##### 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 March 31, 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
(State or other jurisdiction of incorporation or organization)
    
    84-0748903
(I.R.S. Employer Identification No.)121 SOUTH 13TH STREET, SUITE 201
LINCOLN, NEBRASKA
(Address of principal executive offices)
    
    68508


(Zip Code)
 (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
March 31, 2008
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    2Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    57Item 4. Controls and Procedures
    
    
    63PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    63Item 1A. Risk Factors
    
    
    64Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    64Item 6. Exhibits
    
    
    67Signatures
    
    
    68Exhibit 10.1Exhibit 10.2Exhibit 10.3Exhibit 10.4Exhibit 10.5Exhibit 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 ofMarch 31, 2008
    
    
    December 31, 2007(unaudited)Assets:Student loans receivable (net of allowance for loan losses of
$46,137 and $45,592, respectively)
    
    $
    26,321,345
    
    
    
    26,736,122Student loans receivable  held for sale
    
    
    423,651
    
    
    
    Cash and cash equivalents:Cash and cash equivalents  not held at a related party
    
    
    15,881
    
    
    
    38,305Cash and cash equivalents  held at a related party
    
    
    108,290
    
    
    
    73,441Total cash and cash equivalents
    
    
    124,171
    
    
    
    111,746Restricted cash
    
    
    1,700,229
    
    
    
    842,020Restricted investments
    
    
    95,409
    
    
    
    85,227Restricted cash  due to customers
    
    
    48,955
    
    
    
    81,845Accrued interest receivable
    
    
    526,544
    
    
    
    593,322Accounts receivable, net
    
    
    47,752
    
    
    
    49,084Goodwill
    
    
    175,178
    
    
    
    164,695Intangible assets, net
    
    
    92,897
    
    
    
    112,830Property and equipment, net
    
    
    48,089
    
    
    
    55,797Other assets
    
    
    120,523
    
    
    
    107,624Fair value of derivative instruments
    
    
    295,073
    
    
    
    222,471Total assets
    
    $
    30,019,816
    
    
    
    29,162,783Liabilities:Bonds and notes payable
    
    $
    29,129,133
    
    
    
    28,115,829Accrued interest payable
    
    
    92,740
    
    
    
    129,446Other liabilities
    
    
    160,850
    
    
    
    220,899Due to customers
    
    
    48,955
    
    
    
    81,845Fair value of derivative instruments
    
    
    50,031
    
    
    
    5,885Total liabilities
    
    
    29,481,709
    
    
    
    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 37,912,773 shares as of March 31,
2008 and 37,980,617 shares as of December 31, 2007
    
    
    379
    
    
    
    380Class B, convertible, $0.01 par value. Authorized 60,000,000
shares; issued and outstanding 11,495,377 shares as of March 31,
2008 and December 31, 2007
    
    
    115
    
    
    
    115Additional paid-in capital
    
    
    97,875
    
    
    
    96,185Retained earnings
    
    
    442,034
    
    
    
    515,317Employee notes receivable
    
    
    (2,296
    )
    
    
    (3,118
    )Total shareholders equity
    
    
    538,107
    
    
    
    608,879Commitments and contingenciesTotal liabilities and shareholders equity
    
    $
    30,019,816
    
    
    
    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 monthsended March 31,2008
    
    
    2007Interest income:Loan interest
    
    $
    329,986
    
    
    
    397,054Investment interest
    
    
    11,680
    
    
    
    21,425Total interest
income
    
    
    341,666
    
    
    
    418,479Interest expense:Interest on bonds and notes payable
    
    
    325,141
    
    
    
    350,495Net interest income
    
    
    16,525
    
    
    
    67,984Less provision for loan losses
    
    
    5,000
    
    
    
    2,753Net interest income after provision for loan losses
    
    
    11,525
    
    
    
    65,231Other income (expense):Loan and guaranty servicing income
    
    
    26,113
    
    
    
    30,466Other fee-based income
    
    
    45,913
    
    
    
    40,029Software services income
    
    
    6,752
    
    
    
    5,748Other income
    
    
    1,429
    
    
    
    6,879Loss on sale of loans and reduction in fair value related
to loans held for
sale
    
    
    (47,493
    )
    
    
    Derivative market value, foreign currency,
and put option adjustments and derivative
settlements, net
    
    
    (16,598
    )
    
    
    (7,890
    )Total other income
    
    
    16,116
    
    
    
    75,232Operating expenses:Salaries and benefits
    
    
    53,843
    
    
    
    61,704Other operating expenses:Impairment expense
    
    
    18,834
    
    
    
    Advertising and marketing
    
    
    16,203
    
    
    
    13,993Depreciation and amortization
    
    
    10,834
    
    
    
    11,010Professional and other services
    
    
    8,107
    
    
    
    8,369Occupancy and communications
    
    
    5,841
    
    
    
    5,219Postage and distribution
    
    
    3,817
    
    
    
    4,519Trustee and other debt related fees
    
    
    2,390
    
    
    
    2,843Other
    
    
    8,968
    
    
    
    13,572Total other operating expenses
    
    
    74,994
    
    
    
    59,525Total operating expenses
    
    
    128,837
    
    
    
    121,229Income (loss) before income taxes
    
    
    (101,196
    )
    
    
    19,234Income tax expense (benefit)
    
    
    (31,371
    )
    
    
    7,264Income (loss) from continuing operations
    
    
    (69,825
    )
    
    
    11,970Income from discontinued operations, net of tax
    
    
    
    
    
    
    2,810Net income (loss)
    
    $
    (69,825
    )
    
    
    14,780Earnings (loss) per share, basic and diluted:Income (loss) from continuing operations
    
    $
    (1.42
    )
    
    
    0.23Income from discontinued operations
    
    
    
    
    
    
    0.06Net income (loss)
    
    $
    (1.42
    )
    
    
    0.29
   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 December 31, 2006
    
    
    
    
    
    
    39,035,169
    
    
    
    13,505,812
    
    
    $
    
    
    
    
    390
    
    
    
    135
    
    
    
    177,678
    
    
    
    496,341
    
    
    
    (2,825
    )
    
    
    131
    
    
    
    671,850Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,780
    
    
    
    
    
    
    
    
    
    
    
    14,780Other comprehensive income:Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    252
    
    
    
    252Non-pension postretirement benefit plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,031Cash dividend on Class A and Class B
common stock  $0.07 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,464
    )
    
    
    
    
    
    
    
    
    
    
    (3,464
    )Adjustment to adopt provisions of
FASB Interpretation No. 48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61
    )
    
    
    
    
    
    
    
    
    
    
    (61
    )Issuance of common stock, net of forfeitures
    
    
    
    
    
    
    113,091
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    2,339
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,340Compensation expense for stock based awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    758
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    758Repurchase of common stock
    
    
    
    
    
    
    (3,061,072
    )
    
    
    
    
    
    
    
    
    
    
    (30
    )
    
    
    
    
    
    
    (75,430
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (75,460
    )Conversion of common stock
    
    
    
    
    
    
    2,010,435
    
    
    
    (2,010,435
    )
    
    
    
    
    
    
    20
    
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reduction of employee stock notes receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124
    
    
    
    
    
    
    
    124Balance as of March 31, 2007
    
    
    
    
    
    
    38,097,623
    
    
    
    11,495,377
    
    
    $
    
    
    
    
    381
    
    
    
    115
    
    
    
    105,345
    
    
    
    507,596
    
    
    
    (2,701
    )
    
    
    382
    
    
    
    611,118Balance as of December 31, 2007
    
    
    
    
    
    
    37,980,617
    
    
    
    11,495,377
    
    
    $
    
    
    
    
    380
    
    
    
    115
    
    
    
    96,185
    
    
    
    515,317
    
    
    
    (3,118
    )
    
    
    
    
    
    
    608,879Comprehensive income:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (69,825
    )
    
    
    
    
    
    
    
    
    
    
    (69,825
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (69,825
    )Cash dividend on Class A and Class B
common stock  $0.07 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,458
    )
    
    
    
    
    
    
    
    
    
    
    (3,458
    )Forfeitures of common stock, net of issuances
    
    
    
    
    
    
    (19,780
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    763
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    762Compensation expense for stock based awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,415
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,415Repurchase of common stock
    
    
    
    
    
    
    (48,064
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (488
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (488
    )Reduction of employee stock notes receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    822
    
    
    
    
    
    
    
    822Balance as of March 31, 2008
    
    
    
    
    
    
    37,912,773
    
    
    
    11,495,377
    
    
    $
    
    
    
    
    379
    
    
    
    115
    
    
    
    97,875
    
    
    
    442,034
    
    
    
    (2,296
    )
    
    
    
    
    
    
    538,107
   4




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##### Table of Contents



NELNET,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three months ended March 31,2008
    
    
    2007Net income (loss)
    
    $
    (69,825
    )
    
    
    14,780Income from discontinued operations
    
    
    
    
    
    
    2,810Income (loss) from continuing operations
    
    
    (69,825
    )
    
    
    11,970Adjustments to reconcile income from continuing operations to net cash provided
by operating activities, net of business acquisitions:Depreciation and amortization, including loan premiums and deferred origination costs
    
    
    38,952
    
    
    
    69,968Derivative market value adjustment
    
    
    (36,003
    )
    
    
    (3,613
    )Foreign currency transaction adjustment
    
    
    92,937
    
    
    
    13,686Change in value of put options issued in business acquisitions
    
    
    427
    
    
    
    2,057Proceeds from termination of derivative instruments
    
    
    7,547
    
    
    
    Payments to terminate floor contracts
    
    
    
    
    
    
    (8,100
    )Impairment expense
    
    
    18,834
    
    
    
    Loss (gain) on sale of student loans and reduction in fair value related to loans held for sale
    
    
    47,474
    
    
    
    (1,786
    )Non-cash compensation expense
    
    
    3,099
    
    
    
    844Deferred income tax benefit
    
    
    (27,389
    )
    
    
    (1,086
    )Provision for loan losses
    
    
    5,000
    
    
    
    2,753Other non-cash items
    
    
    191
    
    
    
    (2,243
    )Decrease (increase) in accrued interest receivable
    
    
    66,778
    
    
    
    (43,744
    )Decrease in accounts receivable
    
    
    1,332
    
    
    
    5,395(Increase) decrease in other assets
    
    
    (11,678
    )
    
    
    2,392Decrease in accrued interest payable
    
    
    (36,706
    )
    
    
    (5,420
    )Decrease in other liabilities
    
    
    (26,027
    )
    
    
    (4,519
    )Net cash flows from operating activities  continuing operations
    
    
    74,943
    
    
    
    38,554Net cash flows from operating activities  discontinued operations
    
    
    
    
    
    
    6,436Net cash provided by operating activities
    
    
    74,943
    
    
    
    44,990Cash flows from investing activities, net of business acquisitions:Originations, purchases, and consolidations of student loans, including loan premiums
and deferred origination costs
    
    
    (1,174,366
    )
    
    
    (1,751,965
    )Purchases of student loans, including loan premiums, from a related party
    
    
    (177,788
    )
    
    
    (22,197
    )Net proceeds from student loan repayments, claims, capitalized interest, participations, and other
    
    
    424,315
    
    
    
    475,211Proceeds from sale of student loans
    
    
    841,087
    
    
    
    53,432Purchases of property and equipment, net
    
    
    (1,350
    )
    
    
    (7,218
    )(Increase) decrease in restricted cash
    
    
    (858,209
    )
    
    
    359,194Purchases of restricted investments
    
    
    (89,576
    )
    
    
    (124,690
    )Proceeds from maturities of restricted investments
    
    
    79,394
    
    
    
    139,059Purchases of equity method investments
    
    
    (1,718
    )
    
    
    Distributions from equity method investments
    
    
    
    
    
    
    100Business acquisitions, net of cash acquired
    
    
    (18,000
    )
    
    
    1,883Net cash flows from investing activities  continuing operations
    
    
    (976,211
    )
    
    
    (877,191
    )Net cash flows from investing activities  discontinued operations
    
    
    
    
    
    
    (109
    )Net cash used in investing activities
    
    
    (976,211
    )
    
    
    (877,300
    )Cash flows from financing activities:Payments on bonds and notes payable
    
    
    (550,318
    )
    
    
    (690,492
    )Proceeds from issuance of bonds and notes payable
    
    
    1,459,422
    
    
    
    1,669,801Proceeds (payments) from issuance of notes payable due to a related party, net
    
    
    11,321
    
    
    
    (53,008
    )Payments of debt issuance costs
    
    
    (3,184
    )
    
    
    (1,369
    )Dividends paid
    
    
    (3,458
    )
    
    
    (3,464
    )Proceeds from issuance of common stock
    
    
    
    
    
    
    525Repurchases of common stock
    
    
    (488
    )
    
    
    (75,460
    )Payments received on employee stock notes receivable
    
    
    398
    
    
    
