Student loan finance corporation
Student Loan Finance Corporation ("SLFC") was incorporated in the State of South Dakota on May 7, 1997. SLFC is in the business of purchasing, originating, holding, servicing and collecting student loans. SLFCs employees and management had, since 1979, operated the student loan program of Great Plains Education Foundation, Inc., a South Dakota nonprofit corporation formerly known as Student Loan Finance Corporation ("Great Plains"). In a reorganization completed in February 1998, Great Plains transferred all of its operating assets, including employees, to SLFC, which was at the time a whollyowned subsidiary of Great Plains.
Great Plains also transferred its liability on all of its indebtedness, together with its rights to the student loans and other assets pledged to the repayment thereof, to SLFC. SLFC, in turn, transferred such liability and pledged assets to its subsidiary, EdLinc. SLFC currently services student loans on behalf of EdLinc and its other subsidiaries: Surety Loan Funding Company, GOAL Funding, Inc., and GOAL Funding II, Inc.
On May 17, 1999, SLFC redeemed 76.5 shares of its Class A common stock held by Great Plains. On that same date, Great Plains sold its remaining outstanding shares of Class A common stock to the Stock Bonus Plan and Trust of SLFC and the Money Purchase Plan and Trust of SLFC, which together constitute an Employee Stock Ownership Plan, as that term is defined in Section 4975(e)(7) of the Internal Revenue Code. The outstanding class A common stock was exchanged for 204,905 shares of class B common stock. In January, 2004, the Corporation increased its authorized shares of common stock as follows:
Education Loans Incorporated Education Loans Incorporated ("EdLinc") is a bankruptcy-remote, special purpose Delaware corporation and wholly-owned subsidiary of SLFC. In connection with the Great Plains reorganization in February, 1998, EdLinc assumed all of SLFCs indebtedness, together with its rights to the student loans and other assets pledged to the repayment thereof. SLFC transferred such assets without recourse, and was released from all obligations, except in its capacity as servicer under a Servicing Agreement executed between the corporations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS EdLinc was organized to engage exclusively in the following business and financial activities beginning February, 1998: (i) to receive the assets and assume the liabilities transferred to it in connection with the reorganization; (ii) to originate or acquire student loans; (iii) to enter into certain agreements relating to student loans; (iv) to issue bonds, notes, asset-backed certificates or other securities payable solely from student loans and other assets pledged to the payment thereof; and (v) to engage in acts incidental to and necessary, suitable or convenient for the accomplishment of the foregoing purposes and permitted under Delaware law.
Surety Loan Funding Company Surety Loan Funding Company ("Surety"), a South Dakota corporation and wholly-owned subsidiary of SLFC, was incorporated on May 18, 1998. Surety Loan Funding Company was organized to transact surety insurance, in the State of South Dakota only, in the education loan market and to originate or otherwise invest in education loans, including loans originated under the Higher Education Act of 1965, as amended.
GOAL Funding Inc.
GOAL Funding, Inc. ("GOAL I") is a bankruptcy remote, special purpose Delaware corporation and a wholly-owned subsidiary of SLFC. GOAL I was created to provide a vehicle for temporary financing of eligible loans pending their sale to EdLinc.
GOAL Funding II, Inc.
GOAL Funding II, Inc. ("GOAL II") is a bankruptcy remote, special purpose Delaware corporation and a wholly-owned subsidiary of SLFC. GOAL II was created to provide a vehicle for temporary financing of eligible loans pending their sale to EdLinc.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses charged to expense, based on loan type (see Note 5), origination credit standards (for alternative loans), historical and estimated future default rates, claim reject rates and recovery rates. Based on federal regulations, default losses on guaranteed Federal Family Education Loan Program (FFELP) loans are either 0% or 2% depending on when the loan was disbursed. At the time the claim is paid by the guarantor, the Corporation adjusts the allowance for any uncollected amount. There is no federal guarantee for the alternative loans with the risk of loss retained entirely by the Corporation. Alternative loans are charged against the allowance for loan loss when the loan is 270 days delinquent. In addition, loans may be charged against the allowance at earlier times, when management believes that collection of the principal balance is unlikely. Recoveries of amounts previously charged off are credited to the allowance.
Management's evaluation of the adequacy of the allowance for loan losses is inherently judgmental and subjective as it requires estimates that may be susceptible to significant changes. It is reasonably possible that changes in the estimates may occur in the near term.
Non-Accrual and Past Due Loans
The Corporations accrual of interest on loans guaranteed by the FFELP is discontinued at the time the loan is submitted to a guarantor for claim payment (no later than the 360th day of delinquency). The accrual of interest on alternative loans is discontinued at the end of the month in which the loan becomes 270 days delinquent, at which time the loan and accrued interest are charged against the allowance. There was no investment in loans on non-accrual status as of December 31, 2004 and 2003 as loans are written off at the point in time interest accrual is discontinued. The principal balance outstanding of FFELP loans past due ninety days or more and still accruing interest as of December 31, 2004 and 2003 was $77.0 and $53.4 million, respectively. The principal outstanding on alternative loans past due ninety days or more and still accruing interest as of December 31, 2004 and 2003 was $10.4 million and $4.1 million, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Interest on Student Loans Interest on student loans (including subsidized interest) is accrued as earned on the unpaid principal balance. Interest income is increased by amortization of deferred origination fees and is reduced by borrower incentive rebates, Department of Education rebates, amortization of acquisition costs, and amortization of the push down adjustment on student loans, all of which totaled a net reduction of approximately $11.4 million and $8.8 million for the years ended December 31, 2004 and 2003, respectively.
Quarterly interest subsidy payments are made by the U.S. Secretary of Education on qualified loans until the student is required under the provisions of the Higher Education Act to begin payment. SLFC earned approximately $9.7 million and $7.7 million from the Department of Education in interest subsidies for the years ended December 31, 2004 and 2003, which represents approximately 12.0% and 13.8% of SLFCs total revenues, respectively.
Special Allowance
The U.S. Secretary of Education provides a special allowance to lenders participating in qualified student loan programs. This allowance is based upon a percentage of the average unpaid principal balance of qualifying student loans held by SLFC and is accrued as earned. SLFC earned approximately $15.4 million and $4.2 million from the Department of Education for special allowance for the years ended December 31, 2004 and 2003, which represents approximately 19.1% and 7.6% of SLFCs total revenues, respectively.
Origination Fee Income
Origination fees charged to borrowers on alternative student loans are amortized to income over the life of the loans, using methods that approximate the effective interest rate method.
Loan Origination Costs
Direct loan origination costs are amortized over the life of the loans as a reduction of yield on the loans. Direct loan origination costs include third party and direct internal personnel-related costs incurred in the processing of loan applications, excluding such costs associated with rejected loan applications. Premiums, Transfer Fees, Origination Fees and Discounts on Student Loans Premiums, transfer fees, origination fees and discounts on student loans are amortized over the estimated life of the loans acquired, using methods that approximate the effective interest rate method. Advance premiums paid on future loan purchases are deferred until the loan is acquired and amortized thereafter. Cost of Debt Issuance Bond and note issuance costs are amortized over the estimated life of the bonds and notes using the bonds outstanding method.
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