**EXHIBIT 99.1****Risk Factors Related to Our Industry and Our Company****Changes in federal laws and regulations relating to education loans, particularly legislationaffecting federally guaranteed consolidation loans, could materially adversely affect our resultsof operations.**     The Higher Education Act of 1965 must be reauthorized by Congress every five years and theFFEL Program is periodically amended. The United States Congress is currently consideringreauthorization of the Act, which is scheduled to expire December 31, 2005. Changes in the HigherEducation Act made in the two most recent reauthorizations have resulted in reductions in educationloan yields paid to lenders, increased fees paid by lenders and a decreased level of federalguarantee. Federally guaranteed consolidation loans made up 90.3 percent of our loan originationsfor the year ended December 31, 2004, and 85.6 percent of our loan originations for the nine monthsended September 30, 2005, and efforts underway to pass legislation that affects FFELP loans wouldhave a significant impact on us.On July 22, 2005, the U.S. House of Representative’s Education and Workforce Committee passed H.R.609 to reauthorize the Higher Education Act. Among the key changes impacting CFS were thefollowing: **•** Borrower choice of fixed or variable rate loan consolidation: Borrowers will have achoice between a fixed rate based on 91 day T-bill plus 3.3 percent or an annual resetvariable rate loan based on 91 day T-bill plus 2.3 percent. A new .5 percent originationfee, paid by the borrower, will be charged on fixed rate consolidation loans.  **•** Increased risk sharing: The loan guaranty will drop from 98 percent to 96 percent (inthe case of Exceptional Performers, from 100 percent to 98 percent.)  **•** Elimination of regular floor income: Lenders will be required to rebate to the federalgovernment those returns on student loans where interest paid by the borrowers exceeds thespecial allowance formula (90 day commercial paper plus 2.64 percent.)  **•** Repeal of the single holder rule, which in most cases, requires that a borrowerconsolidate his or her loans with a single lender if that lender holds all of theborrower’s FFELP loans. However, borrowers will be required to contact their currentsingle lender to notify the lender of the borrower’s intent to consolidate with anotherlender.  **•** Increased annual borrowing limits: First year loan limits are increased from $2,625 to$3,500, and succeeding undergraduate years from $3,500 to $4,500. Graduate unsubsidizedborrowing limits are increased from $10,000 to 12,000 per year. Aggregate loan limits arenot increased.
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     The new interest rate structure for consolidation loans, if ultimately passed into law, couldreduce the amount of income we can earn on the loans we originate in the future and reduce thedemand for consolidation loans. H.R. 609 is expected to be voted on by the full House ofRepresentatives later this year and further amendments are possible which could affect ourbusiness.Additionally, on September 8, 2005, the Senate’s Health Education Labor and Pensions committeeapproved Senate Bill (S. 1614) reauthorizing the Higher Education Act, which differs materiallyfrom the House bill. Among the key changes impacting CFS were the following: **•** Implementation of the scheduled 2006 interest rate change from a variable rate to afixed rate for Stafford loans and PLUS loans. Stafford loans will have a fixed interestrate of 6.8 percent and PLUS loans will have a fixed interest rate of 8.5 percent, asopposed to 7.9 percent.  **•** Increased risk sharing: The loan guaranty will drop from 98 percent to 97 percent forall lenders.  **•** Elimination of the Exceptional Performer Designation, which provides that designatedlenders and servicers receive a 100 percent guaranty on defaulted student loans.  **•** Elimination of regular floor income: Lenders will be required to rebate to the federalgovernment those returns on student loans where interest paid by the borrowers exceeds thespecial allowance formula (90 day commercial paper plus 2.64 percent). This provision isconsistent with H.R. 609.  **•** Total repeal of the single holder rule, which in most cases, requires that a borrowerconsolidate his or her loans with a single lender if that lender holds all of theborrower’s FFELP loans.  **•** Increased lender paid fee on consolidation loans from .5 percent to 1 percent.  **•** Expanded PLUS loan eligibility to include graduate and professional students as well astheir parents.  **•** Required 1 percent fee charged by Guaranty Agencies for each disbursement.  **•** Expanded Credit Bureau Reporting Requirements: Lenders must report student loaninformation to all national credit bureaus and must report the type of student loan ratherthan a generic classification such as “installment loans”.  **•** Increased annual borrowing limits: First year loan limits are increased from $2,625 to$3,500, and succeeding undergraduate years from $3,500 to $4,500. Graduate unsubsidizedborrowing limits are increased from $10,000 to 12,000 per year. Unsubsidized loan limitsfor coursework necessary to enroll in a graduate program or for a professional credentialare increased from $5,000 to $7,000. Aggregate loan limits are not increased.The full Senate has not scheduled a vote on S.1614, and may not do so until next year. Also,amendments to the Senate bill are possible.