    124Net cash flows from financing activities  continuing operations
    
    
    913,693
    
    
    
    846,657Net cash flows from financing activities  discontinued operations
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    913,693
    
    
    
    846,657Effect of exchange rate fluctuations on cash
    
    
    
    
    
    
    135Net increase in cash and cash equivalents
    
    
    12,425
    
    
    
    14,482Cash and cash equivalents, beginning of period
    
    
    111,746
    
    
    
    106,086Cash and cash equivalents, end of period
    
    $
    124,171
    
    
    
    120,568Supplemental disclosures of cash flow information:Interest paid
    
    $
    354,904
    
    
    
    315,682Income taxes paid, net of refunds
    
    $
    5,343
    
    
    
    780
   5




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##### Table of Contents



NELNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of March 31, 2008 and for the three months ended
March 31, 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 endedMarch 31, 2007Operating income of discontinued operations
    
    $
    4,414Income tax on operations
    
    
    (1,604
    )Income from discontinued operations, net of tax
    
    $
    2,810
  Three months endedMarch 31, 2007Net interest income
    
    $
    71Other income
    
    
    19,031Operating expenses
    
    
    (14,688
    )Income before income taxes
    
    
    4,414Income tax expense
    
    
    1,604Operating income of discontinued
operations, net of tax
    
    $
    2,810
  6




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##### Table of Contents



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
    
    
    
    3,458
 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
    
    
    
    
    
    
    
    2,716
 (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 duringthe three month
    
    
    Write-down of
    
    
    
    
    
    
    Restructuringperiod ended
    
    
    assets to net
    
    
    Cash
    
    
    accrual as ofOperating segment
    
    March 31, 2008
    
    
    realizable value
    
    
    payments
    
    
    March 31, 2008Student Loan and Guaranty Servicing
    
    $
    6,010
    
    
    
    (5,074
    )
    
    
    (430
    )
    
    
    506Tuition Payment Processing and
Campus Commerce
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Enrollment Services and List
Management
    
    
    312
    
    
    
    
    
    
    
    (291
    )
    
    
    21Software and Technical Services
    
    
    518
    
    
    
    
    
    
    
    (472
    )
    
    
    46Asset Generation and Management
    
    
    11,287
    
    
    
    (9,351
    )
    
    
    (1,806
    )
    
    
    130Corporate Activity and Overhead
    
    
    8,375
    
    
    
    (4,409
    )
    
    
    (1,953
    )
    
    
    2,013$
    26,502
    
    
    
    (18,834
    )
    
    
    (4,952
    )
    
    
    2,716
  8




---



##### Table of Contents



Remainingrestructuring costsexpected to beRestructuring
    
    
    recognized duringcosts recognized
    
    
    the three monthEstimated
    
    
    during the three
    
    
    period endingtotal restructuring
    
    
    month period ended
    
    
    June 30, 2008Operating segment
    
    costs
    
    
    March 31, 2008
    
    
    (2nd quarter 2008)Student Loan and Guaranty Servicing
    
    $
    6,083
    
    
    
    6,010
    
    
    
    73Tuition Payment Processing and
Campus Commerce
    
    
    
    
    
    
    
    
    
    
    Enrollment Services and List
Management
    
    
    312
    
    
    
    312
    
    
    
    Software and Technical Services
    
    
    525
    
    
    
    518
    
    
    
    7Asset Generation and Management
    
    
    11,287
    
    
    
    11,287
    
    
    
    Corporate Activity and Overhead
    
    
    8,748
    
    
    
    8,375
    
    
    
    373$
    26,955
    
    
    
    26,502
    
    
    
    453
 4. Legal, Industry, and Legislative Developments
 Legal Proceedings
 General
  Municipal Derivative Bid Practices Investigation
       9




---



##### Table of Contents



Industry Inquiries and Investigations
    Department of Education Review
   Department of Justice
   Internal Revenue Service
   10




---



##### Table of Contents



Legislative Developments
  
    
    Increases statutory limits on annual and aggregate borrowing for FFELP loans;
    
    Enhances benefits for parents who borrow PLUS loans; and
    
    Allows the Department to act as a secondary market and enter into forward purchasing
agreements with lenders.
    5. Student Loans Receivable and Allowance for Loan Losses
  As of
    
    
    As ofMarch 31, 2008
    
    
    December 31, 2007Federally insured loans
    
    $
    26,064,046
    
    
    
    26,054,398Non-federally insured loans
    
    
    283,308
    
    
    
    274,81526,347,354
    
    
    
    26,329,213Unamortized loan premiums and deferred origination costs
    
    
    443,779
    
    
    
    452,501Allowance for loan losses  federally insured loans
    
    
    (23,962
    )
    
    
    (24,534
    )Allowance for loan losses  non-federally insured loans
    
    
    (22,175
    )
    
    
    (21,058
    )$
    26,744,996
    
    
    
    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
    
    
    7.83
    %
    
    
    7.66
    %Total allowance as a percentage of ending balance of total loans
    
    
    0.18
    %
    
    
    0.17
    %
 Loan Sales
    11




---



##### Table of Contents



6. Intangible Assets and Goodwill
  Weightedaverageremaininguseful life as of
    
    
    As of
    
    
    As ofMarch 31,
    
    
    March 31,
    
    
    December 31,2008
    
    
    2008
    
    
    2007Amortizable intangible assets:Customer relationships (net of accumulated amortization of $22,680
and $20,299, respectively)
    
    
    114
    
    
    $
    57,680
    
    
    
    60,061Trade names (net of accumulated amortization of $2,316 and
$1,258, respectively)
    
    
    50
    
    
    
    14,743
    
    
    
    1,609Covenants not to compete (net of accumulated amortization of
$10,569 and $11,815, respectively)
    
    
    28
    
    
    
    9,227
    
    
    
    15,425Loan origination rights (net of accumulated amortization of $8,180)
    
    
    
    
    
    
    
    
    
    
    8,473Database and content (net of accumulated amortization of $3,756
and $3,193, respectively)
    
    
    31
    
    
    
    5,724
    
    
    
    6,287Computer software (net of accumulated amortization of $5,554
and $4,898, respectively)
    
    
    17
    
    
    
    3,448
    
    
    
    4,189Student lists (net of accumulated amortization of $6,319 and
$5,806, respectively)
    
    
    11
    
    
    
    1,878
    
    
    
    2,391Other (net of accumulated amortization of $77 and $71, respectively)
    
    
    95
    
    
    
    197
    
    
    
    203Total  amortizable intangible assets
    
    85 months
    
    

    
    92,897
    
    
    
    98,638Unamortizable intangible assets  trade names
    
    
    
    
    
    
    
    
    
    
    14,192$
    92,897
    
    
    
    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
    
    $
    18,5062009
    
    
    20,5742010
    
    
    14,8062011
    
    
    10,2912012
    
    
    9,0302013 and thereafter
    
    
    19,690$
    92,897
  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
    
    
    
    
    
    
    
    
    
    
    11,150
    
    
    
    
    
    
    
    
    
    
    
    11,150Impairment charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (667
    )
    
    
    (667
    )Balance as of March 31, 2008
    
    $
    
    
    
    
    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. 7. Bonds and Notes Payable
  As of March 31, 2008Carrying
    
    Interest rateamount
    
    range
    
    Final maturityVariable-rate bonds and notes (a):Bonds and notes based on indices
    
    $
    18,442,481
    
    2.60% - 4.48%
    
    09/25/13 - 06/25/41Bonds and notes based on auction or remarketing (b)
    
    
    2,875,045
    
    0.00% - 7.90%
    
    11/01/09 - 07/01/43Total variable-rate bonds and notes
    
    
    21,317,526Commercial paper  FFELP facility
    
    
    6,486,212
    
    2.61% - 3.84%
    
    05/09/10Commercial paper  private loan facility
    
    
    190,050
    
    3.64%
    
    01/25/09Fixed-rate bonds and notes (a)
    
    
    211,704
    
    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
    
    
    375,000
    
    2.90% - 3.53%
    
    05/08/12Other borrowings
    
    
    73,641
    
    2.96% - 5.10%
    
    09/28/08 - 11/01/15$
    29,129,133
 (a)
    
    Issued in securitization transactions(b)
    
    As of March 31, 2008, the Company had $1.0 billion of bonds based on an auction
rate of 0.00%, 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 (and
subsequently, the Maximum Rate) produced negative rates, which resulted in auction rates
of zero percent for the applicable period.  13




---



##### Table of Contents



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
    
    
    6,629,109
    
    5.22% - 5.98%
    
    05/09/10Commercial paper  private loan facility
    
    
    226,250
    
    5.58%
    
    01/25/09Fixed-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 securitization transactions Securitization Transactions
  
       14




---



##### Table of Contents



Commercial Paper and Other
       Unsecured Lines of Credit
    15




---



##### Table of Contents



Other Borrowings
  8. Derivative Financial Instruments
  Interest Rate Swaps
     Weightedaverage fixedNotional
    
    
    rate paid byMaturity
    
    Amount
    
    
    the Company (b)2008 (a)
    
    $
    2,000,000
    
    
    
    4.18
    %2009
    
    
    500,000
    
    
    
    4.082010
    
    
    700,000
    
    
    
    3.442011
    
    
    500,000
    
    
    
    3.572012
    
    
    250,000
    
    
    
    3.86$
    3,950,000
    
    
    
    3.94
    %
 
 (a)
    
    The maturity date on these derivatives is June 30, 2008. The Company
has hedged a portion of its student loan portfolio in which the borrower interest
rate resets annually on July 1. These loans can generate excess spread income
compared with the rate based on the special allowance formula in declining
interest rate environments. As discussed above, the Company refers to this
additional income as variable-rate floor income.(b)
    
    For all interest rate derivatives, the Company receives discrete three-month LIBOR.   16




---



##### Table of Contents



Basis Swaps
  Notional AmountEffective datein second
    
    
    Effective datein third
    
    
    Effective datein second
    
    
    Effective datein thirdMaturity
    
    quarter 2007
    
    
    quarter 2007
    
    
    quarter 2008
    
    
    quarter 2008
    
    
    Total2008
    
    $
    2,000,000
    
    
    
    2,000,000
    
    
    
    
    
    
    
    
    
    
    
    4,000,0002009
    
    
    2,000,000
    
    
    
    4,000,000
    
    
    
    
    
    
    
    
    
    
    
    6,000,0002010
    
    
    500,000
    
    
    
    2,000,000
    
    
    
    2,000,000
    
    
    
    1,000,000
    
    
    
    5,500,0002011
    
    
    
    
    
    
    2,700,000
    
    
    
    
    
    
    
    
    
    
    
    2,700,0002012
    
    
    
    
    
    
    1,000,000
    
    
    
    800,000
    
    
    
    1,600,000
    
    
    
    3,400,000$
    4,500,000
    
    
    
    11,700,000
    
    
    
    2,800,000
    
    
    
    2,600,000
    
    
    
    21,600,000
  Cross-Currency Interest Rate Swaps
  
 Accounting for Derivative Financial Instruments
   As of
    
    
    As ofMarch 31, 2008
    
    
    December 31, 2007Interest rate swaps
    
    $
    (37,566
    )
    
    
    (2,695
    )Basis swaps
    
    
    (3,277
    )
    
    
    27,525Cross-currency interest rate swaps
    
    
    285,885
    
    
    
    191,756Net fair value
    
    $
    245,042
    
    
    
    216,586
   17




---



##### Table of Contents



Three months endedMarch 31,
    
    
    March 31,2008
    
    
    2007Interest rate swaps
    
    $
    (3,177
    )
    
    
    7,499Basis swaps
    
    
    40,457
    
    
    
    60Cross-currency interest rate swaps
    
    
    3,483
    
    
    
    (3,319
    )Derivative settlements received, net
    
    $
    40,763
    
    
    
    4,240
   9. Fair Value
 Fair Value Measurements
   
    
    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.
 
