
    
    
    
    193,527
    
    
    
    (24,966
    )
    
    
    
    
    
    
    597
    
    
    
    176,731Other income (expense):Loan and guaranty servicing income
    
    
    94,828
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94,828
    
    
    
    288
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    95,116Other fee-based income
    
    
    
    
    
    
    31,492
    
    
    
    73,341
    
    
    
    
    
    
    
    104,833
    
    
    
    10,511
    
    
    
    972
    
    
    
    
    
    
    
    
    
    
    
    116,316Software services income
    
    
    
    
    
    
    
    
    
    
    456
    
    
    
    16,566
    
    
    
    17,022
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,022Other income
    
    
    11
    
    
    
    59
    
    
    
    
    
    
    
    
    
    
    
    70
    
    
    
    4,329
    
    
    
    9,649
    
    
    
    
    
    
    
    
    
    
    
    14,048Gain on sale of loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,288
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,288Intersegment revenue
    
    
    58,821
    
    
    
    508
    
    
    
    891
    
    
    
    13,026
    
    
    
    73,246
    
    
    
    
    
    
    
    7,608
    
    
    
    (80,854
    )
    
    
    
    
    
    
    Derivative market value, foreign currency,
and put option adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,866
    
    
    
    11,866Derivative settlements, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,950
    )
    
    
    12,050
    
    
    
    
    
    
    
    
    
    
    
    7,100Total other income (expense)
    
    
    153,660
    
    
    
    32,059
    
    
    
    74,688
    
    
    
    29,592
    
    
    
    289,999
    
    
    
    13,466
    
    
    
    30,279
    
    
    
    (80,854
    )
    
    
    11,866
    
    
    
    264,756Operating expenses:Salaries and benefits
    
    
    66,988
    
    
    
    15,312
    
    
    
    26,486
    
    
    
    18,869
    
    
    
    127,655
    
    
    
    20,600
    
    
    
    34,669
    
    
    
    (2,370
    )
    
    
    1,456
    
    
    
    182,010Restructure expense- severance and contract
termination costs
    
    
    1,231
    
    
    
    
    
    
    
    737
    
    
    
    58
    
    
    
    2,026
    
    
    
    1,921
    
    
    
    1,009
    
    
    
    (4,956
    )
    
    
    
    
    
    
    Impairment expense
    
    
    
    
    
    
    
    
    
    
    11,401
    
    
    
    
    
    
    
    11,401
    
    
    
    28,291
    
    
    
    9,812
    
    
    
    
    
    
    
    
    
    
    
    49,504Other expenses
    
    
    26,219
    
    
    
    6,522
    
    
    
    42,957
    
    
    
    2,224
    
    
    
    77,922
    
    
    
    22,940
    
    
    
    58,762
    
    
    
    168
    
    
    
    24,014
    
    
    
    183,806Intersegment expenses
    
    
    8,681
    
    
    
    384
    
    
    
    252
    
    
    
    550
    
    
    
    9,867
    
    
    
    59,594
    
    
    
    4,235
    
    
    
    (73,696
    )
    
    
    
    
    
    
    Total operating expenses
    
    
    103,119
    
    
    
    22,218
    
    
    
    81,833
    
    
    
    21,701
    
    
    
    228,871
    
    
    
    133,346
    
    
    
    108,487
    
    
    
    (80,854
    )
    
    
    25,470
    
    
    
    415,320Income (loss) before income taxes
    
    
    55,148
    
    
    
    12,504
    
    
    
    (6,860
    )
    
    
    7,909
    
    
    
    68,701
    
    
    
    73,647
    
    
    
    (103,174
    )
    
    
    
    
    
    
    (13,007
    )
    
    
    26,167Income tax expense (benefit) (a)
    
    
    20,956
    
    
    
    4,752
    
    
    
    (2,607
    )
    
    
    3,006
    
    
    
    26,107
    
    
    
    27,986
    
    
    
    (40,059
    )
    
    
    
    
    
    
    (4,128
    )
    
    
    9,906Net income (loss) from
continuing operations
    
    
    34,192
    
    
    
    7,752
    
    
    
    (4,253
    )
    
    
    4,903
    
    
    
    42,594
    
    
    
    45,661
    
    
    
    (63,115
    )
    
    
    
    
    
    
    (8,879
    )
    
    
    16,261Loss from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,416
    )
    
    
    (2,416
    )Net income (loss)
    
    $
    34,192
    
    
    
    7,752
    
    
    
    (4,253
    )
    
    
    4,903
    
    
    
    42,594
    
    
    
    45,661
    
    
    
    (63,115
    )
    
    
    
    
    
    
    (11,295
    )
    
    
    13,845
 (a)
    
    Income taxes are based on 38% of net income (loss) before tax for the individual operating segment.  
    
    Income earned on certain investment activities;
 
    
    Interest expense incurred on unsecured debt transactions;
 
    
    Other products and service offerings that are not considered operating segments; and
 
    
    Corporate activities and overhead functions such as executive management, human
resources, accounting and finance, legal, marketing, and corporate technology support.
  27




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##### Table of Contents



Student
    
    
    Tuition
    
    
    EnrollmentLoan
    
    
    Payment
    
    
    Services
    
    
    Software
    
    
    Asset
    
    
    Corporateand
    
    
    Processing
    
    
    and
    
    
    and
    
    
    Generation
    
    
    ActivityGuaranty
    
    
    and Campus
    
    
    List
    
    
    Technical
    
    
    and
    
    
    andServicing
    
    
    Commerce
    
    
    Management
    
    
    Services
    
    
    Management
    
    
    Overhead
    
    
    TotalThree months ended September 30, 2008Derivative market value, foreign currency, and
put option adjustments (1)
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,030
    )
    
    
    2,945
    
    
    
    (6,085
    )Amortization of intangible assets (2)
    
    
    1,165
    
    
    
    1,889
    
    
    
    3,258
    
    
    
    286
    
    
    
    
    
    
    
    
    
    
    
    6,598Compensation related to business combinations (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    477
    
    
    
    477Variable-rate floor income, net of settlements on derivatives (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,580
    )
    
    
    
    
    
    
    (1,580
    )Income (loss) from discontinued operations, net of tax (5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net tax effect (6)
    
    
    (432
    )
    
    
    (699
    )
    
    
    (1,205
    )
    
    
    (106
    )
    
    
    3,926
    
    
    
    (1,266
    )
    
    
    218Total adjustments to GAAP
    
    $
    733
    
    
    
    1,190
    
    
    
    2,053
    
    
    
    180
    
    
    
    (6,684
    )
    
    
    2,156
    
    
    
    (372
    )Three months ended September 30, 2007Derivative market value, foreign currency, and
put option adjustments (1)
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,017
    )
    
    
    1,568
    
    
    
    (18,449
    )Amortization of intangible assets (2)
    
    
    1,350
    
    
    
    1,434
    
    
    
    6,442
    
    
    
    287
    
    
    
    1,372
    
    
    
    
    
    
    
    10,885Compensation related to business combinations (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    503
    
    
    
    503Variable-rate floor income, net of settlements on derivatives (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (597
    )
    
    
    
    
    
    
    (597
    )Income (loss) from discontinued operations, net of tax (5)
    
    
    (909
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (909
    )Net tax effect (6)
    
    
    (513
    )
    
    
    (545
    )
    
    
    (2,448
    )
    
    
    (109
    )
    
    
    7,312
    
    
    
    (726
    )
    
    
    2,971Total adjustments to GAAP
    
    $
    (72
    )
    
    
    889
    
    
    
    3,994
    
    
    
    178
    
    
    
    (11,930
    )
    
    
    1,345
    
    
    
    (5,596
    )Nine months ended September 30, 2008Derivative market value, foreign currency, and
put option adjustments (1)
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,504
    
    
    
    3,483
    
    
    
    35,987Amortization of intangible assets (2)
    
    
    3,586
    
    
    
    5,937
    
    
    
    9,193
    
    
    
    858
    
    
    
    145
    
    
    
    
    
    
    
    19,719Compensation related to business combinations (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,523
    
    
    
    2,523Variable-rate floor income, net of settlements on derivatives (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,360
    )
    
    
    
    
    
    
    (32,360
    )Income (loss) from discontinued operations, net of tax (5)
    
    
    (981
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (981
    )Net tax effect (6)
    
    
    (1,182
    )
    
    
    (1,954
    )
    
    
    (3,045
    )
    
    
    (284
    )
    
    
    548
    
    
    
    (2,067
    )
    
    
    (7,984
    )Total adjustments to GAAP
    
    $
    1,423
    
    
    
    3,983
    
    
    
    6,148
    
    
    
    574
    
    
    
    837
    
    
    
    3,939
    
    
    
    16,904Nine months ended September 30, 2007Derivative market value, foreign currency, and
put option adjustments (1)
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,801
    )
    
    
    (4,065
    )
    
    
    (11,866
    )Amortization of intangible assets (2)
    
    
    3,744
    
    
    
    4,372
    
    
    
    9,797
    
    
    
    904
    
    
    
    5,197
    
    
    
    
    
    
    
    24,014Compensation related to business combinations (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,456
    
    
    
    1,456Variable-rate floor income, net of settlements on derivatives (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (597
    )
    
    
    
    
    
    
    (597
    )Income (loss) from discontinued operations, net of tax (5)
    
    
    2,416
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,416Net tax effect (6)
    
    
    (1,423
    )
    
    
    (1,661
    )
    
    
    (3,723
    )
    
    
    (343
    )
    
    
    1,216
    
    
    
    1,806
    
    
    
    (4,128
    )Total adjustments to GAAP
    
    $
    4,737
    
    
    
    2,711
    
    
    
    6,074
    
    
    
    561
    
    
    
    (1,985
    )
    
    
    (803
    )
    
    
    11,295
 (1)
    
    Derivative market value, foreign currency, and put option adjustments: Base net
income excludes the periodic unrealized gains and losses that are caused by the change
in fair value on derivatives used in the Companys risk management strategy in which the
Company does not qualify for hedge treatment under GAAP. Included in base net
income are the economic effects of the Companys derivative instruments, which includes
any cash paid or received being recognized as an expense or revenue upon actual
derivative settlements. Base net income also excludes the foreign currency
transaction gains or losses caused by the re-measurement of the Companys
Euro-denominated bonds to U.S. dollars and the change in fair value of put options
issued by the Company for certain business acquisitions.(2)
    
    Amortization of intangible assets: Base net income excludes the amortization
of acquired intangibles.(3)
    
    Compensation related to business combinations: The Company has structured
certain business combinations in which the consideration paid has been dependent on the
sellers continued employment with the Company. As such, the value of the consideration
paid is recognized as compensation expense by the Company over the term of the
applicable employment agreement. Base net income excludes this expense.(4)
    
    Variable-rate floor income: Loans that reset annually on July 1 can generate
excess spread income compared with the rate based on the special allowance payment
formula in declining interest rate environments. The Company refers to this additional
income as variable-rate floor income. The Company excludes variable-rate floor income,
net of settlements paid on derivatives used to hedge student loan assets earning
variable-rate floor income, from its base net income since the timing and amount of
variable-rate floor income (if any) is uncertain, it has been eliminated by legislation
for all loans originated on and after April 1, 2006, and it is in excess of expected
spreads. In addition, because variable-rate floor income is subject to the underlying
rate for the subject loans being reset annually on July 1, it is a factor beyond the
Companys control which can affect the period-to-period comparability of results of
operations.(5)
    
    Discontinued operations: In May 2007, the Company sold EDULINX. As a result of
this transaction, the results of operations for EDULINX are reported as discontinued
operations for all periods presented. The Company presents base net income excluding
discontinued operations since the operations and cash flows of EDULINX have been
eliminated from the ongoing operations of the Company.(6)
    
    Beginning in 2008, tax effect is computed using the Companys consolidated
effective tax rate for each applicable quarterly period. In prior periods, tax effect
was computed at 38%. The change in the value of the put options for prior periods
(included in Corporate Activities and Overhead) was not tax effected as this is not
deductible for income tax purposes.  28




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS
 (Managements Discussion and Analysis of Financial Condition and Results of Operations is for the
three and nine months ended September 30, 2008 and 2007. All dollars are in thousands, except per
share amounts, unless otherwise noted).
  Forward-looking and cautionary statements
  Overview
    29




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##### Table of Contents




    
    Liquidity developments related to the Companys FFELP warehouse and unsecured line of
credit facilities and legislative developments regarding funding new loan originations;
 
    
    Strong student loan spread earned on the Companys loan portfolio;
 
    
    Increased revenue and operating margins from the Companys fee-based businesses; and
 
    
    Continued decreases in operating expenses.
 Liquidity and Legislative Developments
 FFELP Warehouse Facility and Unsecured Line of Credit
      Funding New Loan Originations
  2009-2010
 Student Loan Spread
 fixed-rate
  30




---



##### Table of Contents



Fee-based businesses
   Operating Expenses
  RESULTS OF OPERATIONS
  Net Interest Income
    
    
    Reduced special allowance payments to for-profit lenders and not-for-profit lenders
by 0.55 percentage points and 0.40 percentage points, respectively, for both Stafford
and Consolidation loans disbursed on or after October 1, 2007;
 
    
    Reduced special allowance payments to for-profit lenders and not-for-profit lenders
by 0.85 percentage points and 0.70 percentage points, respectively, for PLUS loans
disbursed on or after October 1, 2007;
 
    
    Increased origination fees paid by lenders on all FFELP loan types, from 0.5 percent
to 1.0 percent, for all loans first disbursed on or after October 1, 2007;
 
    
    Eliminated all provisions relating to Exceptional Performer status, and the monetary
benefit associated with it, effective October 1, 2007; and
 
    
    Reduces default insurance to 95 percent of the unpaid principal of such loans, for
loans first disbursed on or after October 1, 2012.
  31




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##### Table of Contents



Provision for Loan Losses
      Other Income
  Loan and Guaranty Servicing Income
  32




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##### Table of Contents



Other Fee-Based Income
 Software Services
 Operating Expenses
  Three and nine months ended September 30, 2008 compared to the three and nine months ended
September 30, 2007
 Net Interest Income
 Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    $ Change
    
    
    2008
    
    
    2007
    
    
    $ ChangeInterest income:Loan interest
    
    $
    284,468
    
    
    
    437,251
    
    
    
    (152,783
    )
    
    
    911,140
    
    
    
    1,251,391
    
    
    
    (340,251
    )Investment interest
    
    
    9,118
    
    
    
    21,023
    
    
    
    (11,905
    )
    
    
    29,914
    
    
    
    61,231
    
    
    
    (31,317
    )Total interest income
    
    
    293,586
    
    
    
    458,274
    
    
    
    (164,688
    )
    
    
    941,054
    
    
    
    1,312,622
    
    
    
    (371,568
    )Interest expense:Interest on bonds and notes payable
    
    
    234,016
    
    
    
    393,875
    
    
    
    (159,859
    )
    
    
    791,621
    
    
    
    1,112,263
    
    
    
    (320,642
    )Net interest income
    
    
    59,570
    
    
    
    64,399
    
    
    
    (4,829
    )
    
    
    149,433
    
    
    
    200,359
    
    
    
    (50,926
    )Provision for loan losses
    
    
    7,000
    
    
    
    18,340
    
    
    
    (11,340
    )
    
    
    18,000
    
    
    
    23,628
    
    
    
    (5,628
    )Net interest income after
provision for loan losses
    
    $
    52,570
    
    
    
    46,059
    
    
    
    6,511
    
    
    
    131,433
    
    
    
    176,731
    
    
    
    (45,298
    )
 
    
    Net interest income decreased for the three and nine months ended September 30, 2008
compared to 2007 as a result of the compression in the core student loan spread as
discussed in this Item 2 under Asset Generation and Management Operating Segment  Results
of Operations. Core student loan spread was 0.93% and 1.20% for the nine months ended
September 30, 2008 and 2007, respectively, and 1.02% and 1.05% for the three months ended
September 30, 2008 and 2007, respectively. The decrease was also due to an overall
decrease in cash held in 2008 compared to 2007 and lower interest rates in 2008. The
decreases to net interest income were offset by the amount of variable-rate floor income
the Company earned during these periods. During the three and nine months ended September
30, 2008, the Company earned $1.6 million and $41.7 million, respectively, of variable-rate
floor income, as compared to $0.6 million of variable-rate floor income earned during both
the three and nine months ended September 30, 2007.
 
