**EXHIBIT 99.1**
**Risks Factors Related to Our Industry and Our Company**
**Changes in federal laws and regulations relating to education loans,particularly legislation affecting federally guaranteed consolidation loans,could materially adversely affect our results of operations.**
          The Higher Education Act of 1965 must be reauthorized by Congress everyfive years and the FFEL Program is periodically amended. The United StatesCongress is currently considering reauthorization of the Act, which isscheduled to expire September 30, 2005. Changes in the Higher Education Actmade in the two most recent reauthorizations have resulted in reductions ineducation loan yields paid to lenders, increased fees paid by lenders and adecreased level of federal guarantee. Federally guaranteed consolidation loansmade up 94.9% of our loan originations for the year ended December 31, 2003 and89.6% of our loan portfolio as of September 30, 2004, and efforts underway topass legislation that affects federal consolidation loans would have asignificant impact on us. Among the key changes that may be considered in thereauthorization debate that could have a negative effect on our business is:
• *Eliminating fixed-rate consolidation loans and requiring that allconsolidation loans be made at a variable rate*. If consolidation loansare required to be made at a variable rate rather than a fixed rate, asvirtually all consolidation loans are currently made, it could reducethe amount of income we can earn on the loans we originate in thefuture and reduce the demand for consolidation loans. A bill recentlyintroduced by the Chair of the House Committee on Education and theWorkforce contains this provision.
               This legislative change, if enacted, could materially reduce our loanoriginations and earnings.
               In addition, legislation has been introduced proposing a number ofinitiatives aimed at supporting the William D. Ford Federal Direct LoanProgram, which we refer to as the FDL Program or FDLP. Under the FDL Program,the U.S. Department of Education, or DOE, makes loans directly to studentborrowers through the educational institutions they attend. If legislationpromoting the FDL Program to the detriment of the FFEL Program were to beenacted, it could materially reduce our loan originations and earnings.
               Further amendments, the nature of which we cannot currently anticipate,could also affect our business and our results of operations. Moreover, therecan be no assurance that the provisions of the Higher Education Act will bereauthorized next year. While Congress has consistently extended the effectivedate of the Higher Education Act, it may elect not to reauthorize the DOE’sability to provide interest subsidies and federal guarantees for student loans.Such a failure to reauthorize would reduce the number of federally guaranteedstudent loans available for us to originate in the future and could materiallyreduce our results of operations.
 

 

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**Changes in the interpretations of the Higher Education Act issued by the U.S.Department of Education could negatively impact our loan originations.**
          The U.S. Department of Education oversees and implements the HigherEducation Act and periodically issues regulations and interpretations of thatAct. Changes in such regulations and interpretations could negatively impactour business.
          Currently, if only one lender holds all of a student’s FFELP loans, thenanother lender cannot consolidate the loans away from the current holder unlessthe current holder refuses, or does not offer, to consolidate the loans forthe borrower. This regulation is referred to as the single holder rule. Historically, wedid not believe the single holder rule limited the ability of a borrower toconsolidate FFELP loans held by a single lender with FDLP loans. However, theU.S. Department of Education issued a letter on April 29, 2004 that limited theability of borrowers having FFELP loans that are held by a single lender andFDLP loans to obtain a FFELP consolidation loan with any lender other than thelender holding all of the borrower’s FFELP loans. This new ruling wasscheduled to go into effect in September 2004. However, on August 26, 2004,the U.S. Department of Education issued a letter stating the new ruling wouldnot go into effect until September 2005.
          In addition, we marketed and offered FFELP consolidation loans toborrowers seeking to refinance only their FDLP consolidation loans. However,in June 2004, the U.S. Department of Education’s servicers for the FDL Programinformed us and, we believe, other FFELP loan originators that FFELP loanswhich refinance only FDLP consolidation loans would no longer be permitted. OnAugust 26, 2004, the U.S. Department of Education issued a letter indicatingthis type of consolidation would be permitted unless reauthorization of theHigher Education Act were to change it.
**Significantly decreased demand for consolidation loans would materially reduceour revenue.**
          A combination of increased consumer awareness, rising education debtvolume and historically low interest rates available to borrowers in the lastthree years has increased the number of borrowers seeking to consolidate theirvariable-rate education loans into one loan. For the year ended December 31,2003 and for the nine months ended September 30, 2004, 94.9% and 89.6%,respectively, of our loan originations were consolidation loans. One of theadvantages of consolidation loans is that borrowers are able to fix theinterest rate on their variable rate student loans at the then existing rate.If rates rise, students may have less incentive to consolidate their loans at afixed rate. Demand for consolidation loans could also decrease in the futureas a result of a decrease in the pool of potential borrowers eligible toconsolidate their loans. The DOE projects that FFELP consolidation loan volumewill decrease from $35.3 billion in federal fiscal year 2003 to an estimated$25.9 billion in federal fiscal year 2004 and to $22.3 billion in federalfiscal year 2005. A significant portion of the borrowers eligible toconsolidate their loans have loans held by one lender and, as a result of thesingle holder rule discussed in the prior risk factor, those loans are notavailable for consolidation by other lenders unless the original lender does notoffer or refuses to consolidate those loans. Demand for consolidation loanscould also decrease as a result of regulatory changes or if any of thelegislative proposals described above are enacted. A significant decrease in demand forconsolidation loans would have a material adverse effect upon our revenue,particularly our fees on loan sales.
 

