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e8vk

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

Current Report Pursuant to Section 13 or 15(d)
of The Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): July 20, 2006

SLM CORPORATION

(Exact name of registrant as specified in its charter)


DELAWARE	File No. 001-13251	52-2013874
(State or other jurisdiction	(Commission File Number)	(IRS Employer
of incorporation)		Identification No.)

12061 Bluemont Way, Reston, Virginia 20190
(Address if principal executive offices)(zip code)

Registrant’s telephone number, including area code: (703) 810-3000

Not Applicable
(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:


o		Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)


o		Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)


o		Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))


o		Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02 Results of Operations and Financial Condition

On July 20, 2006, SLM Corporation issued a press release with respect to its earnings for the fiscal quarter ended June 30, 2006, which is furnished as Exhibit 99.1 to this Current Report on Form 8-K. Additional information for the quarter, which is available on the Registrant’s website at http://www2.salliemae.com/investors/stockholderinfo/earningsinfo, is furnished as Exhibit 99.2.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


SLM CORPORATION
By:	/s/ C. E. ANDREWS
	Name:	C.E. Andrews
	Title:	Chief Financial Officer

Dated: July 20, 2006

SLM CORPORATION
Form 8-K
CURRENT REPORT
EXHIBIT INDEX


Exhibit
No.		Description
99.1		Press Release dated July 20, 2006
99.2		Additional Information Available on the Registrant’s Website

exv99w1

Exhibit 99.1



FOR IMMEDIATE RELEASE	Media Contacts:	Investor Contacts:
	Tom Joyce	Steve McGarry
	703/984-5610	703/984-6746
	Martha Holler	Joe Fisher
	703/984-5178	703/984-5755

SALLIE MAE REPORTS STRONG SECOND-QUARTER RESULTS

	•		Fee Income Up 23 Percent

	•		Total Managed Loan Portfolio Exceeds $130 Billion

RESTON, Va., July 20, 2006 — SLM Corporation (NYSE: SLM), commonly known as Sallie Mae, today reported second-quarter 2006 earnings and performance results that include $3.2 billion in preferred-channel loan originations, a 14-percent increase from the year-ago quarter’s $2.8 billion.

The company’s internal lending brands originated $1.8 billion in loans during the 2006 second quarter. This represented 55 percent of all preferred-channel originations issued during the period. Preferred-channel loan originations include loans originated by the company’s internal lending brands and external lending partners.

“Our internal brand growth remains strong, and our pipeline of new school clients signals a terrific start to the new academic year,” said Tim Fitzpatrick, chief executive officer. “Our fee-based businesses are also performing well. We delivered a solid quarter for our shareholders while continuing to provide increased access to higher education.”

During the second-quarter 2006, private education loan originations, a segment of preferred-channel originations, grew 32 percent from the year-ago quarter to $1.1 billion, and included more than $124 million of direct-to-consumer loans.

Year-to-date 2006, the company has originated $10.8 billion through its preferred channel, up 13 percent from the same period last year. Preferred-channel originations in the first half of 2006 include $5.3 billion originated through internal brands and $3.3 billion of private education loan originations.

At the end of the second-quarter 2006, the company’s total managed student loan portfolio was $130.1 billion, a 12-percent increase from the end of the 2005 second quarter.

Sallie Mae reports financial results on a GAAP basis and also presents certain “core earnings” performance measures on a basis that differs from GAAP. The company’s management, equity investors, credit rating agencies and debt capital providers use these “core earnings” measures to monitor the company’s business performance.

Sallie Mae

•

12061 Bluemont Way

•

Reston, Va 20190

•

www.salliemae.com

Sallie Mae reported second-quarter 2006 GAAP net income of $724 million, or $1.61 per diluted share, compared to $297 million, or $.66 per diluted share, in the year-ago period. Included in these GAAP results are pre-tax gains on derivative and hedging activities of $123 million in the second quarter 2006, compared to a pre-tax loss of $(106) million in the year-ago quarter, and an increase of $409 million in gains on student loan securitizations.

“Core earnings” net income for the second quarter 2006 was $320 million, or $.72 per diluted share, up from $279 million, or $.62 per diluted share, in the year-ago quarter. These results include a non-recurring special allowance payment accrued during the second-quarter 2006. The company began expensing stock-based compensation in 2006. Recognizing stock-based compensation expense in both the current and year-ago periods and eliminating the one-time special allowance payment, “core earnings” per diluted share were $.70 in the 2006 second quarter, up from $.60 in the same quarter in 2005, a 17-percent increase.

For the first half of 2006, “core earnings” net income was $607 million, compared to $535 million in the first half of 2005.

“Core earnings” net interest income was $602 million for the quarter, a 17-percent increase from the year-ago quarter’s $516 million. “Core earnings” other income, which consists primarily of fees earned from guarantor servicing and collection activity, was $266 million for the 2006 second quarter, up 23 percent from $216 million in the year-ago quarter. “Core earnings” operating expenses were $299 million in the second-quarter 2006, compared to $271 million in the same quarter last year.

Both a description of the “core earnings” treatment and a full reconciliation to the GAAP income statement can be found at: http://www2.salliemae.com/investors/stockholderinfo/earningsinfo, click on the Second Quarter 2006 Supplemental Earnings Disclosure.

Total equity for the company at June 30, 2006, was $4.4 billion, up from $3.7 billion a year ago. The company’s tangible capital at June 30, 2006, was 2.19 percent of managed assets, compared to 2.03 percent at the same time last year.

The company will host its regular earnings conference call today at noon. Sallie Mae executives will be on hand to discuss various highlights of the quarter and to answer questions related to the company’s performance. Individuals interested in participating should call the following number today, July 20, 2006, starting at 11:45 a.m. EDT: (877) 356-5689 (USA and Canada) or (706) 679-0623 (International). The conference call will be replayed continuously beginning Thursday, July 20, at 3:30 p.m. EDT and concluding at 11:59 p.m. EDT on Thursday, July 27. Please dial (800) 642-1687 (USA and Canada) or dial (706) 645-9291 (International) and use access code 2203336. In addition, there will be a live audio Web cast of the conference call, which may be accessed at www.salliemae.com. A replay will be available 30-45 minutes after the live broadcast.

***

This press release contains “forward-looking statements” including expectations as to future market share, the success of preferred channel originations and future results. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Because such statements inherently involve risks

Sallie Mae

•

12061 Bluemont Way

•

Reston, Va 20190

•

www.salliemae.com

and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Such risks include, among others, changes in the terms of student loans and the educational credit marketplace arising from the implementation of applicable laws and regulations, and from changes in such laws and regulations, changes in the demand for educational financing or in financing preferences of educational institutions, students and their families, and changes in the general interest rate environment. For more information, see the company’s filings with the Securities and Exchange Commission.

***

SLM Corporation (NYSE: SLM ), commonly known as Sallie Mae, is the nation’s leading provider of education funding, managing more than $130 billion in student loans and serving 10 million customers. Sallie Mae was originally created in 1972 as a government-sponsored entity (GSE) and terminated its ties to the federal government in 2004. The company remains the country’s largest originator of federally insured student loans. Through its specialized subsidiaries and divisions, Sallie Mae also provides debt management services as well as business and technical products to a range of business clients, including colleges, universities and loan guarantors. More information is available at www.salliemae.com. SLM Corporation and its subsidiaries are not sponsored by or agencies of the United States of America.

###

Sallie Mae

•

12061 Bluemont Way

•

Reston, Va 20190

•

www.salliemae.com

SLM CORPORATION

Supplemental Earnings Disclosure

June 30, 2006

(Dollars in millions, except earnings per share)


	Quarters ended									Six months ended
	June 30,			March 31,			June 30,			June 30,			June 30,
	2006			2006			2005			2006			2005
	(unaudited)			(unaudited)			(unaudited)			(unaudited)			(unaudited)

SELECTED FINANCIAL INFORMATION AND RATIOS
GAAP Basis
Net income	$	724		$	152		$	297		$	875		$	520
Diluted earnings per common share⁽¹⁾	$	1.61		$	.34		$	.66		$	1.96		$	1.15
Return on assets		3.20	%		.68	%		1.55	%		1.94	%		1.37	%
“Core Earnings” Basis⁽²⁾
“Core Earnings” net income	$	320		$	287		$	279		$	607		$	535
“Core Earnings” diluted earnings per common share⁽¹⁾	$	.72		$	.65		$	.62		$	1.37		$	1.18
“Core Earnings” return on assets		.90	%		.85	%		.90	%		.88	%		.88	%
OTHER OPERATING STATISTICS
Average on-balance sheet student loans	$	80,724		$	82,850		$	70,580		$	81,781		$	69,129
Average off-balance sheet student loans		47,716			42,069			43,791			44,909			42,846

Average Managed student loans	$	128,440		$	124,919		$	114,371		$	126,690		$	111,975

Ending on-balance sheet student loans, net	$	82,279		$	81,645		$	72,831
Ending off-balance sheet student loans, net		47,865			45,225			43,669

Ending Managed student loans, net	$	130,144		$	126,870		$	116,500

Ending Managed FFELP Stafford and Other Student Loans, net	$	41,926		$	42,340		$	47,126
Ending Managed Consolidation Loans, net		69,195			66,662			55,875
Ending Managed Private Education Loans, net		19,023			17,868			13,499

Ending Managed student loans, net	$	130,144		$	126,870		$	116,500

⁽¹⁾

In December 2004, the Company adopted the Emerging Issues Task Force (“EITF”) Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share,” as it relates to the Company’s $2 billion in contingently convertible debt instruments (“Co-Cos”) issued in May 2003. EITF No. 04-8 requires the shares underlying Co-Cos to be included in diluted earnings per common share computations regardless of whether the market price trigger or the conversion price has been met, using the “if-converted” method. The impact of Co-Cos due to the application of EITF No. 04-8 was to decrease diluted earnings per common share by the following amounts:


	Quarters ended									Six months ended
	June 30,			March 31,			June 30,			June 30,			June 30,
	2006			2006			2005			2006			2005
	(unaudited)			(unaudited)			(unaudited)			(unaudited)			(unaudited)

Impact of Co-Cos on GAAP diluted earnings per common share	$	(.08	)	$	—	^(A)	$	(.02	)	$	(.07	)	$	(.04	)
Impact of Co-Cos on “Core Earnings” diluted earnings per common share	$	(.01	)	$	(.01	)	$	(.02	)	$	(.02	)	$	(.04	)


	^(A)	There is no impact on diluted earnings per common share because the effect of the assumed conversion is antidilutive.


⁽²⁾	See explanation of “Core Earnings” performance measures under “Reconciliation of ‘Core Earnings’ Net Income to GAAP Net Income.”

SLM CORPORATION

Consolidated Balance Sheets

(In thousands, except per share amounts)


	June 30,		March 31,		June 30,
	2006		2006		2005
	(unaudited)		(unaudited)		(unaudited)

Assets
FFELP Stafford and Other Student Loans (net of allowance for losses of $6,890; $5,547; and $0, respectively)	$	21,390,845	$	18,882,890	$	22,092,672
Consolidation Loans (net of allowance for losses of $10,090; $9,983; and $5,313, respectively)		54,054,932		53,450,647		44,640,737
Private Education Loans (net of allowance for losses of $251,582; $232,147; and $228,205, respectively)		6,832,843		9,311,164		6,097,102
Other loans (net of allowance for losses of $15,190; $15,081; and $12,764, respectively)		1,050,632		1,114,200		962,017
Cash and investments		6,204,462		4,349,669		3,637,936
Restricted cash and investments		3,489,542		3,065,148		2,422,714
Retained Interest in off-balance sheet securitized loans		3,151,855		2,487,117		2,631,308
Goodwill and acquired intangible assets, net		1,080,703		1,091,301		1,003,427
Other assets		4,650,851		4,013,450		3,270,831

Total assets	$	101,906,665	$	97,765,586	$	86,758,744


Liabilities
Short-term borrowings	$	3,801,266	$	3,362,548	$	4,679,612
Long-term borrowings		90,506,785		87,083,110		75,017,121
Other liabilities		3,229,477		3,555,318		3,336,943

Total liabilities		97,537,528		94,000,976		83,033,676


Commitments and contingencies

Minority interest in subsidiaries		9,369		9,682		73,330

Stockholders’ equity
Preferred stock, par value $.20 per share, 20,000 shares authorized; Series A: 3,300; 3,300; and 3,300 shares, respectively, issued at stated value of $50 per share; Series B: 4,000; 4,000; and 4,000 shares, respectively, issued at stated value of $100 per share		565,000		565,000		565,000
Common stock, par value $.20 per share, 1,125,000 shares authorized: 430,753; 429,329; and 486,706 shares, respectively, issued		86,151		85,866		97,341
Additional paid-in capital		2,440,565		2,364,252		2,035,676
Accumulated other comprehensive income, net of tax		370,204		328,496		473,121
Retained earnings		1,775,948		1,163,570		2,862,730

Stockholders’ equity before treasury stock		5,237,868		4,507,184		6,033,868
Common stock held in treasury at cost: 19,078; 16,599; and 66,532 shares, respectively		878,100		752,256		2,382,130

Total stockholders’ equity		4,359,768		3,754,928		3,651,738

Total liabilities and stockholders’ equity	$	101,906,665	$	97,765,586	$	86,758,744

SLM CORPORATION

Consolidated Statements of Income

(In thousands, except per share amounts)


	Quarters ended								Six months ended
	June 30,		March 31,			June 30,			June 30,		June 30,
	2006		2006			2005			2006		2005
	(unaudited)		(unaudited)			(unaudited)			(unaudited)		(unaudited)

Interest income:
FFELP Stafford and Other Student Loans	$	337,090	$	298,500		$	238,510		$	635,590	$	429,243
Consolidation Loans		841,591		821,335			554,429			1,662,926		1,062,850
Private Education Loans		233,696		241,353			126,809			475,049		256,425
Other loans		23,541		23,307			20,046			46,848		40,199
Cash and investments		124,954		95,810			54,245			220,764		116,294

Total interest income		1,560,872		1,480,305			994,039			3,041,177		1,905,011
Interest expense		1,204,067		1,092,784			664,251			2,296,851		1,228,463

Net interest income		356,805		387,521			329,788			744,326		676,548
Less: provisions for losses		67,396		60,319			78,948			127,715		125,471

Net interest income after provisions for losses		289,409		327,202			250,840			616,611		551,077

Other income:
Gains on student loan securitizations		671,262		30,023			262,001			701,285		311,895
Servicing and securitization revenue		82,842		98,931			149,931			181,773		292,892
Gains (losses) on derivative and hedging activities, net		122,719		(86,739	)		(105,940	)		35,980		(140,191	)
Guarantor servicing fees		33,256		26,907			25,686			60,163		58,226
Debt management fees		90,161		91,612			82,589			181,773		168,341
Collections revenue		67,357		56,681			41,881			124,038		76,764
Other		66,557		68,428			55,748			134,985		118,067

Total other income		1,134,154		285,843			511,896			1,419,997		885,994
Operating expenses		316,602		323,309			287,413			639,911		549,704

Income before income taxes and minority interest in net earnings of subsidiaries		1,106,961		289,736			475,323			1,396,697		887,367
Income taxes		381,828		137,045			176,573			518,873		363,039

Income before minority interest in net earnings of subsidiaries		725,133		152,691			298,750			877,824		524,328
Minority interest in net earnings of subsidiaries		1,355		1,090			2,235			2,445		4,429

Net income		723,778		151,601			296,515			875,379		519,899
Preferred stock dividends		8,787		8,301			3,908			17,088		6,783

Net income attributable to common stock	$	714,991	$	143,300		$	292,607		$	858,291	$	513,116

Basic earnings per common share	$	1.74	$	.35		$	.70		$	2.08	$	1.22

Average common shares outstanding		410,957		412,675			419,497			411,811		420,206

Diluted earnings per common share	$	1.61	$	.34		$	.66		$	1.96	$	1.15

Average common and common equivalent shares outstanding		454,314		422,974			461,900			453,803		462,454

Dividends per common share	$	.25	$	.22		$	.22		$	.47	$	.41

SLM CORPORATION

Segment and “Core Earnings”

Consolidated Statements of Income

(In thousands)


	Quarter ended June 30, 2006
						Corporate			Total ‘‘Core					Total
	Lending		DMO			and Other			Earnings”		Adjustments			GAAP
	(unaudited)

Interest income:
FFELP Stafford and Other Student Loans	$	718,909	$	—		$	—		$	718,909	$	(381,819	)	$	337,090
Consolidation Loans		1,114,355		—			—			1,114,355		(272,764	)		841,591
Private Education Loans		485,429		—			—			485,429		(251,733	)		233,696
Other loans		23,541		—			—			23,541		—			23,541
Cash and investments		169,877		—			659			170,536		(45,582	)		124,954

Total interest income		2,512,111		—			659			2,512,770		(951,898	)		1,560,872
Total interest expense		1,903,523		5,466			1,345			1,910,334		(706,267	)		1,204,067

Net interest income		608,588		(5,466	)		(686	)		602,436		(245,631	)		356,805
Less: provisions for losses		60,009		—			(32	)		59,977		7,419			67,396

Net interest income after provisions for losses		548,579		(5,466	)		(654	)		542,459		(253,050	)		289,409
Fee income		—		90,161			33,256			123,417		—			123,417
Collections revenue		—		67,213			—			67,213		144			67,357
Other income		50,771		—			24,338			75,109		868,271			943,380
Operating expenses⁽¹⁾		163,162		85,110			50,235			298,507		18,095			316,602

Income before income taxes and minority interest in net earnings of subsidiaries		436,188		66,798			6,705			509,691		597,270			1,106,961
Income tax expense⁽²⁾		161,391		24,715			2,480			188,586		193,242			381,828
Minority interest in net earnings of subsidiaries		—		1,355			—			1,355		—			1,355

Net income	$	274,797	$	40,728		$	4,225		$	319,750	$	404,028		$	723,778


⁽¹⁾	Operating expenses for the Lending, DMO, and Corporate and Other Business segments include $8 million, $2 million, and $4 million, respectively, of stock-based compensation expense due to the implementation of SFAS No. 123(R) in the first quarter of 2006.

⁽²⁾	Income taxes are based on a percentage of net income before tax for the individual reportable segment.


	Quarter ended March 31, 2006
						Corporate			Total “Core					Total
	Lending		DMO			and Other			Earnings”		Adjustments			GAAP
						(unaudited)

Interest income:
FFELP Stafford and Other Student Loans	$	649,751	$	—		$	—		$	649,751	$	(351,251	)	$	298,500
Consolidation Loans		1,027,962		—			—			1,027,962		(206,627	)		821,335
Private Education Loans		428,760		—			—			428,760		(187,407	)		241,353
Other loans		23,307		—			—			23,307		—			23,307
Cash and investments		130,461		—			1,323			131,784		(35,974	)		95,810

Total interest income		2,260,241		—			1,323			2,261,564		(781,259	)		1,480,305
Total interest expense		1,659,372		5,156			1,278			1,665,806		(573,022	)		1,092,784

Net interest income		600,869		(5,156	)		45			595,758		(208,237	)		387,521
Less: provisions for losses		74,820		—			19			74,839		(14,520	)		60,319

Net interest income after provisions for losses		526,049		(5,156	)		26			520,919		(193,717	)		327,202
Fee income		—		91,612			26,907			118,519		—			118,519
Collections revenue		—		56,540			—			56,540		141			56,681
Other income		40,572		—			30,009			70,581		40,062			110,643
Operating expenses⁽¹⁾		161,438		89,513			58,512			309,463		13,846			323,309

Income (loss) before income taxes and minority interest in net earnings of subsidiaries		405,183		53,483			(1,570	)		457,096		(167,360	)		289,736
Income tax expense (benefit)⁽²⁾		149,917		19,789			(581	)		169,125		(32,080	)		137,045
Minority interest in net earnings of subsidiaries		—		1,090			—			1,090		—			1,090

Net income (loss)	$	255,266	$	32,604		$	(989	)	$	286,881	$	(135,280	)	$	151,601


⁽¹⁾	Operating expenses for the Lending, DMO, and Corporate and Other Business segments include $10 million, $3 million, and $5 million, respectively, of stock-based compensation expense due to the implementation of SFAS No. 123(R) in the first quarter of 2006.

⁽²⁾	Income taxes are based on a percentage of net income before tax for the individual reportable segment.


