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SLM Corp – ‘10-K405’ for 12/31/00

On: Monday, 4/2/01, at 10:16am ET · For: 12/31/00 · Accession #: 928385-1-500211 · File #: 1-13251

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 4/02/01  SLM Corp                          10-K405    12/31/00    3:377K                                   Donnelley R R & S… 09/FA

Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K405     Annual Report -- [x] Reg. S-K Item 405                95    578K 
 2: EX-3.2      Articles of Incorporation/Organization or By-Laws     17     74K 
 3: EX-23       Consent of Experts or Counsel                          1      5K

10-K405 — Annual Report — [x] Reg. S-K Item 405
Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) (a) 1. Financial Statements And Appendix A Borrower benefits Business Cash and investments Certain Relationships and Related Transactions Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Directors and Executive Officers of the Registrant Executive Compensation Exhibits, Financial Statement Schedules and Reports on Form 8-K Financial Statements and Supplementary Data Floor Revenue Contracts Gains on student loan securitizations GSE Dissolution After Reorganization GSE Regulation Income taxes Interest expense Interest Rate Risk Management Interest Rate Swaps Legal Proceedings Management's Discussion and Analysis of Financial Condition and Results of Operations Market for Registrant's Common Equity and Related Stockholder Matters Net interest income Operations during the Wind-Down Period Other Income Privatization Act, The Products and Services Pro-forma Statements of Income Properties Quantitative and Qualitative Disclosures about Market Risk Recently Issued Accounting Pronouncements Regulation Reorganization Report of Independent Public Accountants Securitization Program Security Ownership of Certain Beneficial Owners and Management Selected Financial Data Servicing and Securitization Revenue Special Allowance Payments Stockholders' equity Student loan income Student Loans Student Loan Spread Analysis Submission of Matters to a Vote of Security-Holders Taxable Equivalent Net Interest Income The Privatization Act USA Education
1	1st Page - Filing Submission
2	Item 1. Business
4	Products and Services
7	Borrower benefits
9	Operations during the Wind-Down Period
10	Regulation
"	The Privatization Act
"	Reorganization
12	GSE Dissolution After Reorganization
13	GSE Regulation
15	Item 2. Properties
"	Item 3. Legal Proceedings
"	Item 4. Submission of Matters to a Vote of Security-Holders
16	Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
17	Item 6. Selected Financial Data
18	Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
20	Net interest income
21	Taxable Equivalent Net Interest Income
22	Student Loans
"	Student Loan Spread Analysis
25	Securitization Program
26	Gains on student loan securitizations
"	Servicing and Securitization Revenue
"	Other Income
29	Pro-forma Statements of Income
36	Interest Rate Risk Management
39	Recently Issued Accounting Pronouncements
"	Item 7a. Quantitative and Qualitative Disclosures about Market Risk
"	Item 8. Financial Statements and Supplementary Data
"	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
40	Item 10. Directors and Executive Officers of the Registrant
"	Item 11. Executive Compensation
"	Item 12. Security Ownership of Certain Beneficial Owners and Management
"	Item 13. Certain Relationships and Related Transactions
"	Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
"	(a) 1. Financial Statements
45	Report of Independent Public Accountants
46	Stockholders' equity
47	Interest expense
"	Income taxes
51	Student loan income
52	Interest Rate Swaps
"	Floor Revenue Contracts
73	Cash and investments
79	USA Education
85	Appendix A
87	Special Allowance Payments
92	And

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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

----------------  

FORM 10-K 

(Mark One)                                                                      

[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934                                                                 
For the fiscal year ended December 31, 2000 or                          
[_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934                                                             
For the transition period from       to                                   

Commission file numbers 001-13251 

----------------  

USA EDUCATION, INC. 
(formerly SLM Holding Corporation)
(Exact Name of Registrant as Specified in Its Charter)
Delaware                                52-2013874
 (State of Other Jurisdiction of        (I.R.S. Employer Identification No.)
Incorporation or Organization)                       20193              
11600 Sallie Mae Drive, Reston,                     (Zip Code)            
Virginia                                          
(Address of Principal Executive                                           
Offices)                                          

(703) 810 3000
(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: 
Common Stock, par value $.20 per share. 

6.97% Cumulative Redeemable Preferred Stock, Series A, par value $.20 per share 

Securities registered pursuant to Section 12(g) of the Act:   
None.   