 

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**We must comply with governmental regulations relating to our FFELP loans andguaranty agency rules and our business and results of operations could bematerially adversely affected if we fail to meet these requirements.**
          Our principal business is comprised of originating, holding and servicingeducation loans made and guaranteed pursuant to the FFEL Program. Mostsignificant aspects of our lines of business are governed by the HigherEducation Act. We must also meet various requirements of the guarantyagencies, which are private not-for-profit organizations or state agencies thathave entered into federal reinsurance contracts with the DOE, in order tomaintain the federal guarantee on our FFELP loans. These requirementsestablish origination and servicing requirements and procedural guidelines andspecify school and borrower eligibility criteria. The federal guarantee ofFFELP loans is conditioned on compliance with origination, servicing andcollection standards set by the DOE and guaranty agencies. FFELP loans thatare not originated, disbursed or serviced in accordance with DOE regulationsrisk loss of their guarantee, in full or in part.
          Our failure to comply with the regulatory regimes described above mayarise from:
• breaches of our internal control system, such as a failure toadjust manual or automated servicing functions following a change inregulatory requirements; • unintentional employee errors, such as inputting erroneous data orfailure to adhere to established company processes; • technological defects, such as a malfunction in or destruction ofour computer systems; • fraud by third parties who refer loan applications to us or fromwhom we acquire originated loan applications; or • fraud by our employees or other persons in activities such asorigination or borrower payment processing.
          If we fail to comply with any of the above requirements, we could incurpenalties or lose the federal guarantee on some or all of our FFELP loans. Inaddition, even if we comply with the above requirements, a failure to comply bythird parties with whom we conduct business may be attributable to us andresult in us incurring penalties or losing the federal guarantee on some or allof our FFELP loans. If we experience a high rate of servicing deficiencies, wecould incur costs associated with remedial servicing, and, if we areunsuccessful in curing such deficiencies, the eventual losses on the loans thatare not cured could be material. An additional consequence of servicingdeficiencies would be loss of our Exceptional Performer Status. Failure tocomply with these laws and regulations could result in our liability toborrowers and potential class action suits.
 

 

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          Wereserve against potential denied guarantee claims stemming fromfailures to comply with requirements. As of September 30, 2004,we reserved $75,000. Our actual loss experience on denied guarantee claims historically has notbeen material to our operations, but the impact on us could become material ifdenied guarantee claims were to increase substantially in future periods. In2002, we lost $32,000 and, in 2003, we lost $8,000 due to denied guaranteeclaims. Year-to-date losses through September 30, 2004 total $4,000.
**We have only recently begun retaining a significant portion of the loans weoriginate in our portfolio and servicing loans and we cannot predict whether wewill suffer losses as a result of the performance of our assets and operationsover the long term.**
     We were formed in June 1998. Prior to 2002, we did not retain in ourportfolio a significant amount of the loans we originated. We retainedapproximately 51%, 50% and 21% of the FFELP loans we originated in the firstnine months of 2004 and the full years 2003 and 2002, respectively. Althoughwe believe that the retained loans are valuable assets, due to their longduration and high quality (due to the federal guarantee), we cannot assure youthat over the long term our earnings from retaining loans in our portfolio willexceed the value of the income we would have received from selling those loans.The loans retained in our portfolio may be repaid prior to maturity whichwould reduce the amount of interest we earn and expose us to reinvestment risk.Moreover, the loans retained in our portfolio could perform poorly in thefuture and our allowance for loan losses could be insufficient, which couldmaterially reduce our earnings and impair our ability to access theasset-backed securitization market in the future on favorable terms.
     In addition, we only began servicing loans in April 2003, following ouracquisition of SunTech. Although SunTech has been in business for more than 15years and has serviced a significant portion of the loans we have originatedsince our formation in 1998, we have operated as a vertically integratedcompany offering loan servicing for only one year. If SunTech does not performat the level of its historical performance, our business and results ofoperations could be materially adversely affected.
**Our quarterly results of operations have varied significantly in the past andare expected to continue to do so, which may cause our stock price tofluctuate.**
     Our quarterly results of operations have varied significantly in the pastand are expected to continue to do so in the future. Over the past two fiscalyears, our quarterly income (loss) before income tax provision (benefit) andaccretion of dividends on preferred stock has ranged from a low of a $13.5million loss in the second quarter of 2003 to a high of $18.2 million of incomein the third quarter of 2002. In addition, over this period, our quarterlyoriginations as a percentage of total annual originations have ranged from alow of 9.4% to a high of 36.4%. The market price of our common stock maydecline significantly if our future quarterly results of operations fall belowthe expectations of securities or industry analysts or investors.
     Our quarterly results of operations in any period will be particularlyaffected by the amount and timing of our loan sales. Because we target apercentage of our loan originations to be retained on an annual, rather thanquarterly basis, our quarterly results of operations will fluctuate. A numberof additional factors, some of which are outside of our control, will alsocause our quarterly results to fluctuate, including:
 