	Quarter ended June 30, 2005
						Corporate			Total “Core					Total
	Lending⁽²⁾		DMO⁽²⁾			and Other⁽²⁾			Earnings”		Adjustments			GAAP
	(unaudited)

Interest income:
FFELP Stafford and Other Student Loans	$	582,344	$	—		$	—		$	582,344	$	(343,834	)	$	238,510
Consolidation Loans		666,417		—			—			666,417		(111,988	)		554,429
Private Education Loans		246,948		—			—			246,948		(120,139	)		126,809
Other loans		20,046		—			—			20,046		—			20,046
Cash and investments		77,660		—			859			78,519		(24,274	)		54,245

Total interest income		1,593,415		—			859			1,594,274		(600,235	)		994,039
Total interest expense		1,073,010		3,888			1,361			1,078,259		(414,008	)		664,251

Net interest income		520,405		(3,888	)		(502	)		516,015		(186,227	)		329,788
Less: provisions for losses		14,540		—			(315	)		14,225		64,723			78,948

Net interest income after provisions for losses		505,865		(3,888	)		(187	)		501,790		(250,950	)		250,840
Fee income		—		82,589			25,686			108,275		—			108,275
Collections revenue		—		41,881			—			41,881		—			41,881
Other income		36,136		34			29,243			65,413		296,327			361,740
Operating expenses		140,592		67,496			63,314			271,402		16,011			287,413

Income (loss) before income taxes and minority interest in net earnings of subsidiaries		401,409		53,120			(8,572	)		445,957		29,366			475,323
Income tax expense (benefit)⁽¹⁾		148,522		19,654			(3,172	)		165,004		11,569			176,573
Minority interest in net earnings of subsidiaries		928		1,199			—			2,127		108			2,235

Net income (loss)	$	251,959	$	32,267		$	(5,400	)	$	278,826	$	17,689		$	296,515


⁽¹⁾	Income taxes are based on a percentage of net income before tax for the individual reportable segment.

⁽²⁾	In the first quarter of 2006, the Company changed its method for allocating certain Corporate and Other expenses to the other business segments. All periods presented have been updated to reflect the new allocation methodology.


	Six months ended June 30, 2006
						Corporate			Total “Core					Total
	Lending		DMO			and Other			Earnings”		Adjustments			GAAP
	(unaudited)

Interest income:
FFELP Stafford and Other Student Loans	$	1,368,660	$	—		$	—		$	1,368,660	$	(733,070	)	$	635,590
Consolidation Loans		2,142,317		—			—			2,142,317		(479,391	)		1,662,926
Private Education Loans		914,189		—			—			914,189		(439,140	)		475,049
Other loans		46,848		—			—			46,848		—			46,848
Cash and investments		300,338		—			1,982			302,320		(81,556	)		220,764

Total interest income		4,772,352		—			1,982			4,774,334		(1,733,157	)		3,041,177
Total interest expense		3,562,895		10,622			2,623			3,576,140		(1,279,289	)		2,296,851

Net interest income		1,209,457		(10,622	)		(641	)		1,198,194		(453,868	)		744,326
Less: provisions for losses		134,829		—			(13	)		134,816		(7,101	)		127,715

Net interest income after provisions for losses		1,074,628		(10,622	)		(628	)		1,063,378		(446,767	)		616,611
Fee income		—		181,773			60,163			241,936		—			241,936
Collections revenue		—		123,753			—			123,753		285			124,038
Other income		91,343		—			54,347			145,690		908,333			1,054,023
Operating expenses⁽¹⁾		324,600		174,623			108,747			607,970		31,941			639,911

Income before income taxes and minority interest in net earnings of subsidiaries		841,371		120,281			5,135			966,787		429,910			1,396,697
Income tax expense⁽²⁾		311,308		44,504			1,899			357,711		161,162			518,873
Minority interest in net earnings of subsidiaries		—		2,445			—			2,445		—			2,445

Net income	$	530,063	$	73,332		$	3,236		$	606,631	$	268,748		$	875,379


⁽¹⁾	Operating expenses for the Lending, DMO, and Corporate and Other Business segments include $18 million, $5 million, and $9 million, respectively, of stock-based compensation expense due to the implementation of SFAS No. 123(R) in the first quarter of 2006.

⁽²⁾	Income taxes are based on a percentage of net income before tax for the individual reportable segment.


	Six months ended June 30, 2005
						Corporate			Total “Core					Total
	Lending⁽²⁾		DMO⁽²⁾			and Other⁽²⁾			Earnings”		Adjustments			GAAP
	(unaudited)

Interest income:
FFELP Stafford and Other Student Loans	$	1,092,284	$	—		$	—		$	1,092,284	$	(663,041	)	$	429,243
Consolidation Loans		1,247,394		—			—			1,247,394		(184,544	)		1,062,850
Private Education Loans		474,255		—			—			474,255		(217,830	)		256,425
Other loans		40,199		—			—			40,199		—			40,199
Cash and investments		155,848		—			1,804			157,652		(41,358	)		116,294

Total interest income		3,009,980		—			1,804			3,011,784		(1,106,773	)		1,905,011
Total interest expense		1,991,103		7,956			2,771			2,001,830		(773,367	)		1,228,463

Net interest income		1,018,877		(7,956	)		(967	)		1,009,954		(333,406	)		676,548
Less: provisions for losses		69,502		—			(355	)		69,147		56,324			125,471

Net interest income after provisions for losses		949,375		(7,956	)		(612	)		940,807		(389,730	)		551,077
Fee income		—		168,341			58,226			226,567		—			226,567
Collections revenue		—		76,764			—			76,764		—			76,764
Other income		71,898		67			60,872			132,837		449,826			582,663
Operating expenses		274,777		131,412			114,510			520,699		29,005			549,704

Income before income taxes and minority interest in net earnings of subsidiaries		746,496		105,804			3,976			856,276		31,091			887,367
Income tax expense⁽¹⁾		276,203		39,148			1,471			316,822		46,217			363,039
Minority interest in net earnings of subsidiaries		1,749		2,420			—			4,169		260			4,429

Net income (loss)	$	468,544	$	64,236		$	2,505		$	535,285	$	(15,386	)	$	519,899


⁽¹⁾		Income taxes are based on a percentage of net income before tax for the individual reportable segment.

⁽²⁾		In the first quarter of 2006, the Company changed its method for allocating certain Corporate and Other expenses to the other business segments. All periods presented have been updated to reflect the new allocation methodology.

SLM CORPORATION

Reconciliation of “Core Earnings” Net Income to GAAP Net Income

(In thousands, except per share amounts)


	Quarters ended									Six months ended
				March 31,			June 30,			June 30,			June 30,
	June 30, 2006			2006			2005			2006			2005
	(unaudited)			(unaudited)			(unaudited)			(unaudited)			(unaudited)

“Core Earnings” net income^(A)	$	319,750		$	286,881		$	278,826		$	606,631		$	535,285
“Core Earnings” adjustments:
Net impact of securitization accounting		503,083			(62,061	)		107,531			441,022			75,159
Net impact of derivative accounting		164,678			(38,817	)		(10,989	)		125,861			78,623
Net impact of Floor Income		(52,333	)		(52,569	)		(51,084	)		(104,902	)		(93,517	)
Amortization of acquired intangibles		(18,158	)		(13,913	)		(16,092	)		(32,071	)		(29,174	)

Total “Core Earnings” adjustments before income taxes and minority interest in net earnings of subsidiaries		597,270			(167,360	)		29,366			429,910			31,091
Net tax effect^(B)		(193,242	)		32,080			(11,569	)		(161,162	)		(46,217	)

Total “Core Earnings” adjustments before minority interest in net earnings of subsidiaries		404,028			(135,280	)		17,797			268,748			(15,126	)
Minority interest in net earnings of subsidiaries		—			—			(108	)		—			(260	)

Total “Core Earnings” adjustments		404,028			(135,280	)		17,689			268,748			(15,386	)

GAAP net income	$	723,778		$	151,601		$	296,515		$	875,379		$	519,899

GAAP diluted earnings per common share	$	1.61		$	.34		$	.66		$	1.96		$	1.15


^(A) “Core Earnings” diluted earnings per common share	$	.72		$	.65		$	.62		$	1.37		$	1.18


^(B)		Such tax effect is based upon the Company’s “Core Earnings” effective tax rate for the year. The net tax effect results primarily from the exclusion of the permanent income tax impact of the equity forward contracts.

“Core Earnings”

In accordance with the Rules and Regulations of the Securities and Exchange Commission (“SEC”), we prepare financial statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”). In addition to evaluating the Company’s GAAP-based financial information, management evaluates the Company’s business segments on a basis that, as allowed under Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information,” differs from GAAP. We refer to management’s basis of evaluating our segment results as “Core Earnings” presentations for each business segment and we refer to this information in our presentations with credit rating agencies and lenders. While “Core Earnings” are not a substitute for reported results under GAAP, we rely on “Core Earnings” to manage each operating segment because we believe these measures provide additional information regarding the operational and performance indicators that are most closely assessed by management.

this information provides additional insight into the financial performance of the Company’s core business activities. Our “Core Earnings” are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. “Core Earnings” reflect only current period adjustments to GAAP as described below. Accordingly, the Company’s “Core Earnings” presentation does not represent another comprehensive basis of accounting. A more detailed discussion of the differences between GAAP and “Core Earnings” follows.

Limitations of “Core Earnings”

While GAAP provides a uniform, comprehensive basis of accounting, for the reasons described above, management believes that “Core Earnings” are an important additional tool for providing a more complete understanding of the Company’s results of operations. Nevertheless, “Core Earnings” are subject to certain general and specific limitations that investors should carefully consider. For example, as stated above, unlike financial accounting, there is no comprehensive, authoritative guidance for management reporting. Our “Core Earnings” are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. Unlike GAAP, “Core Earnings” reflect only current period adjustments to GAAP. Accordingly, the Company’s “Core Earnings” presentation does not represent a comprehensive basis of accounting. Investors, therefore, may not compare our Company’s performance with that of other financial services companies based upon “Core Earnings.” “Core Earnings” results are only meant to supplement GAAP results by providing additional information regarding the operational and performance indicators that are most closely used by management, the Company’s board of directors, rating agencies and lenders to assess performance.

Other limitations arise from the specific adjustments that management makes to GAAP results to derive “Core Earnings” results. For example, in reversing the unrealized gains and losses that result from SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” on derivatives that do not qualify for “hedge treatment,” as well as on derivatives that do qualify but are in part ineffective because they are not perfect hedges, we focus on the long-term economic effectiveness of those instruments relative to the underlying hedged item and isolate the effects of interest rate volatility, changing credit spreads and changes in our stock price on the fair value of such instruments during the period. Under GAAP, the effects of these factors on the fair value of the derivative instruments (but not on the underlying hedged item) tend to show more volatility in the short term. While our presentation of our results on a Managed Basis provides important information regarding the performance of our Managed portfolio, a limitation of this presentation is that we are presenting the ongoing spread income on loans that have been sold to a trust managed by us. While we believe that our Managed Basis presentation presents the economic substance of our Managed loan portfolio, it understates earnings volatility from securitization gains. Our “Core Earnings” results exclude certain Floor Income, which is real cash income, from our reported results and therefore may understate earnings in certain periods. Management’s financial planning and valuation of operating results, however, does not take into account Floor Income because of its inherent uncertainty, except when it is economically hedged through Floor Income Contracts.

Pre-Tax Differences between “Core Earnings” and GAAP

Our “Core Earnings” are the primary financial performance measures used by management to evaluate performance and to allocate resources. Accordingly, financial information is reported to management on a “Core Earnings” basis by reportable segment, as these are the measures used regularly by our chief operating decision maker. Our “Core Earnings” are used in developing our financial plans and tracking results, and also in establishing corporate performance targets and determining incentive compensation. Management believes this information provides additional insight into the financial performance of the Company’s core business activities. “Core Earnings” reflect only current period adjustments to GAAP, as described in the more detailed discussion of the differences between GAAP and “Core Earnings” that follows, which includes further detail on each specific adjustments required to reconcile our “Core Earnings” segment presentation to our GAAP earnings.


	1)	Securitization Accounting: Under GAAP, certain securitization transactions in our Lending operating segment are accounted for as sales of assets. Under “Core Earnings” for the Lending operating segment, we present all securitization transactions on a Managed Basis as long-term non-recourse financings. The upfront “gains” on sale from securitization transactions as well as ongoing “servicing and securitization revenue” presented in accordance with GAAP are excluded from “Core Earnings” and are replaced by the interest income, provisions for loan losses, and interest expense as they are earned or incurred on the securitization loans. We also exclude transactions with our off-balance sheet trusts from “Core Earnings” as they are considered intercompany transactions on a Managed Basis.

	2)	Derivative Accounting: “Core Earnings” exclude periodic unrealized gains and losses arising primarily in our Lending business segment, and to a lesser degree in our Corporate and Other business segment, that are caused primarily by the one-sided mark-to-market derivative valuations prescribed by SFAS No. 133 on derivatives that do not qualify for “hedge treatment” under GAAP. Under “Core Earnings,” we recognize the economic effect of these hedges, which generally results in any cash paid or received being recognized ratably as an expense or revenue over the hedged item’s life. “Core Earnings” also exclude the gain or loss on equity forward contracts that under SFAS No. 133 are required to be accounted for as derivatives and marked-to-market through earnings.

	3)	Floor Income: The timing and amount (if any) of Floor Income earned in our Lending operating segment is uncertain and in excess of expected spreads. Therefore, we exclude such income from “Core Earnings” when it is not economically hedged. We employ derivatives, primarily Floor Income Contracts and futures, to economically hedge Floor Income. As discussed above in “Derivative Accounting,” these derivatives do not qualify as effective accounting hedges, and therefore, under GAAP, they are marked-to-market through the “gains (losses) on derivative and hedging activities, net” line on the income statement with no offsetting gain or loss recorded for the economically hedged items. For “Core Earnings,” we reverse the fair value adjustments on the Floor Income Contracts and futures economically hedging Floor Income and include the amortization of net premiums received (net of Eurodollar futures contracts’ realized gains or losses) in income.

	4)	Other items: We exclude the amortization of acquired intangibles.

exv99w2

Exhibit 99.2

SLM CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
SECOND QUARTER 2006
(Dollars in millions, except per share amounts, unless otherwise stated)

The following supplemental information should be read in connection with SLM Corporation’s (the “Company”) press release of second quarter 2006 earnings, dated July 20, 2006.

This Supplemental Financial Information release contains forward-looking statements and information that are based on management’s current expectations as of the date of this document. When used in this report, the words “anticipate,” “believe,” “estimate,” “intend” and “expect” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to risks, uncertainties, assumptions and other factors that may cause the actual results to be materially different from those reflected in such forward-looking statements. These factors include, among others, changes in the terms of student loans and the educational credit marketplace arising from the implementation of applicable laws and regulations and from changes in these laws and regulations, which may reduce the volume, average term and yields on student loans under the Federal Family Education Loan Program (“FFELP”) or result in loans being originated or refinanced under non-FFELP programs or may affect the terms upon which banks and others agree to sell FFELP loans to SLM Corporation, more commonly known as Sallie Mae, and its subsidiaries (collectively, “the Company”). In addition, a larger than expected increase in third party consolidations of our FFELP loans could materially adversely affect our results of operations. The Company could also be affected by changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students and their families; incorrect estimates or assumptions by management in connection with the preparation of our consolidated financial statements; changes in the composition of our Managed FFELP and Private Education Loan portfolios; a significant decrease in our common stock price, which may result in counterparties terminating equity forward positions with us, which, in turn, could have a materially dilutive effect on our common stock; changes in the general interest rate environment and in the securitization markets for education loans, which may increase the costs or limit the availability of financings necessary to initiate, purchase or carry education loans; losses from loan defaults; changes in prepayment rates and credit spreads; and changes in the demand for debt management services and new laws or changes in existing laws that govern debt management services.

Definitions for capitalized terms in this document can be found in the Company’s 2005 Form 10-K filed with the SEC on March 9, 2006.

Certain reclassifications have been made to the balances as of and for the quarters ended March 31, 2006 and June 30, 2005, to be consistent with classifications adopted for the quarter ended June 30, 2006.

RESULTS OF OPERATIONS

The following table presents the statements of income for the quarters ended June 30, 2006, March 31, 2006, and June 30, 2005 and for the six months ended June 30, 2006 and 2005.

Statements of Income


	Quarters ended								Six months ended
	June 30,		March 31,			June 30,			June 30,		June 30,
	2006		2006			2005			2006		2005
	(unaudited)		(unaudited)			(unaudited)			(unaudited)		(unaudited)

Interest income:
FFELP Stafford and Other Student Loans	$	337	$	299		$	239		$	635	$	429
Consolidation Loans		841		821			554			1,663		1,063
Private Education Loans		234		241			127			475		257
Other loans		24		23			20			47		40
Cash and investments		125		96			54			221		116

Total interest income		1,561		1,480			994			3,041		1,905
Interest expense		1,204		1,093			664			2,296		1,228

Net interest income		357		387			330			745		677
Less: provisions for losses		68		60			79			128		126

Net interest income after provisions for losses		289		327			251			617		551

Other income:
Gains on student loan securitizations		671		30			262			701		312
Servicing and securitization revenue		83		99			150			182		293
Gains (losses) on derivative and hedging activities, net		123		(87	)		(106	)		36		(140	)
Guarantor servicing fees		33		27			26			60		58
Debt management fees		90		92			82			182		168
Collections revenue		67		56			42			124		77
Other		67		69			56			135		118

Total other income		1,134		286			512			1,420		886
Operating expenses		316		323			288			640		550

Income before income taxes and minority interest in net earnings of subsidiaries		1,107		290			475			1,397		887
Income taxes⁽¹⁾		382		137			176			519		363

Income before minority interest in net earnings of subsidiaries		725		153			299			878		524
Minority interest in net earnings of subsidiaries		1		1			2			3		4

Net income		724		152			297			875		520
Preferred stock dividends		9		9			4			17		7

Net income attributable to common stock	$	715	$	143		$	293		$	858	$	513

Diluted earnings per common share⁽²⁾	$	1.61	$	.34		$	.66		$	1.96	$	1.15


⁽¹⁾		Income tax expense includes the permanent tax impact of excluding gains and losses from equity forward contracts from taxable income.


⁽²⁾ Impact of Co-Cos on GAAP diluted earnings per common share	$	(.08	)	$	—	^(A)	$	(.02	)	$	(.07	)	$	(.04	)


^(A)		There is no impact from Co-Cos on diluted earnings per common share because the effect of the assumed conversion is antidilutive.

Earnings Release Summary

The following table summarizes GAAP income statement items disclosed separately in the Company’s press releases of earnings or the Company’s quarterly earnings conference calls for the quarters ended June 30, 2006, March 31, 2006, and June 30, 2005 and for the six months ended June 30, 2006 and 2005.


	Quarters ended								Six months ended
	June 30,		March 31,			June 30,			June 30,		June 30,
(in thousands)	2006		2006			2005			2006		2005

Reported net income attributable to common stock	$	714,991	$	143,300		$	292,607		$	858,291	$	513,116
Income (expense) items disclosed separately (tax effected):
Non-recurring Special Allowance Payment (“SAP”)		6,428		—			—			6,428		—
Update of Borrower Benefits estimates		—		6,610			4,683			6,610		4,683
Change in Private Education Loan allowance estimates		—		—			(34,005	)		—		(34,005	)
CLC lawsuit settlement charge		—		—			(8,820	)		—		(8,820	)

Total income/(expense) items disclosed separately (tax effected)		6,428		6,610			(38,142	)		13,038		(38,142	)

Net income attributable to common stock before the impact of items disclosed separately	$	708,563	$	136,690		$	330,749		$	845,253	$	551,258

Co-Cos after-tax expense	$	16,460	$	—	^(A)	$	10,297		$	31,277	$	18,916

Average common and common equivalent shares outstanding		454,314		422,974	^(A)		461,900			453,803		462,454


^(A)		There is no impact from Co-Cos on diluted earnings per common share because the effect of the assumed conversion is antidilutive.

The following table summarizes “Core Earnings” income statement items disclosed separately in the Company’s press releases of earnings or the Company’s quarterly earnings conference calls for the quarters ended June 30, 2006, March 31, 2006, and June 30, 2005 and for the six months ended June 30, 2006 and 2005. See “BUSINESS SEGMENTS” for a discussion of “Core Earnings” and a reconciliation of “Core Earnings” net income to GAAP net income.