----------------  

Indicate by check mark whether the registrant: (1) has filed all reports  
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of   
1934 during the preceding 12 months (or for such shorter period that the        
registrant was required to file such reports), and (2) has been subject to such 
filing requirements for the past 90 days. Yes [X] No [_]                        

The aggregate market value of voting stock held by non-affiliates of the  
registrant as of February 28, 2001 was approximately $11,697,238,179 (based on  
closing sale price of $72.53 per share as reported for the New York Stock       
Exchange--Composite Transactions).                                              

On that date, there were 162,881,521 shares of Common Stock outstanding.  

DOCUMENTS INCORPORATED BY REFERENCE 

 Portions of the Proxy Statement relating to the registrant's Annual Meeting
of Shareholders scheduled to be held May 10, 2001 are incorporated by reference 
into Part III of this Report.                                                   

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to    
the best of registrant's knowledge, in definitive proxy or information          
statements incorporated by reference in Part III of this Form 10-K or any       
amendment to this Form 10-K. [X]                                                

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This Report 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 costs of    
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 the Company. 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; and 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.            

PART I. 

Item 1. Business                                                                

We believe that the industry data on the FFELP and the Federal Direct Loan
Program (the "FDLP") contained in this report are based on reliable sources and 
represent the best available information for these purposes, including          
published and unpublished U.S. Department of Education ("DOE") data and         
industry publications.                                                          

GENERAL                                                                         

USA Education, Inc. (formerly SLM Holding Corporation), a Delaware        
Corporation (the "Company"), is the nation's largest private source of funding  
and servicing support for higher education loans for students and their         
parents. The Company provides a wide range of financial services, processing    
capabilities and information technology to meet the needs of educational        
institutions, lenders, students, and guarantee agencies. It was formed in 1997  
in connection with the reorganization (the "Reorganization") of the Student     
Loan Marketing Association, a government-sponsored enterprise (the "GSE") that  
had been established by an act of Congress in 1972. The Student Loan Marketing  
Association Reorganization Act of 1996 (the "Privatization Act") required the   
GSE to propose to shareholders a plan of reorganization under which their share 
ownership would convert to an equivalent share ownership in a state-chartered   
holding company that would own all of the stock of the GSE. Under the           
Privatization Act, the Reorganization was approved by the GSE's shareholders on 
July 31, 1997 and effected on August 7, 1997. The Privatization Act requires    
the GSE to transfer its business to the Company and dissolve on or before       
September 30, 2008. During the period prior to the dissolution of the GSE (the  
"Wind-Down Period"), the GSE is subject to various limitations on its business  
and activities. See "--Operations during the Wind-Down Period" and              
"Regulation--The Privatization Act."                                            

As of December 31, 2000, the Company's managed portfolio of federally     
insured student loans totaled approximately $64.5 billion (including loans      
owned and loans securitized). The Company also had commitments to purchase      
$16.4 billion of additional student loans as of December 31, 2000. While the    
Company continues to be the leading purchaser of student loans, its business    
has expanded since the creation of the GSE in 1972, reflecting changes in both  
the education sector and the financial markets.                                 

  Primarily a provider of education credit, the Company serves a diverse range
of clients, including approximately 5,500 educational and financial             
institutions and state agencies. The Company serves in excess of 7 million      
borrowers through its ownership and management of approximately $67.5 billion   
in student loans.                                                               

  On July 31, 2000, the Company acquired the guarantee servicing, student loan
servicing and secondary market operations of USA Group, Inc. ("USA Group").     
With this acquisition, the Company has broadened its                            

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offering of education related services to include servicing and administrative  
support for guarantee agencies. In addition, the acquisition has opened new     
channels and affiliations for loan volume growth and has further diversified    
the Company's sources of revenue. Prior to the USA Group acquisition, the       
Company derived substantially all of its income from interest earnings or       
"spread income" from its portfolio of student loans. As a result of this        
acquisition, the Company anticipates that "fee income" from its guarantor       
servicing and third party servicing operations will account for an increasingly 
larger portion of its income.                                                   

The Company believes that it has achieved its leadership position in the  
education finance industry due to its focus on customer relationships, value-   
added products and services, superior loan servicing capabilities and a sound   
financial management strategy. In recognition of the increasingly important     
role that college and university administrators play in the student loan        
process, the Company's primary marketing focus is the school financial aid      
office where its strategy is to deliver simple, flexible and cost-effective     
products and services to schools and students. This strategy, combined with     
superior servicing and technology capabilities, has helped the Company build    
valuable partnerships with schools, lenders, guarantee agencies and others.     