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In light of the fact that the Senate and the House Reauthorization Bills materially differ, theywill ultimately have to be reconciled in conference committee by the two legislative chambers. Theultimate content and timing of completed legislation is unknown.     Moreover, there can be no assurance that the provisions of the Higher Education Act will bereauthorized by December 31, 2005, when the current authorization lapses. Although Congress hasconsistently extended the effective date of the Higher Education Act, it may elect not toreauthorize the Department of Education’s ability to provide interest subsidies and federalguarantees for student loans. Such a failure to reauthorize would reduce the number of federallyguaranteed student loans available for us to originate in the future and could materially reduceour results of operations.     **Changes in the interpretations of the Higher Education Act issued by the U.S. Department ofEducation could negatively impact our loan originations.**     The U.S. Department of Education oversees and implements the Higher Education Act andperiodically issues regulations and interpretations of that Act. Changes in such regulations andinterpretations could negatively impact our business.     Currently, if only one lender holds all of a student’s FFELP loans, then another lender cannotconsolidate the loans away from the current holder unless the current holder refuses, or does notoffer, to consolidate the loans for the borrower. This regulation is referred to as the singleholder rule. Historically, we did not believe the single holder rule limited the ability of aborrower to consolidate FFELP loans held by a single lender with the William D. Ford Federal DirectLoan Program (“FDLP loans”). However, the U.S. Department of Education issued a letter on April29, 2004, that limited the ability of borrowers having FFELP loans that are held by a single lenderand FDLP loans to obtain a FFELP consolidation loan with any lender other than the lender holdingall of the borrower’s FFELP loans. This new ruling was scheduled to go into effect in September2004. However, on August 26, 2004, the U.S. Department of Education issued a letter stating thenew ruling would not go into effect until September 2005. Subsequently, the Department pushed outthe effective date of their ruling until March 31, 2006. We believe that the delayed effective datemay be further extended by the Department, if Congress has not completed HEA reauthorization byMarch 31, 2006; however, there can be no assurance of this extension. As noted in the first riskfactor, both H.R. 609 and S. 1614 would repeal the single holder rule.     In addition, we marketed and offered FFELP consolidation loans to borrowers seeking torefinance only their FDLP consolidation loans. However, in June 2004, the U.S. Department ofEducation’s servicers for the FDL Program informed us and, we believe, other FFELP loan originatorsthat FFELP loans that refinance only FDLP consolidation loans would no longer be permitted. OnAugust 26, 2004, the U.S. Department of Education issued a letter indicating this type ofconsolidation would be permitted unless reauthorization of the Higher Education Act were to changeit.
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     These rulings adversely affected loan originations in 2004 and the first three of quarters of2005 and could adversely affect the volume of loan originations in the future.**Significantly decreased demand for consolidation loans would materially reduce our revenue.**     A combination of increased consumer awareness, rising education debt volume and historicallylow interest rates available to borrowers from 2002 through mid-2005 resulted in a significantnumber of borrowers seeking to consolidate their variable-rate education loans into one loan. Ofour total loan originations for the year ended December 31, 2004, 90.3 percent were consolidationloans, while 85.6 percent of the total originations were consolidation loans for the nine monthsended September 30, 2005. One of the advantages of consolidation loans has been that borrowershave been able to fix the interest rate on their variable rate student loans at the then existingrate. When rates rise, which occurred on July 1, 2005, students may have less incentive toconsolidate their loans at a fixed rate. Demand for consolidation loans could also decrease in thefuture as a result of a decrease in the pool of potential borrowers eligible to consolidate theirloans. The Congressional Budget Office projects that FFELP consolidation loan volume will decreasefrom $35.9 billion in federal fiscal year 2004 to an estimated $31.2 billion in federal fiscal year2005 and to $22.3 billion in federal fiscal year 2006. A significant portion of the borrowerseligible to consolidate their loans have loans held by one lender and, as a result of the singleholder rule discussed in the prior risk factor, those loans are not available for consolidation byother lenders unless the original lender does not offer or refuses to consolidate those loans.Demand for consolidation loans could also decrease as a result of regulatory changes or if any ofthe legislative proposals described above are enacted. A significant decrease in demand forconsolidation loans would have a material adverse effect upon our revenue, particularly our fees onloan sales.**We must comply with governmental regulations relating to our FFELP loans and guaranty agency rulesand our business and results of operations could be materially adversely affected if we fail tomeet these requirements.**     Our principal business is comprised of originating, holding and servicing education loans madeand guaranteed pursuant to the FFEL Program. Most significant aspects of our lines of business aregoverned by the Higher Education Act and the regulations issued by the Department of Education. Wemust also meet various requirements of the guaranty agencies, which are private not-for-profitorganizations or state agencies that have entered into federal reinsurance contracts with theDepartment of Education, in order to maintain the federal guarantee on our FFELP loans. Theserequirements establish origination and servicing requirements and procedural guidelines and specifyschool and borrower eligibility criteria. The federal guarantee of FFELP loans is conditioned oncompliance with origination, servicing and collection standards set by the Department of Educationand guaranty agencies. FFELP loans that are not originated, disbursed or serviced in accordancewith Department of Education regulations risk loss of their guarantee, in full or in part.
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     Our failure to comply with the regulatory requirements described above may arise from: **•** breaches of our internal control system, such as a failure to adjust manual orautomated servicing functions following a change in regulatory requirements;  **•** unintentional employee errors, such as inputting erroneous data or failure to adhere toestablished company processes;  **•** technological defects, such as a malfunction in or destruction of our computer systems;  **•** fraud by third parties who refer loan applications to us or from whom we acquireoriginated loan applications; or  **•** fraud by our employees or other persons in activities such as origination or borrowerpayment processing.     If we fail to comply with any of the above requirements, we could incur penalties or lose thefederal guarantee on some or all of our FFELP loans. In addition, even if we comply with the aboverequirements, a failure to comply by third parties with whom we conduct business may beattributable to us and result in our incurring penalties or losing the federal guarantee on some orall of our FFELP loans. If we experience a high rate of servicing deficiencies, we could incurcosts associated with remedial servicing, and, if we are unsuccessful in curing such deficiencies,the eventual losses on the loans that are not cured could be material. Failure to comply withthese laws and regulations could result in our liability to borrowers and potential class actionsuits.     