    
    Excluding an expense of $15.7 million in September 2007 to increase the Companys
allowance for loan losses related to the increase in risk share as a result of the
elimination of the Exceptional Performer program in the third quarter of 2007, the
provision for loan losses increased for the three and nine months ended September 30, 2008
compared to 2007. The provision for loan losses for federally insured loans increased as a
result of the increase in risk share as a result of the loss of Exceptional Performer in
September 2007. The provision for loan
losses for non-federally insured loans increased primarily due to increases in
delinquencies as a result of the continued weakening of the U.S. economy.
  33




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##### Table of Contents



Other Income
 Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    $ Change
    
    
    2008
    
    
    2007
    
    
    $ ChangeLoan and guaranty servicing income
    
    $
    30,633
    
    
    
    33,040
    
    
    
    (2,407
    )
    
    
    81,650
    
    
    
    95,116
    
    
    
    (13,466
    )Other fee-based income
    
    
    45,887
    
    
    
    38,025
    
    
    
    7,862
    
    
    
    132,617
    
    
    
    116,316
    
    
    
    16,301Software services income
    
    
    4,217
    
    
    
    5,426
    
    
    
    (1,209
    )
    
    
    15,865
    
    
    
    17,022
    
    
    
    (1,157
    )Other income
    
    
    1,242
    
    
    
    7,028
    
    
    
    (5,786
    )
    
    
    4,298
    
    
    
    14,048
    
    
    
    (9,750
    )Gain (loss) on sale of loans
    
    
    
    
    
    
    492
    
    
    
    (492
    )
    
    
    (47,426
    )
    
    
    3,288
    
    
    
    (50,714
    )Derivative market value, foreign currency,
and put option adjustments
    
    
    6,085
    
    
    
    18,449
    
    
    
    (12,364
    )
    
    
    (35,521
    )
    
    
    11,866
    
    
    
    (47,387
    )Derivative settlements, net
    
    
    789
    
    
    
    (2,336
    )
    
    
    3,125
    
    
    
    45,989
    
    
    
    7,100
    
    
    
    38,889Total other income
    
    $
    88,853
    
    
    
    100,124
    
    
    
    (11,271
    )
    
    
    197,472
    
    
    
    264,756
    
    
    
    (67,284
    )
 
    
    Loan and guaranty servicing income decreased due to decreases in FFELP loan servicing
income, non-federally insured loan servicing income, and guaranty servicing income as
further discussed in this Item 2 under Student Loan and Guaranty Servicing Operating
Segment  Results of Operations.
 
    
    Other fee-based income increased due to an increase in the number of managed tuition
payment plans and an increase in campus commerce and related clients in the Tuition Payment
Processing and Campus Commerce Operating Segment, as well as an increase in lead generation
sales volume in the Enrollment Services and List Management Operating Segment.
 
    
    Software services income decreased as the result of a reduction in the number of
projects for existing customers and the loss of customers due to the legislative
developments in the student loan industry throughout 2008 in the Software and Technical
Services Operating Segment.
 
    
    Other income decreased for the three and nine months ended September 30, 2008 compared
to 2007 due to a gain of $3.9 million from the sale of an entity accounted for under the
equity method in September 2007. In addition, an agreement with
a third party ended during the third quarter of 2007 under which the Company provided administrative services to the third party for
a fee. The remaining change is a result of a decrease in income earned on certain
investment activities.
 
    
    The Company recognized a loss of $47.5 million during the first quarter of 2008 as a
result of the sale of $1.3 billion of student loans as further discussed in this Item 2
under Asset Generation and Management Operating Segment  Results of Operations.
 
    
    The change in derivative market value, foreign currency, and put option adjustments
was caused by the change in the fair value of the Companys derivative portfolio and
foreign currency rate fluctuations which are further discussed in Item 3, Quantitative and
Qualitative Disclosures about Market Risk.
 
    
    Further detail of the components of derivative settlements is included in Item 3,
Quantitative and Qualitative Disclosures about Market Risk. The Company maintains an
overall risk management strategy that incorporates the use of derivative instruments to
reduce the economic effect of interest rate volatility. Management has structured all of
the Companys derivative transactions with the intent that each is economically effective;
however, the Companys derivative instruments do not qualify for hedge accounting under
SFAS No. 133. Derivative settlements for each applicable period
should be evaluated with the Companys net interest income.
 Operating Expenses
 Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    $ Change
    
    
    2008
    
    
    2007
    
    
    $ ChangeSalaries and benefits
    
    $
    44,739
    
    
    
    55,757
    
    
    
    (11,018
    )
    
    
    136,422
    
    
    
    177,222
    
    
    
    (40,800
    )Other expenses
    
    
    58,930
    
    
    
    63,228
    
    
    
    (4,298
    )
    
    
    168,065
    
    
    
    183,638
    
    
    
    (15,573
    )Operating expenses, excluding
impairment and restructure charges
    
    
    103,669
    
    
    
    118,985
    
    
    $
    (15,316
    )
    
    
    304,487
    
    
    
    360,860
    
    
    $
    (56,373
    )Impairment expense
    
    
    
    
    
    
    39,444
    
    
    
    
    
    
    
    18,834
    
    
    
    39,444Restructure expense
    
    
    
    
    
    
    15,016
    
    
    
    
    
    
    
    7,107
    
    
    
    15,016Total operating expenses
    
    $
    103,669
    
    
    
    173,445
    
    
    
    
    
    
    
    330,428
    
    
    
    415,320
   34




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##### Table of Contents



Income Taxes
 year-to-date year-to-date
  Financial Condition as of September 30, 2008 compared to December 31, 2007
 As of
    
    
    As ofSeptember 30,
    
    
    December 31,
    
    
    Change2008
    
    
    2007
    
    
    Dollars
    
    
    PercentAssets:Student loans receivable, net
    
    $
    26,376,269
    
    
    
    26,736,122
    
    
    
    (359,853
    )
    
    
    (1.3
    )%Cash, cash equivalents, and investments
    
    
    1,454,881
    
    
    
    1,120,838
    
    
    
    334,043
    
    
    
    29.8Goodwill
    
    
    175,178
    
    
    
    164,695
    
    
    
    10,483
    
    
    
    6.4Intangible assets, net
    
    
    83,565
    
    
    
    112,830
    
    
    
    (29,265
    )
    
    
    (25.9
    )Fair value of derivative instruments
    
    
    154,741
    
    
    
    222,471
    
    
    
    (67,730
    )
    
    
    (30.4
    )Other assets
    
    
    725,381
    
    
    
    805,827
    
    
    
    (80,446
    )
    
    
    (10.0
    )Total assets
    
    $
    28,970,015
    
    
    
    29,162,783
    
    
    
    (192,768
    )
    
    
    (0.7
    )%Liabilities:Bonds and notes payable
    
    $
    28,004,835
    
    
    
    28,115,829
    
    
    
    (110,994
    )
    
    
    (0.4
    )%Fair value of derivative instruments
    
    
    22,929
    
    
    
    5,885
    
    
    
    17,044
    
    
    
    289.6Other liabilities
    
    
    332,521
    
    
    
    432,190
    
    
    
    (99,669
    )
    
    
    (23.1
    )Total liabilities
    
    
    28,360,285
    
    
    
    28,553,904
    
    
    
    (193,619
    )
    
    
    (0.7
    )Shareholders equity
    
    
    609,730
    
    
    
    608,879
    
    
    
    851
    
    
    
    0.1Total liabilities and shareholders equity
    
    $
    28,970,015
    
    
    
    29,162,783
    
    
    
    (192,768
    )
    
    
    (0.7
    )%
  OPERATING SEGMENTS
   35




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##### Table of Contents



36




---



##### Table of Contents



Segment Results and Reconciliations to GAAP
 Three months ended September 30, 2008Fee-BasedStudent
    
    
    Tuition
    
    
    Enrollment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Base netLoan
    
    
    Payment
    
    
    Services
    
    
    Software
    
    
    
    
    
    
    Asset
    
    
    Corporate
    
    
    
    
    
    
    incomeand
    
    
    Processing
    
    
    and
    
    
    and
    
    
    Total
    
    
    Generation
    
    
    Activity
    
    
    Eliminations
    
    
    Adjustments
    
    
    GAAPGuaranty
    
    
    and Campus
    
    
    List
    
    
    Technical
    
    
    Fee-
    
    
    and
    
    
    and
    
    
    and
    
    
    to GAAP
    
    
    Results ofServicing
    
    
    Commerce
    
    
    Management
    
    
    Services
    
    
    Based
    
    
    Management
    
    
    Overhead
    
    
    Reclassifications
    
    
    Results
    
    
    OperationsTotal interest income
    
    $
    304
    
    
    
    396
    
    
    
    6
    
    
    
    
    
    
    
    706
    
    
    
    290,039
    
    
    
    2,010
    
    
    
    (749
    )
    
    
    1,580
    
    
    
    293,586Interest expense
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    224,272
    
    
    
    10,492
    
    
    
    (749
    )
    
    
    
    
    
    
    234,016Net interest income (loss)
    
    
    304
    
    
    
    396
    
    
    
    5
    
    
    
    
    
    
    
    705
    
    
    
    65,767
    
    
    
    (8,482
    )
    
    
    
    
    
    
    1,580
    
    
    
    59,570Less provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,000Net interest income (loss) after provision
for loan losses
    
    
    304
    
    
    
    396
    
    
    
    5
    
    
    
    
    
    
    
    705
    
    
    
    58,767
    
    
    
    (8,482
    )
    
    
    
    
    
    
    1,580
    
    
    
    52,570Other income (expense):Loan and guaranty servicing income
    
    
    30,769
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,769
    
    
    
    (136
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,633Other fee-based income
    
    
    
    
    
    
    11,861
    
    
    
    29,859
    
    
    
    
    
    
    
    41,720
    
    
    
    4,167
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,887Software services income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,217
    
    
    
    4,217
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,217Other income
    
    
    6
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    (88
    )
    
    
    1,323
    
    
    
    
    
    
    
    
    
    
    
    1,242Intersegment revenue
    
    
    18,402
    
    
    
    58
    
    
    
    2
    
    
    
    1,660
    
    
    
    20,122
    
    
    
    
    
    
    
    15,671
    
    
    
    (35,793
    )
    
    
    
    
    
    
    Derivative market value, foreign currency,
and put option adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,085
    
    
    
    6,085Derivative settlements, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    789
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    789Total other income (expense)
    
    
    49,177
    
    
    
    11,920
    
    
    
    29,861
    
    
    
    5,877
    
    
    
    96,835
    
    
    
    4,732
    
    
    
    16,994
    
    
    
    (35,793
    )
    
    
    6,085
    
    
    
    88,853Operating expenses:Salaries and benefits
    
    
    13,876
    
    
    
    6,236
    
    
    
    5,805
    
    
    
    4,138
    
    
    
    30,055
    
    
    
    1,980
    
    
    
    14,179
    
    
    
    (1,952
    )
    
    
    477
    
    
    
    44,739Other expenses
    
    
    10,632
    
    
    
    2,132
    
    
    
    20,416
    
    
    
    568
    
    
    
    33,748
    
    
    
    5,354
    
    
    
    13,477
    
    
    
    (247
    )
    
    
    6,598
    
    
    
    58,930Intersegment expenses
    
    
    11,940
    
    
    
    288
    
    
    
    1,509
    
    
    
    826
    
    
    
    14,563
    
    
    
    18,200
    
    
    
    831
    
    
    
    (33,594
    )
    
    
    
    
    
    
    Total operating expenses
    
    
    36,448
    
    
    
    8,656
    
    
    
    27,730
    
    
    
    5,532
    
    
    
    78,366
    
    
    
    25,534
    
    
    
    28,487
    
    
    
    (35,793
    )
    
    
    7,075
    
    
    
    103,669Income (loss) before income taxes
    
    
    13,033
    
    
    
    3,660
    
    
    
    2,136
    
    
    
    345
    
    
    
    19,174
    
    
    
    37,965
    
    
    
    (19,975
    )
    
    
    
    
    
    
    590
    
    
    
    37,754Income tax expense (benefit) (a)
    
    
    4,823
    
    
    
    1,354
    
    
    
    790
    
    
    
    128
    
    
    
    7,095
    
    
    
    14,047
    
    
    
    (7,391
    )
    
    
    
    
    
    
    218
    
    
    
    13,969Net income (loss) from continuing
operations
    
    
    8,210
    
    
    
    2,306
    
    
    
    1,346
    
    
    
    217
    
    
    
    12,079
    
    
    
    23,918
    
    
    
    (12,584
    )
    
    
    
    
    
    
    372
    
    
    
    23,785Income from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    8,210
    
    
    
    2,306
    
    
    
    1,346
    
    
    
    217
    
    
    
    12,079
    
    
    
    23,918
    
    
    
    (12,584
    )
    
    
    
    
    
    
    372
    
    
    
    23,785(a)     Beginning in 2008, the consolidated effective tax rate for each applicable quarterly period is used to calculate income taxes for each operating segment.Three months ended September 30, 2008:Before Tax Operating Margin
    
    
    26.3
    %
    
    
    29.7
    %
    
    
    7.2
    %
    
    
    5.9
    %
    
    
    19.7
    %
    
    
    59.8
    %Three months ended September 30, 2007:Before Tax Operating Margin 
excluding restructure expense,
impairment expense, and provision
for loan losses related to the loss
of Exceptional Performer
    
    
    42.9
    %
    
    
    36.3
    %
    
    
    7.3
    %
    
    
    26.7
    %
    
    
    32.3
    %
    
    
    49.2
    %
  37




---



##### Table of Contents



Three months ended September 30, 2007Fee-BasedStudent
    
    
    Tuition
    
    
    Enrollment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Base netLoan
    
    
    Payment
    
    
    Services
    
    
    Software
    
    
    
    
    
    
    Asset
    
    
    Corporate
    
    
    
    
    
    
    incomeand
    
    
    Processing
    
    
    and
    
    
    and
    
    
    Total
    
    
    Generation
    
    
    Activity
    
    
    Eliminations
    
    
    Adjustments
    
    
    GAAPGuaranty
    
    
    and Campus
    
    
    List
    
    
    Technical
    
    
    Fee-
    
    
    and
    
    
    and
    
    
    and
    
    
    to GAAP
    
    
    Results ofServicing
    
    
    Commerce
    
    
    Management
    
    
    Services
    
    
    Based
    
    
    Management
    
    
    Overhead
    
    
    Reclassifications
    
    
    Results
    
    
    OperationsTotal interest income
    
    $
    1,182
    
    
    
    990
    
    
    
    110
    
    
    
    
    
    
    
    2,282
    
    
    
    454,053
    
    
    
    1,875
    
    
    
    (533
    )
    
    
    597
    
    
    
    458,274Interest expense
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    384,793
    
    
    
    9,614
    
    
    
    (533
    )
    
    
    
    
    
    
    393,875Net interest income (loss)
    