INDUSTRY OVERVIEW                                                               

The higher education credit marketplace consists of a number of programs  
that are structured to provide affordable financing to students and their       
families to fund education. The great majority of student loans are made to     
finance post-secondary education under federally sponsored programs, although   
many students and parents secure additional education credit through private    
student loan programs. The primary federally sponsored student loan programs    
are the FFELP and the FDLP. The largest student loan program, formerly called   
the Guaranteed Student Loan Program and now known as the FFELP, was created in  
1965 to ensure low-cost access by families to a full range of post-secondary    
educational institutions. In 1972, to encourage further bank participation in   
the Guaranteed Student Loan Program, Congress established the GSE as a for-     
profit, stockholder-owned national secondary market for student loans. Under    
loan programs sponsored by FFELP, banks and other lenders that satisfy          
statutory eligibility requirements can originate student loans at below-market  
interest rates as a result of the federal government's guarantee and its        
payment to lenders of market-based adjustments (special allowance payments).    
The FFELP industry is currently administered through a network of approximately 
3,500 lending institutions and 4,740 educational institutions. Thirty-six       
state-sponsored or non-profit guarantee agencies are responsible for            
guaranteeing the loans on behalf of the DOE. In addition to the Company, a      
number of non-profit entities, banks and other financial intermediaries operate 
as secondary markets for student loans.                                         

The Higher Education Act of 1965, as amended (the "Higher Education Act"),
is reauthorized by Congress approximately every six years. The Higher Education 
Act was last reauthorized on October 7, 1998 in the form of the Higher          
Education Amendments of 1998 (the "Reauthorization Legislation"), legislation   
that lowered both the borrower interest rate on Stafford loans and the lender's 
rate after special allowance payments. The provisions of the FFELP are also     
subject to revision from time to time by Congress.                              

The second largest federally sponsored student loan program and the       
Company's primary competitor is the FDLP. In 1993, Congress expanded a          
previously established pilot program into the FDLP, which is administered and   
marketed to schools by the DOE. Established as an alternative to the private    
sector-based FFELP, the FDLP accounted for approximately one-third of all new   
federally sponsored student loans issued in academic year 1999-2000. Under the  
FDLP, the federal government contracts with third parties for loan              
administration and collection services while financing its lending activity     
through U.S. Treasury borrowings. Loans offered through the FDLP are generally  
the same as those offered through FFELP.                                        

Under FFELP, there are four primary lending products that fund access to  
education. The Company's student loan purchases have primarily involved these   
loan types. They include:                                                       

.  subsidized Stafford loans,                                               

.  unsubsidized Stafford loans,                                             

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.  Parental Loans to Undergraduate Students (PLUS) and                      

.  consolidations loans.                                                    

  Payment of principal and interest are guaranteed (98 percent to 100 percent,
depending on loan origination date) against default by the borrower as well as  
in other circumstances. In addition, the holder of a federal student loan is    
entitled to receive interest subsidy payments and, in certain cases, special    
allowance payments from the Department. (See "Appendix A" for a detailed        
discussion of the FFELP and FDLP).                                              

Demand for student loans has risen substantially over the last several    
years. Higher education tuition cost and fee increases continue to exceed the   
inflation rate. Over half of all full-time college students today depend on     
some form of borrowing, compared to just over 35 percent in 1985. In addition,  
federal legislation enacted in late 1992 expanded loan limits and borrower      
eligibility. All of these factors contributed to annual federally sponsored     
student loan volume growing by approximately 56 percent from the 1994 federal   
fiscal year to the 2000 federal fiscal year. In dollars, the FDLP and FFELP     
student loan volume grew from approximately $24 billion as of September 30,     
1994 to approximately $37.5 billion as of September 30, 2000. According to DOE  
projections, demand for student loans will continue to grow. Total FDLP and     
FFELP student loan volume is projected to reach $70 billion in the 2009 federal 
fiscal year. The Company believes that lender participation in the FFELP is     
relatively concentrated, with an estimated 90 percent of loans being originated 
by the top 100 participants during the federal fiscal year ended September 30,  
2000.                                                                           