In May 2004, the Department of Education awarded the company exceptional performer status as aservicer thus making its loss claims on loans it services at SunTech, our loan servicing center,eligible to be paid to 100 percent of the unpaid principal and interest instead of the standard 98percent for the 12-month period beginning June 1, 2004. In October 2004, SunTech identified aprocessing problem that had resulted in a number of borrowers not receiving final demand letters, atechnical violation of the due diligence requirements of the Higher Education Act. The problem wascorrected immediately, self-reported to the Department of Education and appropriate controls wereput in place. The problem had not been identified during audits performed by the Department, otherservicing compliance auditors or by the independent auditors retained to perform the exceptionalperformer audits under the department’s guidelines. In June 2005, seven months after beingnotified of the problem, the Department of Education informed the company that the exceptionalperformer designation had been withdrawn from SunTech due to this problem. The loss of thedesignation was made retroactive to September 1, 2004. Although we had subsequent discussions withthe Department challenging the determination, the Department notified us in September 2005 that itwould not reconsider its decision. We cannot predict whether the Department may take furtheradverse action against SunTech, such as revoking SunTech’s exceptional performer statusretroactively to a period prior to September 1, 2004, or retroactively denying reimbursements forclaims affected by the problem that had been paid on the
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basis of SunTech’s exceptional performer status. If the Department were to take further adverseaction based on this problem, our operating results and financial condition would be adverselyaffected. We have re-applied for the exceptional performer designation and our application iscurrently being reviewed by the Department. We cannot predict whether SunTech will bere-designated an exceptional performer.**Changes in federal expenditures to support higher education financing could materially adverselyaffect our business.**     Congress is currently undertaking a budget reconciliation process for fiscal 2006. Due to thesize of the current federal budget deficit, indications are that almost all federal programs willbe impacted—including federal student loans. As part of the upcoming federal budgetreconciliation process, which will overlap the pending HEA reauthorization process, proposals havebeen suggested which would, among other things, increase lender-paid loan origination fees, reducethe insurance on student loans, eliminate floor income, and change the interest rate on newconsolidation loans to make the fixed rate less attractive to borrowers. It is unclear how thesebudget reconciliation proposals will ultimately evolve through the Congressional budget,authorizing, and appropriations processes. These budget proposals, if enacted, could materiallyreduce our loan originations and earnings.**We retain a significant portion of the FFELP and private loans we originate in our portfolio. Wecannot predict whether we will suffer losses as a result of the performance of our assets andoperations over the long term.**     Prior to 2002, we did not retain in our portfolio a significant amount of the loans weoriginated. We began retaining FFELP loans in 2002. We retained approximately 50 percent of ourFFELP originations in 2004 and 2003 and 21 percent in 2002. Although we believe that the retainedFFELP loans are valuable assets, due to their long duration and high quality (due to the governmentguarantee), we cannot assure you that over the long term our earnings from retaining loans in ourportfolio will exceed the value of the income we would have received from selling those loans. Theloans retained in our portfolio may be repaid prior to maturity, which would reduce the amount ofinterest we earn and expose us to reinvestment risk. Moreover, the loans retained in our portfoliocould perform poorly in the future and our allowance for loan losses could be insufficient, whichcould materially reduce our earnings and impair our ability to access the asset-backedsecuritization market in the future on favorable terms. During the second quarter of 2005 we alsobegan to retain a portion of the private loans (which do not have a government guarantee) weoriginate, which has introduced additional, different and higher prepayment, credit and liquidityrisks. We have, however, been marketing, originating and servicing this type of loan since 2001and, in addition, have obtained insurance from a double-A rated insurer to protect the companyagainst some of the credit risks associated with these loans. We estimate that private loans willbe less than 10 percent of our total portfolio by the end of 2006.
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     In addition, we began servicing loans in April 2003, following our acquisition of SunTech.Although SunTech has been in business for more than 15 years and hasserviced a significant portion of the loans we have originated since our formation in 1998, we haveoperated as a vertically integrated company offering loan servicing for only two years. If SunTechdoes not perform at the level of its historical performance, our business and results of operationscould be materially adversely affected.**Our quarterly results of operations have varied significantly in the past and we expect they willcontinue to do so, which may cause our stock price to fluctuate.**     Our quarterly results of operations have varied significantly in the past and we expect theywill continue to do so in the future. Over the past three fiscal years, our quarterly income(loss) before income tax provision (benefit) and accretion of dividends on preferred stock hasranged from a low of a $13.5 million loss in the second quarter of 2003 to a high of $29.4 millionof income in the fourth quarter of 2004. In addition, over this period, our quarterly originationsas a percentage of total annual originations have ranged from a low of 9.4 percent to a high of36.4 percent. The market price of our common stock may decline significantly if our futurequarterly results of operations fall below the expectations of securities or industry analysts orinvestors.     Our quarterly results of operations in any period will be particularly affected by the amountand timing of our loan application sales. Because we target a percentage of our loan originationsto be retained on an annual, rather than quarterly basis, our quarterly results of operations willfluctuate. A number of additional factors, some of which are outside of our control, also willcause our quarterly results to fluctuate, including: **•** an increase in loan consolidations in November and December, as a result of theexpiration of the six-month grace period for students graduating in May and June;  **•** the effects of the July 1 reset in borrower interest rates. We give borrowers whocomplete loan applications during the second quarter the option to fund their loans priorto July 1, when the old rate is effective, or after July 1, when the new rate iseffective. Accordingly, if any year’s borrower rate increases from the prior year’sborrower rate, a higher percentage of completed applications will be originated in thesecond quarter; conversely, if any year’s borrower rate decreases over the prior year’sborrower rate, the origination of a significant portion of the loan applications completedin the second quarter will be shifted to the third quarter.  **•** seasonal patterns affecting private in-school loans, primarily an increase in privatein-school loans and loan originations in the third and fourth quarter as students obtainloans to pay tuition, and a decrease in private in-school loan activity in the secondquarter;  **•** seasonal patterns affecting marketing expenses, as we generally market most heavily inthe second and third quarters of the year in an effort to inform recent college graduatesof their consolidation options and offer private in-school loans to students payingtuition;  **•** the impact of general economic conditions;  **•** changes in interest rates; and  **•** the introduction of new product offerings.