    
    1,182
    
    
    
    990
    
    
    
    109
    
    
    
    
    
    
    
    2,281
    
    
    
    69,260
    
    
    
    (7,739
    )
    
    
    
    
    
    
    597
    
    
    
    64,399Less provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,340
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,340Net interest income (loss) after provision
for loan losses
    
    
    1,182
    
    
    
    990
    
    
    
    109
    
    
    
    
    
    
    
    2,281
    
    
    
    50,920
    
    
    
    (7,739
    )
    
    
    
    
    
    
    597
    
    
    
    46,059Other income (expense):Loan and guaranty servicing income
    
    
    32,870
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,870
    
    
    
    170
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,040Other fee-based income
    
    
    
    
    
    
    10,316
    
    
    
    23,471
    
    
    
    
    
    
    
    33,787
    
    
    
    3,526
    
    
    
    712
    
    
    
    
    
    
    
    
    
    
    
    38,025Software services income
    
    
    
    
    
    
    
    
    
    
    169
    
    
    
    5,257
    
    
    
    5,426
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,426Other income
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    1,181
    
    
    
    5,816
    
    
    
    
    
    
    
    
    
    
    
    7,028Gain on sale of loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    492
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    492Intersegment revenue
    
    
    22,237
    
    
    
    168
    
    
    
    (37
    )
    
    
    4,805
    
    
    
    27,173
    
    
    
    
    
    
    
    1,492
    
    
    
    (28,665
    )
    
    
    
    
    
    
    Derivative market value, foreign currency,
and put option adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,449
    
    
    
    18,449Derivative settlements, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,065
    )
    
    
    1,729
    
    
    
    
    
    
    
    
    
    
    
    (2,336
    )Total other income (expense)
    
    
    55,107
    
    
    
    10,515
    
    
    
    23,603
    
    
    
    10,062
    
    
    
    99,287
    
    
    
    1,304
    
    
    
    9,749
    
    
    
    (28,665
    )
    
    
    18,449
    
    
    
    100,124Operating expenses:Salaries and benefits
    
    
    21,961
    
    
    
    5,312
    
    
    
    8,095
    
    
    
    6,537
    
    
    
    41,905
    
    
    
    6,154
    
    
    
    9,691
    
    
    
    2,292
    
    
    
    503
    
    
    
    60,545Restructure expense- severance and contract
termination costs
    
    
    1,231
    
    
    
    
    
    
    
    737
    
    
    
    58
    
    
    
    2,026
    
    
    
    1,921
    
    
    
    1,009
    
    
    
    (4,956
    )
    
    
    
    
    
    
    Impairment expense
    
    
    
    
    
    
    
    
    
    
    11,401
    
    
    
    
    
    
    
    11,401
    
    
    
    28,291
    
    
    
    9,812
    
    
    
    
    
    
    
    
    
    
    
    49,504Other expenses
    
    
    8,565
    
    
    
    2,029
    
    
    
    13,809
    
    
    
    689
    
    
    
    25,092
    
    
    
    7,429
    
    
    
    19,822
    
    
    
    168
    
    
    
    10,885
    
    
    
    63,396Intersegment expenses
    
    
    1,613
    
    
    
    (15
    )
    
    
    67
    
    
    
    147
    
    
    
    1,812
    
    
    
    20,924
    
    
    
    3,433
    
    
    
    (26,169
    )
    
    
    
    
    
    
    Total operating expenses
    
    
    33,370
    
    
    
    7,326
    
    
    
    34,109
    
    
    
    7,431
    
    
    
    82,236
    
    
    
    64,719
    
    
    
    43,767
    
    
    
    (28,665
    )
    
    
    11,388
    
    
    
    173,445Income (loss) before income taxes
    
    
    22,919
    
    
    
    4,179
    
    
    
    (10,397
    )
    
    
    2,631
    
    
    
    19,332
    
    
    
    (12,495
    )
    
    
    (41,757
    )
    
    
    
    
    
    
    7,658
    
    
    
    (27,262
    )Income tax expense (benefit) (a)
    
    
    8,709
    
    
    
    1,588
    
    
    
    (3,951
    )
    
    
    1,000
    
    
    
    7,346
    
    
    
    (4,748
    )
    
    
    (16,233
    )
    
    
    
    
    
    
    2,971
    
    
    
    (10,664
    )Net income (loss) from
continuing operations
    
    
    14,210
    
    
    
    2,591
    
    
    
    (6,446
    )
    
    
    1,631
    
    
    
    11,986
    
    
    
    (7,747
    )
    
    
    (25,524
    )
    
    
    
    
    
    
    4,687
    
    
    
    (16,598
    )Income (loss) from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    909
    
    
    
    909Net income (loss)
    
    $
    14,210
    
    
    
    2,591
    
    
    
    (6,446
    )
    
    
    1,631
    
    
    
    11,986
    
    
    
    (7,747
    )
    
    
    (25,524
    )
    
    
    
    
    
    
    5,596
    
    
    
    (15,689
    )
 (a)
    
    Income taxes are based on 38% of net income (loss) before tax for the individual operating segment.  38




---



##### Table of Contents



Nine months ended September 30, 2008Fee-BasedStudent
    
    
    Tuition
    
    
    Enrollment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Base netLoan
    
    
    Payment
    
    
    Services
    
    
    Software
    
    
    
    
    
    
    Asset
    
    
    Corporate
    
    
    
    
    
    
    incomeand
    
    
    Processing
    
    
    and
    
    
    and
    
    
    Total
    
    
    Generation
    
    
    Activity
    
    
    Eliminations
    
    
    Adjustments
    
    
    GAAPGuaranty
    
    
    and Campus
    
    
    List
    
    
    Technical
    
    
    Fee-
    
    
    and
    
    
    and
    
    
    and
    
    
    to GAAP
    
    
    Results ofServicing
    
    
    Commerce
    
    
    Management
    
    
    Services
    
    
    Based
    
    
    Management
    
    
    Overhead
    
    
    Reclassifications
    
    
    Results
    
    
    OperationsTotal interest income
    
    $
    1,160
    
    
    
    1,471
    
    
    
    16
    
    
    
    
    
    
    
    2,647
    
    
    
    892,690
    
    
    
    4,781
    
    
    
    (1,389
    )
    
    
    42,325
    
    
    
    941,054Interest expense
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    3
    
    
    
    762,689
    
    
    
    30,318
    
    
    
    (1,389
    )
    
    
    
    
    
    
    791,621Net interest income (loss)
    
    
    1,160
    
    
    
    1,471
    
    
    
    13
    
    
    
    
    
    
    
    2,644
    
    
    
    130,001
    
    
    
    (25,537
    )
    
    
    
    
    
    
    42,325
    
    
    
    149,433Less provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,000Net interest income (loss) after provision
for loan losses
    
    
    1,160
    
    
    
    1,471
    
    
    
    13
    
    
    
    
    
    
    
    2,644
    
    
    
    112,001
    
    
    
    (25,537
    )
    
    
    
    
    
    
    42,325
    
    
    
    131,433Other income (expense):Loan and guaranty servicing income
    
    
    81,624
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,624
    
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,650Other fee-based income
    
    
    
    
    
    
    35,975
    
    
    
    83,148
    
    
    
    
    
    
    
    119,123
    
    
    
    13,494
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    132,617Software services income
    
    
    
    
    
    
    
    
    
    
    37
    
    
    
    15,828
    
    
    
    15,865
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,865Other income
    
    
    44
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    49
    
    
    
    293
    
    
    
    3,956
    
    
    
    
    
    
    
    
    
    
    
    4,298Loss on sale of loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47,426
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47,426
    )Intersegment revenue
    
    
    57,008
    
    
    
    242
    
    
    
    2
    
    
    
    4,993
    
    
    
    62,245
    
    
    
    
    
    
    
    46,844
    
    
    
    (109,089
    )
    
    
    
    
    
    
    Derivative market value, foreign currency,
and put option adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    466
    
    
    
    
    
    
    
    
    
    
    
    (35,987
    )
    
    
    (35,521
    )Derivative settlements, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,954
    
    
    
    
    
    
    
    
    
    
    
    (9,965
    )
    
    
    45,989Total other income (expense)
    
    
    138,676
    
    
    
    36,222
    
    
    
    83,187
    
    
    
    20,821
    
    
    
    278,906
    
    
    
    22,807
    
    
    
    50,800
    
    
    
    (109,089
    )
    
    
    (45,952
    )
    
    
    197,472Operating expenses:Salaries and benefits
    
    
    40,365
    
    
    
    17,450
    
    
    
    18,701
    
    
    
    14,031
    
    
    
    90,547
    
    
    
    6,157
    
    
    
    41,581
    
    
    
    1,323
    
    
    
    2,523
    
    
    
    142,131Restructure expense  severance and contract
termination costs
    
    
    747
    
    
    
    
    
    
    
    282
    
    
    
    487
    
    
    
    1,516
    
    
    
    1,845
    
    
    
    3,746
    
    
    
    (7,107
    )
    
    
    
    
    
    
    Impairment expense
    
    
    5,074
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,074
    
    
    
    9,351
    
    
    
    4,409
    
    
    
    
    
    
    
    
    
    
    
    18,834Other expenses
    
    
    27,130
    
    
    
    6,743
    
    
    
    55,863
    
    
    
    1,901
    
    
    
    91,637
    
    
    
    15,793
    
    
    
    42,263
    
    
    
    51
    
    
    
    19,719
    
    
    
    169,463Intersegment expenses
    
    
    35,040
    
    
    
    1,045
    
    
    
    4,936
    
    
    
    1,562
    
    
    
    42,583
    
    
    
    57,754
    
    
    
    3,019
    
    
    
    (103,356
    )
    
    
    
    
    
    
    Total operating expenses
    
    
    108,356
    
    
    
    25,238
    
    
    
    79,782
    
    
    
    17,981
    
    
    
    231,357
    
    
    
    90,900
    
    
    
    95,018
    
    
    
    (109,089
    )
    
    
    22,242
    
    
    
    330,428Income (loss) before income taxes
    
    
    31,480
    
    
    
    12,455
    
    
    
    3,418
    
    
    
    2,840
    
    
    
    50,193
    
    
    
    43,908
    
    
    
    (69,755
    )
    
    
    
    
    
    
    (25,869
    )
    
    
    (1,523
    )Income tax expense (benefit) (a)
    
    
    10,542
    
    
    
    4,081
    
    
    
    1,187
    
    
    
    902
    
    
    
    16,712
    
    
    
    15,889
    
    
    
    (22,824
    )
    
    
    
    
    
    
    (7,984
    )
    
    
    1,793Net income (loss) from continuing operations
    
    
    20,938
    
    
    
    8,374
    
    
    
    2,231
    
    
    
    1,938
    
    
    
    33,481
    
    
    
    28,019
    
    
    
    (46,931
    )
    
    
    
    
    
    
    (17,885
    )
    
    
    (3,316
    )Income from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    981
    
    
    
    981Net income (loss)
    
    $
    20,938
    
    
    
    8,374
    
    
    
    2,231
    
    
    
    1,938
    
    
    
    33,481
    
    
    
    28,019
    
    
    
    (46,931
    )
    
    
    
    
    
    
    (16,904
    )
    
    
    (2,335
    )(a)     Beginning in 2008, the consolidated effective tax rate
for each applicable quarterly period is used to calculate
income taxes for each operating segment.Nine months ended September 30, 2008:Before Tax Operating Margin 
excluding restructure expense,
impairment expense, and the loss on sale
of loans during the first quarter of 2008
    
    
    26.7
    %
    
    
    33.0
    %
    
    
    4.4
    %
    
    
    16.0
    %
    
    
    20.2
    %
    
    
    56.3
    %Nine months ended September, 2007:Before Tax Operating Margin 
excluding restructure expense,
impairment expense, and provision
for loan losses related to the loss
of Exceptional Performer
    
    
    35.6
    %
    
    
    36.0
    %
    
    
    7.0
    %
    
    
    26.9
    %
    
    
    27.6
    %
    
    
    53.7
    %
  39




---



##### Table of Contents



Nine months ended September 30, 2007Fee-BasedStudent
    
    
    Tuition
    
    
    Enrollment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Base netLoan
    
    
    Payment
    
    
    Services
    
    
    Software
    
    
    
    
    
    
    Asset
    
    
    Corporate
    
    
    
    
    
    
    incomeand
    
    
    Processing
    
    
    and
    
    
    and
    
    
    Total
    
    
    Generation
    
    
    Activity
    
    
    Eliminations
    
    
    Adjustments
    
    
    GAAPGuaranty
    
    
    and Campus
    
    
    List
    
    
    Technical
    
    
    Fee-
    
    
    and
    
    
    and
    
    
    and
    
    
    to GAAP
    
    
    Results ofServicing
    
    
    Commerce
    
    
    Management
    
    
    Services
    
    
    Based
    
    
    Management
    
    
    Overhead
    
    
    Reclassifications
    
    
    Results
    
    
    OperationsTotal interest income
    
    $
    4,607
    
    
    
    2,670
    
    
    
    290
    
    
    
    18
    
    
    
    7,585
    
    
    
    1,301,947
    
    
    
    6,230
    
    
    
    (3,737
    )
    
    
    597
    
    
    
    1,312,622Interest expense
    
    
    
    
    
    
    7
    
    
    
    5
    
    
    
    
    
    
    
    12
    
    
    
    1,084,792
    
    
    
    31,196
    
    
    
    (3,737
    )
    
    
    
    
    
    
    1,112,263Net interest income (loss)
    
    
    4,607
    
    
    
    2,663
    
    
    
    285
    
    
    
    18
    
    
    
    7,573
    
    
    
    217,155
    
    
    
    (24,966
    )
    
    
    
    
    
    
    597
    
    
    
    200,359Less provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,628
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,628Net interest income (loss) after provision
for loan losses
    
    
    4,607
    
    
    
    2,663
    
    
    
    285
    
    
    
    18
    
    
    
    7,573
    
    
    
    193,527
    
    
    
    (24,966
    )
    
    
    
    
    
    
    597
    
    
    
    176,731Other income (expense):Loan and guaranty servicing income
    
    
    94,828
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94,828
    
    
    
    288
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    95,116Other fee-based income
    
    
    
    
    
    
    31,492
    
    
    
    73,341
    
    
    
    
    
    
    
    104,833
    
    
    
    10,511
    
    
    
    972
    
    
    
    
    
    
    
    
    
    
    
    116,316Software services income
    
    
    
    
    
    
    
    
    
    
    456
    
    
    
    16,566
    
    
    
    17,022
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,022Other income
    
    
    11
    
    
    
    59
    
    
    
    
    
    
    
    
    
    
    
    70
    
    
    
    4,329
    
    
    
    9,649
    
    
    
    
    
    
    
    
    
    
    
    14,048Gain on sale of loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,288
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,288Intersegment revenue
    
    
    58,821
    
    
    
    508
    
    
    
    891
    
    
    
    13,026
    
    
    
    73,246
    
    
    
    
    
    
    
    7,608
    
    
    
    (80,854
    )
    
    
    
    
    
    
    Derivative market value, foreign currency,
and put option adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,866
    
    
    
    11,866Derivative settlements, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,950
    )
    
    
    12,050
    
    
    
    
    
    
    
    
    
    
    
    7,100Total other income (expense)
    
    
    153,660
    
    
    
    32,059
    
    
    
    74,688
    
    
    
    29,592
    
    
    
    289,999
    
    
    
    13,466
    
    
    
    30,279
    
    
    
    (80,854
    )
    
    
    11,866
    
    
    
    264,756Operating expenses:Salaries and benefits
    
    
    66,988
    
    
    