	Quarters ended							Six months ended
	June 30,		March 31,		June 30,			June 30,		June 30,
(in thousands)	2006		2006		2005			2006		2005

“Core Earnings” net income attributable to common stock	$	310,963	$	278,580	$	274,918		$	589,543	$	528,502
Income (expense) items disclosed separately (tax effected):
Non-recurring SAP		11,343		—		—			11,343		—
Update of Borrower Benefits estimates		—		9,339		8,254			9,339		8,254
Change in Private Education Loan allowance estimates		—		—		2,264			—		2,264
CLC lawsuit settlement charge		—		—		(8,820	)		—		(8,820	)

Total income/(expense) items disclosed separately (tax effected)		11,343		9,339		1,698			20,682		1,698

“Core Earnings” net income attributable to common stock before the impact of items disclosed separately	$	299,620	$	269,241	$	273,220		$	568,861	$	526,804

Co-Cos after-tax expense	$	16,460	$	14,817	$	10,297		$	31,277	$	18,916

Average common and common equivalent shares outstanding		454,314		453,286		461,900			453,803		462,454

Stock-Based Compensation Expense

During the first quarter of 2006, we adopted the Financial Accounting Standards Board’s (“FASB’s”) Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R) requires all share based payments to employees to be recognized in the income statement based on their fair values. For the quarters ended June 30, 2006 and March 31, 2006, reported net income attributable to common stock included $9 million and $11 million, respectively, related to stock option compensation expense, net of related tax effects. The following table is a pro forma presentation of our results had SFAS No. 123(R) been in effect for all periods presented.


	Quarters ended							Six months ended
	June 30,		March 31,		June 30,			June 30,		June 30,
(in thousands)	2006		2006		2005			2006		2005

Reported net income attributable to common stock	$	714,991	$	143,300	$	292,607		$	858,291	$	513,116
Less: Pro forma stock-based compensation expense, net of related tax effects		—		—		(7,633	)		—		(17,413	)

Pro forma net income attributable to common stock	$	714,991	$	143,300	$	284,974		$	858,291	$	495,703

Diluted earnings per common share	$	1.61	$	.34	$	.66		$	1.96	$	1.15

Pro forma diluted earnings per common share	$	1.61	$	.34	$	.64		$	1.96	$	1.11

For the quarters ended June 30, 2006 and March 31, 2006, “Core Earnings” net income attributable to common stock included $9 million and $11 million, respectively, related to stock option compensation expense, net of related tax effects. The following table is a pro forma presentation of our “Core Earnings” results had SFAS No. 123(R) been in effect for all periods presented (see “BUSINESS SEGMENTS” for a discussion of “Core Earnings” and a reconciliation of “Core Earnings” net income to GAAP net income).


	Quarters ended							Six months ended
	June 30,		March 31,		June 30,			June 30,		June 30,
(in thousands)	2006		2006		2005			2006		2005

“Core Earnings” net income attributable to common stock	$	310,963	$	278,580	$	274,918		$	589,543	$	528,502
Less: Pro forma stock-based compensation expense, net of related tax effects		—		—		(7,633	)		—		(17,413	)

Pro forma “Core Earnings” net income attributable to common stock	$	310,963	$	278,580	$	267,285		$	589,543	$	511,089

“Core Earnings” diluted earnings per common share	$	.72	$	.65	$	.62		$	1.37	$	1.18

Pro forma “Core Earnings” diluted earnings per common share	$	.72	$	.65	$	.60		$	1.37	$	1.14

DISCUSSION OF RESULTS OF OPERATIONS

Consolidated Earnings Summary

Three Months Ended June 30, 2006 Compared to Three Months Ended March 31, 2006

For the three months ended June 30, 2006, net income was $724 million ($1.61 diluted earnings per common share), a 376 percent increase from the $152 million in net income for the three months ended March 31, 2006. Second quarter 2006 pre-tax income of $1.1 billion was a 282 percent increase from the $290 million in net income earned in the first quarter of 2006. The larger percentage increase in quarter-over-quarter, after-tax net income versus pre-tax net income is driven by the permanent impact of

excluding non-taxable gains and losses on equity forward contracts in the Company’s stock from taxable income. Under SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” we are required to mark the equity forward contracts to market each quarter and recognize the change in their value in income. Conversely, these unrealized gains and losses are not recognized on a tax basis. In the second quarter of 2006, the unrealized gain on our outstanding equity forward contracts was $39 million, an increase of $161 million versus the unrealized loss of $122 million recognized in the first quarter of 2006. Excluding these gains and losses from taxable income reduced the effective tax rate from 47 percent in the first quarter of 2006 to 35 percent in the second quarter of 2006.

When comparing the pre-tax results of the second quarter to the first quarter, there were several factors contributing to the increase, the two largest of which were a $210 million increase in the net gains and losses on derivative and hedging activities, and an increase in securitization gains of $641 million. The increase in securitization gains can primarily be attributed to two Private Education Loan securitizations in the second quarter of 2006, which had a pre-tax gain of $648 million or 16 percent of the amount securitized, versus no such Private Education Loan gains in the first quarter of 2006. Private Education Loan securitizations generally have significantly higher gains as a percentage of assets securitized due to the higher earning spreads on those loans. The net gains and losses on derivative and hedging activities primarily relate to the unrealized mark-to-market gains and losses on our derivatives that do not receive hedge accounting treatment, with the greatest impact in the second quarter coming from the $161 million change in the mark-to-market of our equity forward contracts caused by the quarter-over-quarter increase in the stock price of SLM Corporation.

Also in the second quarter, we recorded impairment losses in servicing and securitization income to our Retained Interests in securitizations of $91 million versus $52 million in the first quarter. These impairments were primarily the result of continued high Consolidation Loan activity and an impairment of the Embedded Floor Income included in the Retained Interest primarily due to higher interest rates. The increase in impairment losses was the major factor in the $16 million decrease in servicing and securitization revenue.

Net interest income decreased by $31 million or 8 percent versus the prior quarter due to a 15 basis point decrease in the net interest margin. The decrease in net interest margin is due to an 8 basis point decrease in the on-balance sheet student loan spread, caused primarily by higher Consolidation Loan activity and higher interest rates, which reduced Floor Income. The net interest margin was also negatively impacted by the build-up in funding in anticipation of record Consolidation Loan activity as borrowers locked in lower rates before the interest rate reset on FFELP Stafford loans.

During the second quarter we acquired $7.9 billion in student loans, including $1.7 billion in Private Education Loans. In the first quarter of 2006, we acquired $8.6 billion in student loans, of which $2.0 billion were Private Education Loans. In the second quarter of 2006, we originated $3.2 billion of student loans through our Preferred Channel compared to $7.6 billion originated in the first quarter of 2006. Within our Preferred Channel, $1.8 billion or 55 percent were originated under Sallie Mae owned brands.

Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005

For the three months ended June 30, 2006, net income of $724 million ($1.61 diluted earnings per share) was a 144 percent increase from net income of $297 million for the three months ended June 30, 2005. Second quarter 2006 pre-tax income of $1.1 billion was a 133 percent increase from $475 million earned in the second quarter of 2005. The larger percentage increase in year-over-year, after-tax net income versus pre-tax net income is driven by fluctuations in the unrealized gains and losses on equity forward contracts as described above, which decreased the effective tax rate from 37 percent in the second quarter of 2005 to 35 percent in the second quarter of 2006. In the second quarter of 2006, the unrealized gain on our outstanding equity forward contracts was $39 million versus an unrealized gain of $10 million in the second quarter of 2005, both of which were caused by an increase in the Company’s stock price over each period.

There were several factors that contributed to the increase in the pre-tax results of the second quarter of 2006 versus the year-ago quarter, the two largest of which were a $229 million increase in the net gain on derivative and hedging activities, and an increase in securitization gains of $409 million. As discussed above,

securitization gains in the second quarter of 2006 of $671 million were largely driven by the two Private Education Loan securitizations totaling $4 billion of student loans. In the second quarter of 2005, there was only one Private Education Loan securitization totaling $1.5 billion of student loans. The increase in net gains and losses on derivative and hedging activities primarily relates to an unrealized gain for the second quarter of 2006 versus an unrealized loss in the year-ago quarter on Floor Income Contracts. The unrealized gain in the second quarter of 2006 was due to rising forward interest rates. In the year-ago quarter, forward interest rates fell resulting in an unrealized loss.

We incurred impairment losses in the second quarter of 2006 to our Retained Interests in securitizations of $91 million versus $15 million in the year-ago quarter. The 2006 losses were primarily the result of the combined high level of Consolidation Loan activity and the impairment of Embedded Floor Income as a result of higher interest rates. The increase in year-over-year impairment losses was the major driver of the $67 million decrease in servicing and securitization revenue.

Net interest income increased by $26 million or 8 percent year-over-year due to the 18 percent increase in average interest earning assets, offset by a 15 basis point decrease in the net interest margin. The year-over-year decrease in the net interest margin is due to the build-up in funding in anticipation of record Consolidation Loan activity as borrowers locked in lower rates before the interest rate reset on FFELP Stafford Loans. The net interest margin was also negatively impacted by a 4 basis point decrease in the on-balance sheet student loan spread, which was primarily due to lower Floor Income.

In the second quarter of 2006, fee and other income and collections revenue totaled $257 million, an increase of 25 percent over the year-ago quarter. This increase was primarily driven by the $25 million or 60 percent increase in collections revenue.

Our Managed student loan portfolio grew by $13.6 billion, from $116.5 billion at June 30, 2005 to $130.1 billion at June 30, 2006. This growth was fueled by the acquisition of $7.9 billion of student loans, including $1.7 billion in Private Education Loans, in the quarter ended June 30, 2006, versus $7.8 billion acquired in the year-ago quarter, of which $1.3 billion were Private Education Loans. In the quarter ended June 30, 2006, we originated $3.2 billion of student loans through our Preferred Channel, an increase of 14 percent over the $2.8 billion originated in the year-ago quarter.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

For the six months ended June 30, 2006, our net income increased by 68 percent to $875 million ($1.96 diluted earnings per share) from net income of $520 million ($1.15 diluted earnings per share) in 2005. Pre-tax income for the six months ended June 30, 2006 increased by 57 percent to $1.4 billion versus $887 million in the first six months of 2005. The larger percentage increase in year-over-year net income versus pre-tax income is primarily due to the decrease in the effective tax rate from 41 percent in the six months ended June 30, 2005 to 37 percent in the six months ended June 30, 2006, caused by the decrease in unrealized losses on equity forward contracts as described above. In the six months ended June 30, 2006, we recognized unrealized losses on our outstanding equity forward contracts of $83 million versus unrealized losses of $98 million in the first six months of 2005.

The increase in pre-tax income is primarily due to a $389 million increase in securitization gains in the six months ended June 30, 2006. The securitization gains in the first half of 2006 were primarily driven by the two second quarter Private Education Loan securitizations referenced above. In the year-ago period, there was only one Private Education Loan securitization that had a pre-tax gain of $231 million or 15 percent of the amount securitized.

The year-over-year results were negatively impacted by impairments of our Retained Interests in securitizations of $143 million in the first half of 2006 versus $24 million for the six months ended 2005. These impairments were the primary reason for the $111 million year-over-year decrease in servicing and securitization revenue.

The $176 million increase in the gain on derivative and hedging activities primarily relates to unrealized and realized gains and losses on derivatives that do not receive hedge accounting treatment. For the six months

ended June 30, 2006, realized losses decreased by $127 million versus the first six months of 2005. The majority of these losses related to net settlements on Floor Income Contracts, which were offset by Floor Income earned on student loans. Unrealized derivative gains are primarily due to the effect of higher forward interest rates on the liability for outstanding Floor Income Contracts. Forward interest rates increased during the first half of 2006 and 2005; however, during the first half of 2006, the increase in forward interest rates was greater, resulting in greater unrealized gains for the first half of 2006. These gains were partially offset by unrealized losses on basis swaps economically hedging on inflation-indexed debt.

Our Managed student loan portfolio grew by $13.6 billion, from $116.5 billion at June 30, 2005 to $130.1 billion at June 30, 2006. This growth was fueled by the acquisition of $16.5 billion of student loans, including $3.6 billion in Private Education Loans, in the six months ended June 30, 2006, a 7 percent increase over the $15.3 billion acquired in the year-ago period, of which $2.6 billion were Private Education Loans. In the six months ended June 30, 2006, we originated $10.8 billion of student loans through our Preferred Channel, an increase of 13 percent over the $9.5 billion originated in the year-ago period.

NET INTEREST INCOME

Taxable Equivalent Net Interest Income

The amounts in the following table are adjusted for the impact of certain tax-exempt and tax-advantaged investments based on the marginal federal corporate tax rate of 35 percent.


	Quarters ended						Six months ended
	June 30,		March 31,		June 30,		June 30,		June 30,
	2006		2006		2005		2006		2005

Interest income:
Student loans	$	1,412	$	1,361	$	920	$	2,773	$	1,749
Other loans		24		23		20		47		40
Cash and investments		125		96		54		221		116
Taxable equivalent adjustment		1		1		1		1		2

Total taxable equivalent interest income		1,562		1,481		995		3,042		1,907
Interest expense		1,204		1,093		664		2,296		1,228

Taxable equivalent net interest income	$	358	$	388	$	331	$	746	$	679

Average Balance Sheets

The following table reflects the rates earned on interest earning assets and paid on interest bearing liabilities for the quarters ended June 30, 2006, March 31, 2006, and June 30, 2005 and for the six months ended June 30, 2006 and 2005.


	Quarters ended
	June 30,					March 31,					June 30,
	2006					2006					2005
	Balance		Rate			Balance		Rate			Balance		Rate

Average Assets
FFELP Stafford and Other Student Loans	$	20,562		6.58	%	$	19,522		6.20	%	$	20,673		4.63	%
Consolidation Loans		52,201		6.47			54,312		6.13			43,531		5.11
Private Education Loans		7,961		11.77			9,016		10.86			6,376		7.98
Other loans		1,090		8.72			1,172		8.14			1,051		7.83
Cash and investments		8,867		5.67			7,042		5.52			5,206		4.24

Total interest earning assets		90,681		6.91	%		91,064		6.59	%		76,837		5.20	%

Non-interest earning assets		8,648					7,963					6,627

Total assets	$	99,329				$	99,027				$	83,464


	Quarters ended
	June 30,					March 31,					June 30,
	2006					2006					2005
	Balance		Rate			Balance		Rate			Balance		Rate

Average Liabilities and Stockholders’ Equity
Short-term borrowings	$	4,393		5.07	%	$	4,174		4.78	%	$	5,308		3.63	%
Long-term borrowings		87,364		5.27			87,327		4.85			71,673		3.45

Total interest bearing liabilities		91,757		5.26	%		91,501		4.84	%		76,981		3.46	%

Non-interest bearing liabilities		3,501					3,703					3,309
Stockholders’ equity		4,071					3,823					3,174

Total liabilities and stockholders’ equity	$	99,329				$	99,027				$	83,464

Net interest margin				1.58	%				1.73	%				1.73	%


	Six months ended
	June 30,					June 30,
	2006					2005
	Balance		Rate			Balance		Rate

Average Assets
FFELP Stafford and Other Student Loans	$	20,045		6.39	%	$	19,604		4.42	%
Consolidation Loans		53,251		6.30			43,204		4.96
Private Education Loans		8,485		11.29			6,321		8.18
Other loans		1,131		8.42			1,074		7.74
Cash and investments		7,959		5.61			6,473		3.65

Total interest earning assets		90,871		6.75	%		76,676		5.02	%

Non-interest earning assets		8,307					6,507

Total assets	$	99,178				$	83,183

Average Liabilities and Stockholders’ Equity
Short-term borrowings	$	4,284		4.93	%	$	4,388		3.59	%
Long-term borrowings		87,346		5.06			72,461		3.20

Total interest bearing liabilities		91,630		5.05	%		76,849		3.22	%

Non-interest bearing liabilities		3,600					3,267
Stockholders’ equity		3,948					3,067

Total liabilities and stockholders’ equity	$	99,178				$	83,183

Net interest margin				1.65	%				1.78	%

The decrease in the net interest margin for both the three and six months ended June 30, 2006 versus the year-ago periods is primarily due to fluctuations in the student loan spread as discussed under “Student Loans—Student Loan Spread Analysis—On-Balance Sheet,” and to the build-up of funding in anticipation of record Consolidation Loan activity as a result of borrowers locking in lower rates before the July 1 reset on FFELP Stafford loans.

Student Loans

For both federally insured and Private Education Loans, we account for premiums paid, discounts received and certain origination costs incurred on the origination and acquisition of student loans in accordance with SFAS No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.” The unamortized portion of the premiums and discounts is included in the carrying value of the student loan on the consolidated balance sheet. We recognize income on our student loan portfolio based on the expected yield of the student loan after giving effect to the amortization of purchase premiums and the accretion of student loan discounts, as well as interest rate

reductions and rebates expected to be earned through Borrower Benefits programs. Discounts on Private Education Loans are deferred and accreted to income over the lives of the student loans. In the table below, this accretion of discounts is netted with the amortization of the premiums.

Student Loan Spread

An important performance measure closely monitored by management is the student loan spread. The student loan spread is the difference between the income earned on the student loan assets and the interest paid on the debt funding those assets. A number of factors can affect the overall student loan spread such as:


	•	the mix of student loans in the portfolio, with Consolidation Loans having the lowest spread and Private Education Loans having the highest spread;

	•	the premiums paid, borrower fees charged and capitalized costs incurred to acquire student loans which impact the spread through subsequent amortization;

	•	the type and level of Borrower Benefits programs for which the student loans are eligible;

	•	the level of Floor Income and, when considering the “Core Earnings” spread, the amount of Floor Income-eligible loans that have been hedged through Floor Income Contracts; and

	•	funding and hedging costs.

The student loan spread is highly susceptible to liquidity, funding and interest rate risk. These risks are discussed separately in our 2005 Annual Report on Form 10-K at “LIQUIDITY AND CAPITAL RESOURCES” and in the “RISK FACTORS” discussion.

Student Loan Spread Analysis—On-Balance Sheet

The following table analyzes the reported earnings from student loans on-balance sheet. For an analysis of our student loan spread for the entire portfolio of Managed student loans on a similar basis to the on-balance sheet analysis, see “LENDING BUSINESS SEGMENT—Student Loan Spread Analysis—‘Core Earnings’ Basis.”


	Quarters ended									Six months ended
	June 30,			March 31,			June 30,			June 30,			June 30,
	2006			2006			2005			2006			2005

On-Balance Sheet
Student loan yield, before Floor Income		7.92	%		7.51	%		5.79	%		7.71	%		5.68	%
Gross Floor Income		.04			.07			.32			.05			.36
Consolidation Loan Rebate Fees		(.67	)		(.68	)		(.63	)		(.67	)		(.65	)
Borrower Benefits		(.11	)		(.11	)		(.11	)		(.11	)		(.14	)
Premium and discount amortization		(.16	)		(.12	)		(.15	)		(.14	)		(.15	)

Student loan net yield		7.02			6.67			5.22			6.84			5.10
Student loan cost of funds		(5.27	)		(4.84	)		(3.43	)		(5.05	)		(3.19	)

Student loan spread		1.75	%		1.83	%		1.79	%		1.79	%		1.91	%

Average Balances
On-balance sheet student loans	$	80,724		$	82,850		$	70,580		$	81,781		$	69,129

Discussion of Student Loan Spread—Effects of Floor Income and Derivative Accounting

One of the primary drivers of fluctuations in our on-balance sheet student loan spread is the level of gross Floor Income (Floor Income earned before payments on Floor Income Contracts) earned in the period. For the quarters ended June 30, 2006, March 31, 2006, and June, 30, 2005, we earned gross Floor Income of $8 million (4 basis points), $14 million (7 basis points) and $56 million (32 basis points), respectively. The

reduction in gross Floor Income is primarily due to the increase in short-term interest rates. We believe that we have economically hedged most of the Floor Income through the sale of Floor Income Contracts, under which we receive an upfront fee and agree to pay the counterparty the Floor Income earned on a notional amount of student loans. These contracts do not qualify for hedge accounting treatment and as a result the payments on the Floor Income Contracts are included on the income statement with “gains (losses) on derivative and hedging activities, net” rather than in student loan interest income. Payments on Floor Income Contracts associated with on-balance sheet student loans for the quarters ended June 30, 2006, March 31, 2006, and June 30, 2005 totaled $8 million (4 basis points), $14 million (7 basis points) and $52 million (30 basis points), respectively.