 

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• an increase in loan consolidation in November and December, as aresult of the expiration of the six-month grace period; • the effects of the July 1 reset in borrower interest rates. Wegive borrowers who complete loan applications during the second quarterthe option to fund their loans prior to July 1, when the old rate iseffective, or after July 1, when the new rate is effective.Accordingly, if any year’s borrower rate decreases over the prioryear’s borrower rate, the origination of a significant portion of theloan applications completed in the second quarter will be shifted tothe third quarter; conversely, if any year’s borrower rate increasesfrom the prior year’s borrower rate, a higher percentage of completedapplications will be originated in the second quarter. • seasonal patterns affecting private in-school loans, primarily anincrease in private in-school loan originations in the third and fourthquarter as students obtain loans to pay tuition, and a decrease inprivate in-school loan activity in the second quarter; • seasonal patterns affecting marketing expenses, as we generallymarket most heavily in the second and third quarters of the year in aneffort to inform recent college graduates of their consolidationoptions and offer private in-school loans to students paying tuition; • the impact of general economic conditions; • changes in interest rates; and • the introduction of new product offerings.
          We forecast the volume and timing of our loan originations for ouroperational and financial planning on the basis of many factors and subjectivejudgments. Therefore, failure to generate originations according to ourexpectations in a particular quarter could materially decrease our net incomefor that quarter and the next, at a minimum.
**“Do not call” registries may limit our ability to market our products andservices.**
          Our direct marketing operations are subject to various federal and state“do not call” list requirements and may become subject to additional state “donot call” list requirements. The Federal Trade Commission has recently amendedits rules to provide for a centralized national “do not call” registry. Underthese new federal regulations, consumers may have their phone numbers added tothe national “do not call” registry.
          Generally, we are prohibited from calling anyone on that registry unlesswe have an existing relationship with that person. We also are required to paya fee to access the registry on a quarterly basis. Federal enforcement of the“do not call” provisions began in the fall of 2003, and the rule provides forfines of up to $11,000 per violation and other possible penalties. This rulemay restrict our ability to market effectively our products and services to newcustomers. Furthermore, compliance with this new rule may prove difficult, andwe may incur penalties for improperly conducting our marketing activities. Inaddition, failure to comply with the terms of this new rule could have anegative impact on our reputation.
 

 

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          Forty-three states have “do not call” rules. Twenty-seven states use thenational “do not call” registry and sixteen states maintain their own “do notcall” registry. The states have varying penalties and fines for noncompliance.Compliance and coordination with these state lists and with federal lists mayprove difficult and we may incur additional penalties for failure to complywith any of these lists, which could also have a negative impact on ourbusiness.
**We derive a significant portion of our fee income under a small number offorward purchase agreements, and if we are not able to retain these agreements,or if our counterparties under these agreements reduce their willingness toacquire originated loans from us, our net revenue would be reduced and ourresults of operations would suffer.**
          We enter into forward purchase agreements with financial institutions whoagree to purchase and require that we sell to them, a portion of the FFELPconsolidation loan applications we originate. We also enter into forwardpurchase agreements with financial institutions who agree to purchase all ofthe private consolidation applications we originate. Under these agreements,which are typically one- to three-year agreements, we generate loanapplications that are then forwarded to partnering financial institutions overpre-determined periods of time and for agreed upon fees. Three of our forwardpurchase agreements accounted for approximately 72.5% and 84.5% of our feeincome and 60.5% and 55.2% of our net revenue in fiscal 2003 and the firstnine months of fiscal 2004, respectively. Revenue under our largest forwardpurchase agreement represented 43.4% and 54.9% of our fee income and 36.2% and35.8% of our net revenue for fiscal 2003 and the first nine months of fiscal2004, respectively. We may not be able to retain or renew our key forwardpurchase agreements or our counterparties may decrease the level of originatedloans they are willing to acquire from us. If a large forward purchasecontract were cancelled or not renewed and not replaced, our fee income wouldsignificantly decline, and the loss of or a significant reduction of purchasesby, one or more of our significant forward purchase agreement counterpartiescould materially adversely affect our business, operating results and financialcondition. We can provide no assurance that we will be able to renew theseagreements or that suitable replacements can be found at acceptable rates or onacceptable terms.
**Our inability to maintain relationships with our eligible lender or withlenders that originate our private loans could have a material adverse effecton our ability to sustain or increase our business.**
          When we originate FFELP loans on our own behalf or when we acquire FFELPloans from others, we engage The Bank of New York as our “eligible lender,” asdefined in the Higher Education Act, to act as our trustee to hold title to allsuch originated and acquired FFELP loans. This eligible lender trustee holdsthe legal title to our FFELP loans, and we hold 100% of the beneficialinterests in those loans. If we are unable to renew our contract with The Bankof New York, or if the contract is terminated, we would have to find anotherinstitution to serve as our eligible lender. We can provide no assurance thatwe will be able to renew this contract or that a replacement eligible lendercan be found at acceptable rates or on acceptable terms.
 