    15,312
    
    
    
    26,486
    
    
    
    18,869
    
    
    
    127,655
    
    
    
    20,600
    
    
    
    34,669
    
    
    
    (2,370
    )
    
    
    1,456
    
    
    
    182,010Restructure expense- severance an dcontract
termination costs
    
    
    1,231
    
    
    
    
    
    
    
    737
    
    
    
    58
    
    
    
    2,026
    
    
    
    1,921
    
    
    
    1,009
    
    
    
    (4,956
    )
    
    
    
    
    
    
    Impairment expense
    
    
    
    
    
    
    
    
    
    
    11,401
    
    
    
    
    
    
    
    11,401
    
    
    
    28,291
    
    
    
    9,812
    
    
    
    
    
    
    
    
    
    
    
    49,504Other expenses
    
    
    26,219
    
    
    
    6,522
    
    
    
    42,957
    
    
    
    2,224
    
    
    
    77,922
    
    
    
    22,940
    
    
    
    58,762
    
    
    
    168
    
    
    
    24,014
    
    
    
    183,806Intersegment expenses
    
    
    8,681
    
    
    
    384
    
    
    
    252
    
    
    
    550
    
    
    
    9,867
    
    
    
    59,594
    
    
    
    4,235
    
    
    
    (73,696
    )
    
    
    
    
    
    
    Total operating expenses
    
    
    103,119
    
    
    
    22,218
    
    
    
    81,833
    
    
    
    21,701
    
    
    
    228,871
    
    
    
    133,346
    
    
    
    108,487
    
    
    
    (80,854
    )
    
    
    25,470
    
    
    
    415,320Income (loss) before income taxes
    
    
    55,148
    
    
    
    12,504
    
    
    
    (6,860
    )
    
    
    7,909
    
    
    
    68,701
    
    
    
    73,647
    
    
    
    (103,174
    )
    
    
    
    
    
    
    (13,007
    )
    
    
    26,167Income tax expense (benefit) (a)
    
    
    20,956
    
    
    
    4,752
    
    
    
    (2,607
    )
    
    
    3,006
    
    
    
    26,107
    
    
    
    27,986
    
    
    
    (40,059
    )
    
    
    
    
    
    
    (4,128
    )
    
    
    9,906Net income (loss) from continuing operations
    
    
    34,192
    
    
    
    7,752
    
    
    
    (4,253
    )
    
    
    4,903
    
    
    
    42,594
    
    
    
    45,661
    
    
    
    (63,115
    )
    
    
    
    
    
    
    (8,879
    )
    
    
    16,261Income (loss) from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,416
    )
    
    
    (2,416
    )Net income (loss)
    
    $
    34,192
    
    
    
    7,752
    
    
    
    (4,253
    )
    
    
    4,903
    
    
    
    42,594
    
    
    
    45,661
    
    
    
    (63,115
    )
    
    
    
    
    
    
    (11,295
    )
    
    
    13,845
 (a)
    
    Income taxes are based on 38% of net income before tax for the individual operating segment. Non-GAAP Performance Measures
   40




---



##### Table of Contents



Limitations of Base Net Income
    41




---



##### Table of Contents



Student
    
    
    Tuition
    
    
    EnrollmentLoan
    
    
    Payment
    
    
    Services
    
    
    Software
    
    
    Asset
    
    
    Corporateand
    
    
    Processing
    
    
    and
    
    
    and
    
    
    Generation
    
    
    ActivityGuaranty
    
    
    and Campus
    
    
    List
    
    
    Technical
    
    
    and
    
    
    andServicing
    
    
    Commerce
    
    
    Management
    
    
    Services
    
    
    Management
    
    
    Overhead
    
    
    TotalThree months ended September 30, 2008Derivative market value, foreign currency, and
put option adjustments
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,030
    )
    
    
    2,945
    
    
    
    (6,085
    )Amortization of intangible assets
    
    
    1,165
    
    
    
    1,889
    
    
    
    3,258
    
    
    
    286
    
    
    
    
    
    
    
    
    
    
    
    6,598Compensation related to business combinations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    477
    
    
    
    477Variable-rate floor income, net of settlements on derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,580
    )
    
    
    
    
    
    
    (1,580
    )Income (loss) from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net tax effect (a)
    
    
    (432
    )
    
    
    (699
    )
    
    
    (1,205
    )
    
    
    (106
    )
    
    
    3,926
    
    
    
    (1,266
    )
    
    
    218Total adjustments to GAAP
    
    $
    733
    
    
    
    1,190
    
    
    
    2,053
    
    
    
    180
    
    
    
    (6,684
    )
    
    
    2,156
    
    
    
    (372
    )Three months ended September 30, 2007Derivative market value, foreign currency, and
put option adjustments
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,017
    )
    
    
    1,568
    
    
    
    (18,449
    )Amortization of intangible assets
    
    
    1,350
    
    
    
    1,434
    
    
    
    6,442
    
    
    
    287
    
    
    
    1,372
    
    
    
    
    
    
    
    10,885Compensation related to business combinations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    503
    
    
    
    503Variable-rate floor income, net of settlements on derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (597
    )
    
    
    
    
    
    
    (597
    )Income (loss) from discontinued operations, net of tax
    
    
    (909
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (909
    )Net tax effect (a)
    
    
    (513
    )
    
    
    (545
    )
    
    
    (2,448
    )
    
    
    (109
    )
    
    
    7,312
    
    
    
    (726
    )
    
    
    2,971Total adjustments to GAAP
    
    $
    (72
    )
    
    
    889
    
    
    
    3,994
    
    
    
    178
    
    
    
    (11,930
    )
    
    
    1,345
    
    
    
    (5,596
    )Nine months ended September 30, 2008Derivative market value, foreign currency, and
put option adjustments
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,504
    
    
    
    3,483
    
    
    
    35,987Amortization of intangible assets
    
    
    3,586
    
    
    
    5,937
    
    
    
    9,193
    
    
    
    858
    
    
    
    145
    
    
    
    
    
    
    
    19,719Compensation related to business combinations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,523
    
    
    
    2,523Variable-rate floor income, net of settlements on derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,360
    )
    
    
    
    
    
    
    (32,360
    )Income (loss) from discontinued operations, net of tax
    
    
    (981
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (981
    )Net tax effect (a)
    
    
    (1,182
    )
    
    
    (1,954
    )
    
    
    (3,045
    )
    
    
    (284
    )
    
    
    548
    
    
    
    (2,067
    )
    
    
    (7,984
    )Total adjustments to GAAP
    
    $
    1,423
    
    
    
    3,983
    
    
    
    6,148
    
    
    
    574
    
    
    
    837
    
    
    
    3,939
    
    
    
    16,904Nine months ended September 30, 2007Derivative market value, foreign currency, and
put option adjustments
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,801
    )
    
    
    (4,065
    )
    
    
    (11,866
    )Amortization of intangible assets
    
    
    3,744
    
    
    
    4,372
    
    
    
    9,797
    
    
    
    904
    
    
    
    5,197
    
    
    
    
    
    
    
    24,014Compensation related to business combinations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,456
    
    
    
    1,456Variable-rate floor income, net of settlements on derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (597
    )
    
    
    
    
    
    
    (597
    )Income (loss) from discontinued operations, net of tax
    
    
    2,416
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,416Net tax effect (a)
    
    
    (1,423
    )
    
    
    (1,661
    )
    
    
    (3,723
    )
    
    
    (343
    )
    
    
    1,216
    
    
    
    1,806
    
    
    
    (4,128
    )Total adjustments to GAAP
    
    $
    4,737
    
    
    
    2,711
    
    
    
    6,074
    
    
    
    561
    
    
    
    (1,985
    )
    
    
    (803
    )
    
    
    11,295
 (a)
    
    Beginning in 2008, tax effect is computed using the Companys consolidated
effective tax rate for each applicable quarterly period. In prior periods, tax effect
was computed at 38%. The change in the value of the put options for prior periods
(included in Corporate Activity and Overhead) was not tax effected as this is not
deductible for income tax purposes. Differences between GAAP and Base Net Income
   42




---



##### Table of Contents



Derivative market value, foreign currency, and put option adjustments:  Accounting for
Derivative Instruments and Hedging Activities
 Euro-denominated Euro-denominated cross-currency
   Amortization of intangible assets:
 Compensation related to business combinations:
 Variable-rate floor income, net of settlements on derivatives :
 Discontinued operations:
  43




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##### Table of Contents



STUDENT LOAN AND GUARANTY SERVICING OPERATING SEGMENT  RESULTS OF OPERATIONS
  Student Loan Servicing Volumes
 As of
    
    
    As ofSeptember 30,
    
    
    September 30,2008
    
    
    2007Dollar
    
    
    Percent
    
    
    Dollar
    
    
    Percent(dollars in millions)Company
    
    $
    25,248
    (a)
    
    
    70.3
    %
    
    $
    25,491
    
    
    
    76.1
    %Third Party
    
    
    10,661
    (b)
    
    
    29.7
    
    
    
    8,026
    
    
    
    23.9$
    35,909
    
    
    
    100.0
    %
    
    $
    33,517
    
    
    
    100.0
    %
 (a)
    
    Approximately $410
million of these loans were disbursed on or after
May 1, 2008 and are eligible to be sold to the
Department of Education pursuant to its Purchase
Commitment Program. The Department obtains all
rights to service loans which it purchases as part
of this program.(b)
    
    Approximately $671
million of these loans were disbursed on or after
May 1, 2008 and may be eligible to be sold to the
Department of Education pursuant to its Purchase
Commitment Program. The Department obtains all
rights to service loans which it purchases as part
of this program. Three and nine months ended September 30, 2008 compared to the three and nine months ended
September 30, 2007
 Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    $ Change
    
    
    2008
    
    
    2007
    
    
    $ ChangeNet interest income after the provision
for loan losses
    
    $
    304
    
    
    
    1,182
    
    
    
    (878
    )
    
    
    1,160
    
    
    
    4,607
    
    
    
    (3,447
    )Loan and guaranty servicing income
    
    
    30,769
    
    
    
    32,870
    
    
    
    (2,101
    )
    
    
    81,624
    
    
    
    94,828
    
    
    
    (13,204
    )Other income
    
    
    6
    
    
    
    
    
    
    
    6
    
    
    
    44
    
    
    
    11
    
    
    
    33Intersegment revenue
    
    
    18,402
    
    
    
    22,237
    
    
    
    (3,835
    )
    
    
    57,008
    
    
    
    58,821
    
    
    
    (1,813
    )Total other income
    
    
    49,177
    
    
    
    55,107
    
    
    
    (5,930
    )
    
    
    138,676
    
    
    
    153,660
    
    
    
    (14,984
    )Salaries and benefits
    
    
    13,876
    
    
    
    21,961
    
    
    
    (8,085
    )
    
    
    40,365
    
    
    
    66,988
    
    
    
    (26,623
    )Restructure expense  severance and contract
termination costs
    
    
    
    
    
    
    1,231
    
    
    
    (1,231
    )
    
    
    747
    
    
    
    1,231
    
    
    
    (484
    )Impairment expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,074
    
    
    
    
    
    
    
    5,074Other expenses
    
    
    10,632
    
    
    
    8,565
    
    
    
    2,067
    
    
    
    27,130
    
    
    
    26,219
    
    
    
    911Intersegment expenses
    
    
    11,940
    
    
    
    1,613
    
    
    
    10,327
    
    
    
    35,040
    
    
    
    8,681
    
    
    
    26,359Total operating expenses
    
    
    36,448
    
    
    
    33,370
    
    
    
    3,078
    
    
    
    108,356
    
    
    
    103,119
    
    
    
    5,237Base net income before
income taxes
    
    
    13,033
    
    
    
    22,919
    
    
    
    (9,886
    )
    
    
    31,480
    
    
    
    55,148
    
    
    
    (23,668
    )Income tax expense
    
    
    4,823
    
    
    
    8,709
    
    
    
    (3,886
    )
    
    
    10,542
    
    
    
    20,956
    
    
    
    (10,414
    )Base net income
    
    $
    8,210
    
    
    
    14,210
    
    
    
    (6,000
    )
    
    
    20,938
    
    
    
    34,192
    
    
    
    (13,254
    )Before Tax Operating Margin
    
    
    26.3
    %
    
    
    40.7
    %
    
    
    
    
    
    
    22.5
    %
    
    
    34.8
    %Before Tax
Operating Margin 
excluding restructure expense
and impairment expense
    
    
    26.3
    %
    
    
    42.9
    %
    
    
    
    
    
    
    26.7
    %
    
    
    35.6
    %
 Net interest income after the provision for loan losses .
  44




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##### Table of Contents



Loan and guaranty servicing income
 Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    $ Change
    
    
    % Change
    
    
    2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeOrigination and servicing of
FFEL Program loans
    
    $
    14,041
    
    
    
    14,785
    
    
    
    (744
    )
    
    
    (5.0
    )%
    
    $
    38,854
    
    
    
    42,689
    
    
    
    (3,835
    )
    
    
    (9.0
    )%Origination and servicing of
non-federally insured student loans
    
    
    2,016
    
    
    
    3,173
    
    
    
    (1,157
    )
    
    
    (36.5
    )
    
    
    6,159
    
    
    
    7,830
    
    
    
    (1,671
    )
    
    
    (21.3
    )Servicing and support outsourcing for
guaranty agencies
    
    
    14,712
    
    
    
    14,912
    
    
    
    (200
    )
    
    
    (1.3
    )
    
    
    36,611
    
    
    
    44,309
    
    
    
    (7,698
    )
    
    
    (17.4
    )Loan and guaranty servicing income
to external parties
    
    $
    30,769
    
    
    
    32,870
    
    
    
    (2,101
    )
    
    
    (6.4
    )%
    
    $
    81,624
    
    
    
    94,828
    
    
    
    (13,204
    )
    
    
    (13.9
    )%
 
    
    FFELP loan servicing income decreased due to new servicing contracts being priced at
lower rates and the loss of clients following the legislative developments in September
2007. This decrease is partially offset by an increase in loan servicing volume due to
entering into new servicing contracts.
    
    Non-federally insured loan servicing income decreased due to a significant customer
ceasing to originate non-federally insured loans.
    