  18




---



##### Table of Contents



As of
    
    
    As ofMarch 31, 2008
    
    
    December 31, 2007Assets:Student loan assets  held for sale (a)
    
    $
    423,651
    
    
    
    Fair value of derivative instruments (b)
    
    
    295,073
    
    
    
    222,471Total assets
    
    $
    718,724
    
    
    
    222,471Liabilities:Fair value of derivative instruments (b)
    
    $
    50,031
    
    
    
    5,885Other liabilities (c)
    
    
    6,544
    
    
    
    6,117Total liabilities
    
    $
    56,575
    
    
    
    12,002
 (a)
    
    These student loan assets were sold in a transaction subsequent to March 31, 2008
and were valued at fair value based upon the final sale price of the portfolio.(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
  Three months ended March 31,2008
    
    
    2007Weighted average shares outstanding
    
    
    49,444,415
    
    
    
    50,982,187Less: Nonvested restricted stock 
vesting solely upon continued service
    
    
    392,670
    
    
    
    Weighted average shares outstanding used
to compute basic EPS
    
    
    49,051,745
    
    
    
    50,982,187Diluted effect of nonvested restricted stock
    
    
    
    
    
    
    Weighted average shares used to compute diluted EPS
    
    
    49,051,745
    
    
    
    50,982,187
   11. Income Taxes
 Accounting for Uncertainty in Income Taxesan interpretation of FASB
Statement No. 109
  19




---



##### Table of Contents



Maine
    
    2002 through 2004Idaho
    
    2003 through 2005Minnesota
    
    2005 and 2006New York
    
    2004 through 2006Internal Revenue Service
    
    2006
 12. Segment Reporting
 Disclosures about Segments of
an Enterprise and Related Information
     20




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##### 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
   21




---



##### Table of Contents



Segment Results and Reconciliations to GAAP
 Three months ended March 31, 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
    
    $
    613
    
    
    
    765
    
    
    
    9
    
    
    
    
    
    
    
    1,387
    
    
    
    320,358
    
    
    
    1,197
    
    
    
    (94
    )
    
    
    18,818
    
    
    
    341,666Interest expense
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    316,015
    
    
    
    9,219
    
    
    
    (94
    )
    
    
    
    
    
    
    325,141Net interest income (loss)
    
    
    613
    
    
    
    765
    
    
    
    8
    
    
    
    
    
    
    
    1,386
    
    
    
    4,343
    
    
    
    (8,022
    )
    
    
    
    
    
    
    18,818
    
    
    
    16,525Less provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000Net interest income (loss) after provision
for loan losses
    
    
    613
    
    
    
    765
    
    
    
    8
    
    
    
    
    
    
    
    1,386
    
    
    
    (657
    )
    
    
    (8,022
    )
    
    
    
    
    
    
    18,818
    
    
    
    11,525Other income (expense):Loan and guaranty servicing income
    
    
    26,108
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,108
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,113Other fee-based income
    
    
    
    
    
    
    13,822
    
    
    
    27,222
    
    
    
    
    
    
    
    41,044
    
    
    
    4,869
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,913Software services income
    
    
    
    
    
    
    
    
    
    
    37
    
    
    
    6,715
    
    
    
    6,752
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,752Other income
    
    
    32
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    57
    
    
    
    7
    
    
    
    1,365
    
    
    
    
    
    
    
    
    
    
    
    1,429Loss on sale of loans and reduction in fair
value related to loans held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47,493
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47,493
    )Intersegment revenue
    
    
    20,224
    
    
    
    260
    
    
    
    
    
    
    
    1,816
    
    
    
    22,300
    
    
    
    
    
    
    
    17,212
    
    
    
    (39,512
    )
    
    
    
    
    
    
    Derivative market value, foreign currency,
and put option adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    466
    
    
    
    
    
    
    
    
    
    
    
    (57,827
    )
    
    
    (57,361
    )Derivative settlements, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,527
    
    
    
    
    
    
    
    
    
    
    
    (2,764
    )
    
    
    40,763Total other income (expense)
    
    
    46,364
    
    
    
    14,107
    
    
    
    27,259
    
    
    
    8,531
    
    
    
    96,261
    
    
    
    1,381
    
    
    
    18,577
    
    
    
    (39,512
    )
    
    
    (60,591
    )
    
    
    16,116Operating expenses:Salaries and benefits
    
    
    13,998
    
    
    
    5,430
    
    
    
    6,523
    
    
    
    5,168
    
    
    
    31,119
    
    
    
    2,224
    
    
    
    14,591
    
    
    
    4,613
    
    
    
    1,296
    
    
    
    53,843Restructure expense  severance and contract
termination costs
    
    
    851
    
    
    
    
    
    
    
    297
    
    
    
    518
    
    
    
    1,666
    
    
    
    1,896
    
    
    
    3,915
    
    
    
    (7,477
    )
    
    
    
    
    
    
    Impairment expense
    
    
    5,074
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,074
    
    
    
    9,351
    
    
    
    4,409
    
    
    
    
    
    
    
    
    
    
    
    18,834Other expenses
    
    
    8,487
    
    
    
    2,060
    
    
    
    18,163
    
    
    
    619
    
    
    
    29,329
    
    
    
    5,344
    
    
    
    13,865
    
    
    
    1,062
    
    
    
    6,560
    
    
    
    56,160Intersegment expenses
    
    
    13,278
    
    
    
    296
    
    
    
    1,847
    
    
    
    394
    
    
    
    15,815
    
    
    
    20,602
    
    
    
    1,293
    
    
    
    (37,710
    )
    
    
    
    
    
    
    Total operating expenses
    
    
    41,688
    
    
    
    7,786
    
    
    
    26,830
    
    
    
    6,699
    
    
    
    83,003
    
    
    
    39,417
    
    
    
    38,073
    
    
    
    (39,512
    )
    
    
    7,856
    
    
    
    128,837Income (loss) before income taxes
    
    
    5,289
    
    
    
    7,086
    
    
    
    437
    
    
    
    1,832
    
    
    
    14,644
    
    
    
    (38,693
    )
    
    
    (27,518
    )
    
    
    
    
    
    
    (49,629
    )
    
    
    (101,196
    )Income tax expense (benefit) (a)
    
    
    1,640
    
    
    
    2,197
    
    
    
    135
    
    
    
    568
    
    
    
    4,540
    
    
    
    (11,995
    )
    
    
    (8,531
    )
    
    
    
    
    
    
    (15,385
    )
    
    
    (31,371
    )Net income (loss)
    
    $
    3,649
    
    
    
    4,889
    
    
    
    302
    
    
    
    1,264
    
    
    
    10,104
    
    
    
    (26,698
    )
    
    
    (18,987
    )
    
    
    
    
    
    
    (34,244
    )
    
    
    (69,825
    )
 (a)
    
    Beginning in 2008, the consolidated effective tax rate is used to calculate income taxes for
each operating segment.  22




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##### Table of Contents



Three months ended March 31, 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
    
    $
    2,244
    
    
    
    1,010
    
    
    
    87
    
    
    
    18
    
    
    
    3,359
    
    
    
    414,490
    
    
    
    3,801
    
    
    
    (3,171
    )
    
    
    
    
    
    
    418,479Interest expense
    
    
    
    
    
    
    5
    
    
    
    2
    
    
    
    
    
    
    
    7
    
    
    
    341,658
    
    
    
    12,001
    
    
    
    (3,171
    )
    
    
    
    
    
    
    350,495Net interest income (loss)
    
    
    2,244
    
    
    
    1,005
    
    
    
    85
    
    
    
    18
    
    
    
    3,352
    
    
    
    72,832
    
    
    
    (8,200
    )
    
    
    
    
    
    
    
    
    
    
    67,984Less provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,753
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,753Net interest income (loss) after provision
for loan losses
    
    
    2,244
    
    
    
    1,005
    
    
    
    85
    
    
    
    18
    
    
    
    3,352
    
    
    
    70,079
    
    
    
    (8,200
    )
    
    
    
    
    
    
    
    
    
    
    65,231Other income (expense):Loan and guaranty servicing income
    
    
    30,466
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,466
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,466Other fee-based income
    
    
    
    
    
    
    11,771
    
    
    
    24,947
    
    
    
    
    
    
    
    36,718
    
    
    
    3,311
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,029Software services income
    
    
    
    
    
    
    
    
    
    
    130
    
    
    
    5,618
    
    
    
    5,748
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,748Other income
    
    
    6
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    4,829
    
    
    
    2,041
    
    
    
    
    
    
    
    
    
    
    
    6,879Intersegment revenue
    
    
    16,464
    
    
    
    152
    
    
    
    750
    
    
    
    3,832
    
    
    
    21,198
    
    
    
    
    
    
    
    2,016
    
    
    
    (23,214
    )
    
    
    
    
    
    
    Derivative market value, foreign currency,
and put option adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,130
    )
    
    
    (12,130
    )Derivative settlements, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (424
    )
    
    
    4,664
    
    
    
    
    
    
    
    
    
    
    
    4,240Total other income (expense)
    
    
    46,936
    
    
    
    11,926
    
    
    
    25,827
    
    
    
    9,450
    
    
    
    94,139
    
    
    
    7,716
    
    
    
    8,721
    
    
    
    (23,214
    )
    
    
    (12,130
    )
    
    
    75,232Operating expenses:Salaries and benefits
    
    
    23,004
    
    
    
    4,918
    
    
    
    9,369
    
    
    
    6,475
    
    
    
    43,766
    
    
    
    7,279
    
    
    
    12,706
    
    
    
    (2,524
    )
    
    
    477
    
    
    
    61,704Other expenses
    
    
    9,250
    
    
    
    2,160
    
    
    
    14,559
    
    
    
    784
    
    
    
    26,753
    
    
    
    8,265
    
    
    
    17,869
    
    
    
    
    
    
    
    6,638
    
    
    
    59,525Intersegment expenses
    
    
    3,318
    
    
    
    374
    
    
    
    156
    
    
    
    
    
    
    
    3,848
    
    
    
    16,636
    
    
    
    206
    
    
    
    (20,690
    )
    
    
    
    
    
    
    Total operating expenses
    
    
    35,572
    
    
    
    7,452
    
    
    
    24,084
    
    
    
    7,259
    
    
    
    74,367
    
    
    
    32,180
    
    
    
    30,781
    
    
    
    (23,214
    )
    
    
    7,115
    
    
    
    121,229Income (loss) before income taxes
    
    
    13,608
    
    
    
    5,479
    
    
    
    1,828
    
    
    
    2,209
    
    
    
    23,124
    
    
    
    45,615
    
    
    
    (30,260
    )
    
    
    
    
    
    
    (19,245
    )
    
    
    19,234Income tax expense (benefit) (a)
    
    
    5,171
    
    
    
    2,082
    
    
    
    695
    
    
    
    839
    
    
    
    8,787
    
    
    
    17,334
    
    
    
    (12,326
    )
    
    
    
    
    
    
    (6,531
    )
    
    
    7,264Net income (loss) from
continuing operations
    
    
    8,437
    
    
    
    3,397
    
    
    
    1,133
    
    
    
    1,370
    
    
    
    14,337
    
    
    
    28,281
    
    
    
    (17,934
    )
    
    
    
    
    
    
    (12,714
    )
    
    
    11,970Income (loss) from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,810
    
    
    
    2,810Net income (loss)
    
    $
    8,437
    
    
    
    3,397
    
    
    
    1,133
    
    
    
    1,370
    
    
    
    14,337
    
    
    
    28,281
    
    
    
    (17,934
    )
    
    
    
    
    
    
    (9,904
    )
    
    
    14,780
 (a)
    
    Income taxes are based on 38% of net income 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.
 
  23




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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 March 31, 2008Derivative market value, foreign currency, and
put option adjustments (1)
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,400
    
    
    
    427
    
    
    
    57,827Amortization of intangible assets (2)
    
    
    1,256
    
    
    
    2,051
    
    
    
    2,822
    
    
    
    286
    
    
    
    145
    
    
    
    
    
    
    
    6,560Compensation
related to business combinations (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,296
    
    
    
    1,296Variable-rate floor income, net of settlements on derivatives (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,054
    )
    
    
    
    
    
    
    (16,054
    )Income from discontinued operations, net of tax (5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net tax effect (6)
    
    
    (389
    )
    
    
    (636
    )
    
    
    (875
    )
    
    
    (89
    )
    
    
    (12,862
    )
    
    
    (534
    )
    
    
    (15,385
    )Total adjustments to GAAP
    
    $
    867
    
    
    
    1,415
    
    
    
    1,947
    
    
    
    197
    
    
    
    28,629
    
    
    
    1,189
    
    
    
    34,244Three months ended March 31, 2007Derivative market value, foreign currency, and
put option adjustments (1)
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,214
    
    
    
    5,916
    
    
    
    12,130Amortization of intangible assets (2)
    
    
    1,044
    
    
    
    1,469
    
    
    
    1,810
    
    
    
    330
    
    
    
    1,985
    
    
    
    
    
    
    
    6,638Compensation
related to business combinations (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    477
    
    
    
    477Variable-rate floor income, net of settlements on derivatives (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income from discontinued operations, net of tax (5)
    
    
    (2,810
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,810
    )Net tax effect (6)
    
    
    (397
    )
    
    
    (558
    )
    
    
    (688
    )
    
    
    (125
    )
    
    
    (3,116
    )
    
    
    (1,647
    )
    
    
    (6,531
    )Total adjustments to GAAP
    
    $
    (2,163
    )
    
    
    911
    
    
    
    1,122
    
    
    
    205
    
    
    
    5,083
    
    
    
    4,746
    
    
    
    9,904
 (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 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.  24