 

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          Moreover, we have a relationship with a lender for whom we market andfacilitate the origination of private in-school loans. The number of financialinstitutions willing to originate and finance these private in-school loanswill be a significant factor in the growth of this market. As the market isless mature than that for federally guaranteed loans, there are, at present,fewer institutions originating and acquiring these loans. Accordingly, we canprovide no assurance that we will be able to renew this contract or thatsuitable replacements could be found or that we will find additional lenderswilling to finance the volume of private loans that we may seek to market ororiginate.
          Any failure to maintain or replace contractual relationships with thesefinancial institutions or lenders could seriously impair our ability tooriginate loans and generate revenue from originated loans, and to sustain orincrease our business.
**If we are unable to increase our private education loan originations and expandour channels of distribution as we plan, our business may not grow.**
          Our strategy includes increasing the amount of private loans we originateor whose origination we facilitate, as well as expanding our channels ofdistribution. We have much more limited experience in these products andchannels than in our business of marketing and originating FFELP consolidationloans through our DTC channel. In connection with these strategies, we haveinvested and will continue to invest resources in market research andtechnology and have hired and trained and will continue to hire and trainadditional personnel, when necessary. If these strategies are not successful,our earnings may be adversely affected.
**We may not be able to successfully make acquisitions or increase our profitsfrom these acquisitions.**
          We intend to pursue continued growth through acquisitions in the educationfinance industry. Such an acquisition strategy includes certain risks. Forexample:
• we may be unable to identify acquisition candidates, negotiatedefinitive agreements on acceptable terms or, as necessary, secureadditional financing; • we may encounter unforeseen expenses, difficulties, complicationsor delays in connection with the integration of acquired entities; • we may fail to achieve acquisition synergies; • our acquisition strategy, including the focus on the integration ofoperations of acquired entities, may divert management’s attention fromthe day-to-day operation of our businesses; • acquired loan or servicing portfolios may have unforeseen problems; or • key personnel at acquired companies may leave employment.
 

 

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          In addition, we may compete for certain acquisition targets with companieshaving greater financial resources than us. We cannot assure you that we willbe able to successfully make future acquisitions or what effects thoseacquisitions may have on our financial condition and results of operations.Inherent in any future acquisition is the risk of transitioning companycultures and facilities. The failure to efficiently and effectively achievesuch transitions could have a material adverse effect on our financialcondition and results of operations, particularly during the period immediatelyfollowing any acquisitions.
          We anticipate that we would finance potential acquisitions through cashprovided by operating activities and/or borrowings, which would reduce our cashavailable for other purposes and our debt capacity, as well as our debt servicerequirements. We cannot assure you, however, that we would be able to obtainneeded financing in the event acquisition opportunities are identified. We mayalso consider financing acquisitions by issuing additional shares of commonstock to raise capital or as consideration, which would dilute your ownership.
**Our inability to maintain our relationships with third parties for whom weservice loans could reduce our net income.**
          Our inability to maintain strong relationships with servicing customerscould result in loss of loan servicing volume generated by some of our loanservicing customers. We cannot assure you that these relationships willcontinue. As of December 31, 2003 and September 30, 2004, approximately 69.4%and 61.7%, respectively, of the loans we serviced were owned by third parties.Of these, a majority are governed by agreements with terms of three years orless. To the extent that our third-party servicing clients reduce the volumeof education loans that we service on their behalf, our income would bereduced, and, to the extent the related costs could not be reducedcorrespondingly, our net income could be reduced. We might lose third-partyservicing volume for a variety of reasons, including if our third-partyservicing clients begin or increase internal servicing activities, shift volumeto another service provider, exit the FFEL Program completely or if we fail tocomply with applicable laws and regulations. The loss of such loan servicingvolume could result in an adverse effect on our business.
**If loan applications for federally guaranteed loans that we sell aresubsequently found to be ineligible for the federal guarantee, we may berequired to purchase such loans and reimburse the DOE for certain fees.**
          Pursuant to the terms of our forward purchase agreements, FFELP loans thatwe originate must comply with all applicable laws and regulations and must beeligible for federal guarantee. A portion of the loan applications that weoriginate and sell are generated by third-party marketing entities with whom wehave marketing contracts. If any of the loan applications that we sell underour forward purchase agreements, whether marketed by us or by a third-partymarketer, are deemed ineligible for federal guarantee by a guaranty agency, wemay be obligated to purchase those loans. We would also be required toreimburse the DOE for fees associated with those loans. Prior to 2001, aportion of the loan applications we originated were generated by referrals fromcollection agencies, including approximately $3.9 million in principal amountof loans generated by referrals from the Valley Acceptance Corporation.Individuals associated with Valley Acceptance have been charged with improperprocessing of loans, including loan
 