    Servicing and support outsourcing for guaranty agencies decreased due to the termination
of the Voluntary Flexible Agreement between the Department of Education and College Assist
offset by an increase in the volume of guaranteed loans serviced and an increase in
collections revenue. For the three months ended September 30, 2008, the change remained
relatively flat due to an increase in collections revenue from rehabilitated loans.
 Intersegment revenue direct-to-consumer
 Operating expenses .
  45




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##### Table of Contents



TUITION PAYMENT PROCESSING AND CAMPUS COMMERCE OPERATING SEGMENT  RESULTS OF OPERATIONS
  Three and nine months ended September 30, 2008 compared to the three and nine months ended
September 30, 2007
 Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    $ Change
    
    
    2008
    
    
    2007
    
    
    $ ChangeNet interest income after the provision
for loan losses
    
    $
    396
    
    
    
    990
    
    
    
    (594
    )
    
    
    1,471
    
    
    
    2,663
    
    
    
    (1,192
    )Other fee-based income
    
    
    11,861
    
    
    
    10,316
    
    
    
    1,545
    
    
    
    35,975
    
    
    
    31,492
    
    
    
    4,483Other income
    
    
    1
    
    
    
    31
    
    
    
    (30
    )
    
    
    5
    
    
    
    59
    
    
    
    (54
    )Intersegment revenue
    
    
    58
    
    
    
    168
    
    
    
    (110
    )
    
    
    242
    
    
    
    508
    
    
    
    (266
    )Total other income
    
    
    11,920
    
    
    
    10,515
    
    
    
    1,405
    
    
    
    36,222
    
    
    
    32,059
    
    
    
    4,163Salaries and benefits
    
    
    6,236
    
    
    
    5,312
    
    
    
    924
    
    
    
    17,450
    
    
    
    15,312
    
    
    
    2,138Other expenses
    
    
    2,132
    
    
    
    2,029
    
    
    
    103
    
    
    
    6,743
    
    
    
    6,522
    
    
    
    221Intersegment expenses
    
    
    288
    
    
    
    (15
    )
    
    
    303
    
    
    
    1,045
    
    
    
    384
    
    
    
    661Total operating expenses
    
    
    8,656
    
    
    
    7,326
    
    
    
    1,330
    
    
    
    25,238
    
    
    
    22,218
    
    
    
    3,020Base net income
before income taxes
    
    
    3,660
    
    
    
    4,179
    
    
    
    (519
    )
    
    
    12,455
    
    
    
    12,504
    
    
    
    (49
    )Income tax expense
    
    
    1,354
    
    
    
    1,588
    
    
    
    (234
    )
    
    
    4,081
    
    
    
    4,752
    
    
    
    (671
    )Base net income
    
    $
    2,306
    
    
    
    2,591
    
    
    
    (285
    )
    
    
    8,374
    
    
    
    7,752
    
    
    
    622Before Tax Operating Margin
    
    
    29.7
    %
    
    
    36.3
    %
    
    
    
    
    
    
    33.0
    %
    
    
    36.0
    %
 Net interest income after the provision for loan losses .
 Other fee-based income
 Operating expenses .
  46




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##### Table of Contents



ENROLLMENT SERVICES AND LIST MANAGEMENT OPERATING SEGMENT  RESULTS OF OPERATIONS
  Three and nine months ended September 30, 2008 compared to the three and nine months ended
September 30, 2007
 Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    $ Change
    
    
    2008
    
    
    2007
    
    
    $ ChangeNet interest income after the provision
for loan losses
    
    $
    5
    
    
    
    109
    
    
    
    (104
    )
    
    
    13
    
    
    
    285
    
    
    
    (272
    )Other fee-based income
    
    
    29,859
    
    
    
    23,471
    
    
    
    6,388
    
    
    
    83,148
    
    
    
    73,341
    
    
    
    9,807Software services income
    
    
    
    
    
    
    169
    
    
    
    (169
    )
    
    
    37
    
    
    
    456
    
    
    
    (419
    )Intersegment revenue
    
    
    2
    
    
    
    (37
    )
    
    
    39
    
    
    
    2
    
    
    
    891
    
    
    
    (889
    )Total other income
    
    
    29,861
    
    
    
    23,603
    
    
    
    6,258
    
    
    
    83,187
    
    
    
    74,688
    
    
    
    8,499Salaries and benefits
    
    
    5,805
    
    
    
    8,095
    
    
    
    (2,290
    )
    
    
    18,701
    
    
    
    26,486
    
    
    
    (7,785
    )Restructure expense  severance and contract
termination costs
    
    
    
    
    
    
    737
    
    
    
    (737
    )
    
    
    282
    
    
    
    737
    
    
    
    (455
    )Impairment expense
    
    
    
    
    
    
    11,401
    
    
    
    (11,401
    )
    
    
    
    
    
    
    11,401
    
    
    
    (11,401
    )Other expenses
    
    
    20,416
    
    
    
    13,809
    
    
    
    6,607
    
    
    
    55,863
    
    
    
    42,957
    
    
    
    12,906Intersegment expenses
    
    
    1,509
    
    
    
    67
    
    
    
    1,442
    
    
    
    4,936
    
    
    
    252
    
    
    
    4,684Total operating expenses
    
    
    27,730
    
    
    
    34,109
    
    
    
    (6,379
    )
    
    
    79,782
    
    
    
    81,833
    
    
    
    (2,051
    )Base net income (loss)
before income taxes
    
    
    2,136
    
    
    
    (10,397
    )
    
    
    12,533
    
    
    
    3,418
    
    
    
    (6,860
    )
    
    
    10,278Income tax expense (benefit)
    
    
    790
    
    
    
    (3,951
    )
    
    
    4,741
    
    
    
    1,187
    
    
    
    (2,607
    )
    
    
    3,794Base net income (loss)
    
    $
    1,346
    
    
    
    (6,446
    )
    
    
    7,792
    
    
    
    2,231
    
    
    
    (4,253
    )
    
    
    6,484Before Tax Operating Margin
    
    
    7.2
    %
    
    
    (43.8
    %)
    
    
    
    
    
    
    4.1
    %
    
    
    (9.1
    %)Before Tax Operating Margin 
excluding restructure and
impairment expense
    
    
    7.2
    %
    
    
    7.3
    %
    
    
    
    
    
    
    4.4
    %
    
    
    7.0
    %
 Other fee-based income.
 Operating expenses.
  47




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##### Table of Contents



SOFTWARE AND TECHNICAL SERVICES OPERATING SEGMENT  RESULTS OF OPERATIONS
   Three and nine months ended September 30, 2008 compared to the three and nine months ended
September 30, 2007
 Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    $ Change
    
    
    2008
    
    
    2007
    
    
    $ ChangeNet interest income after the provision
for loan losses
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18
    
    
    
    (18
    )Software services income
    
    
    4,217
    
    
    
    5,257
    
    
    
    (1,040
    )
    
    
    15,828
    
    
    
    16,566
    
    
    
    (738
    )Intersegment revenue
    
    
    1,660
    
    
    
    4,805
    
    
    
    (3,145
    )
    
    
    4,993
    
    
    
    13,026
    
    
    
    (8,033
    )Total other income
    
    
    5,877
    
    
    
    10,062
    
    
    
    (4,185
    )
    
    
    20,821
    
    
    
    29,592
    
    
    
    (8,771
    )Salaries and benefits
    
    
    4,138
    
    
    
    6,537
    
    
    
    (2,399
    )
    
    
    14,031
    
    
    
    18,869
    
    
    
    (4,838
    )Restructure expense  severance and contract
termination costs
    
    
    
    
    
    
    58
    
    
    
    (58
    )
    
    
    487
    
    
    
    58
    
    
    
    429Other expenses
    
    
    568
    
    
    
    689
    
    
    
    (121
    )
    
    
    1,901
    
    
    
    2,224
    
    
    
    (323
    )Intersegment expenses
    
    
    826
    
    
    
    147
    
    
    
    679
    
    
    
    1,562
    
    
    
    550
    
    
    
    1,012Total operating expenses
    
    
    5,532
    
    
    
    7,431
    
    
    
    (1,899
    )
    
    
    17,981
    
    
    
    21,701
    
    
    
    (3,720
    )Base net income before
income taxes
    
    
    345
    
    
    
    2,631
    
    
    
    (2,286
    )
    
    
    2,840
    
    
    
    7,909
    
    
    
    (5,069
    )Income tax expense
    
    
    128
    
    
    
    1,000
    
    
    
    (872
    )
    
    
    902
    
    
    
    3,006
    
    
    
    (2,104
    )Base net income
    
    $
    217
    
    
    
    1,631
    
    
    
    (1,414
    )
    
    
    1,938
    
    
    
    4,903
    
    
    
    (2,965
    )Before Tax Operating Margin
    
    
    5.9
    %
    
    
    26.1
    %
    
    
    
    
    
    
    13.6
    %
    
    
    26.7
    %Before Tax
Operating Margin 
excluding restructure expense
    
    
    5.9
    %
    
    
    26.7
    %
    
    
    
    
    
    
    16.0
    %
    
    
    26.9
    %
 Software services income .
 Intersegment revenue .
 Operating expenses .
  48




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##### Table of Contents



ASSET GENERATION AND MANAGEMENT OPERATING SEGMENT  RESULTS OF OPERATIONS
   Student Loan Portfolio
  As of September 30, 2008
    
    
    As of December 31, 2007Dollars
    
    
    Percent
    
    
    Dollars
    
    
    PercentFederally insured: (a) (b)StaffordOriginated prior to 10/1/07
    
    $
    6,780,214
    
    
    
    25.7
    %
    
    $
    6,624,009
    
    
    
    24.8
    %Originated on or after 10/1/07
    
    
    689,097
    
    
    
    2.6
    
    
    
    101,901
    
    
    
    0.4PLUS/SLSOriginated prior to 10/1/07
    
    
    428,037
    
    
    
    1.6
    
    
    
    414,708
    
    
    
    1.5Originated on or after 10/1/07
    
    
    85,066
    
    
    
    0.3
    
    
    
    15,233
    
    
    
    0.1ConsolidationOriginated prior to 10/1/07
    
    
    17,427,448
    
    
    
    66.2
    
    
    
    18,646,993
    
    
    
    69.8Originated on or after 10/1/07
    
    
    316,031
    
    
    
    1.2
    
    
    
    251,554
    
    
    
    0.9Non-federally insured
    
    
    275,520
    
    
    
    1.0
    
    
    
    274,815
    
    
    
    1.0Total
    
    
    26,001,413
    
    
    
    98.6
    
    
    
    26,329,213
    
    
    
    98.5Unamortized
premiums and deferred origination costs
    
    
    423,926
    
    
    
    1.6
    
    
    
    452,501
    
    
    
    1.7Allowance for loan losses:Allowance  federally insured
    
    
    (24,366
    )
    
    
    (0.1
    )
    
    
    (24,534
    )
    
    
    (0.1
    )Allowance  non-federally insured
    
    
    (24,704
    )
    
    
    (0.1
    )
    
    
    (21,058
    )
    
    
    (0.1
    )$
    26,376,269
    
    
    
    100.0
    %
    
    $
    26,736,122
    
    
    
    100.0
    %
 (a)
    
    The College Cost Reduction Act reduced the yield on federally insured
loans originated on or after October 1, 2007. As of September 30, 2008 and
December 31, 2007, $221.6 million and $278.9 million, respectively, of federally
insured student loans are excluded from the above table as these loans are
accounted for as participation interests sold under an agreement with Union Bank
which is further discussed in note 7 of the Companys consolidated financial
statements included in this Quarterly Report. As of September 30, 2008, $172.6
million of the loans accounted for as participation interests sold under this
agreement were originated on or after October 1, 2007.(b)
    
    As of September 30, 2008, $429.2 million of federally insured student
loans were eligible to be sold or participated to the Department under the
Departments Loan Purchase Commitment and Participation Programs, of which $263.9
million were participated to the Department under the Participation Program. Origination and Acquisition
    49




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##### Table of Contents



Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Beginning balance
    
    $
    25,612,126
    
    
    
    25,746,000
    
    
    
    26,329,213
    
    
    
    23,414,468Direct channel:Consolidation loan originations
    
    
    44
    
    
    
    914,842
    
    
    
    69,073
    
    
    
    2,815,791Less consolidation of existing portfolio
    
    
    (27
    )
    
    
    (537,539
    )
    
    
    (28,474
    )
    
    
    (1,450,326
    )Net consolidation loan originations
    
    
    17
    
    
    
    377,303
    
    
    
    40,599
    
    
    
    1,365,465Stafford/PLUS loan originations
    
    
    416,721
    
    
    
    426,740
    
    
    
    952,050
    
    
    
    923,450Branding partner channel
    
    
    334,685
    
    
    
    125,220
    
    
    
    935,992
    
    
    
    583,213Forward flow channel
    
    
    114,488
    
    
    
    178,226
    
    
    
    517,548
    
    
    
    946,342Other channels
    
    
    
    
    
    
    24,373
    
    
    
    55,922
    
    
    
    791,087Total channel acquisitions
    
    
    865,911
    
    
    
    1,131,862
    
    
    
    2,502,111
    
    
    
    4,609,557Repayments, claims, capitalized interest, participations, and other
    
    
    (369,940
    )
    
    
    (479,512
    )
    
    
    (1,255,183
    )
    
    
    (1,112,878
    )Consolidation loans lost to external parties
    
    
    (106,684
    )
    
    
    (200,719
    )
    
    
    (282,951
    )
    
    
    (627,473
    )Loans sold
    
    
    
    
    
    
    (17,661
    )
    
    
    (1,291,777
    )
    
    
    (103,704
    )Ending balance
    
    $
    26,001,413
    
    
    
    26,179,970
    
    
    
    26,001,413
    
    
    
    26,179,970
    
    
    Increases statutory limits on annual and aggregate borrowing for FFELP loans; and
    
    Allows the Department to act as a secondary market and enter into agreements with
lenders to purchase certain FFELP loans or participation interests in those loans.
  
    
    Allows the Department to purchase certain loans from lenders for the 2008-2009
academic year and offers lenders access to short-term liquidity; and
 
    
    Commits to continue working with the FFELP community to explore programs to reengage
the capital markets in the long-run.
   50




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##### Table of Contents



Activity in the Allowance for Loan Losses
  Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Balance at beginning of period
    
    $
    47,909
    
    
    
    27,140
    
    
    
    45,592
    
    
    
    26,003Provision for loan losses:Federally insured loans
    
    
    4,500
    
    
    
    17,040
    
    
    
    12,000
    
    
    
    20,158Non-federally insured loans
    
    
    2,500
    
    
    
    1,300
    
    
    
    6,000
    
    
    
    3,470Total provision for loan losses
    
    
    7,000
    
    
    
    18,340
    
    
    
    18,000
    
    
    
    23,628Charge-offs, net of recoveries:Federally insured loans
    
    
    (4,218
    )
    
    
    (1,327
    )
    
    
    (11,418
    )
    
    
    (3,852
    )Non-federally insured loans
    
    
    (1,621
    )
    
    
    (139
    )
    
    
    (2,354
    )
    
    
    (594
    )Net charge-offs
    
    
    (5,839
    )
    
    
    (1,466
    )
    
    
    (13,772
    )
    
    
    (4,446
    )Sale of federally insured loans
    
    
    
    
    
    
    
    
    
    
    (750
    )
    
    
    Sale of non-federally insured loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,171
    )Balance at end of period
    
    $
    49,070
    
    
    
    44,014
    
    
    
    49,070
    
    
    
    44,014Allocation of the allowance for loan losses:Federally insured loans
    
    $
    24,366
    
    
    
    23,907
    
    
    
    24,366
    
    
    
    23,907Non-federally insured loans
    
    
    24,704
    
    
    
    20,107
    
    
    
    24,704
    
    
    
    20,107Total allowance for loan losses
    
    $
    49,070
    
    
    
    44,014
    
    
    
    49,070
    
    
    
    44,014Net loan charge-offs as a percentage of average student loans
    
    
    0.090
    %
    
    
    0.023
    %
    
    
    0.070
    %
    
    
    0.024
    %Total allowance as a percentage of average student loans
    
    
    0.188
    %
    
    
    0.170
    %
    
    
    0.187
    %
    
    
    0.177
    %Total allowance as a percentage of ending balance of student loans
    
    
    0.189
    %
    
    
    0.168
    %
    
    
    0.189
    %
    
    
    0.168
    %Non-federally insured allowance as a percentage of the ending
balance of non-federally insured loans
    
    
    8.966
    %
    
    
    7.995
    %
    
    
    8.966
    %
    
    
    7.995
    %Average student loans
    
    $
    26,035,006
    
    
    
    25,866,660
    
    
    
    26,220,486
    
    
    
    24,799,585Ending balance of student loans
    
    
    26,001,413
    
    
    
    26,179,970
    
    
    
    26,001,413
    
    
    
    26,179,970Ending balance of non-federally insured loans
    
    
    275,520
    
    
    
    251,503
    
    
    
    275,520
    
    
    