  While the FDLP grew at a much higher rate during the first four years of the
program (FY94-FY97), the FDLP has lost market share during the past three       
years. During the federal fiscal year 2000, FFELP student loans represented 68  
percent, or $25.7 billion, of the total student loan market. FFELP student      
loans represented only 66 percent of the total student loan market in the       
federal fiscal year 1997.                                                       

PRODUCTS AND SERVICES                                                           

Over the past decade, a number of developments have significantly changed 
the student loan industry. The developments--primarily, the continued reduction 
in the legislated asset spread, the encroachment of the FDLP, the concentration 
of participating lenders, the advent of student loan securitization and the     
Company's 1997 reorganization--led the Company to reassess its bank-oriented    
loan purchase strategy. As a result, the Company changed the focus of its       
marketing efforts to the college campus, specifically the financial aid         
offices. Management believes that the keys to the success of this campus-       
centered marketing strategy are:                                                

.  strategic lender partnerships and loan origination,                      

.  an expanded sales force offering a broad range of focused brands,        

.  premium loan delivery and technology solutions,                          

.  private credit solutions and                                             

.  borrower benefits.                                                       

As of December 31, 2000, the Company's managed portfolio of federally     
insured student loans totaled $64.5 billion, including $62.4 billion of FFELP   
loans (including loans owned and loans securitized) and $2.1 billion of Health  
Education Assistance Programs loans ("HEAL").                                   

Strategic Lending Partnerships and Loan Origination. Through dedicated    
lender relationships and direct origination, the Company intends to build its   
control channel--loans originated and serviced on the Company's servicing       
platform that are committed for sale to or owned from inception by the Company. 
The loans acquired or originated in this fashion are more profitable to the     
Company as they are acquired at a lower average premium and have a longer       
average life and lower servicing costs. Loan volume disbursed on the Company's  
control channel totaled $7.3 billion in 2000 and $5.1 billion in 1999, a 42     
percent increase year-over-year.                                                

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Excluding business acquisitions, the Company's control channel volume was 
approximately 61 percent of its total purchase volume in 2000 and 52 percent of 
its purchase volume in 1999. In 2000, the primary contributors to the Company's 
control channel volume were its joint venture with Chase Manhattan Bank and its 
strategic alliance with Bank One, which resulted from the Company's USA Group   
acquisition. During the federal fiscal year ending September 30, 2000, Chase    
and Bank One were the second and third largest originators, respectively, of    
federally insured student loans.                                                

  Although a significant portion of the Company's volume comes from commercial
banks, the Company also purchases student loans from other eligible FFELP       
lenders, including savings and loan associations, mutual savings banks, credit  
unions and insurance companies, educational institutions, and state and private 
non-profit loan originating and secondary market agencies.                      

The Company entered into its joint venture with Chase Manhattan Bank (the 
"Joint Venture") in 1994 and restructured it in 1998 such that the Company now  
purchases all loans originated by Chase. The Company also purchased the $5      
billion of loans that were co-owned in the Joint Venture at the time of the     
restructuring. Since the Company now owns the loans, it no longer receives      
servicing fees from the Joint Venture that were previously included in other    
income.                                                                         

On December 31, 1999, USA Group entered into an agreement to establish an 
innovative strategic alliance with Bank One, one of the nation's largest        
education loan originators. This alliance was transferred to the Company as     
part of the Company's acquisition of USA Group's business operations. Under     
this alliance, Education One Group, Inc., which is now an indirect wholly owned 
subsidiary of the Company, is the sole, limited purpose agent of Bank One       
operating exclusively to market and sell Bank One's education loans. Under the  
Company's renewable, multi-year agreement, which strengthened and expanded its  
then existing arrangement with Bank One, the Company's affiliates will service  
and purchase a significant share of Bank One's annual new loan volume.          