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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 months ended March 31, 2008 and 2007. All dollars are in thousands, except per share
amounts, unless otherwise noted).
  Forward-looking and cautionary statements
  Overview
    
    
    Fee-based revenue for the three months ended March 31, 2008 was 83% of total revenues
compared to 53% of total revenues for the three months ended March 31, 2007 as shown
below:
 Three months ended
    
    
    Three months endedMarch 31, 2008
    
    
    March 31, 2007Dollar
    
    
    Percent
    
    
    Dollar
    
    
    PercentFee-based revenue
    
    $
    78,778
    
    
    
    83
    %
    
    $
    76,243
    
    
    
    53
    %Net interest income
    
    
    16,525
    
    
    
    17
    
    
    
    67,984
    
    
    
    47$
    95,303
    
    
    
    100
    %
    
    $
    144,227
    
    
    
    100
    %
 
    
    Operating expenses, excluding restructuring and impairment charges, decreased $18.7
million, or 15.4%, from $121.2 million for the three months ended March 31, 2007 to
$102.5 million for the three months ended March 31, 2008.
  25




---



##### Table of Contents




    
    The debt and secondary markets continued to experience unprecedented disruptions;
 
    
    The Company initiated a restructuring plan as a result of the continued disruptions
in the capital markets; and
 
    
    The Company sold $1.3 billion of FFELP student loans at a discount to
par.
 Disruptions in the Debt and Secondary Markets
   
    
    Increases statutory limits on annual and aggregate borrowing for FFELP loans;
 
    
    Enhances benefits for parents who borrow PLUS loans; and
 
    
    Allows the Department to act as a secondary market and enter into forward purchasing
agreements with lenders.
    Restructuring Plan  Capital Markets Impact
     26




---



##### Table of Contents



Loan Sales
   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.
  27




---



##### Table of Contents



Provision for Loan Losses
        28




---



##### Table of Contents



Other Income
  Loan and Guaranty Servicing Income
 Other Fee-Based Income
 Software Services
 Operating Expenses
  Three months ended March 31, 2008 compared to the three months ended March 31, 2007
 Net Interest Income
 Three months ended March 31,2008
    
    
    2007
    
    
    $ ChangeInterest income:Loan interest
    
    $
    329,986
    
    
    
    397,054
    
    
    
    (67,068
    )Investment interest
    
    
    11,680
    
    
    
    21,425
    
    
    
    (9,745
    )Total interest income
    
    
    341,666
    
    
    
    418,479
    
    
    
    (76,813
    )Interest expense:Interest on bonds and notes payable
    
    
    325,141
    
    
    
    350,495
    
    
    
    (25,354
    )Net interest income
    
    
    16,525
    
    
    
    67,984
    
    
    
    (51,459
    )Provision for loan losses
    
    
    5,000
    
    
    
    2,753
    
    
    
    2,247Net interest income after
provision for loan losses
    
    $
    11,525
    
    
    
    65,231
    
    
    
    (53,706
    )
 
    
    Net interest income decreased primarily 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.
 
    
    The provision for loan losses increased for the three months ended March 31, 2008
compared to 2007 due to an increase in risk share as a result of the elimination of the
Exceptional Performer program.
  29




---



##### Table of Contents



Other Income
 Three months ended March 31,2008
    
    
    2007
    
    
    $ ChangeLoan and guaranty servicing income
    
    $
    26,113
    
    
    
    30,466
    
    
    
    (4,353
    )Other fee-based income
    
    
    45,913
    
    
    
    40,029
    
    
    
    5,884Software services income
    
    
    6,752
    
    
    
    5,748
    
    
    
    1,004Other income
    
    
    1,429
    
    
    
    6,879
    
    
    
    (5,450
    )Loss on sale of loans and reduction in fair
value related to loans held for sale
    
    
    (47,493
    )
    
    
    
    
    
    
    (47,493
    )Derivative market value, foreign currency,
and put option adjustments
    
    
    (57,361
    )
    
    
    (12,130
    )
    
    
    (45,231
    )Derivative settlements, net
    
    
    40,763
    
    
    
    4,240
    
    
    
    36,523Total other income
    
    $
    16,116
    
    
    
    75,232
    
    
    
    (59,116
    )
 
    
    Loan and guaranty servicing income decreased due to decreases in both FFELP 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, an increase in campus commerce and related clients, and an increase in lead
generation sales volume.
 
    
    Software services income increased as a result of new customers and additional
projects for existing customers.
 
    
    Other income decreased as the result of certain gains recognized on the sale of
student loan assets in the first quarter of 2007.
 
    
    The loss on sale of loans and reduction in fair value related to loans held for sale
was due to the sale of a portfolio of student loan assets in March and April 2008 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 a 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.
 
    
    The change in derivative settlements is discussed in Item 3, Quantitative and
Qualitative Disclosures about Market Risk.
 Operating Expenses
 Net changeImpact of
    
    
    after impact ofThree months ended
    
    
    restructuring and
    
    
    restructuring and
    
    
    Three months endedMarch 31, 2007
    
    
    impairment charges
    
    
    impairment charges
    
    
    March 31, 2008Salaries and benefits
    
    $
    61,704
    
    
    
    5,904
    
    
    
    (13,765
    )
    
    
    53,843Other expenses
    
    
    52,887
    
    
    
    1,573
    
    
    
    (4,860
    )
    
    
    49,600Impairment expense
    
    
    
    
    
    
    18,834
    
    
    
    
    
    
    
    18,834Total operating expenses, excluding
amortization of intangible assets
    
    
    114,591
    
    
    
    26,311
    
    
    
    (18,625
    )
    
    
    122,277Amortization of intangible assets
    
    
    6,638
    
    
    
    
    
    
    
    (78
    )
    
    
    6,560Total operating expenses
    
    $
    121,229
    
    
    
    26,311
    
    
    
    (18,703
    )
    
    
    128,837
   30




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##### Table of Contents



Income Taxes
   Financial Condition as of March 31, 2008 compared to December 31, 2007
 As of
    
    
    As ofMarch 31,
    
    
    December 31,
    
    
    Change2008
    
    
    2007
    
    
    Dollars
    
    
    PercentAssets:Student loans receivable, net
    
    $
    26,321,345
    
    
    
    26,736,122
    
    
    
    (414,777
    )
    
    
    (1.6
    )%Student loans receivable  held for sale
    
    
    423,651
    
    
    
    
    
    
    
    423,651
    
    
    
    N/ACash, cash equivalents, and investments
    
    
    1,968,764
    
    
    
    1,120,838
    
    
    
    847,926
    
    
    
    75.7Goodwill
    
    
    175,178
    
    
    
    164,695
    
    
    
    10,483
    
    
    
    6.4Intangible assets, net
    
    
    92,897
    
    
    
    112,830
    
    
    
    (19,933
    )
    
    
    (17.7
    )Fair value of derivative instruments
    
    
    295,073
    
    
    
    222,471
    
    
    
    72,602
    
    
    
    32.6Other assets
    
    
    742,908
    
    
    
    805,827
    
    
    
    (62,919
    )
    
    
    (7.8
    )Total assets
    
    $
    30,019,816
    
    
    
    29,162,783
    
    
    
    857,033
    
    
    
    2.9
    %Liabilities:Bonds and notes payable
    
    $
    29,129,133
    
    
    
    28,115,829
    
    
    
    1,013,304
    
    
    
    3.6
    %Fair value of derivative instruments
    
    
    50,031
    
    
    
    5,885
    
    
    
    44,146
    
    
    
    750.1Other liabilities
    
    
    302,545
    
    
    
    432,190
    
    
    
    (129,645
    )
    
    
    (30.0
    )Total liabilities
    
    
    29,481,709
    
    
    
    28,553,904
    
    
    
    927,805
    
    
    
    3.2Shareholders equity
    
    
    538,107
    
    
    
    608,879
    
    
    
    (70,772
    )
    
    
    (11.6
    )Total liabilities and shareholders equity
    
    $
    30,019,816
    
    
    
    29,162,783
    
    
    
    857,033
    
    
    
    2.9
    %
   31




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##### Table of Contents



OPERATING SEGMENTS
        32




---



##### Table of Contents



Segment Results and Reconciliations to GAAP
 Three months ended March 31, 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
    
    $
    613
    
    
    
    765
    
    
    
    9
    
    
    
    
    
    
    
    1,387
    
    
    
    320,358
    
    
    
    1,197
    
    
    
    (94
    )
    
    
    18,818
    
    
    
    341,666Interest expense
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    316,015
    
    
    
    9,219
    
    
    
    (94
    )
    
    
    
    
    
    
    325,141Net interest income (loss)
    
    
    613
    
    
    
    765
    
    
    
    8
    
    
    
    
    
    
    
    1,386
    
    
    
    4,343
    
    
    
    (8,022
    )
    
    
    
    
    
    
    18,818
    
    
    
    16,525Less provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000Net interest income (loss) after provision
for loan losses
    
    
    613
    
    
    
    765
    
    
    
    8
    
    
    
    
    
    
    
    1,386
    
    
    
    (657
    )
    
    
    (8,022
    )
    
    
    
    
    
    
    18,818
    
    
    
    11,525Other income (expense):Loan and guaranty servicing income
    
    
    26,108
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,108
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,113Other fee-based income
    
    
    
    
    
    
    13,822
    
    
    
    27,222
    
    
    
    
    
    
    
    41,044
    
    
    
    4,869
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,913Software services income
    
    
    
    
    
    
    
    
    
    
    37
    
    
    
    6,715
    
    
    
    6,752
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,752Other income
    
    
    32
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    57
    
    
    
    7
    
    
    
    1,365
    
    
    
    
    
    
    
    
    
    
    
    1,429Loss on sale of loans and reduction in fair
value related to loans held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47,493
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47,493
    )Intersegment revenue
    
    
    20,224
    
    
    
    260
    
    
    
    
    
    
    
    1,816
    
    
    
    22,300
    
    
    
    
    
    
    
    17,212
    
    
    
    (39,512
    )
    
    
    
    
    
    
    Derivative market value, foreign currency,
and put option adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    466
    
    
    
    
    
    
    
    
    
    
    
    (57,827
    )
    
    
    (57,361
    )Derivative settlements, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,527
    
    
    
    
    
    
    
    
    
    
    
    (2,764
    )
    
    
    40,763Total other income (expense)
    
    
    46,364
    
    
    
    14,107
    
    
    
    27,259
    
    
    
    8,531
    
    
    
    96,261
    
    
    
    1,381
    
    
    
    18,577
    
    
    
    (39,512
    )
    
    
    (60,591
    )
    
    
    16,116Operating expenses:Salaries and benefits
    
    
    13,998
    
    
    
    5,430
    
    
    
    6,523
    
    
    
    5,168
    
    
    
    31,119
    
    
    
    2,224
    
    
    
    14,591
    
    
    
    4,613
    
    
    
    1,296
    
    
    
    53,843Restructure expense  severance and contract
termination costs
    
    
    851
    
    
    
    
    
    
    
    297
    
    
    
    518
    
    
    
    1,666
    
    
    
    1,896
    
    
    
    3,915
    
    
    
    (7,477
    )
    
    
    
    
    
    
    Impairment expense
    
    
    5,074
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,074
    
    
    
    9,351
    
    
    
    4,409
    
    
    
    
    
    
    
    
    
    
    
    18,834Other expenses
    
    
    8,487
    
    
    
    2,060
    
    
    
    18,163
    
    
    
    619
    
    
    
    29,329
    
    
    
    5,344
    
    
    
    13,865
    
    
    
    1,062
    
    
    
    6,560
    
    
    
    56,160Intersegment expenses
    
    
    13,278
    
    
    
    296
    
    
    
    1,847
    
    
    
    394
    
    
    
    15,815
    
    
    
    20,602
    
    
    
    1,293
    
    
    
    (37,710
    )
    
    
    
    
    
    
    Total operating expenses
    
    
    41,688
    
    
    
    7,786
    
    
    
    26,830
    
    
    
    6,699
    
    
    
    83,003
    
    
    
    39,417
    
    
    
    38,073
    
    
    
    (39,512
    )
    
    
    7,856
    
    
    
    128,837Income (loss) before income taxes
    
    
    5,289
    
    
    
    7,086
    
    
    
    437
    
    
    
    1,832
    
    
    
    14,644
    
    
    
    (38,693
    )
    
    
    (27,518
    )
    
    
    
    
    
    
    (49,629
    )
    
    
    (101,196
    )Income tax expense (benefit) (a)
    
    
    1,640
    
    
    
    2,197
    
    
    
    135
    
    
    
    568
    
    
    
    4,540
    
    
    
    (11,995
    )
    
    
    (8,531
    )
    
    
    
    
    
    
    (15,385
    )
    
    
    (31,371
    )Net income (loss)
    
    $
    3,649
    
    
    
    4,889
    
    
    
    302
    
    
    