    251,503
   As of September 30, 2008
    
    
    As of December 31, 2007Dollars
    
    
    Percent
    
    
    Dollars
    
    
    PercentFederally Insured Loans:Loans in-school/grace/deferment(1)
    
    $
    8,250,265
    
    
    
    
    
    
    $
    7,115,505Loans in forebearance(2)
    
    
    2,527,052
    
    
    
    
    
    
    
    3,015,456Loans in repayment status:Loans current
    
    
    13,171,661
    
    
    
    88.1
    %
    
    
    13,937,702
    
    
    
    87.5
    %Loans delinquent 31-60 days(3)
    
    
    557,788
    
    
    
    3.7
    
    
    
    682,956
    
    
    
    4.3Loans delinquent 61-90 days(3)
    
    
    267,665
    
    
    
    1.8
    
    
    
    353,303
    
    
    
    2.2Loans delinquent 91 days or greater(4)
    
    
    951,462
    
    
    
    6.4
    
    
    
    949,476
    
    
    
    6.0Total loans in repayment
    
    
    14,948,576
    
    
    
    100.0
    %
    
    
    15,923,437
    
    
    
    100.0
    %Total federally insured loans
    
    $
    25,725,893
    
    
    
    
    
    
    $
    26,054,398Non-Federally Insured Loans:Loans in-school/grace/deferment(1)
    
    $
    103,833
    
    
    
    
    
    
    $
    111,946Loans in forebearance(2)
    
    
    8,921
    
    
    
    
    
    
    
    12,895Loans in repayment status:Loans current
    
    
    154,130
    
    
    
    94.7
    %
    
    
    142,851
    
    
    
    95.3
    %Loans delinquent 31-60 days(3)
    
    
    3,005
    
    
    
    1.9
    
    
    
    3,450
    
    
    
    2.3Loans delinquent 61-90 days(3)
    
    
    2,325
    
    
    
    1.4
    
    
    
    1,247
    
    
    
    0.8Loans delinquent 91 days or greater(4)
    
    
    3,306
    
    
    
    2.0
    
    
    
    2,426
    
    
    
    1.6Total loans in repayment
    
    
    162,766
    
    
    
    100.0
    %
    
    
    149,974
    
    
    
    100.0
    %Total non-federally insured loans
    
    $
    275,520
    
    
    
    
    
    
    $
    274,815
  51




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##### Table of Contents



(1)
    
    Loans for borrowers who still may be attending school or engaging in other permitted
educational activities and are not yet required to make payments on the loans, e.g., residency
periods for medical students or a grace period for bar exam preparation for law students.(2)
    
    Loans for borrowers who have temporarily ceased making full payments due to hardship or other
factors, according to a schedule approved by the servicer consistent with the established loan
program servicing procedures and policies.(3)
    
    The period of delinquency is based on the number of days scheduled payments are contractually
past due and relate to repayment loans, that is, receivables not charged off, and not in
school, grace, deferment, or forbearance.(4)
    
    Loans delinquent 91 days or greater include loans in claim status, which are loans that have
gone into default and have been submitted to the guaranty agency for FFELP loans, or, if
applicable, the insurer for non-federally insured loans, to process the claim for payment. Student Loan Spread Analysis
  Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Student loan yield
    
    
    5.38
    %
    
    
    7.83
    %
    
    
    5.69
    %
    
    
    7.87
    %Consolidation rebate fees
    
    
    (0.72
    )
    
    
    (0.76
    )
    
    
    (0.74
    )
    
    
    (0.77
    )Premium and deferred origination
costs amortization
    
    
    (0.33
    )
    
    
    (0.36
    )
    
    
    (0.35
    )
    
    
    (0.36
    )Student loan net yield
    
    
    4.33
    
    
    
    6.71
    
    
    
    4.60
    
    
    
    6.74Student loan cost of funds (a)
    
    
    (3.29
    )
    
    
    (5.65
    )
    
    
    (3.50
    )
    
    
    (5.54
    )Student loan spread
    
    
    1.04
    
    
    
    1.06
    
    
    
    1.10
    
    
    
    1.20Variable-rate floor income,
net of settlements on derivatives (b)
    
    
    (0.02
    )
    
    
    (0.01
    )
    
    
    (0.17
    )
    
    
    Core student loan spread
    
    
    1.02
    %
    
    
    1.05
    %
    
    
    0.93
    %
    
    
    1.20
    %Average balance of student loans
    
    $
    26,035,006
    
    
    
    25,866,660
    
    
    
    26,220,486
    
    
    
    24,799,585Average balance of debt outstanding
    
    
    26,769,955
    
    
    
    27,321,874
    
    
    
    27,120,342
    
    
    
    26,293,342
 (a)
    
    The student loan cost of funds includes the effects of net settlement costs on the
Companys derivative instruments (excluding the net settlements of $1.7 million and $12.1
million, for the three and nine months ended September 30, 2007, respectively, on those
derivatives no longer hedging student loan assets).(b)
    
    The Company entered into interest rate swaps with effective dates beginning in January
2008 to hedge a portion of the variable-rate floor income. Settlements on these
derivatives are presented as part of the Companys statutory calculation of variable-rate
floor income. The maturity date for these derivatives was June 30, 2008.   52




---



##### Table of Contents




    
    Historically, the movement of the various interest rate indices received on the
Companys student loan assets and paid on the debt to fund such loans was highly
correlated. As shown in Item 3, Quantitative and Qualitative Disclosures about Market
Risk, the short-term movement of the indices was dislocated beginning in August 2007.
This dislocation has had a negative impact on the Companys student loan net interest
income.
    
    The spread to LIBOR on asset-backed securities transactions has increased significantly
since August 2007. Since August 2007, the Company has issued $6.0 billion of notes in
asset-backed securities transactions ($1.5 billion in August 2007, $1.2 billion in March
2008, $1.9 billion in April 2008, and $1.3 billion in May 2008). The increase in costs on
these transactions from historical levels have had and will continue to have a negative
impact on the Companys student loan net interest income. The increased spread to LIBOR
on asset-backed securities transactions is shown in the below table:
 
 
    
    As a result of the passage of the College Cost Reduction and Access Act of 2007,
the yield on FFELP loans originated after October 1, 2007 was reduced. As of
September 30, 2008, the Company had $1.1 billion of FFELP loans originated after
October 1, 2007. The core student loan spread on FFELP loans originated after
October 1, 2007 for both the three and nine months ended September 30, 2008 was
approximately 40 to 50 basis points.
 asset-backed
  53




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##### Table of Contents



Three and nine months ended September 30, 2008 compared to the three and nine months ended
September 30, 2007
 Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    $ Change
    
    
    2008
    
    
    2007
    
    
    $ ChangeNet interest income after the provision
for loan losses
    
    $
    58,767
    
    
    
    50,920
    
    
    
    7,847
    
    
    
    112,001
    
    
    
    193,527
    
    
    
    (81,526
    )Loan and guaranty servicing income
    
    
    (136
    )
    
    
    170
    
    
    
    (306
    )
    
    
    26
    
    
    
    288
    
    
    
    (262
    )Other fee-based income
    
    
    4,167
    
    
    
    3,526
    
    
    
    641
    
    
    
    13,494
    
    
    
    10,511
    
    
    
    2,983Other income
    
    
    (88
    )
    
    
    1,181
    
    
    
    (1,269
    )
    
    
    293
    
    
    
    4,329
    
    
    
    (4,036
    )Gain (loss) on sale of loans
    
    
    
    
    
    
    492
    
    
    
    (492
    )
    
    
    (47,426
    )
    
    
    3,288
    
    
    
    (50,714
    )Derivative market value, foreign currency,
and put option adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    466
    
    
    
    
    
    
    
    466Derivative settlements, net
    
    
    789
    
    
    
    (4,065
    )
    
    
    4,854
    
    
    
    55,954
    
    
    
    (4,950
    )
    
    
    60,904Total other income
    
    
    4,732
    
    
    
    1,304
    
    
    
    3,428
    
    
    
    22,807
    
    
    
    13,466
    
    
    
    9,341Salaries and benefits
    
    
    1,980
    
    
    
    6,154
    
    
    
    (4,174
    )
    
    
    6,157
    
    
    
    20,600
    
    
    
    (14,443
    )Restructure expense  severance and contract
termination costs
    
    
    
    
    
    
    1,921
    
    
    
    (1,921
    )
    
    
    1,845
    
    
    
    1,921
    
    
    
    (76
    )Impairment expense
    
    
    
    
    
    
    28,291
    
    
    
    (28,291
    )
    
    
    9,351
    
    
    
    28,291
    
    
    
    (18,940
    )Other expenses
    
    
    5,354
    
    
    
    7,429
    
    
    
    (2,075
    )
    
    
    15,793
    
    
    
    22,940
    
    
    
    (7,147
    )Intersegment expenses
    
    
    18,200
    
    
    
    20,924
    
    
    
    (2,724
    )
    
    
    57,754
    
    
    
    59,594
    
    
    
    (1,840
    )Total operating expenses
    
    
    25,534
    
    
    
    64,719
    
    
    
    (39,185
    )
    
    
    90,900
    
    
    
    133,346
    
    
    
    (42,446
    )Base net income (loss) before income taxes
    
    
    37,965
    
    
    
    (12,495
    )
    
    
    50,460
    
    
    
    43,908
    
    
    
    73,647
    
    
    
    (29,739
    )Income tax expense (benefit)
    
    
    14,047
    
    
    
    (4,748
    )
    
    
    18,795
    
    
    
    15,889
    
    
    
    27,986
    
    
    
    (12,097
    )Base net income (loss)
    
    $
    23,918
    
    
    
    (7,747
    )
    
    
    31,665
    
    
    
    28,019
    
    
    
    45,661
    
    
    
    (17,642
    )Before Tax Operating Margin
    
    
    59.8
    %
    
    
    (23.9
    %)
    
    
    
    
    
    
    32.6
    %
    
    
    35.6
    %Before Tax Operating Margin 
excluding restructure expense,
impairment expense, provision for loan
losses related to the loss of Exceptional
Performer, and the loss on sale of loans
during the first quarter 2008
    
    
    59.8
    %
    
    
    49.2
    %
    
    
    
    
    
    
    56.3
    %
    
    
    53.7
    %
 Net interest income after the provision for loan losses
 Three months ended September 30,
    
    
    Change2008
    
    
    2007
    
    
    Dollars
    
    
    PercentLoan interest
    
    $
    351,331
    
    
    
    509,596
    
    
    
    (158,265
    )
    
    
    (31.1
    )%Consolidation rebate fees
    
    
    (47,105
    )
    
    
    (49,492
    )
    
    
    2,387
    
    
    
    4.8Amortization of loan premiums and
deferred origination costs
    
    
    (21,338
    )
    
    
    (23,450
    )
    
    
    2,112
    
    
    
    9.0Total loan interest
    
    
    282,888
    
    
    
    436,654
    
    
    
    (153,766
    )
    
    
    (35.2
    )Investment interest
    
    
    7,151
    
    
    
    17,399
    
    
    
    (10,248
    )
    
    
    (58.9
    )Total interest income
    
    
    290,039
    
    
    
    454,053
    
    
    
    (164,014
    )
    
    
    (36.1
    )Interest on bonds and notes payable
    
    
    223,523
    
    
    
    384,793
    
    
    
    (161,270
    )
    
    
    (41.9
    )Intercompany interest
    
    
    749
    
    
    
    
    
    
    
    749
    
    
    
    N/AProvision for loan losses
    
    
    7,000
    
    
    
    18,340
    
    
    
    (11,340
    )
    
    
    (61.8
    )Net interest income after provision
for loan losses
    
    $
    58,767
    
    
    
    50,920
    
    
    
    7,847
    
    
    
    15.4
    %
  54




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##### Table of Contents




    
    The average student loan portfolio increased $0.2 billion, or 0.7%, for the three months
ended September 30, 2008 compared to the same period in 2007. The increase in average
loans was offset by a decrease in the yield earned on student loans. Loan interest income
decreased $158.3 million as a result of these factors.
    
    Consolidation rebate fees decreased due to the $0.9 billion, or 4.6%, decrease in the
average consolidation portfolio.
    
    The amortization of loan premiums and deferred origination costs decreased as a result
of reduced costs to acquire or originate loans.
    
    Investment income decreased as a result of an overall decrease in average cash held in
2008 as compared to 2007, as well as lower interest rates.
    
    Interest expense decreased as a result of a decrease in interest rates on the Companys
variable rate debt which lowered the Companys cost of funds (excluding net derivative
settlements) to 3.32% for the three months ended September 30, 2008 compared to 5.59% for
the same period a year ago. In addition, average debt decreased by $0.6 billion, or 2.0%,
for the three months ended September 30, 2008 compared to the same period in 2007.
    
    Excluding an expense of $15.7 million in September 2007 to increase the Companys
allowance for loan losses related to the increase in risk share as a result of the
elimination of the Exceptional Performer program in the third quarter of 2007, the
provision for loan losses increased for the three months ended September 30, 2008 compared
to 2007. The provision for loan losses for federally insured loans increased as a result
of the increase in risk share as a result of the loss of Exceptional Performer in September
2007. The provision for loan losses for
non-federally insured loans increased primarily due to increases in delinquencies as a
result of the continued weakening of the U.S. economy.
 Nine months ended September 30,
    
    
    Change2008
    
    
    2007
    
    
    Dollars
    
    
    PercentLoan interest
    
    $
    1,083,078
    
    
    
    1,461,594
    
    
    
    (378,516
    )
    
    
    (25.9
    )%Consolidation rebate fees
    
    
    (144,680
    )
    
    
    (143,657
    )
    
    
    (1,023
    )
    
    
    (0.7
    )Amortization of loan premiums and
deferred origination costs
    
    
    (69,583
    )
    
    
    (67,143
    )
    
    
    (2,440
    )
    
    
    (3.6
    )Total loan interest
    
    
    868,815
    
    
    
    1,250,794
    
    
    
    (381,979
    )
    
    
    (30.5
    )Investment interest
    
    
    23,875
    
    
    
    51,153
    
    
    
    (27,278
    )
    
    
    (53.3
    )Total interest income
    
    
    892,690
    
    
    
    1,301,947
    
    
    
    (409,257
    )
    
    
    (31.4
    )Interest on bonds and notes payable
    
    
    761,300
    
    
    
    1,081,588
    
    
    
    (320,288
    )
    
    
    (29.6
    )Intercompany interest
    
    
    1,389
    
    
    
    3,204
    
    
    
    (1,815
    )
    
    
    (56.6
    )Provision for loan losses
    
    
    18,000
    
    
    
    23,628
    
    
    
    (5,628
    )
    
    
    (23.8
    )Net interest income after provision
for loan losses
    
    $
    112,001
    
    
    
    193,527
    
    
    
    (81,526
    )
    
    
    (42.1
    )%
 
    
    The average student loan portfolio increased $1.4 billion, or 5.7%, for the nine months
ended September 30, 2008 compared to the same period in 2007. The increase in average
loans was offset by a decrease in the yield earned on student loans. Loan interest income
decreased $378.5 million as a result of these factors.
 
    
    Consolidation rebate fees increased due to the $0.5 billion, or 2.8%, increase in the
average consolidation loan portfolio.
 
    
    The amortization of loan premiums and deferred origination costs increased as a result
of an increase in the average student loan portfolio offset as a result of reduced costs to
acquire or originate loans.
 
    
    Investment income decreased as a result of an overall decrease in average cash held in
2008 as compared to 2007, as well as lower interest rates.
 