The Company also purchases student loans through standard purchase        
commitment contracts. During 2000, the Company purchased approximately $1.4     
billion of student loans through such arrangements. The Company enters into     
commitment contracts with lenders to purchase loans up to a specified aggregate 
principal amount over the term of the contract, which is generally three years. 
Under all commitment contracts (including control channel commitments), lenders 
have the right, and in most cases the obligation, to sell to the Company the    
loans they own over a specified period of time at a purchase price that is      
based on certain loan characteristics. Unlike control channel commitments, the  
loans under standard commitments are not originated on a Sallie Mae servicing   
platform.                                                                       

The Company supplements its commitment purchases with spot purchases. In a
spot purchase, the Company competes with other market participants to purchase  
a portfolio of eligible loans from a selling holder. Excluding business         
acquisitions, the Company made approximately 8 percent and 1 percent of its     
purchases of educational loans through spot purchases in 2000 and 1999,         
respectively. In general, spot purchase volume is more costly than volume       
purchased under commitment contracts.                                           

In 1998, the Company began to originate a nominal amount of FFELP loans   
through its wholly owned subsidiary, SLM Education Loan Corp. As of December    
31, 2000, the Company originated $306 million of FFELP loans. In order to       
accelerate its loan origination efforts, the Company completed two strategic    
acquisitions: Nellie Mae in 1999 and Student Loan Funding Resources Inc.        
("SLFR") in 2000. At the time of purchase, Nellie Mae had a $2.6 billion        
student loan portfolio. SLFR owned a $3.0 billion portfolio and originated      
approximately $25 million in student loans during their fiscal year ended       
June 30, 2000. The Company expects that its origination activity will increase  
as more schools adopt the Laureate, and NetWizard(TM) student loan delivery     
systems discussed below. The Company will continue to explore acquiring         
additional student loan volume and origination capabilities through strategic   
acquisitions of student loan businesses.                                        

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Expanding Sales Force. Beginning in 1997 and in conjunction with its joint
venture with Chase Manhattan Bank, the Company began to expand its sales force  
and solidify its primary lending relationships. By 2001, the Company had        
increased its sales force five-fold to approximately 220 individuals            
representing brands such as Sallie Mae, Nellie Mae, SLFR, SLM Financial and     
Education One. Management believes this sales coverage, together with the       
service level and product set provided by the Company, will maximize the        
potential that the Company or one of its brands will be placed on a college or  
university's preferred lender list.                                             

Premium Loan Delivery Systems and Technology. In concert with its focus to
drive volume to its control channel through the financial aid office, the       
Company launched Laureate, its Internet-based student loan delivery system, for 
the 1999-2000 academic year. In addition, with the acquisition of the business  
operations of USA Group, the Company now offers NetWizard, an alternative       
Internet-based student loan delivery system. These systems provide real-time    
data linkage among schools, borrowers, lenders and guarantors. With these       
systems, a student loan process that previously required multiple sessions over 
several days can now be completed in one on-line session. As of December 31,    
2000, 238 schools were using Laureate. Through Laureate, the Company has        
processed over $1.5 billion in FFELP loans since its July 1999 launch. In       
addition, as of December 31, 2000, 1,125 schools were using NetWizard for a     
variety of loan delivery and financial aid services.                            

In conjunction with commitment contracts, the Company frequently provides 
selling institutions with loan origination and interim servicing support in the 
form of ExportSS(R) through one of the Company's loan servicing centers. The    
Company also offers selling institutions operational support in the form of     
PortSS(R) an automated loan administration system for the lender's use at its   
own offices before loan sale. In 2000 and 1999, 82 percent and 79 percent,      
respectively, of the Company's purchase commitment volume came from users of    
ExportSS and PortSS. Through TransportSSSM, the Company also offers commitment  
clients the ability to originate loans and then transfer them to the Company    
for servicing. PortSS, ExportSS and TransportSS provide the Company and the     
lender assurance that loans will be efficiently administered by the Company and 
that borrowers will have access to the Company's repayment options and          
benefits. While USA Group did not offer a similar set of products and services, 
it sought to foster efficient loan administration through arrangements with     
"alliance lenders," who generally are entitled to the full complement of USA    
Group's products and services. The largest such alliance lender is Bank One,    
which accounted for approximately 80 percent of the business secured through    
the alliance lender program. See "--Strategic Lending Partnerships and Loan     
Originations."                                                                  