In addition to Floor Income Contracts, we also extensively use basis swaps to manage our basis risk associated with interest rate sensitive assets and liabilities. These swaps generally do not qualify as accounting hedges and are likewise required to be accounted for in the “gains (losses) on derivative and hedging activities, net” line on the income statement. As a result, they are not considered in the calculation of the cost of funds in the above table.

Discussion of Student Loan Spread—Effects of Significant Events in the Quarters Presented

The second quarter 2006 spread includes $10 million or 5 basis points of income associated with non-recurring SAP that we accrued on PLUS loans as a result of program changes effected by the Higher Education Reconciliation Act of 2005 (“Reconciliation Legislation”).

In the second quarters of 2006 and 2005, the increase in premium amortization is largely due to the write-off of unamortized premiums on loans consolidated with third parties. In addition, in the second quarter of 2006, we increased the Constant Prepayment Rate (“CPR”) for our FFELP Stafford loan portfolio in response to the increased rate of loan prepayments occurring through consolidation.

In the first quarter of 2006, we updated our assumptions for the qualification for Borrower Benefits to reflect trends in borrower behavior versus qualification requirements, which resulted in a reduction of our liability for Borrower Benefits of $10 million or 5 basis points. In addition, in the second quarter of 2005, we revised our estimates regarding the qualification for Borrower Benefits which resulted in a reduction of the liability for Borrower Benefits of $7 million or 4 basis points.

In the second quarter of 2005, we reduced student loan interest income by $14 million or 9 basis points to reflect a revision of our estimates pertaining to our non-accrual policy for interest income.

In both the second quarters of 2006 and 2005, there was an increase in Consolidation Loan activity as FFELP Stafford borrowers locked in lower interest rates by consolidating their loans prior to the July 1 interest rate reset for FFELP Stafford loans. In addition, reconsolidation of Consolidation Loans through the Direct Loan Program continued in the second quarter of 2006 from the backlog of processing applications after the March 31, 2006 prohibition (see “LENDING BUSINESS SEGMENT—Student Loan Activity” for further discussion). The increase in consolidations resulted in an increase in student loan premium write-offs for both FFELP Stafford and Consolidation Loans consolidated with third parties in the second quarter. Loans lost through consolidation benefit the student loan spread to a lesser extent through the write-off of the Borrower Benefits liability associated with these loans. Furthermore, in both the second quarter of 2006 and 2005, we accrued a net write-off to our Borrower Benefits liability for loans whose consolidation applications had been received but not yet processed by June 30, 2006, resulting in reductions to Borrower Benefits expense.

Discussion of Student Loan Spread—Other Quarter-over-Quarter Fluctuations

After giving effect to the items discussed above, the decrease in the second quarter of 2006 on-balance sheet spread as compared to the first quarter of 2006 was due primarily to the decrease in the average balance of higher yielding Private Education Loans. The average balance of on-balance sheet Private Education Loans in the second quarter of 2006 decreased 12 percent from the average balance in the first quarter of 2006 as a result of securitizing $4 billion in Private Education Loans in the second quarter of 2006. When compared to the prior year, the 2006 student loan spread benefited from the 25 percent increase in the average balance of

Private Education Loans, which now constitutes 10 percent of the total average balance of on-balance sheet student loans versus 9 percent in the prior year. Also, the portfolio of on-balance sheet Private Education Loans in the second quarter of 2006 had higher average spreads than the on-balance sheet Private Education Loans in the second quarter of 2005.

On-Balance Sheet Floor Income

For on-balance sheet student loans, gross Floor Income is included in student loan income whereas payments on Floor Income Contracts are included in the “gains (losses) on derivative and hedging activities, net” line in other income. The following table summarizes the components of Floor Income from on-balance sheet student loans, net of payments under Floor Income Contracts, for the quarters ended June 30, 2006, March 31, 2006, and June 30, 2005 and for the six months ended June 30, 2006 and 2005.


	Quarters ended
	June 30,								March 31,								June 30,
	2006								2006								2005
	Fixed			Variable					Fixed			Variable					Fixed			Variable
	borrower			borrower					borrower			borrower					borrower			borrower
	rate			rate		Total			rate			rate		Total			rate			rate		Total

Floor Income:
Gross Floor Income	$	8		$	—	$	8		$	14		$	—	$	14		$	56		$	—	$	56
Payments on Floor Income Contracts		(8	)		—		(8	)		(14	)		—		(14	)		(52	)		—		(52	)

Net Floor Income	$	—		$	—	$	—		$	—		$	—	$	—		$	4		$	—	$	4

Net Floor Income in basis points		—			—		—			—			—		—			2			—		2


	Six months ended
	June 30,								June 30,
	2006								2005
	Fixed			Variable					Fixed			Variable
	borrower			borrower					borrower			borrower
	Rate			Rate		Total			Rate			Rate		Total

Floor Income:
Gross Floor Income	$	22		$	—	$	22		$	122		$	—	$	122
Payments on Floor Income Contracts		(22	)		—		(22	)		(112	)		—		(112	)

Net Floor Income	$	—		$	—	$	—		$	10		$	—	$	10

Net Floor Income in basis points		—			—		—			3			—		3

The decrease in the second quarter 2006 net Floor Income versus the year-ago quarter is primarily due to an increase in short-term interest rates.

SECURITIZATION PROGRAM

Securitization Activity

The following table summarizes our securitization activity for the quarters ended June 30, 2006, March 31, 2006, and June 30, 2005 and for the six months ended June 30, 2006 and 2005.


	Quarters ended
	June 30,									March 31,									June 30,
	2006									2006									2005
	No. of		Amount		Pre-Tax		Gain			No. of		Amount		Pre-Tax		Gain			No. of		Amount		Pre-Tax		Gain
	Transactions		Securitized		Gain		%			Transactions		Securitized		Gain		%			Transactions		Securitized		Gain		%

FFELP Stafford/PLUS loans		—	$	—	$	—		—	%		2	$	5,004	$	17		.3	%		—	$	—	$	—		—	%
Consolidation Loans		1		2,500		23		.9			1		3,002		13		.4			2		4,011		31		.8
Private Education Loans		2		4,000		648		16.2			—		—		—		—			1		1,505		231		15.3

Total securitizations—sales		3		6,500	$	671		10.3	%		3		8,006	$	30		.4	%		3		5,516	$	262		4.7	%

Asset-backed commercial paper		—		—							—		—							—		—
Consolidation Loans⁽¹⁾		1		3,001							—		—							1		2,226

Total securitizations—financings		1		3,001							—		—							1		2,226

Total securitizations		4	$	9,501							3	$	8,006							4	$	7,742


	Six months ended
	June 30,									June 30,
	2006									2005
	No. of		Amount		Pre-Tax		Gain			No. of		Amount		Pre-Tax		Gain
	Transactions		Securitized		Gain		%			Transactions		Securitized		Gain		%

FFELP Stafford/PLUS loans		2	$	5,004	$	17		.3	%		2	$	3,530	$	50		1.4	%
Consolidation Loans		2		5,502		36		.7			2		4,011		31		.8
Private Education Loans		2		4,000		648		16.2			1		1,505		231		15.3

Total securitizations— sales		6		14,506	$	701		4.8	%		5		9,046	$	312		3.4	%

Asset-backed commercial paper		—		—							—		—
Consolidation Loans⁽¹⁾		1		3,001							1		2,226

Total securitizations— financings		1		3,001							1		2,226

Total securitizations		7	$	17,507							6	$	11,272


⁽¹⁾		In certain Consolidation Loan securitization structures, we hold certain rights that can affect the remarketing of certain bonds, such that these securitizations did not qualify as qualifying special purpose entities (“QSPEs”). Accordingly, they are accounted for on-balance sheet as variable interest entities (“VIEs”).

The decrease in the FFELP Stafford/PLUS gain as a percentage of loans securitized from 1.4 percent for the six months ended June 30, 2005 to 0.3 percent for the six months ended June 30, 2006 is primarily due to: 1) an increase in the CPR assumption to account for continued high levels of Consolidation Loan activity; 2) an increase in the discount rate to reflect higher long term interest rates; 3) the re-introduction of Risk Sharing with the Reconciliation Legislation reauthorizing the student loan programs of the Higher Education Act; and 4) an increase in the amount of student loan premiums included in the carrying value of the loans sold. The higher premiums on these loans were primarily due to the allocation of the purchase price to student loan portfolios acquired through the acquisitions of several companies in the student loan industry. Higher premiums were also due to loans acquired through zero-fee lending and the school-as-lender channel.

Servicing and Securitization Revenue

Servicing and securitization revenue, the ongoing revenue from securitized loan pools accounted for off-balance sheet as QSPEs, includes the interest earned on the Residual Interest and the revenue we receive for servicing the loans in the securitization trusts. Interest income recognized on the Residual Interest is based on our anticipated yield determined by estimating future cash flows each quarter.

The following table summarizes the components of servicing and securitization revenue for the quarters ended June 30, 2006, March 31, 2006, and June 30, 2005 and for the six months ended June 30, 2006 and 2005.


	Quarters ended									Six months ended
	June 30,			March 31,			June 30,			June 30,			June 30,
	2006			2006			2005			2006			2005

Servicing revenue	$	88		$	79		$	86		$	168		$	171
Securitization revenue, before net Embedded Floor Income and impairment		84			69			72			153			135

Servicing and securitization revenue, before net Embedded Floor Income and impairment		172			148			158			321			306
Embedded Floor Income		4			7			24			10			50
Less: Floor Income previously recognized in gain calculation		(2	)		(4	)		(17	)		(6	)		(39	)

Net Embedded Floor Income		2			3			7			4			11

Servicing and securitization revenue, before impairment		174			151			165			325			317
Retained Interest impairment		(91	)		(52	)		(15	)		(143	)		(24	)

Total servicing and securitization revenue	$	83		$	99		$	150		$	182		$	293

Average off-balance sheet student loans	$	47,716		$	42,069		$	43,791		$	44,909		$	42,846

Average balance of Retained Interest	$	3,004		$	2,501		$	2,576		$	2,754		$	2,448

Servicing and securitization revenue as a percentage of the average balance of off-balance sheet student loans (annualized)		.70	%		.95	%		1.37	%		.82	%		1.38	%

Servicing and securitization revenue is primarily driven by the average balance of off-balance sheet student loans and the amount of and the difference in the timing of Embedded Floor Income recognition on off-balance sheet student loans. The increase in securitization revenue, before net Embedded Floor Income and impairment, from the first quarter of 2006 to the second quarter of 2006 is primarily due to (1) a full quarter of earnings from three off-balance sheet securitizations in the first quarter and (2) a Private Education Loan securitization settling early in the second quarter that has significantly higher ongoing revenue than FFELP Stafford/PLUS and Consolidation Loan securitizations.

Servicing and securitization revenue can also be negatively impacted by impairments of the value of our Retained Interest, caused primarily by the effect of higher than expected Consolidation Loan activity on FFELP Stafford/PLUS student loan securitizations and the effect of market interest rates on the Embedded Floor Income included in the Retained Interest. The majority of the consolidations bring the loans back on-balance sheet so for those loans we retain the value of the asset on-balance sheet versus in the trust. For the quarters ended June 30, 2006, March 31, 2006 and June 30, 2005, we recorded impairments to the Retained Interests of $91 million, $52 million and $15 million, respectively, and for the six months ended June 30, 2006 and 2005, we recorded impairments of $143 million and $24, respectively. These impairment charges were primarily the result of FFELP Stafford loans prepaying faster than projected through loan consolidation ($92 million and $20 million for the six months ended June 30, 2006 and 2005, respectively), and the effect of market interest rates on the Embedded Floor Income which is part of the Retained Interest ($51 million and $4 million for the six months ended June 30, 2006 and 2005, respectively). The impairment for the six months ended June 30, 2006 also reflects the increase in our CPR assumption for the remainder of 2006 from 20 percent to 40 percent for the third quarter and 30 percent for the fourth quarter, to account for the surge in Consolidation Loan applications received in the second quarter that will be processed in the third and fourth quarters of 2006. The level and timing of Consolidation Loan activity is highly volatile, and in response we continue to revise our estimates of the effects of Consolidation Loan activity on our Retained Interests and it

may result in additional impairment recorded in future periods if Consolidation Loan activity remains higher than projected.

BUSINESS SEGMENTS

The results of operations of the Company’s Lending and Debt Management Operations (“DMO”) operating segments are presented below. These defined business segments operate in distinct business environments and are considered reportable segments under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” based on quantitative thresholds applied to the Company’s financial statements. In addition, we provide other complementary products and services, including guarantor and student loan servicing, through smaller operating segments that do not meet such thresholds and are aggregated in the Corporate and Other reportable segment for financial reporting purposes.

The management reporting process measures the performance of the Company’s operating segments based on the management structure of the Company as well as the methodology used by management to evaluate performance and allocate resources. In accordance with the Rules and Regulations of the Securities and Exchange Commission (“SEC”), we prepare financial statements in accordance with GAAP. In addition to evaluating the Company’s GAAP-based financial information, management, including the Company’s chief operation decision maker, evaluates the performance of the Company’s operating segments based on their profitability on a basis that, as allowed under SFAS No. 131, differs from GAAP. We refer to management’s basis of evaluating our segment results as “Core Earnings” presentations for each business segment and we refer to these performance measures in our presentations with credit rating agencies and lenders. Accordingly, information regarding the Company’s reportable segments is provided herein based on “Core Earnings,” which are discussed in detail below.

Our “Core Earnings” are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. “Core Earnings” net income reflects only current period adjustments to GAAP net income as described below. Unlike financial accounting, there is no comprehensive, authoritative guidance for management reporting and as a result, our management reporting is not necessarily comparable with similar information for any other financial institution. The Company’s operating segments are defined by the products and services they offer or the types of customers they serve, and they reflect the manner in which financial information is currently evaluated by management. Intersegment revenues and expenses are netted within the appropriate financial statement line items consistent with the income statement presentation provided to management. Changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial information.

“Core Earnings” are the primary financial performance measures used by management to develop the Company’s financial plans, track results, and establish corporate performance targets and incentive compensation. While “Core Earnings” are not a substitute for reported results under GAAP, the Company relies on “Core Earnings” in operating its business because “Core Earnings” permit management to make meaningful period-to-period comparisons of the operational and performance indicators that are most closely assessed by management. Management believes this information provides additional insight into the financial performance of the core business activities of our operating segments. Accordingly, the tables presented below reflect “Core Earnings” which is reviewed and utilized by management to manage the business for each of the Company’s reportable segments. A further discussion regarding “Core Earnings” is included under “Limitations of ‘Core Earnings’” and “Pre-tax Differences between ‘Core Earnings’ and GAAP.”

The Lending operating segment includes all discussion of income and related expenses associated with the net interest margin, the student loan spread and its components, the provisions for loan losses, and other fees earned on our Managed portfolio of student loans. The DMO operating segment reflects the fees earned and expenses incurred in providing accounts receivable management and collection services. Our Corporate and Other reportable segment includes our remaining fee businesses and other corporate expenses that do not pertain directly to the primary segments identified above.

In the first quarter of 2006, the Company changed its method for allocating certain Corporate and Other expenses to the other business segments. All periods presented have been updated to reflect the new allocation methodology.


	Quarter ended June 30, 2006
						Corporate		Total “Core					Total
	Lending		DMO			and Other		Earnings”		Adjustments⁽³⁾			GAAP

Interest income:
FFELP Stafford and Other Student Loans	$	719	$	—		$	—	$	719	$	(382	)	$	337
Consolidation Loans		1,114		—			—		1,114		(273	)		841
Private Education Loans		485		—			—		485		(251	)		234
Other loans		24		—			—		24		—			24
Cash and investments		170		—			1		171		(46	)		125

Total interest income		2,512		—			1		2,513		(952	)		1,561
Total interest expense		1,904		5			1		1,910		(706	)		1,204

Net interest income		608		(5	)		—		603		(246	)		357
Less: provisions for losses		60		—			—		60		8			68

Net interest income after provisions for losses		548		(5	)		—		543		(254	)		289
Fee income		—		90			33		123		—			123
Collections revenue		—		67			—		67		—			67
Other income		51		—			24		75		869			944
Operating expenses⁽¹⁾		163		85			50		298		18			316

Income before income taxes and minority interest in net earnings of subsidiaries		436		67			7		510		597			1,107
Income tax expense⁽²⁾		161		26			2		189		193			382
Minority interest in net earnings of subsidiaries		—		1			—		1		—			1

Net income	$	275	$	40		$	5	$	320	$	404		$	724


⁽¹⁾		Operating expenses for the Lending, DMO, and Corporate and Other Business segments include $8 million, $2 million, and $4 million, respectively, of stock-based compensation expense due to the implementation of SFAS No. 123(R) in the first quarter of 2006.

⁽²⁾		Income taxes are based on a percentage of net income before tax for the individual reportable segment.

⁽³⁾		“Core Earnings” adjustments to GAAP:


	Quarter ended June 30, 2006
	Net impact of			Net impact of					Amortization
	securitization			derivative		Net impact of			of acquired
(Dollars in millions)	accounting			accounting		Floor Income			intangibles			Total

Net interest income	$	(236	)	$	42	$	(52	)	$	—			(246	)
Less: provisions for losses		8			—		—			—			8

Net interest income after provisions for losses		(244	)		42		(52	)		—			(254	)
Fee income		—			—		—			—			—
Collections revenue		—			—		—			—			—
Other income		746			123		—			—			869
Operating expenses		—			—		—			18			18

Total pre-tax “Core Earnings” adjustments to GAAP	$	502		$	165	$	(52	)	$	(18	)		597

Income tax expense													193
Minority interest in net earnings of subsidiaries													—

Total “Core Earnings” adjustments to GAAP												$	404


	Quarter ended March 31, 2006
						Corporate			Total “Core					Total
	Lending		DMO			and Other			Earnings”		Adjustments⁽³⁾			GAAP

Interest income:
FFELP Stafford and Other Student Loans	$	650	$	—		$	—		$	650	$	(351	)	$	299
Consolidation Loans		1,028		—			—			1,028		(207	)		821
Private Education Loans		429		—			—			429		(188	)		241
Other loans		23		—			—			23		—			23
Cash and investments		131		—			1			132		(36	)		96

Total interest income		2,261		—			1			2,262		(782	)		1,480
Total interest expense		1,660		5			1			1,666		(573	)		1,093

Net interest income		601		(5	)		—			596		(209	)		387
Less: provisions for losses		75		—			—			75		(15	)		60

Net interest income after provisions for losses		526		(5	)		—			521		(194	)		327
Fee income		—		92			27			119		—			119
Collections revenue		—		56			—			56		—			56
Other income		40		—			30			70		41			111
Operating expenses⁽¹⁾		161		89			59			309		14			323

Income (loss) before income taxes and minority interest in net earnings of subsidiaries		405		54			(2	)		457		(167	)		290
Income tax expense (benefit)⁽²⁾		150		20			(1	)		169		(32	)		137
Minority interest in net earnings of subsidiaries		—		1			—			1		—			1

Net income (loss)	$	255	$	33		$	(1	)	$	287	$	(135	)	$	152


⁽¹⁾		Operating expenses for the Lending, DMO, and Corporate and Other Business segments include $10 million, $3 million, and $5 million, respectively, of stock-based compensation expense due to the implementation of SFAS No. 123(R) in the first quarter of 2006.

⁽²⁾		Income taxes are based on a percentage of net income before tax for the individual reportable segment.

⁽³⁾		“Core Earnings” adjustments to GAAP:


	Quarter ended March 31, 2006
	Net impact of			Net impact of						Amortization
	securitization			derivative			Net impact of			of acquired
(Dollars in millions)	accounting			accounting			Floor Income			intangibles			Total

Net interest income	$	(205	)	$	48		$	(52	)	$	—		$	(209	)
Less: provisions for losses		(15	)		—			—			—			(15	)

Net interest income after provisions for losses		(190	)		48			(52	)		—			(194	)
Fee income		—			—			—			—			—
Collections revenue		—			—			—			—			—
Other income		128			(87	)		—			—			41
Operating expenses		—			—			—			14			14

Total pre-tax “Core Earnings” adjustments to GAAP	$	(62	)	$	(39	)	$	(52	)	$	(14	)		(167	)

Income tax expense (benefit)														(32	)
Minority interest in net earnings of subsidiaries														—

Total “Core Earnings” adjustments to GAAP													$	(135	)


	Quarter ended June 30, 2005
						Corporate			Total “Core					Total
	Lending		DMO			and Other			Earning”‘		Adjustments⁽²⁾			GAAP

Interest income:
FFELP Stafford and Other Student Loans	$	582	$	—		$	—		$	582	$	(343	)	$	239
Consolidation Loans		667		—			—			667		(113	)		554
Private Education Loans		247		—			—			247		(120	)		127
Other loans		20		—			—			20		—			20
Cash and investments		77		—			1			78		(24	)		54

Total interest income		1,593		—			1			1,594		(600	)		994
Total interest expense		1,073		4			1			1,078		(414	)		664

Net interest income		520		(4	)		—			516		(186	)		330
Less: provisions for losses		14		—			—			14		65			79

Net interest income after provisions for losses		506		(4	)		—			502		(251	)		251
Fee income		—		82			26			108		—			108
Collections revenue		—		42			—			42		—			42
Other income		36		—			29			65		297			362
Operating expenses		141		67			63			271		17			288

Income (loss) before income taxes and minority interest in net earnings of subsidiaries		401		53			(8	)		446		29			475
Income tax expense (benefit)⁽¹⁾		148		20			(3	)		165		11			176
Minority interest in net earnings of subsidiaries		1		1			—			2		—			2

Net income (loss)	$	252	$	32		$	(5	)	$	279	$	18		$	297


⁽¹⁾		Income taxes are based on a percentage of net income before tax for the individual reportable segment.