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     We forecast the volume and timing of our loan originations for our operational and financialplanning on the basis of many factors and subjective judgments. Therefore, failure to generateoriginations according to our expectations in a particular quarter could materially decrease ournet income for that quarter and the next, at a minimum.**Prescreened options notices may limit our ability to market our products and services.**     Recent regulations implementing section 213 of the Fair and Accurate Credit Transaction Act,also referred to as the FACT Act, which amended section 615(d)(15 I.S.C.) 1681m(d) of the FairCredit Reporting Act, requires that prescreened solicitations sent to consumers contain a simpleand easy to understand notice providing information about the offer and instructions on opting outof receiving future offers. This notice must be on the first page of the offer.     This rule will restrict our ability to effectively market our products and services to newconsumers to the extent that this rule results in an increased number of potential borrowers optingout of offers.**“Do not call” registries may limit our ability to market our products and services.**     Our direct marketing operations are subject to various federal and state “do not call” listrequirements and may become subject to additional state “do not call” list requirements. TheFederal Trade Commission maintains a centralized national “do not call” registry, through whichconsumers may have their phone numbers added to the national “do not call” registry.     Generally, we are prohibited from calling anyone on that registry unless we have an existingrelationship with that person. We also are required to pay a fee to access the registry on aquarterly basis. Fines of up to $11,000 per initial violation and up to $25,000 per subsequentviolation and other possible penalties can be imposed for violations of the regulations. This rulemay restrict our ability to market effectively our products and services to new customers.Furthermore, compliance with this rule may prove difficult, and we may incur penalties forimproperly conducting our marketing activities. In addition, failure to comply with the terms ofthis rule could have a negative impact on our reputation.     Forty-three states have “do not call” rules. Twenty-seven states use and/or enforce thenational “do not call” registry and 17 states maintain their own “do not call” registry. Thestates have varying penalties and fines for noncompliance. Compliance and coordination with thesestate lists and with federal lists can be difficult and we may incur additional penalties forfailure to comply with any of these lists, which could restrict our ability to effectively marketour products and services to new consumers.
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**We derive a significant portion of our fee income under a small number of forward purchaseagreements, and if we are not able to retain these agreements, or if our counterparties under theseagreements reduce their willingness to acquire originated loans from us, our net revenue would bereduced and our results of operations would suffer.**     We enter into forward purchase agreements with financial institutions who agree to purchaseand require that we sell to them, a portion of the FFELP consolidation loan applications and, morerecently, FFELP consolidation loans that we originate. We also enter into forward purchaseagreements with financial institutions who agree to purchase a substantial portion of the privateconsolidation applications we originate. Under these agreements, which are typically one- tothree-year agreements, we generate loan applications or loans that are then forwarded to partneringfinancial institutions over pre-determined periods of time and for agreed upon fees. Two of ourforward purchase agreements accounted for approximately 73.2 percent of our fee income in fiscal2004 and 83.4 percent of our fee income in the first nine months of 2005 and 50.4 percent of ournet revenue in fiscal 2004 and 58.5 percent of our net revenue in the first nine months of 2005.Revenue under our largest forward purchase agreement represented 61.6 percent of our fee income infiscal 2004 and 72.5 percent of our fee income for the first nine months of 2005 and 42.4 percentof our net revenue for fiscal 2004 and 50.8 percent of our net revenue for the first nine months of2005. We may not be able to retain or renew our key forward purchase agreements or ourcounterparties may decrease the level of originated loans they are willing to acquire from us. Ifa large forward purchase contract were cancelled or not renewed and not replaced by contracts withcomparable terms, our fee income would significantly decline, and the loss of, or a significantreduction of, purchases by one or more of our significant forward purchase agreement counterpartiescould materially adversely affect our business, operating results and financial condition. We canprovide no assurance that we will be able to renew these agreements or that suitable replacementscan be found at acceptable rates or on acceptable terms.     In the third quarter of 2005, we renegotiated our loan origination responsibility agreementwith The Student Loan Corporation, an affiliate of Citibank, N.A. The Student Loan Corporation, orSLC, is our largest customer. Under the amended and restated agreement, SLC is obligated topurchase up to a certain dollar amount of consolidation loan applications originated by us underthe Federal Family Education Loan Program and we are obligated to source to SLC, consolidation loanapplications that are submitted by an applicant who has an underlying SLC or CitiBank loan as partof the consolidation application. Under the amended agreement, fee income as a percentage of loansoriginated has been reduced, retroactive to July 1, 2005.
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**Our inability to maintain relationships with our FFELP eligible lender or with lenders thatoriginate our private loans, or the lender that makes the private loans that we market, purchaseand retain, could have a material adverse effect on our ability to sustain or increase ourbusiness.**     When we originate FFELP loans on our own behalf or when we acquire FFELP loans from others, weengage The Bank of New York as our “eligible lender,” as defined in the Higher Education Act, toact as our trustee to hold title to all such originated and acquired FFELP loans. This eligiblelender trustee holds the legal title to our FFELP loans, and we hold 100 percent of the beneficialinterests in those loans. If we are unable to renew our contract with The Bank of New York, or ifthe contract is terminated, we would have to find another institution to serve as our eligiblelender. We can provide no assurance that we will be able to renew this contract or that areplacement eligible lender can be found at acceptable rates or on acceptable terms.     Finally, we also have relationships with several lenders for whom we market and provideorigination services for private in-school loans. In addition, we have relationships with a lenderfrom whom we purchase private loans to retain on our balance sheet. The number of financialinstitutions willing to originate and finance these private in-school loans will be a significantfactor in the growth of this market. As the market is less mature than that for federallyguaranteed loans, there are, at present, fewer institutions originating and acquiring these loans.Accordingly, we can provide no assurance that we will be able to renew these contracts or thatsuitable replacements could be found or that we will find additional lenders willing to finance thevolume of private loans that we may seek to market, originate or purchase, and therefore we couldfind it necessary to finance some or all of these loans ourselves.     Any failure to maintain or replace contractual relationships with these financial institutionsor lenders could seriously impair our ability to originate loans and generate revenue fromoriginated loans, to recognize interest income from retained private loans and to sustain orincrease our business.**If we are unable to increase our private education loans and loan originations and expand ourchannels of distribution as we plan, our business may not grow.**     Our strategy includes increasing the amount of private loans we originate, as well asexpanding our channels of distribution and retaining a portion of these loans. We have lessexperience in these products and channels than in our business of marketing and originating FFELPconsolidation loans through our direct to consumer channel. In connection with these strategies,we have invested and will continue to invest resources in market research and technology and havehired and trained and will continue to hire and train additional personnel, when necessary. Ifthese strategies are not successful, our earnings may be adversely affected.