    1,264
    
    
    
    10,104
    
    
    
    (26,698
    )
    
    
    (18,987
    )
    
    
    
    
    
    
    (34,244
    )
    
    
    (69,825
    )(a) Beginning in 2008, the consolidated effective tax rate is used to calculate income taxes for each operating segment.Three months ended March 31, 2008:After Tax Operating Margin 
excluding restructure expense,
impairment expense, and the loss
on sale of loans and reduction in
fair
value related to loans held for sale
    
    
    16.5
    %
    
    
    32.9
    %
    
    
    1.9
    %
    
    
    19.0
    %
    
    
    15.1
    %
    
    
    28.7
    %Three months ended March 31, 2007:After Tax Operating Margin
    
    
    17.2
    %
    
    
    26.3
    %
    
    
    4.4
    %
    
    
    14.5
    %
    
    
    14.7
    %
    
    
    36.4
    %
  33




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##### Table of Contents



Three months ended March 31, 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
    
    $
    2,244
    
    
    
    1,010
    
    
    
    87
    
    
    
    18
    
    
    
    3,359
    
    
    
    414,490
    
    
    
    3,801
    
    
    
    (3,171
    )
    
    
    
    
    
    
    418,479Interest expense
    
    
    
    
    
    
    5
    
    
    
    2
    
    
    
    
    
    
    
    7
    
    
    
    341,658
    
    
    
    12,001
    
    
    
    (3,171
    )
    
    
    
    
    
    
    350,495Net interest income (loss)
    
    
    2,244
    
    
    
    1,005
    
    
    
    85
    
    
    
    18
    
    
    
    3,352
    
    
    
    72,832
    
    
    
    (8,200
    )
    
    
    
    
    
    
    
    
    
    
    67,984Less provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,753
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,753Net interest income (loss) after provision
for loan losses
    
    
    2,244
    
    
    
    1,005
    
    
    
    85
    
    
    
    18
    
    
    
    3,352
    
    
    
    70,079
    
    
    
    (8,200
    )
    
    
    
    
    
    
    
    
    
    
    65,231Other income (expense):Loan and guaranty servicing income
    
    
    30,466
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,466
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,466Other fee-based income
    
    
    
    
    
    
    11,771
    
    
    
    24,947
    
    
    
    
    
    
    
    36,718
    
    
    
    3,311
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,029Software services income
    
    
    
    
    
    
    
    
    
    
    130
    
    
    
    5,618
    
    
    
    5,748
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,748Other income
    
    
    6
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    4,829
    
    
    
    2,041
    
    
    
    
    
    
    
    
    
    
    
    6,879Intersegment revenue
    
    
    16,464
    
    
    
    152
    
    
    
    750
    
    
    
    3,832
    
    
    
    21,198
    
    
    
    
    
    
    
    2,016
    
    
    
    (23,214
    )
    
    
    
    
    
    
    Derivative market value, foreign currency,
and put option adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,130
    )
    
    
    (12,130
    )Derivative settlements, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (424
    )
    
    
    4,664
    
    
    
    
    
    
    
    
    
    
    
    4,240Total other income (expense)
    
    
    46,936
    
    
    
    11,926
    
    
    
    25,827
    
    
    
    9,450
    
    
    
    94,139
    
    
    
    7,716
    
    
    
    8,721
    
    
    
    (23,214
    )
    
    
    (12,130
    )
    
    
    75,232Operating expenses:Salaries and benefits
    
    
    23,004
    
    
    
    4,918
    
    
    
    9,369
    
    
    
    6,475
    
    
    
    43,766
    
    
    
    7,279
    
    
    
    12,706
    
    
    
    (2,524
    )
    
    
    477
    
    
    
    61,704Other expenses
    
    
    9,250
    
    
    
    2,160
    
    
    
    14,559
    
    
    
    784
    
    
    
    26,753
    
    
    
    8,265
    
    
    
    17,869
    
    
    
    
    
    
    
    6,638
    
    
    
    59,525Intersegment expenses
    
    
    3,318
    
    
    
    374
    
    
    
    156
    
    
    
    
    
    
    
    3,848
    
    
    
    16,636
    
    
    
    206
    
    
    
    (20,690
    )
    
    
    
    
    
    
    Total operating expenses
    
    
    35,572
    
    
    
    7,452
    
    
    
    24,084
    
    
    
    7,259
    
    
    
    74,367
    
    
    
    32,180
    
    
    
    30,781
    
    
    
    (23,214
    )
    
    
    7,115
    
    
    
    121,229Income (loss) before income
taxes
    
    
    13,608
    
    
    
    5,479
    
    
    
    1,828
    
    
    
    2,209
    
    
    
    23,124
    
    
    
    45,615
    
    
    
    (30,260
    )
    
    
    
    
    
    
    (19,245
    )
    
    
    19,234Income tax expense (benefit) (a)
    
    
    5,171
    
    
    
    2,082
    
    
    
    695
    
    
    
    839
    
    
    
    8,787
    
    
    
    17,334
    
    
    
    (12,326
    )
    
    
    
    
    
    
    (6,531
    )
    
    
    7,264Net income (loss) from
continuing operations
    
    
    8,437
    
    
    
    3,397
    
    
    
    1,133
    
    
    
    1,370
    
    
    
    14,337
    
    
    
    28,281
    
    
    
    (17,934
    )
    
    
    
    
    
    
    (12,714
    )
    
    
    11,970Income (loss) from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,810
    
    
    
    2,810Net income (loss)
    
    $
    8,437
    
    
    
    3,397
    
    
    
    1,133
    
    
    
    1,370
    
    
    
    14,337
    
    
    
    28,281
    
    
    
    (17,934
    )
    
    
    
    
    
    
    (9,904
    )
    
    
    14,780
 (a)
    
    Income taxes are based on 38% of net income before tax for the
individual operating segment. Non-GAAP Performance Measures
   Limitations of Base Net Income
   34




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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 March 31, 2008Derivative market value, foreign currency, and
put option adjustments
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,400
    
    
    
    427
    
    
    
    57,827Amortization of intangible assets
    
    
    1,256
    
    
    
    2,051
    
    
    
    2,822
    
    
    
    286
    
    
    
    145
    
    
    
    
    
    
    
    6,560Compensation related to business combinations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,296
    
    
    
    1,296Variable-rate floor income, net of settlements on derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,054
    )
    
    
    
    
    
    
    (16,054
    )Income from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net tax effect (a)
    
    
    (389
    )
    
    
    (636
    )
    
    
    (875
    )
    
    
    (89
    )
    
    
    (12,862
    )
    
    
    (534
    )
    
    
    (15,385
    )Total adjustments to GAAP
    
    $
    867
    
    
    
    1,415
    
    
    
    1,947
    
    
    
    197
    
    
    
    28,629
    
    
    
    1,189
    
    
    
    34,244Three months ended March 31, 2007Derivative market value, foreign currency, and
put option adjustments
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,214
    
    
    
    5,916
    
    
    
    12,130Amortization of intangible assets
    
    
    1,044
    
    
    
    1,469
    
    
    
    1,810
    
    
    
    330
    
    
    
    1,985
    
    
    
    
    
    
    
    6,638Compensation related to business combinations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    477
    
    
    
    477Variable-rate floor income, net of settlements on derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income from discontinued operations, net of tax
    
    
    (2,810
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,810
    )Net tax effect (a)
    
    
    (397
    )
    
    
    (558
    )
    
    
    (688
    )
    
    
    (125
    )
    
    
    (3,116
    )
    
    
    (1,647
    )
    
    
    (6,531
    )Total adjustments to GAAP
    
    $
    (2,163
    )
    
    
    911
    
    
    
    1,122
    
    
    
    205
    
    
    
    5,083
    
    
    
    4,746
    
    
    
    9,904
 (a)
    
    Beginning in 2008, tax effect is computed using the Companys consolidated
effective tax rate for each applicable period. In prior periods, tax effect was
computed at 38%. The change in the value of the put options for prior periods (included
in Corporate Activity and Overhead) was not tax effected as this is not deductible for
income tax purposes. Differences between GAAP and Base Net Income
  Derivative market value, foreign currency, and put option adjustments:  Accounting for
Derivative Instruments and Hedging Activities
  35




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##### Table of Contents



Amortization of intangible assets:
 Compensation related to business combinations:
 Variable-rate
floor income, net of settlements on derivatives:
  Discontinued operations:
  36




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##### Table of Contents



STUDENT LOAN AND GUARANTY SERVICING OPERATING SEGMENT  RESULTS OF OPERATIONS
  Student Loan Servicing Volumes
 As of
    
    
    As ofMarch 31,
    
    
    March 31,2008
    
    
    2007Dollar
    
    
    Percent
    
    
    Dollar
    
    
    Percent(dollars in millions)Company
    
    $
    25,416
    
    
    
    71.7
    %
    
    $
    23,274
    
    
    
    72.3
    %Third Party
    
    
    10,046
    
    
    
    28.3
    
    
    
    8,935
    
    
    
    27.7$
    35,462
    
    
    
    100.0
    %
    
    $
    32,209
    
    
    
    100.0
    %
 Three months ended March 31, 2008 compared to the three months ended March 31, 2007
 Three months ended March 31,2008
    
    
    2007
    
    
    $ ChangeNet interest income after the provision
for loan losses
    
    $
    613
    
    
    
    2,244
    
    
    
    (1,631
    )Loan and guaranty servicing income
    
    
    26,108
    
    
    
    30,466
    
    
    
    (4,358
    )Other income
    
    
    32
    
    
    
    6
    
    
    
    26Intersegment revenue
    
    
    20,224
    
    
    
    16,464
    
    
    
    3,760Total other income
    
    
    46,364
    
    
    
    46,936
    
    
    
    (572
    )Salaries and benefits
    
    
    13,998
    
    
    
    23,004
    
    
    
    (9,006
    )Restructure expense  severance and contract
termination costs
    
    
    851
    
    
    
    
    
    
    
    851Impairment expense
    
    
    5,074
    
    
    
    
    
    
    
    5,074Other expenses
    
    
    8,487
    
    
    
    9,250
    
    
    
    (763
    )Intersegment expenses
    
    
    13,278
    
    
    
    3,318
    
    
    
    9,960Total operating expenses
    
    
    41,688
    
    
    
    35,572
    
    
    
    6,116Base net income before income taxes
    
    
    5,289
    
    
    
    13,608
    
    
    
    (8,319
    )Income tax expense
    
    
    1,640
    
    
    
    5,171
    
    
    
    (3,531
    )Base net income
    
    $
    3,649
    
    
    
    8,437
    
    
    
    (4,788
    )After Tax Operating Margin
    
    
    7.8
    %
    
    
    17.2
    %After Tax Operating Margin 
excluding restructure expense
and impairment expense
    
    
    16.5
    %
    
    
    17.2
    %
 Net interest income after the provision for loan losses.
  37




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##### Table of Contents



Loan and guaranty servicing income
 Three months ended March
31,
    
    
    Change2008
    
    
    2007
    
    
    Dollars
    
    
    PercentOrigination and servicing of
FFEL Program loans
    
    $
    12,279
    
    
    
    14,130
    
    
    
    (1,851
    )
    
    
    (13.1
    )%Origination and servicing of
of non-federally insured student loans
    
    
    2,271
    
    
    
    2,321
    
    
    
    (50
    )
    
    
    (2.2
    )Servicing and support outsourcing for
guaranty agencies
    
    
    11,558
    
    
    
    14,015
    
    
    
    (2,457
    )
    
    
    (17.5
    )Loan and guaranty servicing income
to external parties
    
    $
    26,108
    
    
    
    30,466
    
    
    
    (4,358
    )
    
    
    (14.3
    )%
 
    
    FFELP loan servicing income decreased due to new servicing contracts being priced at
lower rates following the legislative developments in September 2007. In addition, a few
lenders have chosen to internally service rather than pay an external party subsequent to
the legislative developments.
 