⁽²⁾		“Core Earnings” adjustments to GAAP:


	Quarter ended June 30, 2005
	Net impact of			Net impact of						Amortization
	securitization			derivative			Net impact of			of acquired
(Dollars in millions)	accounting			accounting			Floor Income			intangibles			Total

Net interest income	$	(230	)	$	95		$	(51	)	$	—		$	(186	)
Less: provisions for losses		65			—			—			—			65

Net interest income after provisions for losses		(295	)		95			(51	)		—			(251	)
Fee income		—			—			—			—			—
Collections revenue		—			—			—			—			—
Other income		403			(106	)		—			—			297
Operating expenses		1			—			—			16			17

Total pre-tax “Core Earnings” adjustments to GAAP	$	107		$	(11	)	$	(51	)	$	(16	)		29

Income tax expense														11
Minority interest in net earnings of subsidiaries														—

Total “Core Earnings” adjustments to GAAP													$	18


	Six months ended June 30, 2006
						Corporate			Total “Core					Total
	Lending		DMO			and Other			Earnings”		Adjustments⁽³⁾			GAAP

Interest income:
FFELP Stafford and Other Student Loans	$	1,369	$	—		$	—		$	1,369	$	(734	)	$	635
Consolidation Loans		2,142		—			—			2,142		(479	)		1,663
Private Education Loans		914		—			—			914		(439	)		475
Other loans		47		—			—			47		—			47
Cash and investments		300		—			2			302		(81	)		221

Total interest income		4,772		—			2			4,774		(1,733	)		3,041
Total interest expense		3,562		11			3			3,576		(1,280	)		2,296

Net interest income		1,210		(11	)		(1	)		1,198		(453	)		745
Less: provisions for losses		135		—			—			135		(7	)		128

Net interest income after provisions for losses		1,075		(11	)		(1	)		1,063		(446	)		617
Fee income		—		182			60			242		—			242
Collections revenue		—		124			—			124		—			124
Other income		92		—			55			147		907			1,054
Operating expenses⁽¹⁾		324		175			109			608		32			640

Income before income taxes and minority interest in net earnings of subsidiaries		843		120			5			968		429			1,397
Income tax expense⁽²⁾		312		44			2			358		161			519
Minority interest in net earnings of subsidiaries		—		3			—			3		—			3

Net income	$	531	$	73		$	3		$	607	$	268		$	875


⁽¹⁾		Operating expenses for the Lending, DMO, and Corporate and Other Business segments include $18 million, $5 million, and $9 million, respectively, of stock-based compensation expense due to the implementation of SFAS No. 123(R) in the first quarter of 2006.

⁽²⁾		Income taxes are based on a percentage of net income before tax for the individual reportable segment.

⁽³⁾		“Core Earnings” adjustments to GAAP:


	Six months ended June 30, 2006
	Net impact of			Net impact of		Net impact of			Amortization
	securitization			derivative		Floor			of acquired
(Dollars in millions)	accounting			accounting		Income			intangibles			Total

Net interest income	$	(438	)	$	90	$	(105	)	$	—			(453	)
Less: provisions for losses		(7	)		—		—			—			(7	)

Net interest income after provisions for losses		(431	)		90		(105	)		—			(446	)
Fee income		—			—		—			—			—
Collections revenue		—			—		—			—			—
Other income		871			36		—			—			907
Operating expenses		—			—		—			32			32

Total pre-tax “Core Earnings” adjustments to GAAP	$	440		$	126	$	(105	)	$	(32	)		429

Income tax expense													161
Minority interest in net earnings of subsidiaries													—

Total “Core Earnings” adjustments to GAAP												$	268


	Six months ended June 30, 2005
						Corporate			Total ‘‘Core					Total
	Lending		DMO			and Other			Earnings”		Adjustments⁽²⁾			GAAP

Interest income:
FFELP Stafford and Other Student Loans	$	1,092	$	—		$	—		$	1,092	$	(663	)	$	429
Consolidation Loans		1,248		—			—			1,248		(185	)		1,063
Private Education Loans		474		—			—			474		(217	)		257
Other loans		40		—			—			40		—			40
Cash and investments		156		—			2			158		(42	)		116

Total interest income		3,010		—			2			3,012		(1,107	)		1,905
Total interest expense		1,991		8			3			2,002		(774	)		1,228

Net interest income		1,019		(8	)		(1	)		1,010		(333	)		677
Less: provisions for losses		69		—			—			69		57			126

Net interest income after provisions for losses		950		(8	)		(1	)		941		(390	)		551
Fee income		—		168			58			226		—			226
Collections revenue		—		77			—			77		—			77
Other income		72		—			61			133		450			583
Operating expenses		275		132			114			521		29			550

Income before income taxes and minority interest in net earnings of subsidiaries		747		105			4			856		31			887
Income tax expense⁽¹⁾		277		39			1			317		46			363
Minority interest in net earnings of subsidiaries		2		2			—			4		—			4

Net income	$	468	$	64		$	3		$	535	$	(15	)	$	520


⁽¹⁾		Income taxes are based on a percentage of net income before tax for the individual reportable segment.

⁽²⁾		“Core Earnings” adjustments to GAAP:


	Six months ended June 30, 2005
	Net impact of			Net impact of						Amortization of
	securitization			derivative			Net impact of			acquired
(Dollars in millions)	accounting			accounting			Floor Income			intangibles			Total

Net interest income	$	(458	)	$	219		$	(94	)	$	—		$	(333	)
Less: provisions for losses		57			—			—			—			57

Net interest income after provisions for losses		(515	)		219			(94	)		—			(390	)
Fee income		—			—			—			—			—
Collections revenue		—			—			—			—			—
Other income		590			(140	)		—			—			450
Operating expenses		—			—			—			29			29

Total pre-tax “Core Earnings” adjustments to GAAP	$	75		$	79		$	(94	)	$	(29	)		31

Income tax expense														46
Minority interest in net earnings of subsidiaries														—

Total “Core Earnings” adjustments to GAAP													$	(15	)

Reconciliation of “Core Earnings” Net Income to GAAP Net Income


	Quarters ended									Six months ended
	June 30,			March 31,			June 30,			June 30,			June 30,
	2006			2006			2005			2006			2005

“Core Earnings” net income⁽¹⁾	$	320		$	287		$	279		$	607		$	535
“Core Earnings” adjustments:
Net impact of securitization accounting		502			(62	)		107			440			75
Net impact of derivative accounting		165			(39	)		(11	)		126			79
Net impact of Floor Income		(52	)		(52	)		(51	)		(105	)		(94	)
Amortization of acquired intangibles		(18	)		(14	)		(16	)		(32	)		(29	)

Total “Core Earnings” adjustments before income taxes		597			(167	)		29			429			31
Net tax effect⁽²⁾		(193	)		32			(11	)		(161	)		(46	)

Total “Core Earnings” adjustments		404			(135	)		18			268			(15	)

GAAP net income	$	724		$	152		$	297		$	875		$	520

GAAP diluted earnings per common share	$	1.61		$	.34		$	.66		$	1.96		$	1.15


⁽¹⁾ “Core Earnings” diluted earnings per common share	$	.72		$	.65		$	.62		$	1.37		$	1.18


⁽²⁾		Such tax effect is based upon the Company’s “Core Earnings” effective tax rate for the year. The net tax effect results primarily from the exclusion of the permanent income tax impact of the equity forward contracts.

Limitations of “Core Earnings”

Other limitations arise from the specific adjustments that management makes to GAAP results to derive “Core Earnings” results. For example, in reversing the unrealized gains and losses that result from SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” on derivatives that do not qualify for “hedge treatment,” as well as on derivatives that do qualify but are in part ineffective because they are not perfect hedges, we focus on the long-term economic effectiveness of those instruments relative to the underlying hedged item and isolate the effects of interest rate volatility, changing credit spreads and changes in our stock price on the fair value of such instruments during the period. Under GAAP, the effects of these factors on the fair value of the derivative instruments (but not on the underlying hedged item) tend to show more volatility in the short term. While our presentation of our results on a “Core Earnings” basis provides important information regarding the performance of our Managed portfolio, a limitation of this presentation is that we are presenting the ongoing spread income on loans that have been sold to a trust managed by us. While we believe that our “Core Earnings” presentation presents the economic substance of our Managed loan portfolio, it understates earnings volatility from securitization gains. Our “Core Earnings” results exclude certain Floor Income, which is real cash income, from our reported results and therefore may understate earnings in certain periods. Management’s financial planning and valuation of operating results, however, does

not take into account Floor Income because of its inherent uncertainty, except when it is economically hedged through Floor Income Contracts.

Pre-tax Differences between “Core Earnings” and GAAP

Our “Core Earnings” are the primary financial performance measures used by management to evaluate performance and to allocate resources. Accordingly, financial information is reported to management on a “Core Earnings” basis by reportable segment, as these are the measures used regularly by our chief operating decision maker. Our “Core Earnings” are used in developing our financial plans and tracking results, and also in establishing corporate performance targets and determining incentive compensation. Management believes this information provides additional insight into the financial performance of the Company’s core business activities. “Core Earnings” net income reflects only current period adjustments to GAAP net income, as described in the more detailed discussion of the differences between “Core Earnings” and GAAP that follows, which includes further detail on each specific adjustments required to reconcile our “Core Earnings” segment presentation to our GAAP earnings.

1) Securitization: Under GAAP, certain securitization transactions in our Lending operating segment are accounted for as sales of assets. Under “Core Earnings” for the Lending operating segment, we present all securitization transactions on a “Core Earnings” basis as long-term non-recourse financings. The upfront “gains” on sale from securitization transactions as well as ongoing “servicing and securitization revenue” presented in accordance with GAAP are excluded from “Core Earnings” and are replaced by the interest income, provisions for loan losses, and interest expense as they are earned or incurred on the securitization loans. We also exclude transactions with our off-balance sheet trusts from “Core Earnings” as they are considered intercompany transactions on a “Core Earnings” basis.

The following table summarizes the securitization adjustments in our Lending business segment for the quarters ended June 30, 2006, March 31, 2006, and June 30, 2005 and for the six months ended June 30, 2006 and 2005.


	Quarters ended									Six months ended
	June 30,			March 31,			June 30,			June 30,			June 30,
	2006			2006			2005			2006			2005

“Core Earnings” securitization adjustments:
Net interest income on securitized loans, after provisions for losses	$	(242	)	$	(189	)	$	(295	)	$	(430	)	$	(515	)
Gains on student loan securitizations		671			30			262			701			312
Servicing and securitization revenue		83			99			150			182			293
Intercompany transactions with off-balance sheet trusts		(10	)		(2	)		(10	)		(13	)		(15	)

Total “Core Earnings” securitization adjustments	$	502		$	(62	)	$	107		$	440		$	75

2) Derivative Accounting: “Core Earnings” exclude periodic unrealized gains and losses arising primarily in our Lending operating segment, and to a lesser degree in our Corporate and Other reportable segment, that are caused primarily by the one-sided mark-to-market derivative valuations prescribed by SFAS No. 133 on derivatives that do not qualify for “hedge treatment” under GAAP. Under “Core Earnings,” we recognize the economic effect of these hedges, which generally results in any cash paid or received being recognized ratably as an expense or revenue over the hedged item’s life. “Core Earnings” also exclude the gain or loss on equity forward contracts that under SFAS No. 133, are required to be accounted for as derivatives and are marked-to-market through earnings.

SFAS No. 133 requires that changes in the fair value of derivative instruments be recognized currently in earnings unless specific hedge accounting criteria, as specified by SFAS No. 133, are met. We believe that our derivatives are effective economic hedges, and as such, are a critical element of our interest rate risk management strategy. However, some of our derivatives, primarily Floor Income Contracts, certain Eurodollar futures contracts and certain basis swaps and equity forward contracts (discussed in detail below), do not

qualify for “hedge treatment” as defined by SFAS No. 133, and the stand-alone derivative must be marked-to-market in the income statement with no consideration for the corresponding change in fair value of the hedged item. The gains and losses described in “Gains (losses) on derivative and hedging activities, net” are primarily caused by interest rate volatility, changing credit spreads and changes in our stock price during the period as well as the volume and term of derivatives not receiving hedge treatment.

Our Floor Income Contracts are written options that must meet more stringent requirements than other hedging relationships to achieve hedge effectiveness under SFAS No. 133. Specifically, our Floor Income Contracts do not qualify for hedge accounting treatment because the paydown of principal of the student loans underlying the Floor Income embedded in those student loans does not exactly match the change in the notional amount of our written Floor Income Contracts. Under SFAS No. 133, the upfront payment is deemed a liability and changes in fair value are recorded through income throughout the life of the contract. The change in the value of Floor Income Contracts is primarily caused by changing interest rates that cause the amount of Floor Income earned on the underlying student loans and paid to the counterparties to vary. This is economically offset by the change in value of the student loan portfolio, including our Retained Interests, earning Floor Income but that offsetting change in value is not recognized under SFAS No. 133. We believe the Floor Income Contracts are economic hedges because they effectively fix the amount of Floor Income earned over the contract period, thus eliminating the timing and uncertainty that changes in interest rates can have on Floor Income for that period. Prior to SFAS No. 133, we accounted for Floor Income Contracts as hedges and amortized the upfront cash compensation ratably over the lives of the contracts.

Basis swaps are used to convert floating rate debt from one floating interest rate index to another to better match the interest rate characteristics of the assets financed by that debt. We primarily use basis swaps to change the index of our floating rate debt to better match the cash flows of our student loan assets that are primarily indexed to a commercial paper, Prime or Treasury bill index. SFAS No. 133 requires that when using basis swaps, the change in the cash flows of the hedge effectively offset both the change in the cash flows of the asset and the change in the cash flows of the liability. Our basis swaps hedge variable interest rate risk, however they do not meet this effectiveness test because our FFELP student loans can earn at either a variable or a fixed interest rate depending on market interest rates. We also have basis swaps that do not meet the SFAS No. 133 effectiveness test that economically hedge off-balance sheet instruments. As a result, under GAAP these swaps are recorded at fair value with changes in fair value reflected in the income statement.

Generally, a decrease in current interest rates and the respective forward interest rate curves results in an unrealized loss related to our written Floor Income Contracts which is offset by an increase in the value of the economically hedged student loans. This increase is not recognized in income. We will experience unrealized gains/losses related to our basis swaps if the two underlying indices (and related forward curve) do not move in parallel.

Under SFAS No. 150, equity forward contracts that allow a net settlement option either in cash or the Company’s stock are required to be accounted for as derivatives in accordance with SFAS No. 133. As a result, we account for our equity forward contracts as derivatives in accordance with SFAS No. 133 and mark them to market through earnings. They do not qualify as effective SFAS No. 133 hedges, as a requirement to achieve hedge accounting is the hedged item must impact net income and the settlement of these contracts through the purchase of our own stock does not impact net income.

The table below quantifies the adjustments for derivative accounting under SFAS No. 133 on our net income for the quarters ended June 30, 2006, March 31, 2006 and June 30, 2005, and for the six months ended June 30, 2006 and 2005, when compared with the accounting principles employed in all years prior to the SFAS No. 133 implementation.


	Quarters ended								Six months ended
	June 30,		March 31,			June 30,			June 30,		June 30,
	2006		2006			2005			2006		2005

“Core Earnings” derivative adjustments:
Gains (losses) on derivative and hedging activities, net, included in other income⁽¹⁾	$	123	$	(87	)	$	(106	)	$	36	$	(140	)
Less: Realized losses on derivative and hedging activities, net⁽¹⁾		41		48			94			89		216

Unrealized gains (losses) on derivative and hedging activities, net		164		(39	)		(12	)		125		76
Other pre-SFAS No. 133 accounting adjustments		1		—			1			1		3

Total net impact of SFAS No. 133 derivative accounting	$	165	$	(39	)	$	(11	)	$	126	$	79


⁽¹⁾		See “Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities” below for a detailed breakdown of the components of realized losses on derivative and hedging activities.

Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities

SFAS No. 133 requires net settlement income/expense on derivatives and realized gains/losses related to derivative dispositions (collectively referred to as “realized gains (losses) on derivative and hedging activities”) that do not qualify as hedges under SFAS No. 133 to be recorded in a separate income statement line item below net interest income. The table below summarizes the realized losses on derivative and hedging activities, and the associated reclassification on a “Core Earnings” basis for the quarters ended June 30, 2006, March 31, 2006, and June 30, 2005 and for the six months ended June 30, 2006 and 2005.


	Quarters ended									Six months ended
	June 30,			March 31,			June 30,			June 30,			June 30,
	2006			2006			2005			2006			2005

Reclassification of realized gains (losses) on derivative and hedging activities:
Net settlement expense on Floor Income Contracts reclassified to net interest income	$	(12	)	$	(21	)	$	(77	)	$	(33	)	$	(165	)
Net settlement expense on interest rate swaps reclassified to net interest income		(29	)		(27	)		(17	)		(56	)		(46	)
Net realized losses on closed Eurodollar futures contracts and terminated derivative contracts reclassified to other income		—			—			—			—			(5	)

Total reclassifications of realized losses on derivative and hedging activities		(41	)		(48	)		(94	)		(89	)		(216	)
Add: Unrealized gains (losses) on derivative and hedging activities, net⁽¹⁾		164			(39	)		(12	)		125			76

Gains (losses) on derivative and hedging activities, net	$	123		$	(87	)	$	(106	)	$	36		$	(140	)


⁽¹⁾		“Unrealized gains (losses) on derivative and hedging activities, net” is comprised of the following unrealized mark-to-market gains (losses):


	Quarters ended								Six months ended
	June 30,		March 31,			June 30,			June 30,			June 30,
	2006		2006			2005			2006			2005

Floor Income Contracts	$	88	$	144		$	(146	)	$	232		$	122
Equity forward contracts		39		(122	)		10			(83	)		(98	)
Basis swaps		14		(82	)		127			(68	)		67
Other		23		21			(3	)		44			(15	)

Total unrealized gains (losses) on derivative and hedging activities, net	$	164	$	(39	)	$	(12	)	$	125		$	76

3) Floor Income: The timing and amount (if any) of Floor Income earned in our Lending operating segment is uncertain and in excess of expected spreads. Therefore, we exclude such income from “Core Earnings” when it is not economically hedged. We employ derivatives, primarily Floor Income Contracts and futures, to economically hedge Floor Income. As discussed above in “Derivative Accounting,” these derivatives do not qualify as effective accounting hedges, and therefore, under GAAP, they are marked-to-market through the “gains (losses) on derivative and hedging activities, net” line on the income statement with no offsetting gain or loss recorded for the economically hedged items. For “Core Earnings,” we reverse the fair value adjustments on the Floor Income Contracts and futures economically hedging Floor Income and include the amortization of net premiums received (net of Eurodollar futures contracts’ realized gains or losses) in income.

The following table summarizes the Floor Income adjustments in our Lending business segment for the quarters ended June 30, 2006, March 31, 2006, and June 30, 2005 and for the six months ended June 30, 2006 and 2005.