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**We may not be able to successfully make acquisitions or increase our profits from theseacquisitions.**     We intend to pursue continued growth through acquisitions in the education finance industry.Such an acquisition strategy includes certain risks. For example: **•** we may be unable to identify acquisition candidates, negotiate definitive agreements onacceptable terms or, as necessary, secure additional financing;  **•** we may encounter unforeseen expenses, difficulties, complications or delays inconnection with the integration of acquired entities;  **•** we may fail to achieve acquisition synergies;  **•** our acquisition strategy, including the focus on the integration of operations ofacquired entities, may divert management’s attention from the day-to-day operation of ourbusinesses;  **•** acquired loan or servicing portfolios may have unforeseen problems; or  **•** key personnel at acquired companies may leave employment.     In addition, we may compete for certain acquisition targets with companies having greaterfinancial resources than ours. We cannot assure you that we will be able to successfully makefuture acquisitions or what effects those acquisitions may have on our financial condition andresults of operations. Inherent in any future acquisition is the risk of transitioning companycultures and facilities. The failure to efficiently and effectively achieve such transitions couldhave a material adverse effect on our financial condition and results of operations, particularlyduring the periods immediately following any acquisitions.     We anticipate that we would finance potential acquisitions through cash provided by operatingactivities and/or borrowings, which would reduce our cash available for other purposes and our debtcapacity, as well as our debt service requirements. We cannot assure you, however, that we wouldbe able to obtain needed financing in the event acquisition opportunities are identified. We alsomay consider financing acquisitions by issuing additional shares of common stock to raise capitalor as consideration, which would dilute your ownership.**Our inability to maintain our relationships with third parties for whom we service loans couldreduce our net income.**     Our inability to maintain strong relationships with servicing customers could result in lossof loan servicing volume generated by some of our loan servicing customers. We cannot assure youthat these relationships will continue. As of December 31, 2004, approximately 58.8 percent of theloans we serviced were owned by third parties, while as of September 30, 2005, approximately 53.9percent of the loans we serviced were owned by third parties. Of these, approximately 39.1 percentare subject to agreements that expire within the next 12 months. To the extent that ourthird-party servicing clients reduce the volume of education loans that we service on their behalf,our income would be reduced, and, to the extent the related costs could not be reduced
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correspondingly, our net income could be reduced. We might lose third-party servicing volume for avariety of reasons, including if our third-party servicing clients begin or increase internalservicing activities, shift volume to another service provider, or exit the FFEL Program or privateloan business completely or if we fail to comply with applicable laws and regulations. The loss ofsuch loan servicing volume could result in an adverse effect on our business.     In January 2005, we were notified by Educaid®, Wachovia Education Finance, one of our largestthird-party servicing customers that it would not be renewing its agreement relating to ourservicing of federal consolidation loans on its behalf, which is due to expire in January 2006.Servicing fees from Educaid for this agreement represented approximately 28 percent of third-partyservicing fees for both the quarter and the nine months endedSeptember 30, 2005. The deconversion of the loans off of oursystem will take place in the fourth quarter of 2005.**If loan applications for federally guaranteed loans that we sell are subsequently found to beineligible for the federal guarantee, we may be required to purchase such loans and reimburse theDepartment of Education for certain fees.**     Pursuant to the terms of our forward purchase agreements, FFELP loans that we originate mustcomply with all applicable laws and regulations and must be eligible for federal guarantee. Aportion of the loan applications that we originate and sell are generated by third-party marketingentities with whom we have marketing contracts. If any of the loan applications that we sell underour forward purchase agreements, whether marketed by us or by a third-party marketer, are deemedineligible for federal guarantee by a guaranty agency, we may be obligated to purchase those loans.We would also be required to reimburse the Department of Education for fees associated with thoseloans. Prior to 2001, a portion of the loan applications we originated were generated by referralsfrom collection agencies, including approximately $3.9 million in principal amount of loansgenerated by referrals from the Valley Acceptance Corporation. Individuals associated with ValleyAcceptance have been charged with improper processing of loans, including loan applications that weoriginated and sold to third parties. To date, 59 claims relating to these loans have beenreturned to the guarantor by the Department of Education. The lender has asked us to purchase theseloans. We are currently addressing the issue with the guarantor, lender and the Department ofEducation. If any of these or other loan applications that we originated are finally determined tobe uninsured, including loans referred to us by other third-party marketers, we may be required topurchase additional loans in the future and reimburse the Department of Education for theassociated fees, if any, which could have an adverse effect on our results of operations.**We could experience cash flow problems if a guaranty agency defaults on its guarantee obligation.**     A deterioration in the financial status of guaranty agencies, which are private not-for-profitorganizations or state agencies, or in their ability to honor guarantee claims on defaulted studentloans could result in a failure of these guaranty agencies to make their
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guarantee payments in a timely manner, if at all. If the Department of Education has determinedthat a guaranty agency is unable to meet its guarantee obligations, we may submit claims directlyto the Department of Education, and the Department of Education would be required to pay the fullguarantee claim. In such event, payment of the guarantee claims may not be made in a timelymanner, which could adversely affect our liquidity.     We have obtained insurance for the private loans that we retain on our portfolio. If theinsurance provider for these loans is downgraded or is unable to meet its payment obligations, thecost of financing the private loan portfolio could increase, we will not be able to recover theinsured loss and our financial results and liquidity could be adversely affected.**Fluctuations in interest rates may materially and adversely affect our net income.**     Because we expect to generate a significant portion of our earnings from the difference, orspread, between the yield we receive on our portfolio of loans and the cost of financing theseloans, changes in interest rates could have a material effect on our results of operations.Although we have recently begun retaining some private loans in our portfolio, currently nearly allthe loans in our portfolio are FFELP consolidation loans, which bear interest at a fixed rate.However, the yield we receive is the higher of the fixed rate or a variable rate determined underthe FFEL Program. For consolidation loans in our portfolio, the FFELP-determined variable rate is2.64 percent over the 91-day financial commercial paper rate. Substantially all interest costs onour debt obligations are determined based upon LIBOR, commercial paper or the results of auctions.Using the portfolio as of December 31, 2004, and September 30, 2005, and assuming normal portfoliopayment patterns for the following 12-month periods, an increase in interest rates of 200 basispoints would decrease our net interest income for the December 31, 2004, period by approximately$12.6 million and for the September 30, 2005, period by approximately $5.7 million, and an increasein interest rates of 100 basis points would decrease our net interest income for the December 31,2004, period by approximately $8.2 million and for the September 30, 2005, period by approximately$3.9 million, while a corresponding decrease in these interest rates of 100 basis points wouldincrease our net interest income for the December 31, 2004, period by approximately $14.3 millionand for the September 30, 2005, period by approximately $7.5 million. Changes in interest rates,the composition of our loan portfolio and derivative instruments will impact the effect of interestrates on our earnings, and we cannot predict any such impact with any level of certainty. See“Management’s Discussion and Analysis of Financial Condition and Results of Operations – InterestRate Risk”.