    
    Servicing and support outsourcing for guaranty agencies decreased due to the termination
of the VFA between the Department and College Assist offset by an increase in the volume of
guaranteed loans serviced as well as an increase in collections due to utilizing an outside
collection agency.
 Intersegment revenue
 Operating expenses .
  38




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##### Table of Contents



TUITION PAYMENT PROCESSING AND CAMPUS COMMERCE OPERATING SEGMENT  RESULTS OF OPERATIONS
  Three months ended March 31, 2008 compared to the three months ended March 31, 2007
 Three months ended March 31,2008
    
    
    2007
    
    
    $ ChangeNet interest income after the provision
for loan losses
    
    $
    765
    
    
    
    1,005
    
    
    
    (240
    )Other fee-based income
    
    
    13,822
    
    
    
    11,771
    
    
    
    2,051Other income
    
    
    25
    
    
    
    3
    
    
    
    22Intersegment revenue
    
    
    260
    
    
    
    152
    
    
    
    108Total other income
    
    
    14,107
    
    
    
    11,926
    
    
    
    2,181Salaries and benefits
    
    
    5,430
    
    
    
    4,918
    
    
    
    512Other expenses
    
    
    2,060
    
    
    
    2,160
    
    
    
    (100
    )Intersegment expenses
    
    
    296
    
    
    
    374
    
    
    
    (78
    )Total operating expenses
    
    
    7,786
    
    
    
    7,452
    
    
    
    334Base net income
before income taxes
    
    
    7,086
    
    
    
    5,479
    
    
    
    1,607Income tax expense
    
    
    2,197
    
    
    
    2,082
    
    
    
    115Base net income
    
    $
    4,889
    
    
    
    3,397
    
    
    
    1,492After Tax Operating Margin
    
    
    32.9
    %
    
    
    26.3
    %
 Other fee-based income
 Operating expenses .
  39




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##### Table of Contents



ENROLLMENT SERVICES AND LIST MANAGEMENT OPERATING SEGMENT  RESULTS OF OPERATIONS
  Three months ended March 31, 2008 compared to the three months ended March 31, 2007
 Three months ended March 31,2008
    
    
    2007
    
    
    $ ChangeNet interest income after the provision
for loan losses
    
    $
    8
    
    
    
    85
    
    
    
    (77
    )Other fee-based income
    
    
    27,222
    
    
    
    24,947
    
    
    
    2,275Software services income
    
    
    37
    
    
    
    130
    
    
    
    (93
    )Intersegment revenue
    
    
    
    
    
    
    750
    
    
    
    (750
    )Total other income
    
    
    27,259
    
    
    
    25,827
    
    
    
    1,432Salaries and benefits
    
    
    6,523
    
    
    
    9,369
    
    
    
    (2,846
    )Restructure expense  severance and contract
termination costs
    
    
    297
    
    
    
    
    
    
    
    297Other expenses
    
    
    18,163
    
    
    
    14,559
    
    
    
    3,604Intersegment expenses
    
    
    1,847
    
    
    
    156
    
    
    
    1,691Total operating expenses
    
    
    26,830
    
    
    
    24,084
    
    
    
    2,746Base net income before
income taxes
    
    
    437
    
    
    
    1,828
    
    
    
    (1,391
    )Income tax expense
    
    
    135
    
    
    
    695
    
    
    
    (560
    )Base net income
    
    $
    302
    
    
    
    1,133
    
    
    
    (831
    )After Tax Operating Margin
    
    
    1.1
    %
    
    
    4.4
    %After Tax Operating Margin 
excluding restructure expense
    
    
    1.9
    %
    
    
    4.4
    %
 Other fee-based income.
 Operating expenses.
  40




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##### Table of Contents



SOFTWARE AND TECHNICAL SERVICES OPERATING SEGMENT  RESULTS OF OPERATIONS
   Three months ended March 31, 2008 compared to the three months ended March 31, 2007
 Three months ended March 31,2008
    
    
    2007
    
    
    $ ChangeNet interest income after the provision
for loan losses
    
    $
    
    
    
    
    18
    
    
    
    (18
    )Software services income
    
    
    6,715
    
    
    
    5,618
    
    
    
    1,097Intersegment revenue
    
    
    1,816
    
    
    
    3,832
    
    
    
    (2,016
    )Total other income
    
    
    8,531
    
    
    
    9,450
    
    
    
    (919
    )Salaries and benefits
    
    
    5,168
    
    
    
    6,475
    
    
    
    (1,307
    )Restructure expense  severance and contract
termination costs
    
    
    518
    
    
    
    
    
    
    
    518Other expenses
    
    
    619
    
    
    
    784
    
    
    
    (165
    )Intersegment expenses
    
    
    394
    
    
    
    
    
    
    
    394Total operating expenses
    
    
    6,699
    
    
    
    7,259
    
    
    
    (560
    )Base net income before
income taxes
    
    
    1,832
    
    
    
    2,209
    
    
    
    (377
    )Income tax expense
    
    
    568
    
    
    
    839
    
    
    
    (271
    )Base net income
    
    $
    1,264
    
    
    
    1,370
    
    
    
    (106
    )After Tax Operating Margin
    
    
    14.8
    %
    
    
    14.5
    %After Tax Operating Margin 
excluding restructure expense
    
    
    19.0
    %
    
    
    14.5
    %
 Software services income .
 Intersegment revenue .
 Operating expenses .
  41




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##### Table of Contents



ASSET
GENERATION AND MANAGEMENT OPERATING SEGMENT  RESULTS OF OPERATIONS
   Student Loan Portfolio
  As of March 31, 2008
    
    
    As of December 31, 2007Dollars
    
    
    Percent
    
    
    Dollars
    
    
    PercentFederally insured: (a)StaffordOriginated prior to 10/1/07
    
    $
    6,985,081
    
    
    
    26.1
    %
    
    $
    6,624,009
    
    
    
    24.8
    %Originated on or after 10/1/07
    
    
    275,411
    
    
    
    1.0
    
    
    
    101,901
    
    
    
    0.4PLUS/SLSOriginated prior to 10/1/07
    
    
    448,610
    
    
    
    1.7
    
    
    
    414,708
    
    
    
    1.5Originated on or after 10/1/07
    
    
    36,891
    
    
    
    0.1
    
    
    
    15,233
    
    
    
    0.1ConsolidationOriginated prior to 10/1/07
    
    
    18,000,685
    
    
    
    67.3
    
    
    
    18,646,993
    
    
    
    69.8Originated on or after 10/1/07
    
    
    317,368
    
    
    
    1.2
    
    
    
    251,554
    
    
    
    0.9Non-federally insured
    
    
    283,308
    
    
    
    1.1
    
    
    
    274,815
    
    
    
    1.0Total
    
    
    26,347,354
    
    
    
    98.5
    
    
    
    26,329,213
    
    
    
    98.5Unamortized premiums and deferred
origination costs
    
    
    443,779
    
    
    
    1.7
    
    
    
    452,501
    
    
    
    1.7Allowance for loan losses:Allowance  federally insured
    
    
    (23,962
    )
    
    
    (0.1
    )
    
    
    (24,534
    )
    
    
    (0.1
    )Allowance  non-federally insured
    
    
    (22,175
    )
    
    
    (0.1
    )
    
    
    (21,058
    )
    
    
    (0.1
    )$
    26,744,996
    
    
    
    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.  42




---



##### Table of Contents



Origination and Acquisition
   Three months ended March 31,2008
    
    
    2007Beginning balance
    
    $
    26,329,213
    
    
    
    23,414,468Direct channel:Consolidation loan originations (a)
    
    
    65,745
    
    
    
    1,064,238Less consolidation of existing portfolio
    
    
    (27,459
    )
    
    
    (473,795
    )Net consolidation
loan originations
    
    
    38,286
    
    
    
    590,443Stafford/PLUS loan originations
    
    
    421,101
    
    
    
    354,827Branding partner channel (b) (c)
    
    
    473,378
    
    
    
    202,290Forward flow channel (d)
    
    
    318,844
    
    
    
    375,941Other channels
    
    
    55,922
    
    
    
    205,918Total channel acquisitions
    
    
    1,307,531
    
    
    
    1,729,419Repayments, claims, capitalized interest, and other
    
    
    (299,800
    )
    
    
    (235,807
    )Consolidation loans lost to external parties
    
    
    (129,418
    )
    
    
    (239,404
    )Loans sold
    
    
    (860,172
    )
    
    
    (51,646
    )Ending balance
    
    $
    26,347,354
    
    
    
    24,617,030
 (a)
    
    With the changes in legislation and impact of capital markets, the Company
suspended consolidation loan originations in January 2008.(b)
    
    Included in the branding partner channel are private loan originations of $12.4
million and $44.3 million for the three months ended March 31, 2008 and 2007,
respectively. As a result of the impact of the capital market disruptions, the Company
suspended private loan originations during the first quarter of 2008.(c)
    
    During the three months ended March 31, 2008, the Company accelerated the
purchase of loans from a branding partner lender of approximately $405.8 million.(d)
    
    During the three months ended March 31, 2008, the Company accelerated the
purchase of loans from certain forward flow lenders of approximately $105.4 million.   43




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##### Table of Contents



Activity in the Allowance for Loan Losses
  Three months ended March 31,2008
    
    
    2007Balance at beginning of period
    
    $
    45,592
    
    
    
    26,003Provision for loan losses:Federally insured loans
    
    
    3,500
    
    
    
    1,453Non-federally insured loans
    
    
    1,500
    
    
    
    1,300Total provision for loan losses
    
    
    5,000
    
    
    
    2,753Charge-offs, net of recoveries:Federally insured loans
    
    
    (3,322
    )
    
    
    (1,195
    )Non-federally insured loans
    
    
    (383
    )
    
    
    (166
    )Net charge-offs
    
    
    (3,705
    )
    
    
    (1,361
    )Sale of federally insured loans
    
    
    (750
    )
    
    
    Sale of non-federally insured loans
    
    
    
    
    
    
    (1,171
    )Balance at end of period
    
    $
    46,137
    
    
    
    26,224Allocation of the allowance for loan losses:Federally insured loans
    
    $
    23,962
    
    
    
    7,859Non-federally insured loans
    
    
    22,175
    
    
    
    18,365Total allowance for loan losses
    
    $
    46,137
    
    
    
    26,224Net loan charge-offs as a percentage of average student loans
    
    
    0.055
    %
    
    
    0.023
    %Total allowance as a percentage of average student loans
    
    
    0.172
    %
    
    
    0.110
    %Total allowance as a percentage of ending balance of student loans
    
    
    0.175
    %
    
    
    0.107
    %Non-federally insured allowance as a percentage of the ending
balance of non-federally insured loans
    
    
    7.827
    %
    
    
    8.167
    %Average student loans
    
    $
    26,859,328
    
    
    
    23,844,815Ending balance of student loans
    
    
    26,347,354
    
    
    
    24,617,030Ending balance of non-federally insured loans
    
    
    283,308
    
    
    
    224,870
   44




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##### Table of Contents



As of March 31, 2008
    
    
    As of December 31, 2007Dollars
    
    
    Percent
    
    
    Dollars
    
    
    PercentFederally Insured Loans:Loans in-school/grace/deferment(1)
    
    $
    7,754,639
    
    
    
    
    
    
    $
    7,115,505Loans in forebearance(2)
    
    
    2,715,917
    
    
    
    
    
    
    
    3,015,456Loans in repayment status:Loans current
    
    
    13,744,424
    
    
    
    88.1
    %
    
    
    13,937,702
    
    
    
    87.5
    %Loans delinquent 31-60 days(3)
    
    
    554,712
    
    
    
    3.6
    
    
    
    682,956
    
    
    
    4.3Loans delinquent 61-90 days(3)
    
    
    355,989
    
    
    
    2.3
    
    
    
    353,303
    
    
    
    2.2Loans delinquent 91 days or greater(4)
    
    
    938,365
    
    
    
    6.0
    
    
    
    949,476
    
    
    
    6.0Total loans in repayment
    
    
    15,593,490
    
    
    
    100.0
    %
    
    
    15,923,437
    
    
    
    100.0
    %Total federally insured loans
    
    $
    26,064,046
    
    
    
    
    
    
    $
    26,054,398Non-Federally Insured Loans:Loans in-school/grace/deferment(1)
    
    $
    113,193
    
    
    
    
    
    
    $
    111,946Loans in forebearance(2)
    
    
    10,281
    
    
    
    
    
    
    
    12,895Loans in repayment status:Loans current
    
    
    152,773
    
    
    
    95.6
    %
    
    
    142,851
    
    
    
    95.3
    %Loans delinquent 31-60 days(3)
    
    
    3,038
    
    
    
    1.9
    
    
    
    3,450
    
    
    
    2.3Loans delinquent 61-90 days(3)
    
    
    1,829
    
    
    
    1.1
    
    
    
    1,247
    
    
    
    0.8Loans delinquent 91 days or greater(4)
    
    
    2,194
    
    
    
    1.4
    
    
    
    2,426
    
    
    
    1.6Total loans in repayment
    
    
    159,834
    
    
    
    100.0
    %
    
    
    149,974
    
    
    
    100.0
    %Total non-federally insured loans
    
    $
    283,308
    
    
    
    
    
    
    $
    274,815
 (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 March 31,2008
    
    
    2007Student loan yield
    
    
    6.05
    %
    
    
    7.90
    %Consolidation rebate fees
    
    
    (0.74
    )
    
    
    (0.79
    )Premium and deferred origination costs amortization
    
    
    (0.38
    )
    
    
    (0.36
    )Student loan net yield
    
    
    4.93
    
    
    
    6.75Student loan cost of funds (a)
    
    
    (3.96
    )
    
    
    (5.46
    )Student loan spread
    
    
    0.97
    
    
    
    1.29Variable-rate floor income,
net of settlements on derivatives (b)
    
    
    (0.24
    )
    
    
    Core student loan spread
    
    
    0.73
    %
    
    
    1.29
    %Average balance of student loans
    
    $
    26,859,328
    
    
    
    23,844,815Average balance of debt outstanding
    
    
    27,828,890
    
    
    
    25,378,267
 (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 $4.7 million for the
three months ended March 31, 2007 on those derivatives no longer hedging student loan
assets).(b)
    
    Variable-rate floor income is calculated by the Company on a statutory basis. As a
result of the disruptions in the debt and secondary capital markets which began in August
2007, the full benefit of variable-rate floor income has not been realized by the Company
due to the widening of the spread between short term interest rate indices and the
Companys actual cost of funds. The Company entered into interest rate swaps with
effective dates beginning in January 2008 to hedge a portion of the variable-rate floor
income. Settlements on these derivatives are presented as part of the Companys statutory
calculation of variable-rate floor income.  45




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##### 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, as shown below.
 