	Quarters ended									Six months ended
	June 30,			March 31,			June 30,			June 30,			June 30,
	2006			2006			2005			2006			2005

“Core Earnings” Floor Income adjustments:
Floor Income earned on Managed loans, net of payments on Floor Income Contracts	$	—		$	—		$	6		$	—		$	17
Amortization of net premiums on Floor Income Contracts and futures in net interest income		(52	)		(52	)		(57	)		(105	)		(111	)

Total “Core Earnings” Floor Income adjustments	$	(52	)	$	(52	)	$	(51	)	$	(105	)	$	(94	)

4) Other items: We exclude certain amortization of acquired intangibles. For the three months ended June 30, 2006, March 31, 2006, and June 30, 2005, and for the six months ended June 30, 2006 and 2005, amortization of acquired intangibles totaled $18 million, $14 million, $16 million, $32 million and $29 million, respectively.

LENDING BUSINESS SEGMENT

In our Lending business segment, we originate and acquire federally guaranteed student loans, which are administered by the U.S. Department of Education (“ED”), and Private Education Loans, which are not federally guaranteed. The majority of our Private Education Loans is made in conjunction with a FFELP Stafford loan and as a result is marketed through the same marketing channels as FFELP Stafford loans. While FFELP student loans and Private Education Loans have different overall risk profiles due to the federal guarantee of the FFELP student loans, they share many of the same characteristics such as similar repayment terms, the same marketing channel and sales force, and are originated and serviced on the same servicing platform. Finally, where possible, the borrower receives a single bill for both the federally guaranteed and privately underwritten loans.

The following table includes “Core Earnings” results for our Lending business segment.


	Quarters ended						Six months ended
	June 30,		Mar. 31,		June 30,		June 30,		June 30,
	2006		2006		2005		2006		2005

“Core Earnings” interest income:
FFELP Stafford and Other Student Loans	$	719	$	650	$	582	$	1,369	$	1,092
Consolidation Loans		1,114		1,028		667		2,142		1,248
Private Education Loans		485		429		247		914		474
Other loans		24		23		20		47		40
Cash and investments		170		131		77		300		156

Total “Core Earnings” interest income		2,512		2,261		1,593		4,772		3,010
Total “Core Earnings” interest expense		1,904		1,660		1,073		3,562		1,991

Net “Core Earnings” interest income		608		601		520		1,210		1,019
Less: provisions for losses		60		75		14		135		69

Net “Core Earnings” interest income after provisions for losses		548		526		506		1,075		950
Other income		51		40		36		92		72
Operating expenses		163		161		141		324		275

Income before income taxes and minority interest in net earnings of subsidiaries		436		405		401		843		747
Income taxes		161		150		148		312		277

Income before minority interest in net earnings of subsidiaries		275		255		253		531		470
Minority interest in net earnings of subsidiaries		—		—		1		—		2

“Core Earnings” net income	$	275	$	255	$	252	$	531	$	468

Summary of our Managed Student Loan Portfolio

The following tables summarize the components of our Managed student loan portfolio and show the changing composition of our portfolio.

Ending Balances (net of allowance for loan losses):


	June 30, 2006
	FFELP									Private
	Stafford and			Consolidation						Education
	Other⁽¹⁾			Loans			Total FFELP			Loans			Total

On-balance sheet:
In-school	$	7,469		$	—		$	7,469		$	2,487		$	9,956
Grace and repayment		13,512			53,264			66,776			4,894			71,670

Total on-balance sheet, gross		20,981			53,264			74,245			7,381			81,626
On-balance sheet unamortized premium/(discount)		417			801			1,218			(296	)		922
On-balance sheet allowance for losses		(7	)		(10	)		(17	)		(252	)		(269	)

Total on-balance sheet, net		21,391			54,055			75,446			6,833			82,279

Off-balance sheet:
In-school		2,812			—			2,812			3,954			6,766
Grace and repayment		17,412			14,746			32,158			8,602			40,760

Total off-balance sheet, gross		20,224			14,746			34,970			12,556			47,526
Off-balance sheet unamortized premium/(discount)		323			397			720			(274	)		446
Off-balance sheet allowance for losses		(12	)		(3	)		(15	)		(92	)		(107	)

Total off-balance sheet, net		20,535			15,140			35,675			12,190			47,865

Total Managed	$	41,926		$	69,195		$	111,121		$	19,023		$	130,144

% of on-balance sheet FFELP		28	%		72	%		100	%
% of Managed FFELP		38	%		62	%		100	%
% of total		32	%		53	%		85	%		15	%		100	%


	March 31, 2006
	FFELP									Private
	Stafford and			Consolidation						Education
	Other⁽¹⁾			Loans			Total FFELP			Loans			Total

On-balance sheet:
In-school	$	7,518		$	—		$	7,518		$	4,713		$	12,231
Grace and repayment		11,015			52,654			63,669			5,170			68,839

Total on-balance sheet, gross		18,533			52,654			71,187			9,883			81,070
On-balance sheet unamortized premium/(discount)		356			807			1,163			(340	)		823
On-balance sheet allowance for losses		(6	)		(10	)		(16	)		(232	)		(248	)

Total on-balance sheet, net		18,883			53,451			72,334			9,311			81,645

Off-balance sheet:
In-school		4,631			—			4,631			2,342			6,973
Grace and repayment		18,473			12,857			31,330			6,494			37,824

Total off-balance sheet, gross		23,104			12,857			35,961			8,836			44,797
Off-balance sheet unamortized premium/(discount)		364			357			721			(188	)		533
Off-balance sheet allowance for losses		(11	)		(3	)		(14	)		(91	)		(105	)

Total off-balance sheet, net		23,457			13,211			36,668			8,557			45,225

Total Managed	$	42,340		$	66,662		$	109,002		$	17,868		$	126,870

% of on-balance sheet FFELP		26	%		74	%		100	%
% of Managed FFELP		39	%		61	%		100	%
% of total		33	%		53	%		86	%		14	%		100	%


⁽¹⁾		FFELP category is primarily Stafford loans and also includes PLUS and HEAL loans.

Ending Balances (net of allowance for loan losses):


	June 30, 2005
	FFELP									Private
	Stafford and			Consolidation						Education
	Other⁽¹⁾			Loans			Total FFELP			Loans			Total

On-balance sheet:
In-school	$	6,822		$	—		$	6,822		$	2,449		$	9,271
Grace and repayment		14,868			43,962			58,830			4,126			62,956

Total on-balance sheet, gross		21,690			43,962			65,652			6,575			72,227
On-balance sheet unamortized premium/(discount)		403			684			1,087			(250	)		837
On-balance sheet allowance for losses		—			(5	)		(5	)		(228	)		(233	)

Total on-balance sheet, net		22,093			44,641			66,734			6,097			72,831

Off-balance sheet:
In-school		3,467			—			3,467			1,987			5,454
Grace and repayment		21,212			10,990			32,202			5,647			37,849

Total off-balance sheet, gross		24,679			10,990			35,669			7,634			43,303
Off-balance sheet unamortized premium/(discount)		354			244			598			(141	)		457
Off-balance sheet allowance for losses		—			—			—			(91	)		(91	)

Total off-balance sheet, net		25,033			11,234			36,267			7,402			43,669

Total Managed	$	47,126		$	55,875		$	103,001		$	13,499		$	116,500

% of on-balance sheet FFELP		33	%		67	%		100	%
% of Managed FFELP		46	%		54	%		100	%
% of total		40	%		48	%		88	%		12	%		100	%


⁽¹⁾		FFELP category is primarily Stafford loans and also includes PLUS and HEAL loans.

Average Balances:


	Quarter ended June 30, 2006
										Private
	FFELP Stafford			Consolidation						Education
	and Other⁽¹⁾			Loans			Total FFELP			Loans			Total

On-balance sheet	$	20,562		$	52,201		$	72,763		$	7,961		$	80,724
Off-balance sheet		22,065			14,881			36,946			10,770			47,716

Total Managed	$	42,627		$	67,082		$	109,709		$	18,731		$	128,440

% of on-balance sheet FFELP		28	%		72	%		100	%
% of Managed FFELP		39	%		61	%		100	%
% of Total		33	%		52	%		85	%		15	%		100	%


	Quarter ended March 31, 2006
										Private
	FFELP Stafford			Consolidation						Education
	and Other⁽¹⁾			Loans			Total FFELP			Loans			Total

On-balance sheet	$	19,522		$	54,312		$	73,834		$	9,016		$	82,850
Off-balance sheet		21,784			11,636			33,420			8,649			42,069

Total Managed	$	41,306		$	65,948		$	107,254		$	17,665		$	124,919

% of on-balance sheet FFELP		26	%		74	%		100	%
% of Managed FFELP		39	%		61	%		100	%
% of Total		33	%		53	%		86	%		14	%		100	%


⁽¹⁾		FFELP category is primarily Stafford loans and also includes PLUS and HEAL loans.

Average Balances:


	Quarter ended June 30, 2005
										Private
	FFELP Stafford			Consolidation						Education
	and Other⁽¹⁾			Loans			Total FFELP			Loans			Total

On-balance sheet	$	20,673		$	43,531		$	64,204		$	6,376		$	70,580
Off-balance sheet		26,912			9,819			36,731			7,060			43,791

Total Managed	$	47,585		$	53,350		$	100,935		$	13,436		$	114,371

% of on-balance sheet FFELP		32	%		68	%		100	%
% of Managed FFELP		47	%		53	%		100	%
% of Total		41	%		47	%		88	%		12	%		100	%


	Six months ended June 30, 2006
										Private
	FFELP Stafford			Consolidation						Education
	and Other⁽¹⁾			Loans			Total FFELP			Loans			Total

On-balance sheet	$	20,045		$	53,251		$	73,296		$	8,485		$	81,781
Off-balance sheet		21,926			13,267			35,193			9,716			44,909

Total Managed	$	41,971		$	66,518		$	108,489		$	18,201		$	126,690

% of on-balance sheet FFELP		27	%		73	%		100	%
% of Managed FFELP		39	%		61	%		100	%
% of Total		33	%		53	%		86	%		14	%		100	%


	Six months ended June 30, 2005
										Private
	FFELP Stafford			Consolidation						Education
	and Other⁽¹⁾			Loans			Total FFELP			Loans			Total

On-balance sheet	$	19,603		$	43,205		$	62,808		$	6,321		$	69,129
Off-balance sheet		27,578			8,661			36,239			6,607			42,846

Total Managed	$	47,181		$	51,866		$	99,047		$	12,928		$	111,975

% of on-balance sheet FFELP		31	%		69	%		100	%
% of Managed FFELP		48	%		52	%		100	%
% of Total		42	%		46	%		88	%		12	%		100	%


⁽¹⁾		FFELP category is primarily Stafford loans and also includes PLUS and HEAL loans.

Student Loan Spread Analysis — “Core Earnings” Basis

The following table analyzes the earnings from our portfolio of Managed student loans on a “Core Earnings” basis (see “BUSINESS SEGMENTS — Pre-tax Differences between ‘Core Earnings’ and GAAP”). The “Core Earnings” Basis Student Loan Spread Analysis presentation and certain components used in the calculation differ from the On-Balance Sheet Student Loan Spread Analysis presentation. The “Core Earnings” basis presentation, when compared to our on-balance sheet presentation, is different in that it:


	•	includes the net interest margin related to our off-balance sheet student loan securitization trusts. This includes any related fees or costs such as the Consolidation Loan Rebate Fees, premium/discount amortization and Borrower Benefits yield adjustments;

	•	includes the reclassification of certain derivative net settlement amounts. The net settlements on certain derivatives that do not qualify as SFAS No. 133 hedges and are recorded as part of the unrealized gain on derivative and hedging activities for GAAP purposes are reclassified to the line item on the income statement that such derivative is economically hedging for the “Core Earnings” basis presentation. For our “Core Earnings” basis student loan spread, this would primarily include: (a) reclassifying the net settlement amounts related to our written Floor Income Contracts to student loan interest income and


		(b) reclassifying the net settlement amounts related to certain of our basis swaps to debt interest expense;


	•	excludes unhedged Floor Income earned on the Managed student loan portfolio; and

	•	includes the amortization of upfront payments on Floor Income Contracts in student loan income that we believe are economically hedging the Floor Income.

As discussed above, these differences result in the “Core Earnings” basis student loan spread not being a GAAP-basis presentation. Management relies on this measure to manage our Lending business segment. Specifically, management uses the “Core Earnings” basis student loan spread to evaluate the overall economic effect that certain factors have on all student loans either on- or off-balance sheet. These factors include the overall mix of student loans in our portfolio, acquisition costs, Borrower Benefits program costs, Floor Income and funding and hedging costs. Management believes that it is important to evaluate all of these factors on a Managed Basis to gain additional information about the economic effect of these factors on all student loans under management. Management believes that this additional information assists us in making strategic decisions about the Company’s business model for the Lending business segment, including among other factors, how we acquire or originate student loans, how we fund acquisitions and originations, what Borrower Benefits we offer and what type of loans we purchase or originate. While management believes that the “Core Earnings” basis student loan spread is an important tool for evaluating the Company’s performance for the reasons described above, it is subject to certain general and specific limitations that investors should carefully consider. See “BUSINESS SEGMENTS — Limitations of ‘Core Earnings.’ ” One specific limitation is that the “Core Earnings” basis student loan spread includes the spread on loans that we have sold to securitization trusts.


	Quarters ended									Six months ended
	June 30,			March 31,			June 30,			June 30,			June 30,
	2006			2006			2005			2006			2005

“Core Earnings” basis student loan yield		8.04	%		7.60	%		5.92	%		7.82	%		5.79	%
Consolidation Loan Rebate Fees		(.54	)		(.55	)		(.48	)		(.54	)		(.48	)
Borrower Benefits		(.07	)		(.07	)		(.04	)		(.07	)		(.07	)
Premium and discount amortization		(.19	)		(.14	)		(.16	)		(.17	)		(.17	)

“Core Earnings” basis student loan net yield		7.24			6.84			5.24			7.04			5.07
“Core Earnings” basis student loan cost of funds		(5.38	)		(4.97	)		(3.50	)		(5.18	)		(3.30	)

“Core Earnings” basis student loan spread		1.86	%		1.87	%		1.74	%		1.86	%		1.77	%

Average Balances
On-balance sheet student loans	$	80,724		$	82,850		$	70,580		$	81,781		$	69,129
Off-balance sheet student loans		47,716			42,069			43,791			44,909			42,846

Managed student loans	$	128,440		$	124,919		$	114,371		$	126,690		$	111,975

Discussion of “Core Earnings” Basis Student Loan Spread — Effects of Significant Events in the Quarters Presented

The second quarter 2006 spread includes $18 million or 6 basis points of income associated with non-recurring SAP that we accrued on PLUS loans in connection with the Higher Education Reconciliation Act of 2005.

In the second quarters of 2006 and 2005, the increase in premium amortization is largely due to the write-off of unamortized premiums on loans consolidated with third parties. In addition, in the second quarter of 2006, we increased the CPR for our FFELP Stafford Loan portfolio in response to the increased rate of loan prepayments occurring through consolidation.

In the first quarter of 2006, we updated our assumptions for the qualification for Borrower Benefits to reflect trends in borrower behavior versus qualification requirements. These updates resulted in a reduction of

our liability for Borrower Benefits of $15 million or 5 basis points. In addition, in the second quarter of 2005, we revised our estimates regarding the qualification for Borrower Benefits which resulted in a reduction of the liability for Borrower Benefits of $13 million or 5 basis points.

In the second quarter of 2005, we reduced student loan interest income by $16 million or 6 basis points to reflect a revision of our estimates pertaining to our non-accrual policy for interest income.

In both the second quarter of 2006 and 2005, there was an increase in Consolidation Loan activity as FFELP Stafford borrowers locked in lower interest rates by consolidating their loans prior to the July 1 interest rate reset for FFELP Stafford loans. In addition, reconsolidation of Consolidation Loans through the Direct Loan Program continued in the second quarter of 2006 from the backlog of processing applications after the March 31, 2006 prohibition (see “LENDING BUSINESS SEGMENT — Student Loan Activity” for further discussion). The increase in consolidations resulted in an increase in student loan premium write-offs for both FFELP Stafford and Consolidation Loans consolidated with third parties in the second quarter. Loans lost through consolidation benefit the student spread to a lesser extent through the write-off of the Borrower Benefits liability associated with these loans. Furthermore, in both the second quarter of 2006 and 2005, we accrued a net write-off to our Borrower Benefits liability for loans whose consolidation applications had been received but not yet processed by June 30, 2006, resulting in reductions to Borrower Benefits expense.

Discussion of “Core Earnings” Basis Student Loan Spread — Other Quarter-over-Quarter Fluctuations

The average balance of Managed Private Education Loans now represents 15 percent of the average Managed student loan portfolio, up from 14 percent and 12 percent in the first quarter of 2006 and the second quarter of 2005, respectively. Private Education Loans are subject to credit risk and therefore earn higher spreads, which averaged 5.07 percent, 4.87 percent and 4.57 percent for the quarters ended June 30, 2006, March 31, 2006 and June 30, 2005, respectively, for the Managed Private Education Loan portfolio, excluding the effect of non-recurring items. The spread for the Managed guaranteed student loan portfolio was 1.24 percent, 1.31 percent and 1.38 percent for the quarters ended June 30, 2006, March 31, 2005 and June 30, 2005, respectively, excluding the effect of non-recurring items.

Private Education Loans

All Private Education Loans are initially acquired on-balance sheet. When we securitize Private Education Loans, we no longer own the loans and they are accounted for off-balance sheet. For our Managed presentation in the table below, we reduce the on-balance sheet allowance for amounts previously provided and then provide for these loans in the off-balance sheet section with the total of both on and off-balance sheet residing in the Managed presentation.

When Private Education Loans in the majority of our securitized trusts become 180 days delinquent, we typically exercise our contingent call option to repurchase these loans at par value out of the trust and record a loss for the difference in the par value paid and the fair market value of the loan at the time of purchase. If these loans reach the 212-day delinquency, a charge-off for the remaining balance of the loan is triggered. On a Managed Basis, the losses recorded under GAAP for loans repurchased at day 180 are reversed and the full amount is charged-off at day 212.

The off-balance sheet allowance is increasing as more loans are securitized but is lower than the on-balance sheet percentage when measured as a percentage of ending loans in repayment because of the different mix of loans on-balance sheet and off-balance sheet, as described above. Additionally, a larger percentage of the off-balance sheet loan borrowers are still in-school status and not required to make payments on their loans. Once repayment begins, the allowance requirements increase to reflect the increased risk of loss as loans enter repayment.

Allowance for Private Education Loan Losses

The following tables summarize changes in the allowance for Private Education Loan losses for the quarters ended June 30, 2006, March 31, 2006, and June 30, 2005 and for the six months ended June 30, 2006 and 2005.