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**The effect of our borrower benefit programs may adversely affect our net interest income.**     Our borrower benefit programs, which reduce the interest rates borrowers pay on their loans,could significantly reduce our net interest income. We offer borrower benefits as incentives toattract new borrowers and to improve our borrowers’ payment behavior. One incentive programreduces a borrower’s interest rate by 0.25 percent per annum for so long as the borrower makesmonthly payments through automatic deductions from his or her checking or savings account.Approximately 29 percent of our borrowers currently participate in this program. In addition, oneof our on-time incentive programs reduces their interest rates by 1.00 percent per annum after theyhave made their initial 36 payments on time and for so long as they continue to make subsequentpayments on time. Although the on-time programs have not had a material impact on our net interestincome since their implementation in 2002 (i.e.:, only 2.7 percent of our borrowers qualified forthis incentive program as of September 30, 2005), our borrower benefits will in the future reducethe yield on our loan portfolio and reduce our net interest income. In addition, competition maycause us to modify or add other borrower benefit programs.     Borrowers under our retained private loans may elect to defer payment of principal andinterest while in school. If a borrower’s financial condition adversely changes while the borroweris in deferral, he or she may be unable to make timely payments once the loan payments begin comingdue. If this occurs to a significant number of borrowers, we could experience higher default ratesthan anticipated in our private loan portfolio, which would adversely affect our operating results,liquidity and financial condition.**Our derivative instruments may not be successful in managing our interest rate risks and failure ofcounterparties to perform under certain derivative instruments could harm our business.**     When we utilize derivative instruments, we utilize them to manage our interest ratesensitivity. Although we do not use derivative instruments for speculative purposes, ourderivative instruments do not meet the criteria set forth in Statement of Financial AccountingStandards, or SFAS No. 133, Accounting for Derivatives Instruments and Hedging Activities, whichallow offset of the changes in the fair value of the derivative instrument against the effects ofthe changes in the hedged item in the statement of income. Therefore, we only mark-to-market thederivative instruments with changes reflected in the income statement. The derivative instrumentswe use are typically interest rate swaps and interest rate caps, which have a duration of between12 and 24 months. Our interest rate hedging strategy is designed to address fluctuations in theshort term, rather than the long term. Developing an effective strategy for dealing with movementsin interest rates is complex, and no strategy can completely insulate us from risks associated withsuch fluctuations. In addition, the counterparty to a derivative instrument could default on itsobligation, thereby exposing us to credit risk. Further, we may have to repay certain costs, suchas transaction fees or brokerage costs, if a derivative instrument is terminated by us. As aresult, we cannot assure you that oureconomic hedging activities will not have an adverse impact on our results of operations orfinancial condition.
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**If we fail to renew our FFELP warehouse facility and revolving line of credit, or our private loanwarehouse facility, our liquidity and results of operations could be adversely affected.**     Our primary funding needs are those required to finance our FFELP and private loan portfoliosand satisfy our cash requirements for acquisitions, operating expenses and technologicaldevelopment. We rely upon two conduit warehouse facilities to support our short term fundingneeds. One facility is for FFELP loans and the other is for private loans The term of both theFFELP facility and the private loan facility is one year, and both facilities are renewable at theoption of the lender and may be terminated at any time for cause. Currently, the aggregateshort-term availability under our FFELP warehouse facility is $1.0 billion and the aggregate shortterm availability under our private loan warehouse facility is $180 million. There can be noassurance that we will be able to maintain the conduit facilities, increase the availability underthe facilities or find alternative funding, if necessary. If the availability under either of ourwarehouse facilities were to decrease or terminate, our ability to retain loans could be reduced,which could adversely affect our results of operation on a short-and/or long-term basis. Ourrevolving line of credit may be terminated at any time upon the occurrence of an event of default.Unavailability of warehouse or revolving financing sources may subject us to the risk that we maybe unable to meet our financial commitments to borrowers and creditors when due, unless we findalternative funding mechanisms.**If we are unable to access the asset-backed securitization market, which we rely on forsubstantially all of our long-term funding of loan originations, our liquidity and results ofoperations could be adversely affected.**     We rely upon asset-backed securitizations as our most significant source of long-term fundingfor our loan portfolio. Including the recent issuance of $1.3 billion of asset-backed notes, whichclosed in July 2005, we have issued $6.7 billion in asset-backed notes since 2001. Our access tothe asset-backed securitization market is subject to conditions in the asset-backed securitizationmarket over which we have no control. If the loans in our securitizations perform poorly, ourability to access the asset-backed securitization market may be impaired or the terms of futuresecuritization may be more costly. If our access to the asset-backed securitization market were todecrease, we would have to find other methods to finance our loan originations on a long-term basisor be required to sell a larger portion of our originated loan applications, either of which, ifavailable, may be less favorable than the asset-backed securitization market has been historically.In such event, our liquidity and results of operations could be adversely affected on a short-and/or long-term basis.