 

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applications which we originated and sold to third parties. To date, asmall number of claims relating to these loans have been returned to us by theapplicable guarantee agency, and, accordingly, we may be required to purchasethese loans and reimburse the DOE for the associated fees. If any loanapplications which we originated are found to be ineligible for federalguarantee after they are funded, including loans referred by other third-partymarketers, we may be required to purchase additional loans in the future andreimburse the DOE for the associated fees which could have an adverse effect onour results of operations.
**We could experience cash flow problems if a guaranty agency defaults on itsguarantee obligation.**
          A deterioration in the financial status of guaranty agencies, which areprivate not-for-profit organizations or state agencies, or in their ability tohonor guarantee claims on defaulted student loans could result in a failure ofthese guaranty agencies to make their guarantee payments in a timely manner, ifat all. If the DOE has determined that a guaranty agency is unable to meet itsguarantee obligations, we may submit claims directly to the DOE, and the DOEwould be required to pay the full guarantee claim. In such event, payment ofthe guarantee claims may not be made in a timely manner, which could adverselyaffect our liquidity.
**Fluctuations in interest rates may materially and adversely affect our netincome.**
     Because we expect to generate a significant portion of our earnings fromthe difference, or spread, between the yield we receive on our portfolio ofloans and the cost of financing these loans, changes in interest rates couldhave a material effect on our results of operations. Substantially all theloans in our portfolio are FFELP consolidation loans which bear interest at afixed rate, however, the yield we receive is the higher of the fixed rate or avariable rate determined under the FFEL Program. For consolidation loans inour portfolio, the FFELP-determined variable rate is 2.64% over the 91-dayfinancial commercial paper rate. Substantially all interest costs on our debtobligations are determined based upon LIBOR, commercial paper or the result ofauctions. Using the portfolio as of December 31, 2003 and September 30, 2004,and assuming normal portfolio payment patterns for the following 12-monthperiod, an increase in interest rates of 200 basis points would decrease ournet interest income for that period by approximately $20.3 million and $16.2million, respectively and an increase in interest rates of 100 basis pointswould decrease our net interest income for that period by approximately $13.5million and $10.0 million, respectively, while a corresponding decrease inthese interest rates of 100 basis points would increase our net interest incomefor that period by approximately $21.8 million and $20.5 million, respectively.Changes in interest rates, the composition of our loan portfolio andderivative instruments will impact the effect of interest rates on ourearnings, and we cannot predict any such impact with any level of certainty.See “Management’s Discussion and Analysis of Financial Condition and Results ofOperations – Interest Rate Risk”.
**The effect of our borrower benefit programs may adversely affect our netinterest income.**
          Our borrower benefit programs, which reduce the interest rates borrowerspay on their loans, could significantly reduce our net interest income. Weoffer borrower benefits as incentives to attract new borrowers and to improveour borrowers’ payment behavior. One
 

 