 
    
    Since August 2007,
the Company has issued $4.6 billion of notes in asset-backed
securities transactions ($1.5 billion in August 2007, $1.2 billion in March 2008, and
$1.9 billion in April 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 credit market disruptions have increased the cost of funds on the Companys
auction and remarketing notes as discussed in this Item 2 Managements Discussion
and Analysis of Financial Condition and Results of Operations  Liquidity and Capital
Resources  Secured Financing Transactions  Asset-backed Securitizations  Auction
or remarketing based notes.
    46




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##### Table of Contents



Three months ended March 31, 2008 compared to the three months ended March 31, 2007
 Three months ended March 31,2008
    
    
    2007
    
    
    $ ChangeNet interest income (loss) after the provision
for loan losses
    
    $
    (657
    )
    
    
    70,079
    
    
    
    (70,736
    )Loan and guaranty servicing income
    
    
    5
    
    
    
    
    
    
    
    5Other fee-based income
    
    
    4,869
    
    
    
    3,311
    
    
    
    1,558Other income
    
    
    7
    
    
    
    4,829
    
    
    
    (4,822
    )Loss on sale of loans and reduction in fair
value related to loans held for sale
    
    
    (47,493
    )
    
    
    
    
    
    
    (47,493
    )Derivative market value, foreign currency,
and put option adjustments and
derivative settlements, net
    
    
    43,993
    
    
    
    (424
    )
    
    
    44,417Total other income
    
    
    1,381
    
    
    
    7,716
    
    
    
    (6,335
    )Salaries and benefits
    
    
    2,224
    
    
    
    7,279
    
    
    
    (5,055
    )Restructure expense  severance and contract
termination costs
    
    
    1,896
    
    
    
    
    
    
    
    1,896Impairment expense
    
    
    9,351
    
    
    
    
    
    
    
    9,351Other expenses
    
    
    5,344
    
    
    
    8,265
    
    
    
    (2,921
    )Intersegment expenses
    
    
    20,602
    
    
    
    16,636
    
    
    
    3,966Total operating expenses
    
    
    39,417
    
    
    
    32,180
    
    
    
    7,237Base net income (loss) before income taxes
    
    
    (38,693
    )
    
    
    45,615
    
    
    
    (84,308
    )Income tax expense (benefit)
    
    
    (11,995
    )
    
    
    17,334
    
    
    
    (29,329
    )Base net income (loss)
    
    $
    (26,698
    )
    
    
    28,281
    
    
    
    (54,979
    )After Tax Operating Margin
    
    
    (3,687.6
    %)
    
    
    36.4
    %After Tax Operating Margin 
excluding restructure expense,
impairment expense, and the
loss on sale of loans and reduction
in fair value related to loans held for sale
    
    
    28.7
    %
    
    
    36.4
    %
 Net interest income after the provision for loan losses
 Three months ended March 31,
    
    
    Change2008
    
    
    2007
    
    
    Dollars
    
    
    PercentLoan interest
    
    $
    386,426
    
    
    
    464,533
    
    
    
    (78,107
    )
    
    
    (16.8
    )%Consolidation rebate fees
    
    
    (49,854
    )
    
    
    (46,420
    )
    
    
    (3,434
    )
    
    
    (7.4
    )Amortization of loan premiums and
deferred origination costs
    
    
    (25,404
    )
    
    
    (21,059
    )
    
    
    (4,345
    )
    
    
    (20.6
    )Total loan interest
    
    
    311,168
    
    
    
    397,054
    
    
    
    (85,886
    )
    
    
    (21.6
    )Investment interest
    
    
    9,190
    
    
    
    17,436
    
    
    
    (8,246
    )
    
    
    (47.3
    )Total interest income
    
    
    320,358
    
    
    
    414,490
    
    
    
    (94,132
    )
    
    
    (22.7
    )Interest on bonds and notes payable
    
    
    315,921
    
    
    
    338,487
    
    
    
    (22,566
    )
    
    
    (6.7
    )Intercompany interest
    
    
    94
    
    
    
    3,171
    
    
    
    (3,077
    )
    
    
    (97.0
    )Provision for loan losses
    
    
    5,000
    
    
    
    2,753
    
    
    
    2,247
    
    
    
    81.6Net interest income (loss) after
provision
for loan losses
    
    $
    (657
    )
    
    
    70,079
    
    
    
    (70,736
    )
    
    
    (100.9
    )%
 
    
    The average student loan portfolio increased $3.0 billion, or 12.6%, for the three
months ended March 31, 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 $78.1 million as a result of these factors.
 
    
    Consolidation rebate fees increased due to the $1.2 billion, or 6.7%, increase in the
average consolidation loan portfolio.
  47




---



##### Table of Contents




    
    The amortization of loan premiums and deferred origination costs increased $4.3 million,
or 20.6%, as a result of loan portfolio growth.
 
    
    Investment income has 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 4.55% for the three months ended March 31, 2008 compared to 5.46% for the
same period a year ago. This was offset by a $2.5 billion, or 9.7%, increase in average
debt for the three months ended March 31, 2008 compared to the same period in 2007.
Interest expense was impacted in 2008 by credit market disruptions as further discussed in
this Report.
 
    
    The provision for loan loss increased due to an increase in risk share as a result of
the elimination of the Exceptional Performer program in the third quarter of 2007.
 Other fee-based income
 Other income
 Loss on sale of loans and reduction in fair value related to loans held for sale
 Operating expenses .
 LIQUIDITY AND CAPITAL RESOURCES
      48




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##### Table of Contents




    
    Increases statutory limits on annual and aggregate borrowing for FFELP loans;
 
    
    Enhances benefits for parents who borrow PLUS loans; and
 
    
    Allows the Department to act as a secondary market and enter into forward purchasing
agreements with lenders.
     Interest rateCarrying
    
    
    Percent of
    
    
    range onamount
    
    
    total
    
    
    carrying amount
    
    Final maturityVariable-rate bonds and notes (a):Bonds and notes based on indices
    
    $
    18,442,481
    
    
    
    63.3
    %
    
    2.60% - 4.48%
    
    09/25/13 - 06/25/41Bonds and notes based on auction or remarketing (b)
    
    
    2,875,045
    
    
    
    9.9
    
    
    0.00% - 7.90%
    
    11/01/09 - 07/01/43Total variable-rate bonds
and notes
    
    
    21,317,526
    
    
    
    73.2Commercial paper  FFELP facility
    
    
    6,486,212
    
    
    
    22.3
    
    
    2.61% - 3.84%
    
    05/09/10Commercial paper  private loan facility
    
    
    190,050
    
    
    
    0.6
    
    
    3.64%
    
    01/25/09Fixed-rate bonds and notes (a)
    
    
    211,704
    
    
    
    0.7
    
    
    5.20% - 6.68%
    
    11/01/09 - 05/02/29Unsecured fixed rate debt
    
    
    475,000
    
    
    
    1.6
    
    
    5.13% and 7.40%
    
    06/01/10 and 09/15/61Unsecured line of credit
    
    
    375,000
    
    
    
    1.3
    
    
    2.90% - 3.53%
    
    05/08/12Other borrowings
    
    
    73,641
    
    
    
    0.3
    
    
    2.96% - 5.10%
    
    09/28/08 - 11/01/15$
    29,129,133
    
    
    
    100.0
    %
 
 (a)
    
    Issued in securitization transactions(b)
    
    As of March 31, 2008, the Company had $1.0 billion of bonds based on an auction rate of
0.00%, 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 (and subsequently, the
Maximum Rate) produced negative rates, which resulted in auction rates of zero percent for
the applicable period. Secured Financing Transactions
   49




---



##### Table of Contents



Loan warehouse facilities
         Asset-backed securitizations
   50




---



##### Table of Contents



LIBOR based notes
  Auction or remarketing based notes
      Operating Lines of Credit
   51




---



##### Table of Contents



(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.
    Universal Shelf Offerings
     52




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##### Table of Contents



Sources of Liquidity
  Sources of primary liquidity: (a)Cash and cash equivalents (b)
    
    $
    124,171Unencumbered student loan assets
    
    
    6,013Unused unsecured line of credit (c)
    
    
    375,000Asset-backed commercial paper borrowing capacity  private loans (d)
    
    
    59,950Asset-backed commercial paper borrowing capacity  FFELP (e)
    
    
    2,463,788Total sources of primary liquidity
    
    $
    3,028,922
 (a)
    
    The sources of primary liquidity table above does not include $5.0 billion
authorized for future issuance under the extendible commercial paper warehouse
program. As a result of the disruption of the credit markets, there is no market for
the issuance of notes under this facility. Management believes it is unlikely a
market will exist in the future.(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 May 9, 2008, the unused unsecured line of credit was $305.0 million.(d)
    
    The Companys private loan warehouse facility expires on January 25, 2009.(e)
    
    The Companys FFELP loan warehouse facility expires on May 9, 2010. However,
the liquidity of this facility must be renewed annually in order to continue to fund
new originations. Liquidity was up for renewal on May 9, 2008. The Company obtained
an extension on this renewal until June 10, 2008. Subsequent to March 31, 2008, the
Company completed certain asset-backed securities transactions and sold loans which
decreased the outstanding balance on this facility. In addition, the Company
decreased the commitment level to fund loans in this facility. As a result of these
transactions, as of May 9, 2008, the borrowing capacity on this facility was $0.7
billion. Contractual Obligations
  Less than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1 to 3 years
    
    
    3 to 5 years
    
    
    5 yearsBonds and notes payable
    
    $
    29,129,133
    
    
    
    7,134,274
    
    
    
    343,457
    
    
    
    61,914
    
    
    
    21,589,488Operating lease obligations
    
    
    46,447
    
    
    
    9,622
    
    
    
    17,756
    
    
    
    12,461
    
    
    
    6,608Other
    
    
    7,564
    
    
    
    7,244
    
    
    
    320
    
    
    
    
    
    
    
    Total
    
    $
    29,183,144
    
    
    
    7,151,140
    
    
    
    361,533
    
    
    
    74,375
    
    
    
    21,596,096
     53




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##### Table of Contents




    
    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
sells loans to the Texas Foundation on a quarterly basis.
 