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**Our right to receive cash in excess of the principal balance of the loans funded from oursecuritizations is limited by their terms and performance.**     As part of our securitization transactions since 2002, we have borrowed funds in excess of theprincipal balance of the loans included in the applicable securitization transactions. A portionof these additional funds has been used to repay other indebtedness and is used to fund ouroperations. We also are entitled to receive excess spread from securitizations in the future,generally after the principal balance of the loans and restricted cash held in the securitizationsequals the outstanding indebtedness. We currently expect to receive excess spread from ourFebruary 2003 issuance in April 2006, from our November 2003 issuance in May 2007, from our April2004 issuance in March 2007, from our February 2005 issuance in June 2008 and from our July 2005issuance in December 2006. However, our rights to cash flows from securitized loans aresubordinate to noteholder interests, and these loans may fail to generate any cash flows beyondwhat is due to pay noteholders. Moreover, the cash generated from these loans may be restricted bythese securitization vehicles for certain periods. Accordingly, adverse developments in theperformance of our current and future securitizations could adversely affect our liquidity and cashflows.**Higher rates of prepayments of FFELP student loans could reduce our profits.**     Pursuant to the Higher Education Act, borrowers may prepay loans made under the FFEL Programat any time. Prepayments may occur for a variety of reasons, including: consolidation of studentloans, which has historically tended to occur more frequently in low interest rate environments;borrower defaults, which may result in the receipt of a guarantee payment; and voluntary full orpartial prepayments. The rate of voluntary prepayments of student loans may be influenced by avariety of economic, social and other factors affecting borrowers, including interest rates, theavailability of alternative financing and legislative changes. Any legislation that permitsborrowers to refinance existing consolidation loans at possibly lower interest rates couldsignificantly increase the rate of prepayments on our student loans. In certain circumstances,borrowers may be eligible to consolidate a FFELP consolidation loan, such as obtaining subsequentStafford or PLUS loans and consolidating them with previous FFELP consolidations. Such higher loanprepayments reduce the amount of cash generated in our securitizations, which, as described above,would adversely affect the amount of excess cash we receive from securitizations. In addition,loan prepayments generally result in a reduction in aggregate net interest income over the life ofthe loan.**If auctions for our auction-rate asset-backed notes are not successful, our cost of funding willincrease and future securitizations may become costly.**     The interest rates on certain of our asset-backed securities are set and periodically resetvia a “dutch auction” utilizing remarketing agents for varying intervals ranging from seven to 91days. Of our $5.8 billion of asset-backed notes and lines of credit outstanding at September 30,2005, 19.1 percent currently bear interest at rates based on auction rates. If there areinsufficient potential bid orders in the auctions to purchase all of the notes offered for sale orbeing repriced, we could be subject to interest costs
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substantially above the anticipated and historical rates paid on these types of securities. Afailed auction or remarketing could also reduce the investor base of our future securitizations andother financing and debt instruments.**Future losses due to defaults on loans held by us present credit risk, which could adversely affectour earnings.**     At September 30, 2005, 99.0 percent of our loan portfolio was comprised of FFELP loans. FFELPloans typically benefit from a federal guarantee of 98 percent of their principal balance andaccrued interest. We bear full risk of losses experienced for the 2 percent non-guaranteed portionof the loans. We maintain a risk sharing rate of 2 percent and loan loss reserves to reflect thepotential liabilities that may result from defaults on the FFELP loans in our portfolio; however,we cannot predict whether the loan loss reserves or risk sharing rate are adequate.     The performance of the FFELP loans in our portfolio is affected by the economy and otherfactors outside of our control, and a prolonged economic downturn may have an adverse effect on thecredit performance of these loans. While we provide allowances estimated to cover losses that maybe experienced in our loans that are federally guaranteed under the FFEL Program, there can be noassurance that such allowances will be sufficient to cover actual losses in the future,particularly since we do not have a long history of holding these loans. As we begin to retainprivate loans, we face the same risks of default without a federal guarantee and would be requiredto provide for a loan loss reserve. Increases in losses in excess of our allowance could adverselyaffect our results of operations in the future.**Access to alternative means of financing the costs of education may reduce demand for governmentguaranteed and private education loans.**     The demand for government guaranteed and private education loans could weaken if borrowers useother sources of funds to finance their post-secondary education. These sources include, amongothers: **•** home equity loans or lines of credit, under which families borrow money based on thevalue of their real estate;  **•** Federal Direct Loan Program loans, if the Department of Education or schools increasethe education loans available through the FDL Program;  **•** pre-paid tuition plans, which allow students to pay tuition at today’s rates to covertuition costs in the future;  **•** 529 plans, which are state-sponsored investment plans that allow a family to save fundsfor education expenses; and  **•** education IRAs, now known as Coverdell Education Savings Accounts, under which a holdercan make annual contributions for education savings.