	Activity in Allowance for Private Education Loans
	On-Balance Sheet									Off-Balance Sheet									Managed Basis
	Quarters ended									Quarters ended									Quarters ended
	June 30,			Mar. 31,			June 30,			June 30,			Mar. 31,			June 30,			June 30,			Mar. 31,			June 30,
	2006			2006			2005			2006			2006			2005			2006			2006			2005

Allowance at beginning of period	$	232		$	204		$	191		$	91		$	78		$	150		$	323		$	282		$	341
Provision for Private Education Loan losses		62			54			36			(7	)		14			(4	)		55			68			32
Change in estimate		—			—			40			—			—			(60	)		—			—			(20	)

Total provision		62			54			76			(7	)		14			(64	)		55			68			12
Charge-offs		(36	)		(32	)		(38	)		(4	)		(1	)		(1	)		(40	)		(33	)		(39	)
Recoveries		6			6			5			—			—			—			6			6			5

Net charge-offs		(30	)		(26	)		(33	)		(4	)		(1	)		(1	)		(34	)		(27	)		(34	)

Balance before securitization of Private Education Loans		264			232			234			80			91			85			344			323			319
Reduction for securitization of Private Education Loans		(12	)		—			(6	)		12			—			6			—			—			—

Allowance at end of period	$	252		$	232		$	228		$	92		$	91		$	91		$	344		$	323		$	319

Net charge-offs as a percentage of average loans in repayment (annualized)		3.13	%		2.83	%		4.33	%		.32	%		.01	%		.13	%		1.52	%		1.27	%		2.04	%
Allowance as a percentage of the ending total loan balance		3.55	%		2.43	%		3.61	%		.75	%		1.06	%		1.21	%		1.78	%		1.78	%		2.31	%
Allowance as a percentage of ending loans in repayment		6.66	%		5.96	%		7.41	%		1.61	%		1.99	%		2.32	%		3.62	%		3.81	%		4.56	%
Average coverage of net charge-offs (annualized)		2.09			2.17			1.73			5.63			326.22			19.64			2.52			3.02			2.34
Average total loans	$	7,961		$	9,016		$	6,376		$	10,770		$	8,649		$	7,060		$	18,731		$	17,665		$	13,436
Ending total loans	$	7,085		$	9,543		$	6,325		$	12,282		$	8,648		$	7,493		$	19,367		$	18,191		$	13,818
Average loans in repayment	$	3,838		$	3,780		$	3,042		$	5,163		$	4,624		$	3,655		$	9,001		$	8,404		$	6,697
Ending loans in repayment	$	3,777		$	3,898		$	3,078		$	5,731		$	4,596		$	3,926		$	9,508		$	8,494		$	7,004


	Activity in Allowance for Private Education Loans
	On-balance sheet						Off-balance sheet						Managed Basis
	Six months ended						Six months ended						Six months ended
	June 30,			June 30,			June 30,			June 30,			June 30,			June 30,
	2006			2005			2006			2005			2006			2005

Allowance at beginning of period	$	204		$	172		$	78		$	143		$	282		$	315
Provision for Private Education Loan losses		116			79			6			4			122			83
Change in estimate		—			40			—			(60	)		—			(20	)

Total provision		116			119			6			(56	)		122			63
Charge-offs		(69	)		(66	)		(4	)		(2	)		(73	)		(68	)
Recoveries		13			9			—			—			13			9

Net charge-offs		(56	)		(57	)		(4	)		(2	)		(60	)		(59	)

Balance before securitization of Private Education Loans		264			234			80			85			344			319
Reduction for securitization of Private Education Loans		(12	)		(6	)		12			6			—			—

Allowance at end of period	$	252		$	228		$	92		$	91		$	344		$	319

Net charge-offs as a percentage of average loans in repayment (annualized)		3.05	%		3.86	%		.16	%		.14	%		1.37	%		1.81	%
Allowance as a percentage of the ending total loan balance		3.55	%		3.61	%		.75	%		1.21	%		1.78	%		2.31	%
Allowance as a percentage of ending loans in repayment		6.66	%		7.41	%		1.61	%		2.32	%		3.62	%		4.56	%
Average coverage of net charge-offs (annualized)		2.22			2.00			11.01			18.32			2.82			2.68
Average total loans	$	8,485		$	6,321		$	9,716		$	6,607		$	18,201		$	12,928
Ending total loans	$	7,085		$	6,325		$	12,282		$	7,493		$	19,367		$	13,818
Average loans in repayment	$	3,720		$	2,960		$	5,191		$	3,639		$	8,911		$	6,599
Ending loans in repayment	$	3,777		$	3,078		$	5,731		$	3,926		$	9,508		$	7,004

The decrease in the provision in the second quarter of 2006 versus the first quarter of 2006 is primarily driven by the seasonality of loans entering repayment. The majority of loans typically enter repayment in the second and fourth quarters. This increase in loans entering repayment often leads to a near-term increase in early-stage delinquencies, or forbearance usage in the first and third quarters with some spillover effect in the fourth quarter for the affected borrowers. This in turn, leads to higher provisions for those quarters. Therefore, all other factors being equal, the provision for loan losses in the second quarter will be lower.

Delinquencies

The tables below present our Private Education Loan delinquency trends as of June 30, 2006, March 31, 2006, and June 30, 2005. Delinquencies have the potential to adversely impact earnings through increased servicing and collection costs in the event the delinquent accounts charge off.


	On-Balance Sheet Private Education
	Loan Delinquencies
	June 30,						March 31,						June 30,
	2006						2006						2005
	Balance			%			Balance			%			Balance			%

Loans in-school/grace/deferment⁽¹⁾	$	3,305					$	5,573					$	3,307
Loans in forbearance⁽²⁾		299						412						190
Loans in repayment and percentage of each status:
Loans current		3,353			88.8	%		3,487			89.4	%		2,756			89.5	%
Loans delinquent 31-60 days⁽³⁾		176			4.7			170			4.4			133			4.4
Loans delinquent 61-90 days⁽³⁾		100			2.6			106			2.7			69			2.2
Loans delinquent greater than 90 days⁽³⁾		148			3.9			135			3.5			120			3.9

Total Private Education Loans in repayment		3,777			100	%		3,898			100	%		3,078			100	%

Total Private Education Loans, gross		7,381						9,883						6,575
Private Education Loan unamortized discount		(296	)					(340	)					(250	)

Total Private Education Loans		7,085						9,543						6,325
Private Education Loan allowance for losses		(252	)					(232	)					(228	)

Private Education Loans, net	$	6,833					$	9,311					$	6,097

Percentage of Private Education Loans in repayment		51.2	%					39.4	%					46.8	%

Delinquencies as a percentage of Private Education Loans in repayment		11.2	%					10.6	%					10.5	%


	Off-Balance Sheet Private Education
	Loan Delinquencies
	June 30,						March 31,						June 30,
	2006						2006						2005
	Balance			%			Balance			%			Balance			%

Loans in-school/grace/deferment⁽¹⁾	$	6,074					$	3,456					$	3,308
Loans in forbearance⁽²⁾		751						784						400
Loans in repayment and percentage of each status:
Loans current		5,483			95.7	%		4,389			95.5	%		3,749			95.5	%
Loans delinquent 31-60 days⁽³⁾		151			2.6			106			2.3			96			2.4
Loans delinquent 61-90 days⁽³⁾		50			.9			46			1.0			35			1.0
Loans delinquent greater than 90 days⁽³⁾		47			.8			55			1.2			46			1.1

Total Private Education Loans in repayment		5,731			100	%		4,596			100	%		3,926			100	%

Total Private Education Loans, gross		12,556						8,836						7,634
Private Education Loan unamortized discount		(274	)					(188	)					(141	)

Total Private Education Loans		12,282						8,648						7,493
Private Education Loan allowance for losses		(92	)					(91	)					(91	)

Private Education Loans, net	$	12,190					$	8,557					$	7,402

Percentage of Private Education Loans in repayment		45.6	%					52.0	%					51.4	%

Delinquencies as a percentage of Private Education Loans in repayment		4.3	%					4.5	%					4.5	%


⁽¹⁾		Loans for borrowers who still may be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation.

⁽²⁾		Loans for borrowers who have requested extension of grace period or who have temporarily ceased making full payments due to hardship or other factors, consistent with the established loan program servicing policies and procedures.

⁽³⁾		The period of delinquency is based on the number of days scheduled payments are contractually past due.


	Managed Basis Private Education
	Loan Delinquencies
	June 30,						March 31,						June 30,
	2006						2006						2005
	Balance			%			Balance			%			Balance			%

Loans in-school/grace/deferment⁽¹⁾	$	9,379					$	9,029					$	6,615
Loans in forbearance⁽²⁾		1,050						1,196						590
Loans in repayment and percentage of each status:
Loans current		8,836			92.9	%		7,876			92.7	%		6,505			92.9	%
Loans delinquent 31-60 days⁽³⁾		327			3.4			276			3.3			229			3.2
Loans delinquent 61-90 days⁽³⁾		150			1.6			152			1.8			104			1.5
Loans delinquent greater than 90 days⁽³⁾		195			2.1			190			2.2			166			2.4

Total Private Education Loans in repayment		9,508			100	%		8,494			100	%		7,004			100	%

Total Private Education Loans, gross		19,937						18,719						14,209
Private Education Loan unamortized discount		(570	)					(528	)					(391	)

Total Private Education Loans		19,367						18,191						13,818
Private Education Loan allowance for losses		(344	)					(323	)					(319	)

Private Education Loans, net	$	19,023					$	17,868					$	13,499

Percentage of Private Education Loans in repayment		47.7	%					45.4	%					49.3	%

Delinquencies as a percentage of Private Education Loans in repayment		7.1	%					7.3	%					7.1	%


⁽¹⁾		Loans for borrowers who still may be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation.

⁽²⁾		Loans for borrowers who have requested extension of grace period or who have temporarily ceased making full payments due to hardship or other factors, consistent with the established loan program servicing policies and procedures.

⁽³⁾		The period of delinquency is based on the number of days scheduled payments are contractually past due.

Forbearance — Managed Basis Private Education Loans

Private Education Loans are made to parent and student borrowers by our lender partners in accordance with our underwriting policies. These loans generally supplement federally guaranteed student loans, which are subject to federal lending caps. Private Education Loans are not guaranteed or insured against any loss of principal or interest. Traditional student borrowers use the proceeds of these loans to obtain higher education, which increases the likelihood of obtaining employment at higher income levels than would be available without the additional education. As a result, the borrowers’ repayment capability improves between the time the loan is made and the time they enter the post-education work force. We generally allow the loan repayment period on traditional Private Education Loans, except those generated by our SLM Financial subsidiary, to begin six to nine months after the student leaves school. This provides the borrower time to obtain a job to service his or her debt. For borrowers that need more time or experience other hardships, we permit additional delays in payment or partial payments (both referred to as forbearances) when we believe additional time will improve the borrower’s ability to repay the loan. Forbearance is also granted to borrowers who may experience temporary hardship after entering repayment, when we believe that it will increase the likelihood of ultimate collection of the loan. Such forbearance is only granted within established guidelines and is closely monitored for compliance. Our policy does not grant any reduction in the repayment obligation (principal or interest) but does allow the borrower to stop or reduce monthly payments for an agreed period of time. When a loan that was delinquent prior to receiving forbearance ends forbearance and re-enters repayment, that loan is returned to current status.

Forbearance is used most heavily immediately after the loan enters repayment. As indicated in the tables below showing the composition and status of the Managed Private Education Loan portfolio by number of months aged from the first date of repayment, the percentage of loans in forbearance decreases the longer the loans have been in repayment. At June 30, 2006, loans in forbearance as a percentage of loans in repayment

and forbearance was 12.3 percent for loans that have been in repayment one to twenty-four months. The percentage declined to 4.4 percent for loans that have been in repayment more than 48 months. Approximately 74 percent of our Managed Private Education Loans in forbearance have been in repayment less than 24 months. These borrowers are essentially extending their grace period as they transition to the workforce. Forbearance continues to be a positive collection tool for the Private Education Loans as we believe it can provide the borrower with sufficient time to obtain employment and income to support his or her obligation. We consider the potential impact of forbearance in the determination of the loan loss reserves.

The tables below show the composition and status of the Private Education Loan portfolio by number of months aged from the first date of repayment:


	Months since entering repayment
										After
	1 to 24			25 to 48			More than			June 30,
June 30, 2006	months			months			48 months			2006⁽¹⁾			Total

Loans in-school/grace/deferment	$	—		$	—		$	—		$	9,379		$	9,379
Loans in forbearance		776			194			80			—			1,050
Loans in repayment — current		5,184			2,024			1,628			—			8,836
Loans in repayment — delinquent 31-60 days		180			87			60			—			327
Loans in repayment — delinquent 61-90 days		90			37			23			—			150
Loans in repayment — delinquent greater than 90 days		101			60			34			—			195

Total	$	6,331		$	2,402		$	1,825		$	9,379			19,937

Unamortized discount														(570	)
Allowance for loan losses														(344	)

Total Managed Private Education Loans, net													$	19,023

Loans in forbearance as a percentage of loans in repayment and forbearance		12.3	%		8.1	%		4.4	%		—	%		9.9	%


	Months since entering repayment
										After
	1 to 24			25 to 48			More than			March 31,
March 31, 2006	months			months			48 months			2006⁽¹⁾			Total

Loans in-school/grace/deferment	$	—		$	—		$	—		$	9,029		$	9,029
Loans in forbearance		940			180			76			—			1,196
Loans in repayment — current		4,535			1,845			1,496			—			7,876
Loans in repayment — delinquent 31-60 days		153			70			53			—			276
Loans in repayment — delinquent 61-90 days		94			35			23			—			152
Loans in repayment — delinquent greater than 90 days		109			51			30			—			190

Total	$	5,831		$	2,181		$	1,678		$	9,029			18,719

Unamortized discount														(528	)
Allowance for loan losses														(323	)

Total Managed Private Education Loans, net													$	17,868

Loans in forbearance as a percentage of loans in repayment and forbearance		16.1	%		8.3	%		4.5	%		—	%		12.3	%


⁽¹⁾		Includes all loans in-school/grace/deferment.


	Months since entering repayment
										After
	1 to 24			25 to 48			More than			June 30,
June 30, 2005	months			months			48 months			2005⁽¹⁾			Total

Loans in-school/grace/deferment	$	—		$	—		$	—		$	6,615		$	6,615
Loans in forbearance		437			106			47			—			590
Loans in repayment — current		3,728			1,515			1,262			—			6,505
Loans in repayment — delinquent 31-60 days		120			65			44			—			229
Loans in repayment — delinquent 61-90 days		57			30			17			—			104
Loans in repayment — delinquent greater than 90 days		80			55			31			—			166

Total	$	4,422		$	1,771		$	1,401		$	6,615			14,209

Unamortized discount														(391	)
Allowance for loan losses														(319	)

Total Managed Private Education Loans, net													$	13,499

Loans in forbearance as a percentage of loans in repayment and forbearance		9.9	%		6.0	%		3.4	%		—	%		7.8	%


⁽¹⁾		Includes all loans in-school/grace/deferment.

The decrease in forbearance as a percentage of loans in repayment and forbearance in the second quarter of 2006 is due to seasonality.

The table below stratifies the portfolio of Managed Private Education Loans in forbearance by the cumulative number of months the borrower has used forbearance as of the dates indicated. As detailed in the table below, 8 percent of loans currently in forbearance have deferred their loan repayment more than 24 months, which is 2 percent higher versus the prior quarter and equivalent to the year-ago period.


	June 30,					March 31,					June 30,
	2006					2006					2005
	Forbearance		% of			Forbearance		% of			Forbearance		% of
	Balance		Total			Balance		Total			Balance		Total

Cumulative number of months borrower has used forbearance
Up to 12 months	$	753		72	%	$	901		76	%	$	426		72	%
13 to 24 months		214		20			220		18			117		20
25 to 36 months		57		5			51		4			32		5
More than 36 months		26		3			24		2			15		3

Total	$	1,050		100	%	$	1,196		100	%	$	590		100	%

Total Loan Net Charge-offs

The following tables summarize the total loan net charge-offs on both an on-balance sheet basis and a Managed Basis for the quarters ended June 30, 2006, March 31, 2006 and June 30, 2005 and for the six months ended June 30, 2006 and 2005.

Total on-balance sheet loan net charge-offs


	Quarters ended						Six months ended
	June 30,		March 31,		June 30,		June 30,		June 30,
	2006		2006		2005		2006		2005

Private Education Loans	$	30	$	26	$	33	$	56	$	57
FFELP Stafford and Other Student Loans		1		1		1		2		2
Mortgage and consumer loans		1		1		1		2		2

Total on-balance sheet loan net charge-offs	$	32	$	28	$	35	$	60	$	61

Total Managed loan net charge-offs


	Quarters ended						Six months ended
	June 30,		March 31,		June 30,		June 30,		June 30,
	2006		2006		2005		2006		2005

Private Education Loans	$	34	$	27	$	34	$	60	$	59
FFELP Stafford and Other Student Loans		1		1		1		2		2
Mortgage and consumer loans		1		1		1		2		2

Total Managed loan net charge-offs	$	36	$	29	$	36	$	64	$	63

Student Loan Premiums as a Percentage of Principal

The following table presents student loan premiums paid as a percentage of the principal balance of student loans acquired for the respective periods.


	Quarters ended															Six months ended
	June 30, 2006					March 31, 2006					June 30, 2005					June 30, 2006					June 30, 2005
	Volume		Rate			Volume		Rate			Volume		Rate			Volume		Rate			Volume		Rate

Student loan premiums paid:
Sallie Mae brands	$	1,671		.77	%	$	3,304		.50	%	$	991		.26	%	$	4,975		.59	%	$	3,294		.28	%
Lender partners		4,225		1.64			3,592		2.00			4,701		1.61			7,817		1.80			8,043		1.70

Total Preferred Channel		5,896		1.39			6,896		1.28			5,692		1.38			12,792		1.33			11,337		1.29
Other purchases⁽¹⁾		493		4.23			175		1.97			641		3.66			668		3.64			1,146		3.47

Subtotal base purchases		6,389		1.61			7,071		1.30			6,333		1.61			13,460		1.45			12,483		1.49
Consolidations		853		3.37			897		1.98			926		2.79			1,750		2.66			1,839		2.38

Total	$	7,242		1.82	%	$	7,968		1.37	%	$	7,259		1.76	%	$	15,210		1.58	%	$	14,322		1.60	%


⁽¹⁾		Primarily includes spot purchases, other commitment clients, and subsidiary acquisitions.

The increase in premiums paid as a percentage of principal balance for Sallie Mae brands is primarily due to the increase in loans where we pay the origination fee on behalf of borrowers, a practice we call zero fee lending. The borrower origination fee will be gradually phased out by the Reconciliation Legislation from 2007 to 2010. We include in Consolidation Loan premiums the 50 basis point Consolidation Loan fee paid on each FFELP Stafford loan that we consolidate, including loans that are already in our portfolio. The Consolidation Loan premium paid percentage is calculated on only consolidation volume that is incremental to our portfolio. This percentage is largely driven by the mix of FFELP Stafford loans consolidated in this quarter.

Student Loan Activity

The following tables summarize the activity in our on-balance sheet, off-balance sheet and Managed portfolios of FFELP student loans and Private Education Loans and highlight the effects of Consolidation Loan activity on our FFELP portfolios.


	On-Balance Sheet
	Three months ended June 30, 2006
	FFELP									Total
	Stafford									Private			Total On-
	and			Consolidation			Total			Education			Balance Sheet
	Other⁽¹⁾			Loans			FFELP			Loans			Portfolio

Beginning balance	$	18,883		$	53,451		$	72,334		$	9,311		$	81,645
Acquisitions		4,821			426			5,247			1,547			6,794
Incremental Consolidations from third parties		—			845			845			8			853
Internal Consolidations		(1,588	)		3,474			1,886			20			1,906
Consolidations to third parties		(386	)		(835	)		(1,221	)		(4	)		(1,225	)
New securitizations		—			(2,532	)		(2,532	)		(3,729	)		(6,261	)
Repayments/claims/resales/other		(339	)		(774	)		(1,113	)		(320	)		(1,433	)

Ending balance	$	21,391		$	54,055		$	75,446		$	6,833		$	82,279


	Off-Balance Sheet
	Three months ended June 30, 2006
	FFELP									Total
	Stafford									Private			Total Off-
	and			Consolidation			Total			Education			Balance Sheet
	Other⁽¹⁾			Loans			FFELP			Loans			Portfolio

Beginning balance	$	23,457		$	13,211		$	36,668		$	8,557		$	45,225
Acquisitions		120			60			180			107			287
Incremental Consolidations from third parties		—			—			—			—			—
Internal Consolidations		(1,711	)		(175	)		(1,886	)		(20	)		(1,906	)
Consolidations to third parties		(436	)		(278	)		(714	)		(5	)		(719	)
New securitizations		—			2,532			2,532			3,729			6,261
Repayments/claims/resales/other		(895	)		(210	)		(1,105	)		(178	)		(1,283	)

Ending balance	$	20,535		$	15,140		$	35,675		$	12,190		$	47,865


	Managed Portfolio
	Three months ended June 30, 2006
	FFELP									Total
	Stafford									Private
	and			Consolidation			Total			Education			Total Managed
	Other⁽¹⁾			Loans			FFELP			Loans			Basis Portfolio

Beginning balance	$	42,340		$	66,662		$	109,002		$	17,868		$	126,870
Acquisitions		4,941			486			5,427			1,654			7,081
Incremental Consolidations from third parties		—			845			845			8			853
Internal Consolidations		(3,299	)		3,299			—			—			—
Consolidations to third parties		(822	)		(1,113	)		(1,935	)		(9	)		(1,944	)
New securitizations		—			—			—			—			—
Repayments/claims/resales/other		(1,234	)		(984	)		(2,218	)		(498	)		(2,716	)

Ending balance	$	41,926		$	69,195		$	111,121		$	19,023		$	130,144


⁽¹⁾		FFELP category is primarily Stafford loans and also includes PLUS and HEAL loans.