    
    Interest expense decreased as a result of a decrease in interest rates on the Companys
variable rate debt which lowered the Companys cost of funds (excluding net derivative
settlements) to 3.75% for the nine months ended September 30, 2008 compared to 5.52% for
the same period a year ago. This was offset by a $0.8 billion, or 3.2%, increase in
average debt for the nine months ended September 30, 2008 compared to the same period in
2007.
 
    
    Excluding an expense of $15.7 million in September 2007 to increase the Companys
allowance for loan losses related to the increase in risk share as a result of the
elimination of the Exceptional Performer program in the third quarter of 2007, the
provision for loan losses increased for the nine months ended September 30, 2008 compared
to 2007. The provision for loan losses for federally insured
loans increased as a result of the increase in risk share as a result of the loss of
Exceptional Performer in September 2007. The
provision for loan losses for non-federally insured loans increased primarily due to
increases in delinquencies as a result of the continued weakening of the U.S. economy.
 Other fee-based income
  55




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##### Table of Contents



Other income.
 Gain (loss) on sale of loans
 Operating expenses .
 LIQUIDITY AND CAPITAL RESOURCES
   As of September 30, 2008Carrying
    
    
    Interest rateamount
    
    
    range
    
    
    Final maturityVariable-rate bonds and notes (a):Bonds and notes based on indices
    
    $
    20,891,535
    
    
    2.79% - 5.07%
    
    
    09/25/13 - 06/25/41Bonds and notes based on auction or remarketing (b)
    
    
    2,771,445
    
    
    0.00% - 9.01%
    
    
    11/01/09 - 07/01/43Total variable-rate bonds and notes
    
    
    23,662,980Commercial paper  FFELP facility (c)
    
    
    2,525,410
    
    
    2.54% - 3.94%
    
    
    05/09/10Commercial paper  private loan facility (c)
    
    
    132,020
    
    
    3.14%

    
    
    03/14/09Fixed-rate bonds and notes (a)
    
    
    205,435
    
    
5.30% - 6.68%
    
    
    11/01/09 - 05/01/29Unsecured fixed rate debt
    
    
    475,000
    
    
    5.13% and 7.40%
    
    06/01/10 and 09/15/61Unsecured line of credit
    
    
    645,000
    
    
    2.90% - 3.65%
    
    
    05/08/12Department of Education Participation
    
    
    263,920
    
    
    3.25%
    
    
    09/30/09Other borrowings
    
    
    95,070
    
    
    4.09% - 5.10%

    
    
    05/22/09 - 11/01/15$
    28,004,835
 (a)
    
    Issued in asset-backed
securitizations.(b)
    
    As of September 30, 2008, the Company had $165 million of
bonds based on an auction rate of 0%, due to the Maximum Rate auction
provisions in the underlying documents for such financings. The Maximum
Rate provisions include multiple components, one of which is based on
T-bill rates. The T-bill component calculation for these bonds produced
negative rates, which resulted in auction rates of zero percent for the
applicable period.(c)
    
    Loan warehouse facilities.  56




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##### Table of Contents



Secured Financing Transactions
   Loan warehouse facilities
  FFELP Warehouse Facility
       Private Loan Warehouse Facility
   57




---



##### Table of Contents



Commercial Paper Warehouse Program
  Asset-backed securitizations
  LIBOR based notes
   Auction or remarketing based notes
     58




---



##### Table of Contents



Funding New FFELP Student Loan Originations
 Department of Educations Loan Participation and Purchase Commitment Programs
    Union Bank Participation Agreement
 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS No. 140).
  59




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##### Table of Contents



Operating Lines of Credit
   (v)
    
    A minimum consolidated net worth;(vi)
    
    A minimum adjusted EBITDA to corporate debt interest (over the last four rolling quarters);(vii)
    
    A limitation on subsidiary indebtedness; and(viii)
    
    A limitation on the percentage of non-guaranteed loans in the Companys portfolio.
    Universal Shelf Offerings
   60




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##### Table of Contents



Contractual Obligations
  Less than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1 to 3 years
    
    
    3 to 5 years
    
    
    5 yearsBonds and notes payable
    
    $
    28,004,835
    
    
    
    501,742
    
    
    
    2,914,569
    
    
    
    790,422
    
    
    
    23,798,102Operating lease obligations
    
    
    41,607
    
    
    
    9,278
    
    
    
    16,398
    
    
    
    11,976
    
    
    
    3,955Other
    
    
    62,520
    
    
    
    30,300
    
    
    
    32,220
    
    
    
    
    
    
    
    Total
    
    $
    28,108,962
    
    
    
    541,320
    
    
    
    2,963,187
    
    
    
    802,398
    
    
    
    23,802,057
     
    
    LoanSTAR Funding Group, Inc. (LoanSTAR)  As part of the agreement for the acquisition
of the capital stock of LoanSTAR from the Greater Texas Foundation (Texas Foundation),
the Company agreed to sell student loans in an aggregate amount sufficient to permit the
Texas Foundation to maintain a portfolio of loans equal to no less than $200 million
through October 2010. The sales price for such loans is the fair value mutually agreed
upon between the Company and the Texas Foundation. To satisfy this obligation, the Company
is obligated to sell loans to the Texas Foundation on a quarterly basis; however, the
Foundation recently has chosen not to purchase such loans.
    
    infiNET Integrated Solutions, Inc. (infiNET)  Stock price guarantee of $104.8375 per
share on 95,380 shares of Class A Common Stock (less the greater of $41.9335 or the gross
sales price such seller obtains from a sale of the shares occurring prior to February 28,
2011 as defined in the agreement) issued as part of the original purchase price. The
obligation to pay this guaranteed stock price is due February 28, 2011 and is not included
in the table above. Based upon the closing sale price of the Companys Class A Common
Stock as of September 30, 2008 of $14.20 per share, the Companys obligation under this
stock price guarantee would have been $6.0 million (($104.8375  $41.9335) x 95,380
shares). Any cash paid by the Company in consideration of satisfying the guaranteed value
of stock issued for this acquisition would be recorded by the Company as a reduction to
additional paid-in capital.
    
    5280 Solutions, Inc.  258,760 shares of Class A Common Stock issued as part of the
original purchase price is subject to a put option arrangement whereby during the 30-day
period ending November 30, 2008, the holders may require the Company to repurchase all or
part of the shares at a price of $37.10 per share. The value of this put option as of
September 30, 2008 was $9.6 million and is included in other in the above table. The
Company paid $9.6 million on November 10, 2008 to satisfy its obligation related to these
agreements.
 
  61




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##### Table of Contents



Sources of Liquidity
 Sources of Liquidity Available for New FFELP Stafford and PLUS Loans
  Sources of Liquidity Available for General Corporate Purposes
  Sources of primary liquidity: (a)Cash and cash equivalents (b)
    
    $
    117,894Unencumbered private student loan assets
    
    
    93,437Unused unsecured line of credit (c)
    
    
    51,200Total sources of primary liquidity
    
    $
    262,531
 (a)
    
    The sources of primary liquidity table above does not include the following: 
    
    Asset-backed security investments  As part of the Companys
issuance of asset-backed securitizations in March 2008 and May 2008, due to
credit market conditions when these notes were issued, the Company purchased
the Class B subordinated notes of $36 million (par value) and $41 million (par
value), respectively. These notes are not included on the Companys
consolidated balance sheet. If the credit market conditions improve, the
Company anticipates selling these notes to third parties. Upon a sale to third
parties, the Company would obtain cash proceeds equal to the market value of
the notes on the date of such sale. Upon sale, these notes would be shown as
bonds and notes payable on the Companys consolidated balance sheet. Unless
there is a significant market improvement, the Company believes the market
value of such notes will be less than par value. The difference between the
par value and market value would be recognized by the Company as interest
expense over the life of the bonds.
 (b)
    
    The Company also has restricted cash and investments, however, the Company is
limited in the amounts of funds that can be transferred from its subsidiaries through
intercompany loans, advances, or cash dividends. These limitations result from the
restrictions contained in trust indentures under debt financing arrangements to which
the Companys education lending subsidiaries are parties. The Company does not
believe these limitations will significantly affect its operating cash needs. The
amounts of cash and investments restricted in the respective reserve accounts of the
education lending subsidiaries are shown on the balance sheets as restricted cash and
investments.(c)
    
    As of November 7, 2008, the Company has $691.5 million outstanding under this
line of credit and $58.5 million available for future uses. The lending commitment on
the Companys unsecured line of credit is provided by multiple banks. Lehman Bank
represents seven percent of the lending commitment under the line of credit. On
September 15, 2008, Lehman Brothers Holdings Inc. filed a voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code. Since the bankruptcy
filing, the Company has experienced funding delays from Lehman Bank for its portion of
the lending commitment under the line of credit. As of November 7, 2008, excluding
Lehman Banks lending commitment, the Company has $51.2 million available for future
use under its unsecured line of credit. Dividends
   62




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES
   Allowance for Loan Losses
     Revenue Recognition
 Student Loan Income Accounting for Non-Refundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases
 Other Fee-Based Income
  63




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##### Table of Contents



Purchase Price Accounting Related to Business and Certain Asset Acquisitions
  Goodwill and Intangible Assets  Impairment Assessments
 Goodwill and Other Intangible Assets (SFAS No. 142).
  Accounting for
the Impairment or Disposal of Long-Lived Assets
  Income Taxes
   64




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##### Table of Contents



RECENT ACCOUNTING PRONOUNCEMENTS
 Business Combinations
 Fair Value Measurements Determining the Fair Value of
a Financial Asset When the Market for That Asset is Not Active
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FASB Statement No. 115
 Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51
 Disclosures about Derivative Instruments and Hedging
Activities
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles
  65




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##### Table of Contents



Accounting for Collaborative Arrangements Reporting Revenue Gross as a Principal Versus Net as
an Agent
 Determination of the Useful Life of Intangible
Assets Goodwill and Other Intangible Assets
 Disclosures about Credit
Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation
No. 45, and Clarification of the Effective Date of FASB Statement No. 161 Accounting for Derivative
Instruments and Hedging Activities Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
 Determining Whether Instruments Granted in
Share-Based Payment Transactions are Participating Securities
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
   66




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##### Table of Contents



As of September 30, 2008
    
    
    As of December 31, 2007Dollars
    
    
    Percent
    
    
    Dollars
    
    
    PercentFixed-rate loan assets
    
    $
    2,240,539
    
    
    
    8.6
    %
    
    $
    1,136,544
    
    
    
    4.3
    %Variable-rate loan assets
    
    
    23,760,874
    
    
    
    91.4
    
    
    
    25,192,669
    
    
    
    95.7Total
    
    $
    26,001,413
    
    
    
    100.0
    %
    
    $
    26,329,213
    
    
    
    100.0
    %Fixed-rate debt instruments
    
    
    680,435
    
    
    
    2.4
    %
    
    
    689,476
    
    
    
    2.5
    %Variable-rate debt instruments
    
    
    27,324,400
    
    
    
    97.6
    
    
    
    27,426,353
    
    
    
    97.5Total
    
    $
    28,004,835
    
    
    
    100.0
    %
    
    $
    28,115,829
    
    
    
    100.0
    %
      
  67




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##### Table of Contents



Borrower/
    
    
    Estimated
    
    
    Balance ofFixed
    
    lender
    
    
    variable
    
    
    assets earning fixed-rateinterest
    
    weighted
    
    
    conversion
    
    
    floor income as ofrate range
    
    average yield
    
    
    rate (a)
    
    
    September 30, 2008 (b)4.5 - 4.99%
    
    
    4.84
    %
    
    
    2.20
    %
    
    $
    1,2745.0 - 5.49%
    
    
    5.08
    %
    
    
    2.44
    %
    
    
    7,6145.5 - 5.99%
    
    
    5.74
    %
    
    
    3.10
    %
    
    
    245,1696.0 - 6.49%
    
    
    6.19
    %
    
    
    3.55
    %
    
    
    419,2916.5 - 6.99%
    
    
    6.70
    %
    
    
    4.06
    %
    
    
    375,9297.0 - 7.49%
    
    
    7.17
    %
    
    
    4.53
    %
    
    
    130,6847.5 - 7.99%
    
    
    7.71
    %
    
    
    5.07
    %
    
    
    224,3318.0 - 8.99%
    
    
    8.16
    %
    
    
    5.52
    %
    
    
    512,938> 9.0%
    
    
    9.04
    %
    
    
    6.40
    %
    
    
    323,309$
    2,240,539
 (a)
    
    The estimated variable conversion rate is the estimated short-term interest rate at which
loans would convert to variable rate.(b)
    
    As of September 30, 2008, the Company had $204.8 million of fixed rate debt that was used
by the Company to hedge fixed-rate student loan assets. The weighted average interest rate
paid by the Company on this debt as of September 30, 2008 was 6.17%.  Weightedaverage fixedNotional
    
    
    rate paid byMaturity
    
    Amount
    
    
    the Company (a)2009
    
    $
    500,000
    
    
    
    4.08
    %2010
    
    
    500,000
    
    
    
    3.84$
    1,000,000
    
    
    
    3.96
    %
 (a)
    
    For all interest rate derivatives for which the Company pays a fixed rate, the Company
receives discrete three-month LIBOR.    68




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##### Table of Contents



Debtoutstandingthat fundedFrequency of
    
    
    
    
    
    
    student loanIndex (e)
    
    Variable Resets
    
    
    Assets
    
    
    assets (a)3 month H15 financial commercial paper (b)
    
    Daily
    
    $
    24,422,798
    
    
    
    354,0033 month Treasury bill
    
    Varies
    
    
    1,303,095
    
    
    
    Private student loans
    
    
    
    
    
    
    275,520
    
    
    
    3 month LIBOR (c)
    
    Quarterly
    
    
    
    
    
    
    20,891,535Auction-rate or remarketing
    
    Varies
    
    
    
    
    
    
    2,771,445Asset-backed commercial paper
    
    Varies
    
    
    
    
    
    
    2,657,430Fixed rate
    
    
    
    
    
    
    
    
    
    
    205,435Other (d)
    
    
    
    
    
    
    878,435
    
    
    
    $
    26,879,848
    
    
    
    26,879,848
 (a)
    
    During 2007, the Company entered into basis swaps in which the Company receives
three-month LIBOR set discretely in advance and pays a daily weighted average three-month
LIBOR less a spread as defined in the individual agreements. The Company entered into these
derivative instruments to better match the interest rate characteristics on its student loan
assets and the debt funding such assets. The following table summarizes these derivatives
as of September 30, 2008: NotionalMaturity
    
    Amount2008
    
    $
    1,000,0002009
    
    
    1,000,0002010 (1)
    
    
    5,500,0002011
    
    
    2,700,0002012
    
    
    2,400,000$
    12,600,000
 (1)
    
    In October 2008, the Company terminated a basis swap with a notional
amount of $1.0 billion and an original maturity date in 2010 for
proceeds of $0.6 million. This derivative is included in the above
table.(b)
    
    The Companys FFELP student loans earn interest based on the daily average H15 financial
commercial paper index calculated on a fiscal quarter. The Companys funding includes $90.1
million funding private student loans under a participation agreement with Union Bank and
$263.9 million funding FFELP student loans under the Departments Participation Program.(c)
    
    The Company has Euro-denominated notes that reprice on the EURIBOR index. The Company has
entered into derivative instruments (cross-currency interest rate swaps) that convert the
EURIBOR index to 3 month LIBOR. As a result, these notes are reflected in the 3 month LIBOR
category in the above table. See Foreign Currency Exchange Risk.  69




---



##### Table of Contents



(d)
    
    Assets include restricted cash and investments and other assets.(e)
    