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     If demand for government guaranteed or private education loans weakens, we would experiencereduced demand for our products and services.**Competition from other originators, lenders and servicers and competition created by the FederalDirect Loan Program may materially adversely impact our business.**     We face significant competition from SLM Corporation, the parent company of Sallie Mae. SLMCorporation originated $18 billion of education loans through its preferred channel in 2004,services nearly half of all outstanding FFELP loans and is the largest holder of education loans,with a managed portfolio of more than $107 billion as of December 31, 2004. We also face intensecompetition from other education-related entities, such as The Student Loan Corporation, Nelnet,CIT (formerly Education Lending Group) and College Loan Corporation. As we seek to further expandour business, we will face numerous other competitors, many of which will be well established inthe markets we seek to penetrate. Some of our current and potential competitors are much largerthan we are, have better name recognition than we do and have greater financial and other resourcesthan we do. Several of these competitors have large market capitalizations or cash reserves andare better positioned to acquire companies or portfolios in order to gain market share than we are.Consequently, such competitors may have more flexibility to address the risks inherent in theeducation finance business. Finally, some of our competitors are tax-exempt organizations that donot pay federal or state income taxes. As a result of their tax-exempt status, these organizationsmay have access to a lower cost of funding their education loans than we do. These factors couldgive our competitors significant advantages.     In 1992, Congress created the William D. Ford Federal Direct Loan Program, which we refer toas the FDL Program or the FDLP. Under the FDL Program, the Department of Education makes loansdirectly to student borrowers through the educational institutions they attend. FDL loans areavailable to students only if the institutions they attend participate in the FDL Program. Thevolume of student loans made under the FFEL Program and available for us to originate may bereduced to the extent loans are made to students under the FDL Program.**Failures in our information technology system could materially disrupt our business.**     Our servicing and operating processes are highly dependent upon our information technologysystem infrastructure, and we face the risk of business disruption if failures in our informationsystems occur, which could have a material impact upon our business and operations. We dependheavily on our own computer-based data processing systems in servicing both our own loans and thoseof third-party servicing customers. Problems or errors may occur in the future in connection withthe conversion of newly originated and acquired loans to our platform. If servicing errors dooccur, they may result in a loss of the federal guarantee or interest penalties on the FFELP loansthat we service or in a failure to collect amounts due on the student loans that we service. Aminor systems print queue problem in October 2004 caused us to retroactively lose our ExceptionalPerformer designation to September 1, 2004. A major physical disaster or other calamity
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that causes significant damage to our information systems could adversely affect our business. Inaddition, loss of our information systems for a sustained period of time could have a negativeimpact on our performance and ultimately on our cash flow in the event we were unable to processborrower payments.**If we fail to comply with governmental regulations relating to our private loan business, ourbusiness and results of operations could be adversely affected.**     We are expanding our private loan business and currently originate and facilitate theorigination of private loans for third parties and market, purchase and retain private loans forand from a national bank. The origination, collection and retention of private loans is subject tofederal and state consumer protection laws and regulations, including state usury and disclosurelaws and related regulations, and the Federal Truth in Lending Act. These laws and regulationsimpose substantial requirements upon lenders and their agents, holders and servicers involved inconsumer finance. Failure to comply with these governmental regulations could have an adverseeffect on our business and results of operations.**If we become subject to the licensing laws of any jurisdiction or any additional governmentregulation, our compliance costs could increase significantly.**     In addition to being subject to certain state and federal consumer protection laws, which maychange, we are currently licensed as telemarketers in two states. We could also become subject toother licensing laws due to changes in existing federal and state regulations. As a result, wecould be required to (1) implement additional or different programs and information technologysystems, (2) meet new licensing capital and reserve requirements or (3) incur additionaladministrative, compliance and third-party service costs. Furthermore, we could become subject tolicensing laws in other states if we engage in licensable activities in the future such as homemortgage and equity loans and includes the risk that even if we were not physically present, astate could assert jurisdiction over our operations for services we provide through the mail, byphone, through the Internet or by other remote means. Our failure to comply with such requirementscould subject us to civil or criminal penalties and could curtail our ability to continue toconduct business in that jurisdiction and possibly affect the enforceability of the loans made inthat state. Moreover, compliance with such requirements could involve additional costs. Either ofthese consequences could have a material adverse effect on our business.     In addition, other organizations with which we work are subject to licensing and extensivegovernmental regulations, including truth-in-lending laws and other consumer protectionregulations. From time to time we have, and we may in the future, become responsible forcompliance with these regulations under contractual arrangements with our clients and if wepurchase these loans from other lenders or holders. If we fail to comply with these regulations,we could be subject to civil or criminal penalties.
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**A failure to obtain trademark registrations and potential trademark infringement claims could causeus to incur additional costs and impede our marketing efforts.**     We believe that our success depends to a degree upon our ability to develop and maintainawareness of our corporate identifiers and brand names. We have applied for a U.S. service markregistration to protect our corporate name and will continue to evaluate the registration ofadditional service marks and trademarks, as appropriate. We cannot guarantee that any of ourpending applications will be approved by the applicable governmental authorities. We may besubject to claims of alleged infringement of the trademarks or other intellectual property rightsof third parties. Any such claims, whether or not meritorious, could result in litigation anddivert the efforts of our personnel. Moreover, should we be found liable for infringement, we maybe required to enter into licensing agreements (if available on acceptable terms or at all) or topay damages and to cease using certain names or identifiers. Any of the foregoing could cause usto incur additional costs and impede our marketing efforts.**Failure to comply with restrictions on inducements under the Higher Education Act could harm ourbusiness.**     The Higher Education Act generally prohibits a lender from providing inducements toeducational institutions or individuals in order to secure applicants for FFELP loans. However,the Department of Education permits de minimis gifts in connection with advertising FFELP loans. Achange in the Department of Education’s position on these matters, could potentially result in theDepartment of Education imposing sanctions upon us if we fail to adapt our policies to comply withthe new guidelines, and such failure could impact our business.     We also have entered into various agreements to use marketing lists of prospective borrowersfrom sources such as associations. On occasion, we pay to acquire these lists and for completedloan applications resulting from these lists. We believe that such arrangements are permissibleand do not violate restrictions on inducements, as they fit within a regulatory exceptionrecognized by the Department of Education for generalized marketing and advertising activities.The Department of Education has provided sub regulatory guidance that such arrangements do notraise any improper inducement issues, since such arrangements fall within the generalized marketingexception. A change in the Department of Education’s position, could hurt our reputation andpotentially result in the Department of Education imposing sanctions on us. These sanctions couldnegatively impact our business.
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