	On-Balance Sheet
	Three months ended March 31, 2006
	FFELP									Total
	Stafford									Private			Total On-
	and			Consolidation			Total			Education			Balance Sheet
	Other⁽¹⁾			Loans			FFELP			Loans			Portfolio

Beginning balance	$	19,988		$	54,859		$	74,847		$	7,757		$	82,604
Acquisitions		5,274			275			5,549			1,892			7,441
Incremental Consolidations from third parties		—			896			896			1			897
Internal Consolidations		(784	)		1,623			839			—			839
Consolidations to third parties		(307	)		(572	)		(879	)		(4	)		(883	)
New securitizations		(5,034	)		(3,039	)		(8,073	)		—			(8,073	)
Repayments/claims/resales/other		(254	)		(591	)		(845	)		(335	)		(1,180	)

Ending balance	$	18,883		$	53,451		$	72,334		$	9,311		$	81,645


	Off-Balance Sheet
	Three months ended March 31, 2006
	FFELP									Total
	Stafford									Private			Total Off-
	and			Consolidation			Total			Education			Balance Sheet
	Other⁽¹⁾			Loans			FFELP			Loans			Portfolio

Beginning balance	$	20,670		$	10,575		$	31,245		$	8,680		$	39,925
Acquisitions		88			58			146			67			213
Incremental Consolidations from third parties		—			—			—			—			—
Internal Consolidations		(741	)		(98	)		(839	)		—			(839	)
Consolidations to third parties		(428	)		(178	)		(606	)		(5	)		(611	)
New securitizations		5,034			3,039			8,073			—			8,073
Repayments/claims/resales/other		(1,166	)		(185	)		(1,351	)		(185	)		(1,536	)

Ending balance	$	23,457		$	13,211		$	36,668		$	8,557		$	45,225


	Managed Portfolio
	Three months ended March 31, 2006
	FFELP									Total
	Stafford									Private
	and			Consolidation			Total			Education			Total Managed
	Other⁽¹⁾			Loans			FFELP			Loans			Basis Portfolio

Beginning balance	$	40,658		$	65,434		$	106,092		$	16,437		$	122,529
Acquisitions		5,362			333			5,695			1,959			7,654
Incremental Consolidations from third parties		—			896			896			1			897
Internal Consolidations		(1,525	)		1,525			—			—			—
Consolidations to third parties		(735	)		(750	)		(1,485	)		(9	)		(1,494	)
New securitizations		—			—			—			—			—
Repayments/claims/resales/other		(1,420	)		(776	)		(2,196	)		(520	)		(2,716	)

Ending balance	$	42,340		$	66,662		$	109,002		$	17,868		$	126,870


⁽¹⁾		FFELP category is primarily Stafford loans and also includes PLUS and HEAL loans.


	On-Balance Sheet
	Three months ended June 30, 2005
	FFELP									Total
	Stafford									Private			Total On-
	and			Consolidation			Total			Education			Balance Sheet
	Other⁽¹⁾			Loans			FFELP			Loans			Portfolio

Beginning balance	$	18,933		$	44,446		$	63,379		$	6,527		$	69,906
Acquisitions		5,188			251			5,439			1,215			6,654
Incremental Consolidations from third parties		—			926			926			—			926
Internal Consolidations		(1,335	)		3,653			2,318			—			2,318
Consolidations to third parties		(182	)		(165	)		(347	)		(2	)		(349	)
New securitizations					(4,045	)		(4,045	)		(1,407	)		(5,452	)
Repayments/claims/resales/other		(511	)		(425	)		(936	)		(236	)		(1,172	)

Ending balance	$	22,093		$	44,641		$	66,734		$	6,097		$	72,831


	Off-Balance Sheet
	Three months ended June 30, 2005
	FFELP									Total
	Stafford									Private			Total Off-
	and			Consolidation			Total			Education			Balance Sheet
	Other⁽¹⁾			Loans			FFELP			Loans			Portfolio

Beginning balance	$	28,392		$	7,410		$	35,802		$	5,991		$	41,793
Acquisitions		97			49			146			60			206
Incremental Consolidations from third parties		—			—			—			—			—
Internal Consolidations		(2,318	)		—			(2,318	)		—			(2,318	)
Consolidations to third parties		(326	)		(64	)		(390	)		(4	)		(394	)
New securitizations					4,045			4,045			1,407			5,452
Repayments/claims/resales/other		(812	)		(206	)		(1,018	)		(52	)		(1,070	)

Ending balance	$	25,033		$	11,234		$	36,267		$	7,402		$	43,669


	Managed Portfolio
	Three months ended June 30, 2005
	FFELP									Total
	Stafford									Private
	and			Consolidation			Total			Education			Total Managed
	Other⁽¹⁾			Loans			FFELP			Loans			Basis Portfolio

Beginning balance	$	47,325		$	51,856		$	99,181		$	12,518		$	111,699
Acquisitions		5,285			300			5,585			1,275			6,860
Incremental Consolidations from third parties		—			926			926			—			926
Internal Consolidations		(3,653	)		3,653			—			—			—
Consolidations to third parties		(508	)		(229	)		(737	)		(6	)		(743	)
New securitizations		—			—			—			—			—
Repayments/claims/resales/other		(1,323	)		(631	)		(1,954	)		(288	)		(2,242	)

Ending balance	$	47,126		$	55,875		$	103,001		$	13,499		$	116,500


⁽¹⁾		FFELP category is primarily Stafford loans and also includes PLUS and HEAL loans.


	On-Balance Sheet
	Six months ended June 30, 2006
	FFELP									Total
	Stafford									Private			Total On-
	and			Consolidation			Total			Education			Balance Sheet
	Other⁽¹⁾			Loans			FFELP			Loans			Portfolio

Beginning balance	$	19,988		$	54,859		$	74,847		$	7,757		$	82,604
Acquisitions		10,095			701			10,796			3,439			14,235
Incremental Consolidations from third parties		—			1,741			1,741			9			1,750
Internal Consolidations		(2,372	)		5,097			2,725			20			2,745
Consolidations to third parties		(693	)		(1,407	)		(2,100	)		(8	)		(2,108	)
New securitizations		(5,034	)		(5,571	)		(10,605	)		(3,729	)		(14,334	)
Repayments/claims/resales/other		(593	)		(1,365	)		(1,958	)		(655	)		(2,613	)

Ending balance	$	21,391		$	54,055		$	75,446		$	6,833		$	82,279


	Off-Balance Sheet
	Six months ended June 30, 2006
	FFELP									Total
	Stafford									Private			Total Off-
	and			Consolidation			Total			Education			Balance Sheet
	Other⁽¹⁾			Loans			FFELP			Loans			Portfolio

Beginning balance	$	20,670		$	10,575		$	31,245		$	8,680		$	39,925
Acquisitions		208			118			326			174			500
Incremental Consolidations from third parties		—			—			—			—			—
Internal Consolidations		(2,452	)		(273	)		(2,725	)		(20	)		(2,745	)
Consolidations to third parties		(864	)		(456	)		(1,320	)		(10	)		(1,330	)
New securitizations		5,034			5,571			10,605			3,729			14,334
Repayments/claims/resales/other		(2,061	)		(395	)		(2,456	)		(363	)		(2,819	)

Ending balance	$	20,535		$	15,140		$	35,675		$	12,190		$	47,865


	Managed Portfolio
	Six months ended June 30, 2006
	FFELP									Total
	Stafford									Private
	and			Consolidation			Total			Education			Total Managed
	Other⁽¹⁾			Loans			FFELP			Loans			Basis Portfolio

Beginning balance	$	40,658		$	65,434		$	106,092		$	16,437		$	122,529
Acquisitions		10,303			819			11,122			3,613			14,735
Incremental Consolidations from third parties		—			1,741			1,741			9			1,750
Internal Consolidations		(4,824	)		4,824			—			—			—
Consolidations to third parties		(1,557	)		(1,863	)		(3,420	)		(18	)		(3,438	)
New securitizations		—			—			—			—			—
Repayments/claims/resales/other		(2,654	)		(1,760	)		(4,414	)		(1,018	)		(5,432	)

Ending balance	$	41,926		$	69,195		$	111,121		$	19,023		$	130,144


⁽¹⁾		FFELP category is primarily Stafford loans and also includes PLUS and HEAL loans.


	On-Balance Sheet
	Six months ended June 30, 2005
	FFELP									Total
	Stafford									Private			Total On-
	and			Consolidation			Total			Education			Balance Sheet
	Other⁽¹⁾			Loans			FFELP			Loans			Portfolio

Beginning balance	$	18,965		$	41,596		$	60,561		$	5,420		$	65,981
Acquisitions		10,027			567			10,594			2,544			13,138
Incremental Consolidations from third parties		—			1,839			1,839			—			1,839
Internal Consolidations		(2,052	)		5,849			3,797			(1	)		3,796
Consolidations to third parties		(332	)		(249	)		(581	)		(4	)		(585	)
New securitizations		(3,542	)		(4,044	)		(7,586	)		(1,407	)		(8,993	)
Repayments/claims/resales/other		(973	)		(917	)		(1,890	)		(455	)		(2,345	)

Ending balance	$	22,093		$	44,641		$	66,734		$	6,097		$	72,831


	Off-Balance Sheet
	Six months ended June 30, 2005
	FFELP									Total
	Stafford									Private			Total Off-
	and			Consolidation			Total			Education			Balance Sheet
	Other⁽¹⁾			Loans			FFELP			Loans			Portfolio

Beginning balance	$	27,825		$	7,570		$	35,395		$	6,062		$	41,457
Acquisitions		162			90			252			106			358
Incremental Consolidations from third parties		—			—			—			—			—
Internal Consolidations		(3,789	)		(8	)		(3,797	)		—			(3,797	)
Consolidations to third parties		(642	)		(91	)		(733	)		(8	)		(741	)
New securitizations		3,542			4,044			7,586			1,407			8,993
Repayments/claims/resales/other		(2,065	)		(371	)		(2,436	)		(165	)		(2,601	)

Ending balance	$	25,033		$	11,234		$	36,267		$	7,402		$	43,669


	Managed Portfolio
	Six months ended June 30, 2005
	FFELP									Total
	Stafford									Private
	and			Consolidation			Total			Education			Total Managed
	Other⁽¹⁾			Loans			FFELP			Loans			Basis Portfolio

Beginning balance	$	46,790		$	49,166		$	95,956		$	11,482		$	107,438
Acquisitions		10,189			657			10,846			2,650			13,496
Incremental Consolidations from third parties		—			1,839			1,839			—			1,839
Internal Consolidations		(5,841	)		5,841			—			(1	)		(1	)
Consolidations to third parties		(974	)		(340	)		(1,314	)		(12	)		(1,326	)
New securitizations		—			—			—			—			—
Repayments/claims/resales/other		(3,038	)		(1,288	)		(4,326	)		(620	)		(4,946	)

Ending balance	$	47,126		$	55,875		$	103,001		$	13,499		$	116,500


⁽¹⁾		FFELP category is primarily Stafford loans and also includes PLUS and HEAL loans.

The increase in consolidations to third parties from 2005 to 2006 is primarily due to some FFELP lenders reconsolidating Consolidation Loans using the Direct Lending program as a pass-through entity to circumvent the statutory prohibition on the reconsolidation of Consolidation Loans. On March 17, 2006, ED issued a “Dear Colleague” letter that prohibited this “two-step” process unless the FFELP consolidation borrower applied for a Direct Loan consolidation by March 31, 2006. Accordingly, in the second quarter of 2006, there was a temporary increase in the reconsolidation of Consolidation Loans to process the back log of FDLP applications. By the end of the quarter, consolidation activity had returned to recent historical levels. The

Higher Education Reconciliation Act of 2005 restricted further reconsolidation; as of July 1, 2006, borrowers with a FFELP consolidation loan may only reconsolidate with the FDLP if they are delinquent, referred to the guaranty agency for default aversion activity, and enter into the income contingent repayment program (‘‘ICR”) in the FDLP.

Other Income — Lending Business Segment

The following table summarizes the components of other income for our Lending business segment for the quarters ended June 30, 2006, March 31, 2006, and June 30, 2005 and for the six months ended June 30, 2006 and 2005.


	Quarters ended						Six months ended
	June 30,		March 31,		June 30,		June 30,		June 30,
	2006		2006		2005		2006		2005

Late fees	$	26	$	25	$	24	$	51	$	44
Gains on sales of mortgages and other loan fees		4		3		4		7		8
Other		21		12		8		34		20

Total other income	$	51	$	40	$	36	$	92	$	72

Operating Expenses — Lending Business Segment

Operating expenses for our Lending business segment include costs incurred to service our Managed student loan portfolio and acquire student loans, as well as other general and administrative expenses. The first and second quarter 2006 operating expenses for the Lending business segment also include $10 million and $8 million, respectively, of stock-based compensation expense, due to the implementation of SFAS No. 123(R) (see “RESULTS OF OPERATIONS — Stock-Based Compensation Expense”).

DEBT MANAGEMENT OPERATIONS (“DMO”) BUSINESS SEGMENT

The following table includes “Core Earnings” results for our DMO business segment.


	Quarters ended									Six months ended
	June 30,			March 31,			June 30,			June 30,			June 30,
	2006			2006			2005			2006			2005

Total interest income	$	—		$	—		$	—		$	—		$	—
Total interest expense		5			5			4			11			8

Net interest income		(5	)		(5	)		(4	)		(11	)		(8	)
Less: provisions for losses		—			—			—			—			—

Net interest income after provisions for losses		(5	)		(5	)		(4	)		(11	)		(8	)
Fee income		90			92			82			182			168
Collections revenue		67			56			42			124			77

Total other income		157			148			124			306			245
Operating expenses		85			89			67			175			132

Income before income taxes and minority interest in net earnings of subsidiaries		67			54			53			120			105
Income taxes		26			20			20			44			39

Income before minority interest in net earnings of subsidiaries		41			34			33			76			66
Minority interest in net earnings of subsidiaries		1			1			1			3			2

“Core Earnings” net income	$	40		$	33		$	32		$	73		$	64

DMO Revenue by Product


	Quarters ended									Six months ended
	June 30,			March 31,			June 30,			June 30,			June 30,
	2006			2006			2005			2006			2005

Purchased paper collections revenue	$	67		$	56		$	42		$	124		$	78
Contingency:
Student loans		69			70			63			139			129
Other		9			10			9			19			18

Total contingency		78			80			72			158			147
Other		12			12			10			24			20

Total	$	157		$	148		$	124		$	306		$	245

USA Funds⁽¹⁾	$	46		$	46		$	43		$	92		$	89

% of total DMO revenue		29	%		31	%		35	%		30	%		36	%


	⁽¹⁾	United Student Aid Funds, Inc. (“USA Funds”)

Total DMO revenue increased by $9 million in the second quarter of 2006 versus the first quarter of 2006. The $33 million, or 27 percent, increase in DMO revenue for the second quarter of 2006 compared to the second quarter of 2005 can be attributed to the year-over-year growth in the purchased paper business of Arrow Financial Services and to revenue generated by GRP Financial Services (acquired in August 2005). The year-over-year growth in contingency fee revenue was primarily driven by the growth in guaranty agency collections.

Purchased Paper — Non-Mortgage


	Quarters ended									Six months ended
	June 30,			March 31,			June 30,			June 30,			June 30,
	2006			2006			2005			2006			2005

Face value of purchases	$	461		$	530		$	444		$	992		$	1,416
Purchase price		41			34			41			75			65
% of face value purchased		8.9	%		6.4	%		9.2	%		7.6	%		4.6	%
Gross Cash Collections (“GCC”)	$	93		$	89		$	61		$	182		$	118
Collections revenue		54			49			42			103			77
% of GCC		58	%		55	%		69	%		56	%		66	%
Carrying value of purchases	$	152		$	146		$	79		$	152		$	79

The amount of face value of purchases in any quarter is a function of a combination of factors including the amount of receivables available for purchase in the marketplace, average age of each portfolio, the asset class of the receivables, and competition in the marketplace. As a result, the percentage of face value purchased will vary from quarter to quarter. The decrease in collections revenue as a percentage of GCC versus the prior year can primarily be attributed to the increase in new portfolio purchases in the second half of 2005. Typically, revenue recognition based on a portfolio’s effective interest rate is a lower percentage of cash collections in the early stages of servicing a portfolio.

Purchased Paper — Mortgage/Properties


	Quarters ended⁽¹⁾						Six months ended⁽¹⁾
	June 30,			March 31,			June 30,
	2006			2006			2006

Face value of purchases	$	191		$	132		$	323
Collections revenue		13			8			21
Collateral value of purchases		212			151			362
Purchase price		160			113			273
% of collateral value		76	%		75	%		76	%
Carrying value of purchases	$	453		$	355		$	453


	⁽¹⁾	GRP was purchased in August 2005. Prior to this acquisition, the Company was not in the mortgage purchased paper business.

The purchase price for sub-performing and non-performing mortgage loans is generally determined as a percentage of the underlying collateral. Fluctuations in the purchase price as a percentage of collateral value can be caused by a number of factors including the percentage of second mortgages in the portfolio and the level of private mortgage insurance associated with particular assets.

Contingency Inventory

The following table presents the outstanding inventory of receivables serviced through our DMO business.


	June 30,		March 31,		June 30,
	2006		2006		2005

Contingency:
Contingency — Student loans	$	7,174	$	7,614	$	7,307
Contingency — Other		2,594		2,461		2,028

Total	$	9,768	$	10,075	$	9,335

Operating Expenses — DMO Business Segment

Operating expenses for our DMO business segment decreased by $4 million, or 4 percent, to $85 million for the three months ended June 30, 2006 versus the prior quarter, and increased by $18 million or 27 percent versus the year-ago quarter. The increase in operating expenses versus the year-ago quarter was primarily due to increased expenses for outsourced collections and recovery costs associated with large fourth quarter portfolio purchases. The increases in DMO contingency fee expenses are consistent with the growth in revenue and accounts serviced, as a high percentage of DMO expenses are variable.

The first and second quarter of 2006 operating expenses for the DMO business segment also include $3 million and $2 million, respectively, of stock-based compensation expense, due to the implementation of SFAS No. 123(R) (see “RESULTS OF OPERATIONS — Stock-Based Compensation Expense”).

CORPORATE AND OTHER BUSINESS SEGMENT

The following table includes “Core Earnings” results for our Corporate and Other business segment.


	Quarters ended								Six months ended
	June 30,		March 31,			June 30,			June 30,			June 30,
	2006		2006			2005			2006			2005

Total interest income	$	1	$	1		$	1		$	2		$	2
Total interest expense		1		1			1			3			3

Net interest income		—		—			—			(1	)		(1	)
Less: provisions for losses		—		—			—			—			—

Net interest income after provisions for losses		—		—			—			(1	)		(1	)
Fee income		33		27			26			60			58
Other income		24		30			29			55			61

Total other income		57		57			55			115			119
Operating expenses		50		59			63			109			114

Income (loss) before income taxes		7		(2	)		(8	)		5			4
Income tax expense (benefit)		2		(1	)		(3	)		2			1

“Core Earnings” net income (loss)	$	5	$	(1	)	$	(5	)	$	3		$	3

Fee and Other Income — Corporate and Other Business Segment

The following table summarizes the components of fee and other income for our Corporate and Other business segment for the quarters ended June 30, 2006, March 31, 2006, and June 30, 2005 and six months ended June 30, 2006 and 2005.


	Quarters ended						Six months ended
	June 30,		March 31,		June 30,		June 30,		June 30,
	2006		2006		2005		2006		2005

Guarantor servicing fees	$	33	$	27	$	26	$	60	$	58
Loan servicing fees		7		8		12		15		25
Other		17		22		17		40		36

Total fee and other income	$	57	$	57	$	55	$	115	$	119

The increase in guarantor servicing fees versus the prior and year-ago quarter is due to a $10 million increase in account maintenance fees caused by a negotiated settlement with USA Funds such that USA Funds was able to cover the previous shortfall caused by the cap on payments from ED to guarantors in fiscal year 2006. This cap is removed by legislation reauthorizing the student loan programs of the Higher Education Act that will not go into effect before October 1, 2006.

USA Funds, the nation’s largest guarantee agency, accounted for 85 percent, 82 percent and 86 percent, respectively, of guarantor servicing fees and 37 percent, 34 percent and 33 percent, respectively, of revenues associated with other products and services for the quarters ended June 30, 2006, March 31, 2006, and June 30, 2005.

Operating Expenses — Corporate and Other Business Segment

Operating expenses for our Corporate and Other business segment include direct costs incurred to service loans for unrelated third parties and to perform guarantor servicing on behalf of guarantor agencies, as well as information technology expenses related to these functions. First and second quarter 2006 operating expenses for our Corporate and Other business segment also include $5 million and $4 million, respectively, of stock-based compensation expense, due to the implementation of SFAS No. 123(R) (see “RESULTS OF OPERATIONS — Stock-Based Compensation Expense”).