    
    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 subsequent 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 March 31, 2008 of $11.75 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
March 31, 2008 was $6.5 million and is included in other in the above table.
 Dividends
  CRITICAL ACCOUNTING POLICIES
   Allowance for Loan Losses
    54




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##### Table of Contents



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
  Purchase Price Accounting Related to Business and Certain Asset Acquisitions
  Income Taxes
   55




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##### Table of Contents



RECENT ACCOUNTING PRONOUNCEMENTS
 Business Combinations
 Fair Value Measurements
 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
 Accounting for Collaborative Arrangements Reporting Revenue Gross as a Principal Versus Net as an Agent
  56




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
   As of March 31, 2008
    
    
    As of December 31, 2007Dollars
    
    
    Percent
    
    
    Dollars
    
    
    PercentFixed-rate loan assets
    
    $
    2,157,195
    
    
    
    8.2
    %
    
    $
    1,136,544
    
    
    
    4.3
    %Variable-rate loan assets
    
    
    24,190,159
    
    
    
    91.8
    
    
    
    25,192,669
    
    
    
    95.7Total
    
    $
    26,347,354
    
    
    
    100.0
    %
    
    $
    26,329,213
    
    
    
    100.0
    %Fixed-rate debt instruments
    
    $
    686,704
    
    
    
    2.4
    %
    
    $
    689,476
    
    
    
    2.5
    %Variable-rate debt instruments
    
    
    28,442,429
    
    
    
    97.6
    
    
    
    27,426,353
    
    
    
    97.5Total
    
    $
    29,129,133
    
    
    
    100.0
    %
    
    $
    28,115,829
    
    
    
    100.0
    %
     57




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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)
    
    
    March 31, 2008 (b)5.0 - 5.49%
    
    
    5.38
    %
    
    
    2.74
    %
    
    $
    745.5 - 5.99%
    
    
    5.87
    
    
    
    3.23
    
    
    
    74,5006.0 - 6.49%
    
    
    6.19
    
    
    
    3.55
    
    
    
    433,1396.5 - 6.99%
    
    
    6.70
    
    
    
    4.06
    
    
    
    387,4147.0 - 7.49%
    
    
    7.17
    
    
    
    4.53
    
    
    
    135,1647.5 - 7.99%
    
    
    7.71
    
    
    
    5.07
    
    
    
    233,6908.0 - 8.99%
    
    
    8.16
    
    
    
    5.52
    
    
    
    548,535> 9.0%
    
    
    9.04
    
    
    
    6.40
    
    
    
    344,679$
    2,157,195
 
 (a)
    
    The estimated variable conversion rate is the estimated short-term interest rate at which
loans would convert to variable rate.(b)
    
    As of March 31, 2008, the Company had $211.7 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 March 31, 2008 was 6.17%.   58




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##### Table of Contents



Weightedaverage fixedNotional
    
    
    rate paid byMaturity
    
    Amount
    
    
    the Company (a)2009
    
    $
    500,000
    
    
    
    4.08
    %2010
    
    
    700,000
    
    
    
    3.442011
    
    
    500,000
    (b)
    
    
    3.572012
    
    
    250,000
    (c)
    
    
    3.86$
    1,950,000
    
    
    
    3.69
    %
 
 (a)
    
    For all interest rate derivatives, the Company receives discrete three-month LIBOR.(b)
    
    $250.0 million notional amount of derivatives have an effective start date in the first
quarter of 2010.(c)
    
    Derivatives have an effective start date in the first quarter 2009.     59




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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
    
    $
    24,623,036
    
    
    
    3 month Treasury bill
    
    Varies
    
    
    1,441,010
    
    
    
    Private student loans
    
    
    
    
    283,308
    
    
    
    3 month LIBOR (c)
    
    Quarterly
    
    
    
    
    
    
    18,442,481Auction-rate or remarketing
    
    Varies
    
    
    
    
    
    
    2,875,045Asset-backed commercial paper
    
    Varies
    
    
    
    
    
    
    6,676,262Fixed rate
    
    
    
    
    
    
    
    
    211,704Other (d)
    
    
    
    
    1,858,138
    
    
    
    $
    28,205,492
    
    
    
    28,205,492
 (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 March 31, 2008: Notional AmountEffective datein second
    
    
    Effective datein third
    
    
    Effective datein second
    
    
    Effective datein thirdMaturity
    
    quarter 2007
    
    
    quarter 2007
    
    
    quarter 2008
    
    
    quarter 2008
    
    
    Total2008
    
    $
    2,000,000
    
    
    
    2,000,000
    
    
    
    
    
    
    
    
    
    
    
    4,000,0002009
    
    
    2,000,000
    
    
    
    4,000,000
    
    
    
    
    
    
    
    
    
    
    
    6,000,0002010
    
    
    500,000
    
    
    
    2,000,000
    
    
    
    2,000,000
    
    
    
    1,000,000
    
    
    
    5,500,0002011
    
    
    
    
    
    
    2,700,000
    
    
    
    
    
    
    
    
    
    
    
    2,700,0002012
    
    
    
    
    
    
    1,000,000
    
    
    
    800,000
    
    
    
    1,600,000
    
    
    
    3,400,000$
    4,500,000
    
    
    
    11,700,000
    
    
    
    2,800,000
    
    
    
    2,600,000
    
    
    
    21,600,000
 (b)
    
    The Companys FFELP student loans earn interest based on the daily average H15 financial
commercial paper calculated on a fiscal quarter.(c)
    
    The Company has 950.0 million of 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.(d)
    
    Assets include restricted cash and investments, pre-funding on certain debt transactions,
and other assets.  60




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##### Table of Contents



(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
   Three months ended March 31,2008
    
    
    2007Interest rate swaps  loan portfolio
    
    $
    (3,177
    )
    
    
    2,835Basis swaps  loan portfolio
    
    
    40,457
    
    
    
    60Interest rate swaps  other (a)
    
    
    
    
    
    
    4,664Cross-currency interest rate swaps
    
    
    3,483
    
    
    
    (3,319
    )Derivative settlements received, net
    
    $
    40,763
    
    
    
    4,240
 (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.  61




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##### Table of Contents



Sensitivity Analysis
  Three months ended March 31, 2008Change from decrease
    
    
    Change from increase
    
    
    Change from increaseof 100 basis points
    
    
    of 100 basis points
    
    
    of 200 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
    
    $
    11,839
    
    
    
    11.7
    %
    
    
    (11,839
    )
    
    
    (11.7
    )%
    
    
    (20,667
    )
    
    
    (20.4
    )%Impact of derivative settlements
    
    
    (6,225
    )
    
    
    (6.2
    )
    
    
    6,225
    
    
    
    6.2
    
    
    
    12,449
    
    
    
    12.3Increase (decrease) in net income before taxes
    
    $
    5,614
    
    
    
    5.5
    %
    
    
    (5,614
    )
    
    
    (5.5
    )%
    
    
    (8,218
    )
    
    
    (8.1
    )%Increase (decrease) in basic and diluted
earning per share
    
    $
    0.08
    
    
    
    
    
    
    
    (0.08
    )
    
    
    
    
    
    
    (0.12
    )
 Three months ended March 31, 2007Change from decrease
    
    
    Change from increase
    
    
    Change from increaseof 100 basis points
    
    
    of 100 basis points
    
    
    of 200 basis pointsDollar
    
    
    Percent
    
    
    Dollar
    
    
    Percent
    
    
    Dollar
    
    
    Percent(dollars in thousands)Effect on earnings:Increase in pre-tax net income before
impact of
derivative
settlements
    
    $
    7,029
    
    
    
    29.7
    %
    
    
    228
    
    
    
    0.9
    %
    
    
    1,593
    
    
    
    6.7
    %Impact of derivative settlements
    
    
    (1,911
    )
    
    
    (8.1
    )
    
    
    1,911
    
    
    
    8.1
    
    
    
    3,822
    
    
    
    16.2Increase in net income before taxes
    
    $
    5,118
    
    
    
    21.6
    %
    
    
    2,139
    
    
    
    9.0
    %
    
    
    5,415
    
    
    
    22.9
    %Increase in basic and diluted
earning per share
    
    $
    0.06
    
    
    
    
    
    
    
    0.03
    
    
    
    
    
    
    
    0.07
 Foreign Currency Exchange Risk
   
   62




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##### Table of Contents



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
  Municipal Derivative Bid Practices Investigation
       63




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##### Table of Contents



Industry Investigations
    Department of Education Review
   Department of Justice
   
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Unregistered Sales of Equity Securities
    64




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##### Table of Contents



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)January 1 - January 31, 2008
    
    
    1,585
    
    
    $
    10.80
    
    
    
    1,585
    
    
    
    7,462,178February 1 - February 29, 2008
    
    
    30,457
    
    
    
    10.08
    
    
    
    30,457
    
    
    
    7,999,673March 1 - March 31, 2008
    
    
    16,022
    
    
    
    10.24
    
    
    
    16,022
    
    
    
    7,741,742Total
    
    
    48,064
    
    
    $
    10.16
    
    
    
    48,064
 (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
January, February, or March 2008. Shares of Class A common stock purchased pursuant to
the 2006 Plan included (i) 1,585 shares, 3,547 shares, and 3,541 shares in January,
February, and March, 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) 26,910 shares and 12,481 shares in February and March, respectively, purchased
from employees upon termination of employment with the Company, which shares were
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
    
    
    Approximate
    
    
    ApproximateMaximum number of
    
    
    value of shares that
    
    
    the 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
    
    
    purchased under
    
    
    purchased under2006 Plan
    
    
    the 2006 ESLP
    
    
    A Common Stock
    
    
    the 2006 ESLP
    
    
    the 2006 Plan andAs of
    
    (A)
    
    
    (B)
    
    
    (C)
    
    
    (D)
    
    
    2006 ESLPJanuary 31, 2008
    
    
    4,686,093
    
    
    $
    36,450,000
    
    
    $
    13.13
    
    
    
    2,776,085
    
    
    
    7,462,178February 29, 2008
    
    
    4,655,636
    
    
    
    36,450,000
    
    
    
    10.90
    
    
    
    3,344,037
    
    
    
    7,999,673March 31, 2008
    
    
    4,639,614
    
    
    
    36,450,000
    
    
    
    11.75
    
    
    
    3,102,128
    
    
    
    7,741,742
  65




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##### Table of Contents



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.
  66




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##### Table of Contents



ITEM 6. EXHIBITS
 4.1
    
    
    Indenture of Trust by and between Nelnet Student Loan Trust 2008-1 and Zions First National Bank,
dated as of March 1, 2008, filed as Exhibit 4.1 to Nelnet Student Loan Trust 2008-1s Current
Report on Form 8-K filed on March 13, 2008 and incorporated herein by reference.4.2
    
    
    Indenture of Trust by and between Nelnet Student Loan Trust 2008-2 and Zions First National Bank,
dated as of April 1, 2008, filed as Exhibit 4.1 to Nelnet Student Loan Trust 2008-2s Current
Report on Form 8-K filed on April 9, 2008 and incorporated herein by reference.4.3
    
    
    Indenture of Trust by and between Nelnet Student Loan Trust 2008-3 and Zions First National Bank,
dated as of April 15, 2008, filed as Exhibit 4.1 to Nelnet Student Loan Trust 2008-3s Current
Report on Form 8-K filed on April 30, 2008 and incorporated herein by reference.10.1*
    
    
    Employment Agreement, dated as of June 10, 2005, between FACTS Management Co. and Timothy A. Tewes.10.2*
    
    
    Non-competition Agreement, dated as of June 10, 2005, between FACTS Management Co. and Timothy A.
Tewes.10.3*
    
    
    First Amendment to Employment Agreement, dated November 22, 2006, between FACTS Management Co. and
Timothy A. Tewes.10.4*
    
    
    Separation Agreement, dated as of December 13, 2007, by and between David Bottegal and Nelnet, Inc.10.5*
    
    
    Employment Agreement, dated as of October 31, 2007, by and between John R. Kline and National
Education Loan Network, Inc. or its designated affiliated company.14.1
    
    
    Nelnet, Inc. Code of Conduct, filed as Exhibit 14.1 to Nelnet, Inc.s Current Report on Form 8-K
filed on February 5, 2008 and incorporated herein by reference.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  67




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##### Table of Contents



SIGNATURES
  NELNET, INC.Date: May 12, 2008
    By:
    /s/ MICHAEL S. DUNLAPName:
    Michael S. DunlapTitle:
    Chairman and Chief Executive OfficerBy:
    /s/ TERRY J. HEIMESName:
    Terry J. HeimesTitle:
    Chief Financial Officer  68




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description4.1
    
    
    Indenture of Trust by and between Nelnet Student Loan Trust 2008-1 and Zions First National Bank,
dated as of March 1, 2008, filed as Exhibit 4.1 to Nelnet Student Loan Trust 2008-1s Current
Report on Form 8-K filed on March 13, 2008 and incorporated herein by reference.4.2
    
    
    Indenture of Trust by and between Nelnet Student Loan Trust 2008-2 and Zions First National Bank,
dated as of April 1, 2008, filed as Exhibit 4.1 to Nelnet Student Loan Trust 2008-2s Current
Report on Form 8-K filed on April 9, 2008 and incorporated herein by reference.4.3
    
    
    Indenture of Trust by and between Nelnet Student Loan Trust 2008-3 and Zions First National Bank,
dated as of April 15, 2008, filed as Exhibit 4.1 to Nelnet Student Loan Trust 2008-3s Current
Report on Form 8-K filed on April 30, 2008 and incorporated herein by reference.10.1*
    
    
    Employment Agreement, dated as of June 10, 2005, between FACTS Management Co. and Timothy A. Tewes.10.2*
    
    
    Non-competition Agreement, dated as of June 10, 2005, between FACTS Management Co. and Timothy A.
Tewes.10.3*
    
    
    First Amendment to Employment Agreement, dated November 22, 2006, between FACTS Management Co. and
Timothy A. Tewes.10.4*
    
    
    Separation Agreement, dated as of December 13, 2007, by and between David Bottegal and Nelnet, Inc.10.5*
    
    
    Employment Agreement, dated as of October 31, 2007, by and between John R. Kline and National
Education Loan Network, Inc. or its designated affiliated company.14.1
    
    
    Nelnet, Inc. Code of Conduct, filed as Exhibit 14.1 to Nelnet, Inc.s Current Report on Form 8-K
filed on February 5, 2008 and incorporated herein by reference.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  69