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incentive program reduces a borrower’s interest rate by 0.25% per annumfor so long as the borrower makes monthly payments through automatic deductionsfrom his or her checking or savings account. Approximately 30% of ourborrowers currently participate in this program. In addition, we offerborrowers an on-time incentive program that reduces their interest rates by1.00% per annum after they have made their initial 36 payments on time and forso long as they continue to make subsequent payments on time. Although theon-time program has not been in place for sufficient time to have had anyimpact on our net interest income, our borrower benefits will in the futurereduce the yield on our loan portfolio and reduce our net interest income. Inaddition, competition may cause us to modify or add other borrower benefitprograms.
**Our derivative instruments may not be successful in managing our interest raterisk and failure of counterparties to perform under certain derivativeinstruments could harm our business.**
          When we utilize derivative instruments, we utilize them to manage ourinterest rate sensitivity. Although we do not use derivative instruments forspeculative purposes, our derivative instruments do not meet the criteria setforth in Statement of Financial Accounting Standards, or SFAS, No. 133,Accounting for Derivatives Instruments and Hedging Activities, which allowoffset of the changes in the fair value of the derivative instrument againstthe effects of the changes in the hedged item in the statement of income.Therefore, we only mark-to-market the derivative instruments with changesreflected in the income statement. The derivative instruments we use aretypically in the form of interest rate swaps and interest rate caps, which havea duration of between twelve and twenty-four months. Our interest rate hedgingstrategy is designed to address fluctuations in the short term, rather than thelong term. Developing an effective strategy for dealing with movements ininterest rates is complex, and no strategy can completely insulate us fromrisks associated with such fluctuations. In addition, a counterparty to aderivative instrument could default on its obligation, thereby exposing us tocredit risk. Further, we may have to repay certain costs, such as transactionfees or brokerage costs, if a derivative instrument is terminated by us. As aresult, we cannot assure you that our economic hedging activities will not havean adverse impact on our results of operations or financial condition.
**If we fail to renew our warehouse facility and revolving line of credit, ourliquidity and results of operations could be adversely affected.**
          Our primary funding needs are those required to finance our loan portfolioand satisfy our cash requirements for acquisitions, operating expenses andtechnological development. We rely upon a conduit warehouse facility tosupport our funding needs on a short-term basis. The term of the facility isone year, and it is renewable at the option of the lender and may be terminatedat any time for cause. Currently, the aggregate short-term availability underour warehouse facility is $750 million. There can be no assurance that we willbe able to maintain such conduit facility, increase the availability under suchfacility or find alternative funding, if necessary. Our revolving line ofcredit may be terminated at any time upon the occurrence of an event ofdefault. Unavailability of warehouse or revolving financing sources maysubject us to the risk that we may be unable to meet our financial commitmentsto borrowers and creditors when due, unless we find alternative fundingmechanisms. If the availability under our warehouse facility were to decreaseor terminate, our ability to retain loans
 

 

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could be adversely affected, which could adversely affect our results ofoperation on a short- and/or long-term basis.
**If we are unable to access the asset-backed securitization market, which werely on for substantially all our long-term funding of loan originations, ourliquidity and results of operations could be adversely affected.**
          We have begun to rely upon, and expect to rely increasingly upon,asset-backed securitizations as our most significant source of long-termfunding for our loan portfolio. We have issued approximately $4.0 billion inasset-backed notes since 2001. Our access to the asset-backed securitizationmarket is subject to conditions in the asset-backed securitization market overwhich we have no control. If the loans in our securitizations perform poorly,our ability to access the asset-backed securitization market may be impaired orthe terms of future securitization may be more costly. If our access to theasset-backed securitization market were to decrease, we would have to findother methods to finance our loan originations on a long-term basis or berequired to sell a larger portion of our originated loan applications either ofwhich option, if available, may be less favorable than the asset-backedsecuritization market has been historically. In such event, our liquidity andresults of operations could be adversely affected on a short- and/or long-termbasis.
**Our right to receive cash in excess of the principal balance of the loansfunded from our securitizations is limited by their terms and performance.**
          As part of our securitization transactions since 2002, we borrowed fundsin excess of the principal balance of the loans included in the applicablesecuritization transactions. A portion of these additional funds was used torepay other indebtedness and to fund our operations. We are also entitled toreceive excess spread from securitizations in the future, generally after theprincipal balance of the loans and restricted cash held in the securitizationsequals the outstanding indebtedness. We currently expect to receive excessspread from our November 2001, February 2003 and November 2003 issuances inSeptember 2006, October 2005 and April 2008, respectively. However, our rightsto cash flows from securitized loans are subordinate to noteholder interests,and these loans may fail to generate any cash flows beyond what is due to paynoteholders. Moreover, the cash generated from these loans may be restrictedby these securitization vehicles for certain periods. Accordingly, adversedevelopments in the performance of our current and future securitizations couldadversely affect our liquidity and cash flows.
**Higher rates of prepayments of student loans could reduce our profits.**
          Pursuant to the Higher Education Act, borrowers may prepay loans madeunder the FFEL Program at any time. Prepayments may result from consolidatingstudent loans, which has historically tended to occur more frequently in lowinterest rate environments, from borrower defaults, which will result in thereceipt of a guarantee payment and from voluntary full or partial prepayments,among other things. The rate of voluntary prepayments of student loans may beinfluenced by a variety of economic, social and other factors affectingborrowers, including interest rates, the availability of alternative financingand legislative changes. Any legislation that permits borrowers to refinanceexisting consolidation loans at possibly lower interest rates
 