    Historically, the movement of the various interest rate indices received on the Companys
student loan assets and paid on the debt to fund such loans was highly correlated. As shown
below, the short-term movement of the indices was dislocated beginning in August 2007. This
dislocation has had a negative impact on the Companys student loan net interest income. 
 Financial Statement Impact of Derivative Instruments
 SFAS No. 133;
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Interest rate swaps  loan portfolio
    
    $
    (3,176
    )
    
    
    
    
    
    
    (14,195
    )
    
    
    4,753Basis swaps  loan portfolio
    
    
    (3,999
    )
    
    
    (2,608
    )
    
    
    41,606
    
    
    
    (2,489
    )Interest rate swaps  other (a)
    
    
    
    
    
    
    1,729
    
    
    
    
    
    
    
    12,050Cross-currency interest rate swaps
    
    
    7,963
    
    
    
    (1,457
    )
    
    
    18,577
    
    
    
    (7,214
    )Derivative settlements received (paid), net
    
    $
    788
    
    
    
    (2,336
    )
    
    
    45,988
    
    
    
    7,100
  70




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##### Table of Contents



(a)
    
    During the fourth quarter 2006, in consideration of not receiving 9.5% special
allowance payments on a prospective basis, the Company entered into a series of off-setting
interest rate swaps that mirrored the $2.45 billion in pre-existing interest rate swaps
that the Company had utilized to hedge its loan portfolio receiving 9.5% special allowance
payments against increases in interest rates.During the second quarter 2007, the Company entered into a series of off-setting interest
rate swaps that mirrored the remaining interest rate swaps utilized to hedge the Companys
student loan portfolio against increases in interest rates.The net effect of the offsetting derivatives discussed above was to lock in a series of
future income streams on underlying trades through their respective maturity dates. The net
settlements on these derivatives are included in interest rate swaps  other. In August
2007, the Company terminated these derivatives for net proceeds of $50.8 million. Sensitivity Analysis
  Three months ended September 30, 2008Change from decrease of 100
    
    
    Change from increase of 100
    
    
    Change from increase of 200basis points
    
    
    basis points
    
    
    basis pointsDollar
    
    
    Percent
    
    
    Dollar
    
    
    Percent
    
    
    Dollar
    
    
    Percent(dollars in thousands)Effect on earnings:Increase (decrease) in pre-tax net income before
impact of derivative settlements
    
    $
    8,803
    
    
    
    23.3
    %
    
    
    (2,299
    )
    
    
    (6.1
    )%
    
    
    (3,170
    )
    
    
    (8.4
    )%Impact of derivative settlements
    
    
    (3,101
    )
    
    
    (8.2
    )
    
    
    3,100
    
    
    
    8.2
    
    
    
    6,201
    
    
    
    16.4Increase in net income before taxes
    
    $
    5,702
    
    
    
    15.1
    %
    
    
    801
    
    
    
    2.1
    %
    
    
    3,031
    
    
    
    8.0
    %Increase in basic and diluted
earning per share
    
    $
    0.07
    
    
    
    
    
    
    
    0.01
    
    
    
    
    
    
    
    0.04
 Three months ended September 30, 2007Change from decrease of 100
    
    
    Change from increase of 100
    
    
    Change from increase of 200basis points
    
    
    basis points
    
    
    basis pointsDollar
    
    
    Percent
    
    
    Dollar
    
    
    Percent
    
    
    Dollar
    
    
    Percent(dollars in thousands)Effect on earnings:Increase in pre-tax net income before
impact of derivative settlements
    
    $
    7,557
    
    
    
    27.7
    %
    
    
    159
    
    
    
    0.6
    %
    
    
    1,395
    
    
    
    5.1
    %Impact of derivative settlements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Increase in net income before taxes
    
    $
    7,557
    
    
    
    27.7
    %
    
    
    159
    
    
    
    0.6
    %
    
    
    1,395
    
    
    
    5.1
    %Increase in basic and diluted
earning per share
    
    $
    0.09
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.02
 Nine months ended September 30, 2008Change from decrease of 100
    
    
    Change from increase of 100
    
    
    Change from increase of 200basis points
    
    
    basis points
    
    
    basis pointsDollar
    
    
    Percent
    
    
    Dollar
    
    
    Percent
    
    
    Dollar
    
    
    Percent(dollars in thousands)Effect on earnings:Increase (decrease) in 
pre-tax net income before
impact of derivative settlements
    
    $
    33,585
    
    
    
    2,205.2
    %
    
    
    (33,585
    )
    
    
    (2,205.2
    )%
    
    
    (46,123
    )
    
    
    (3,028.4
    )%Impact of derivative settlements
    
    
    (8,141
    )
    
    
    (534.5
    )
    
    
    8,141
    
    
    
    534.5
    
    
    
    16,282
    
    
    
    1,069.1Increase (decrease) in net income before taxes
    
    $
    25,444
    
    
    
    1,670.7
    %
    
    
    (25,444
    )
    
    
    (1,670.7
    )%
    
    
    (29,841
    )
    
    
    (1,959.3
    )%Increase (decrease) in basic and diluted
earning per share
    
    $
    0.33
    
    
    
    
    
    
    
    (0.33
    )
    
    
    
    
    
    
    (0.38
    )
 Nine months ended September 30, 2007Change from decrease of 100
    
    
    Change from increase of 100
    
    
    Change from increase of 200basis points
    
    
    basis points
    
    
    basis pointsDollar
    
    
    Percent
    
    
    Dollar
    
    
    Percent
    
    
    Dollar
    
    
    Percent(dollars in thousands)Effect on earnings:Increase in pre-tax net income before
impact of derivative settlements
    
    $
    15,170
    
    
    
    58.0
    %
    
    
    8,858
    
    
    
    33.9
    %
    
    
    20,980
    
    
    
    80.2
    %Impact of derivative settlements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Increase in net income before taxes
    
    $
    15,170
    
    
    
    58.0
    %
    
    
    8,858
    
    
    
    33.9
    %
    
    
    20,980
    
    
    
    80.2
    %Increase in basic and diluted
earning per share
    
    $
    0.20
    
    
    
    
    
    
    
    0.12
    
    
    
    
    
    
    
    0.27
  71




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##### Table of Contents



Foreign Currency Exchange Risk
   
  
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 General
   72




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Municipal Derivative Bid Practices Investigation
   Hinds County, Mississippi v. Wachovia Bank,
N.A. et al.
  Industry Investigations
     Department of Education Review
   73




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Department of Justice
   
 ITEM 1A. RISK FACTORS
  The recent credit and financial market crisis has had an adverse effect on the Companys liquidity
and poses counterparty risks.
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asset-backed
 2008-2009,
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The recent reductions in the Companys student loan purchases from branding and forward flow
partners could have an adverse impact on its business.
  Recent changes in legislation may affect the Companys business and profitability.
  
    
    Contains lender and school code of conduct requirements applicable to FFELP and
private education lenders;
    
    Contains additional provisions and reporting requirements for lenders and schools
participating in preferred lender arrangements; and
    
    Contains additional disclosures that FFELP lenders must make to borrowers as well as
added FFELP loan servicing requirements for lenders.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Stock Repurchases
  Total number of
    
    
    Maximum numbershares purchased
    
    
    of shares that mayTotal number
    
    
    Average
    
    
    as part of publicly
    
    
    yet be purchasedof shares
    
    
    price paid
    
    
    announced plans
    
    
    under the plansPeriod
    
    purchased (1)
    
    
    per share
    
    
    or programs (2) (3)
    
    
    or programs (4)July 1 - July 31, 2008
    
    
    843
    
    
    $
    10.64
    
    
    
    843
    
    
    
    8,006,039August 1 - August 31, 2008
    
    
    4,581
    
    
    
    13.22
    
    
    
    4,581
    
    
    
    6,938,898September 1 - September 30, 2008
    
    
    2,140
    
    
    
    15.67
    
    
    
    2,140
    
    
    
    7,184,957Total
    
    
    7,564
    
    
    $
    13.63
    
    
    
    7,564
 (1)
    
    The total number of shares includes: (i) shares purchased pursuant to the 2006
Plan discussed in footnote (2) below; and (ii) shares purchased pursuant to the 2006
ESLP discussed in footnote (3) below, of which there were none for the months of July,
August, or September 2008. Shares of Class A common stock purchased pursuant to the
2006 Plan included (i) 843 shares, 363 shares, and 2,140 shares in July, August, and
September, respectively, that had been issued to the Companys 401(k) plan and allocated
to employee participant accounts pursuant to the plans provisions for Company matching
contributions in shares of Company stock, and were purchased by the Company from the
plan pursuant to employee participant instructions to dispose of such shares, and (ii)
4,218 shares purchased in August 2008 from employees upon cancellation of loans
associated with shares originally acquired pursuant to the 2006 ESLP.(2)
    
    On May 25, 2006, the Company publicly announced that its Board of Directors had
authorized a stock repurchase program to repurchase up to a total of five million shares
of the Companys Class A common stock (the 2006 Plan). On February 7, 2007, the
Companys Board of Directors increased the total shares the Company is allowed to
repurchase to 10 million. The 2006 Plan had an initial expiration date of May 24, 2008,
which was extended until May 24, 2010 by the Companys Board of Directors on January 30,
2008.(3)
    
    On May 25, 2006, the Company publicly announced that the shareholders of the
Company approved an Employee Stock Purchase Loan Plan (the 2006 ESLP) to allow the
Company to make loans to employees for the purchase of shares of the Companys Class A
common stock either in the open market or directly from the Company. A total of $40
million in loans may be made under the 2006 ESLP, and a total of one million shares of
Class A common stock are reserved for issuance under the 2006 ESLP. Shares may be
purchased directly from the Company or in the open market through a broker at prevailing
market prices at the time of purchase, subject to any conditions or restrictions on the
timing, volume, or prices of purchases as determined by the Compensation Committee of
the Board of Directors and set forth in the Stock Purchase Loan Agreement with the
participant. The 2006 ESLP shall terminate May 25, 2016.(4)
    
    The maximum number of shares that may yet be purchased under the plans is
calculated below. There are no assurances that any additional shares will be
repurchased under either the 2006 Plan or the 2006 ESLP. Shares under the 2006 ESLP may
be issued by the Company rather than purchased in open market transactions. (B / C)
    
    
    (A + D)Approximate dollar
    
    
    Closing price on the
    
    
    Approximate
    
    
    ApproximateMaximum number of
    
    
    value of shares that
    
    
    last trading
    
    
    number of shares
    
    
    number of sharesshares that may yet be
    
    
    may yet be
    
    
    day of the
    
    
    that may yet be
    
    
    that may yet bepurchased under the
    
    
    purchased under
    
    
    Companys Class A
    
    
    purchased under
    
    
    purchased under2006 Plan
    
    
    the 2006 ESLP
    
    
    Common Stock
    
    
    the 2006 ESLP
    
    
    the 2006 Plan andAs of
    
    (A)
    
    
    (B)
    
    
    (C)
    
    
    (D)
    
    
    2006 ESLPJuly 31, 2008
    
    
    4,624,777
    
    
    
    36,450,000
    
    
    
    10.78
    
    
    
    3,381,262
    
    
    
    8,006,039August 31, 2008
    
    
    4,620,196
    
    
    
    36,450,000
    
    
    
    15.72
    
    
    
    2,318,702
    
    
    
    6,938,898September 30, 2008
    
    
    4,618,056
    
    
    
    36,450,000
    
    
    
    14.20
    
    
    
    2,566,901
    
    
    
    7,184,957
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Working capital and dividend restrictions/limitations
   
    
    declare or pay any dividends or distributions on, or redeem, purchase, acquire or
make a liquidation payment regarding, any of the Companys capital stock;
    
    except as required in connection with the repayment of principal, and except for any
partial payments of deferred interest that may be made through the alternative payment
mechanism described in the Hybrid Securities indenture, make any payment of principal
of, or interest or premium, if any, on, or repay, repurchase, or redeem any of the
Companys debt securities that rank pari passuwith or junior to the Hybrid Securities;
or
    
    make any guarantee payments regarding any guarantee by the Company of the
subordinated debt securities of any of the Companys subsidiaries if the guarantee ranks
pari passuwith or junior in interest to the Hybrid Securities.
 pari passu
   
    
    pay dividends or distributions in additional shares of the Companys capital stock;
    
    declare or pay a dividend in connection with the implementation of a shareholders
rights plan, or issue stock under such a plan, or redeem or repurchase any rights
distributed pursuant to such a plan; and
    
    purchase common stock for issuance pursuant to any employee benefit plans.
  78




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ITEM 6. EXHIBITS
 10.1*
    
    Fourth Amendment of Amended and Restated Participation Agreement, dated as of August 1, 2005,
by and between Union Bank and Trust Company and Nelnet, Inc. (f/k/a NELnet, Inc.) (subsequently
renamed National Education Loan Network, Inc.).10.2*
    
    Fifth Amendment of Amended and Restated Participation Agreement, dated as of November 1, 2005,
by and between Union Bank and Trust Company and Nelnet, Inc. (f/k/a NELnet, Inc.) (subsequently
renamed National Education Loan Network, Inc.).10.3*
    
    Sixth Amendment of Amended and Restated Participation Agreement, dated as of December 12, 2005,
by and between Union Bank and Trust Company and Nelnet, Inc. (f/k/a NELnet, Inc.) (subsequently
renamed National Education Loan Network, Inc.).10.4*
    
    Master Participation Agreement, dated as of August 14, 2008, by and between the United States
Department of Education and Nelnet, Inc.10.5*
    
    Master Loan Sale Agreement, dated as of August 14, 2008, by and between the United States
Department of Education and Nelnet, Inc.10.6*+
    
    Separation Agreement, dated as of July 21, 2008, by and between Matthew D. Hall and Nelnet, Inc.31.1*
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Executive
Officer Michael S. Dunlap.31.2*
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Financial
Officer Terry J. Heimes.32**
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 *
    
    Filed herewith**
    
    Furnished herewith+
    
    Indicates a compensatory plan or arrangement  79




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SIGNATURES
  NELNET, INC.Date: November 10, 2008
    By:
    /s/ MICHAEL S. DUNLAPName:
    Michael S. DunlapTitle:
    Chairman and Chief Executive OfficerBy:
    /s/ TERRY J. HEIMESName:
    Terry J. HeimesTitle:
    Chief Financial Officer  80




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EXHIBIT INDEX
 10.1*
    
    Fourth Amendment of Amended and Restated Participation Agreement, dated as of August 1, 2005,
by and between Union Bank and Trust Company and Nelnet, Inc. (f/k/a NELnet, Inc.) (subsequently
renamed National Education Loan Network, Inc.).10.2*
    
    Fifth Amendment of Amended and Restated Participation Agreement, dated as of November 1, 2005,
by and between Union Bank and Trust Company and Nelnet, Inc. (f/k/a NELnet, Inc.) (subsequently
renamed National Education Loan Network, Inc.).10.3*
    
    Sixth Amendment of Amended and Restated Participation Agreement, dated as of December 12, 2005,
by and between Union Bank and Trust Company and Nelnet, Inc. (f/k/a NELnet, Inc.) (subsequently
renamed National Education Loan Network, Inc.).10.4*
    
    Master Participation Agreement, dated as of August 14, 2008, by and between the United States
Department of Education and Nelnet, Inc.10.5*
    
    Master Loan Sale Agreement, dated as of August 14, 2008, by and between the United States
Department of Education and Nelnet, Inc.10.6*+
    
    Separation Agreement, dated as of July 21, 2008, by and between Matthew D. Hall and Nelnet, Inc.31.1*
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Executive
Officer Michael S. Dunlap.31.2*
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Financial
Officer Terry J. Heimes.32**
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 *
    
    Filed herewith**
    
    Furnished herewith+
    
    Indicates a compensatory plan or arrangement  81