 

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could significantly increase the rate of prepayments on our student loans.In certain circumstances, borrowers may be eligible to consolidate a FFELPconsolidation loan, such as obtaining subsequent Stafford or PLUS loans andconsolidating 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 receivefrom securitizations. In addition, loan prepayments generally result in areduction in aggregate net interest income over the life of the loan.
**If auctions for our auction-rate asset-backed notes are not successful, ourcost of funding will increase and future securitizations may become morecostly.**
          The interest rates on certain of our asset-backed securities are set andperiodically reset via a “dutch auction” utilizing remarketing agents forvarying intervals ranging from seven to 91 days. Of our $4.2 billion ofasset-backed notes and lines of credit outstanding at September 30, 2004, 49.1%bear interest at rates based on auction rates. If there are insufficientpotential bid orders in the auctions to purchase all of the notes offered forsale or being repriced, we could be subject to interest costs substantiallyabove the anticipated and historical rates paid on these types of securities.A failed auction or remarketing could also reduce the investor base of ourfuture securitizations and other financing and debt instruments.
**Future losses due to defaults on loans held by us present credit risk whichcould adversely affect our earnings.**
          As of September 30, 2004, 100% our loan portfolio was comprised of FFELPloans. These loans typically benefit from a federal guarantee of 98% of theirprincipal balance and accrued interest. We bear full risk of lossesexperienced with respect to the 2% non-guaranteed portion of the loans. In May2004, the DOE awarded us Exceptional Performance status. As a result, theFFELP loans in our portfolio benefit from a federal guarantee of 100% of theunpaid principal and accrued interest for the twelve month period ending May31, 2005, however there can be no assurance that this designation will beextended beyond that date.
          The performance of the FFELP loans in our portfolio is affected by theeconomy and other factors outside of our control, and a prolonged economicdownturn may have an adverse effect on the credit performance of these loans.While we provide allowances estimated to cover losses that may be experiencedin our loans that are federally guaranteed under the FFEL Program, there can beno assurance that such allowances will be sufficient to cover actual losses inthe future, particularly since we do not have a long history of holding theseloans. Increases in losses in excess of our allowance could adversely affectour results of operations in the future.
**Access to alternative means of financing the costs of education may reducedemand for government guaranteed and private education loans.**
          The demand for government guaranteed and private education loans couldweaken if borrowers use other sources of funds to finance their post-secondaryeducation. These sources include, among others:
 

 

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• home equity loans or lines of credit, under which families borrowmoney based on the value of their real estate; • Federal Direct Loan Program loans, if the DOE or schools increasethe education loans available through the FDL Program; • pre-paid tuition plans, which allow students to pay tuition attoday’s rates to cover tuition costs in the future; • 529 plans, which are state-sponsored investment plans that allow afamily to save funds for education expenses; and • education IRAs, now known as Coverdell Education Savings Accounts,under which a holder can make annual contributions for educationsavings.
          If demand for government guaranteed or private education loans weakens, wewould experience reduced demand for our products and services.
**Competition from other originators, lenders and servicers and competitioncreated by the Federal Direct Loan Program may materially adversely impact ourbusiness.**
          We face significant competition from SLM Corporation, the parent companyof Sallie Mae. SLM Corporation originated $15.2 billion of education loansthrough its preferred channel in 2003, services nearly half of all outstandingFFELP loans and is the largest holder of education loans, with a managedportfolio of approximately $97 billion as of September 30, 2004. We also faceintense competition from other education-related entities, such as EducationLending Group and College Loan Corporation. As we seek to further expand ourbusiness, we will face numerous other competitors, many of which will be wellestablished in the markets we seek to penetrate. Some of our current andpotential competitors are much larger than we are, have better name recognitionthan we do and have greater financial and other resources than we do. Severalof these competitors have large market capitalizations or cash reserves and arebetter positioned to acquire companies or portfolios in order to gain marketshare than we are. Consequently, such competitors may have more flexibility toaddress the risks inherent in the education finance business. Finally, some ofour competitors are tax-exempt organizations that do not pay federal or stateincome taxes. As a result of their tax-exempt status, these organizations mayhave access to a lower cost of funding their education loans than we do. Thesefactors could give our competitors significant advantages.
          In 1992, Congress created the William D. Ford Federal Direct Loan Program,which we refer to as the FDL Program or the FDLP. Under the FDL Program, theDOE makes loans directly to student borrowers through the educationalinstitutions they attend. FDL loans are available to students only if theinstitution they attend participates in the FDL Program. The volume of studentloans 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.
 

 

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**Failures in our information technology system could materially disrupt ourbusiness.**
          Our servicing and operating processes are highly dependent upon ourinformation technology system infrastructure, and we face the risk of businessdisruption if failures in our information systems occur, which could have amaterial impact upon our business and operations. We depend heavily on our owncomputer-based data processing systems in servicing both our own loans andthose of third-party servicing customers. Problems or errors may occur in thefuture in connection with the conversion of newly originated and acquired loansto our platform. If servicing errors do occur, they may result in a loss ofthe federal guarantee or interest penalties on the FFELP loans that we serviceor in a failure to collect amounts due on the student loans that we service aswell as the loss of our Exceptional Performance Status. A major physicaldisaster or other calamity that causes significant damage to our informationsystems could adversely affect our business. Additionally, loss of ourinformation systems for a sustained period of time could have a negative impacton our performance and ultimately on our cash flow in the event we were unableto process borrower payments.
**If we fail to comply with governmental regulations relating to our private loanbusiness, our business and results of operations could be adversely affected.**
          We are expanding our private loan business and currently originate andfacilitate the origination of private loans for third parties. The originationof private loans is subject to federal and state consumer protection laws andregulations, including state usury and disclosure laws and related regulations,and the Federal Truth in Lending Act. These laws and regulations imposesubstantial requirements upon lenders and their agents and servicers involvedin consumer finance. Failure to comply with these governmental regulationscould have an adverse effect on our business and results of operations.
**If we become subject to the licensing laws of any jurisdiction or anyadditional government regulation, our compliance costs could increasesignificantly.**
          In addition to being subject to certain state and federal consumerprotection laws, which may change, we are currently licensed as telemarketersin two states. We could also become subject to other licensing laws due tochanges in existing federal and state regulations. As a result, we could berequired to (1) implement additional or different programs and informationtechnology systems, (2) meet new licensing capital and reserve requirements or(3) incur additional administrative, compliance and third-party service costs.Furthermore, we could become subject to licensing laws in other states if weengage in licensable activities in the future. This includes the risk thateven if we were not physically present, a state could assert jurisdiction overour operations for services we provide through the mail, by phone, through theInternet or by other remote means. Our failure to comply with suchrequirements could subject us to civil or criminal penalties and could curtailour ability to continue to conduct business in that jurisdiction. Moreover,compliance with such requirements could involve additional costs. Either ofthese consequences could have a material adverse effect on our business.
          Additionally, other organizations with which we work are subject tolicensing and extensive governmental regulations, including truth-in-lendinglaws and other consumer protection regulations. From time to time we have, andwe may in the future, become
 

 

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responsible for compliance with these regulations under contractualarrangements with our clients. If we fail to comply with these regulations, wecould be subject to civil or criminal penalties.
**A failure to obtain trademark registrations and potential trademarkinfringement claims could cause us to incur additional costs and impede ourmarketing efforts.**
          We believe that our success depends to a degree upon our ability todevelop and maintain awareness of our corporate identifiers and brand names.We have applied for a U.S. service mark registration to protect our corporatename and will continue to evaluate the registration of additional service marksand trademarks, as appropriate. We cannot guarantee that any of our pendingapplications will be approved by the applicable governmental authorities, andwe are aware that one of our applications has initially been rejected and isnow under appeal. We may be subject to claims of alleged infringement of thetrademarks or other intellectual property rights of third parties. Any suchclaims, whether or not meritorious, could result in litigation and divert theefforts of our personnel. Moreover, should we be found liable forinfringement, we may be required to enter into licensing agreements (ifavailable on acceptable terms or at all) or to pay damages and to cease usingcertain names or identifiers. Any of the foregoing could cause us to incuradditional costs and impede our marketing efforts.
**Failure to comply with restrictions on inducements under the Higher EducationAct could harm our business.**
          The Higher Education Act generally prohibits a lender from providinginducements to educational institutions or individuals in order to secureapplicants for FFELP loans. However, the DOE permits de minimis gifts inconnection with advertising FFELP loans. If the DOE were to change itsposition on these matters, this could potentially result in the DOE imposingsanctions upon us if we fail to adapt our policies to comply with the newguidelines, and such failure could impact our business.
          We have also entered into various agreements to use marketing lists ofprospective borrowers from sources such as associations. On occasion, we payto acquire these lists and for completed loan applications resulting from theselists. We believe that such arrangements are permissible and do not violaterestrictions on inducements, as they fit within a regulatory exceptionrecognized by the DOE for generalized marketing and advertising activities.The DOE has provided subregulatory guidance that such arrangements do not raiseany improper inducement issues, since such arrangements fall within thegeneralized marketing exception. If the DOE were to change its position, thiscould hurt our reputation and potentially result in the DOE imposing sanctionson us. These sanctions could negatively impact our business.