Private Credit Solutions. To meet the full range of needs of financial aid
directors and students, the Company offers a wide complement of privately       
insured funding alternatives to fill the gap between the price of admission and 
federal financial aid. In the spring of 1996, the Company introduced the        
Signature EducationSM Loan Program. Signature StudentSM Loans are available to  
students at most four-year colleges and universities to supplement their        
federal loans. Freshmen and non-creditworthy students are required to have a    
cosigner. Students may borrow as much as the costs of attendance minus other    
financial aid they are eligible to receive. With the Signature Select(R) Loan,  
participating colleges tailor loan features to reflect the needs of their       
individual campuses and provide default coverage in exchange for additional     
program flexibility. Signature Loans are insured by the Company through its     
HEMAR Insurance Corporation of America (HICA) subsidiary. The Company also      
purchases loans originated under various other HICA-insured loan programs,      
including particularly the private loan affinity programs MEDLOANSSM,           
LAWLOANSSM, and MBALOANSSM. These three loan programs accounted for $150        
million in private loans and $365 million in FFELP loans during the academic    
year 1999-2000.                                                                 

Under agreements with the Company, lenders originated approximately $325  
million in loan volume in Signature private loans and $4.3 billion in loan      
volume in FFELP loans at schools where the Company did Signature volume in the  
academic year 1999-2000. The majority of this volume represents loans made to   
borrowers with creditworthy cosigners.                                          

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 Beginning in 1999, SLM Financial, a wholly owned subsidiary of the Company,
substantially expanded the Company's private credit product line, focusing on   
career training, lifelong learning and K-12 education. With the creation of SLM 
Financial, the Company began offering Career Training LoanSM directly to        
borrowers and through partnerships with higher education associations, colleges 
and universities, technical and trade schools and other adult learning centers. 
This loan is available to borrowers enrolled in career training courses or a    
distance learning school; attending a two-year or four-year proprietary school; 
or attending a four-year college less than half-time. In addition, the Company  
made available its K-12 Family Education LoanSM to parents and other family     
members of children attending private K-12 schools. Under this loan program,    
families can borrow up to the entire cost of education including additional     
money for education-related expenses such as the purchase of a computer or      
musical instrument. SLM Financial also offers mortgages, home equity and other  
secured and unsecured consumer loans. All SLM Financial loans are underwritten  
and priced based upon standardized consumer credit scoring criteria. For the    
year ended December 31, 2000, SLM Financial originated $656 million in loans of 
which 63 percent was education related. The Company is also sourcing private    
credit loans on campus through the Nellie Mae, Student Loan Funding and USA     
Group acquired brands.                                                          

Borrower Benefits. To satisfy customer preferences and compete more       
effectively in the student loan marketplace, the Company has developed a        
comprehensive set of loan programs and services for borrowers, including        
numerous loan restructuring and repayment options and programs that encourage   
and reward good repayment habits. The Company also provides counseling and      
information programs (including a worldwide web site) that help borrowers and   
reinforce relationships with college and university customers and lender        
partners.                                                                       

Under the Company's Great Rewards(R) Program, certain FFELP borrowers who 
make their first 48 scheduled monthly payments on time receive a two            
percentage-point interest rate reduction for the remaining term of the loan.    
Other programs credit students an amount equal to part of the loan origination  
fees they pay and modestly reduce interest costs for use of automatic debit     
accounts. The Company also provides financial aid administrators at colleges    
and universities with innovative products and services that simplify the        
lending process, including electronic funds transfer services and loan          
information and management software that enables college application data to be 
transferred electronically between program participants.                        

The Flex Repay Account, the Company's newest graduated repayment option,  
allows students who are having difficulty making repayments to extend loan      
repayment to make their payments more affordable while minimizing total loan    
costs in comparison to loan consolidation.                                      

The Company also offers eligible borrowers a program for consolidation of 
eligible insured loans into a single new insured loan with a term of 10 to 30   
years. As of December 31, 2000, the Company owned approximately $11.7 billion   
of such consolidation loans, known as SMART LOAN(R) Accounts. Following         
enactment of the Emergency Student Loan Consolidation Act in November 1997,     
which made significant changes to the FFELP loan consolidation program, the     
Company temporarily suspended its loan consolidation program. As a result of    
the Reauthorization Legislation, the Company began to offer student loan        
borrowers the SMART LOAN consolidation program again in the fourth quarter of   
1998.                                                                           

LOAN SERVICING                                                                  

  In 1980, the Company began servicing its own student loan portfolio in order
to better control costs and manage risks. In late 1995, in connection with the  
commencement of its securitization program, the Company transferred its         
servicing operations to Sallie Mae Servicing Corporation ("SMSC"). At the end   
of 2000, the Company merged USA Group's servicing operations with and into      
SMSC. Through SMSC, the Company is now the nation's largest servicer of FFELP   
loans, and management believes that the Company is recognized as the premier    
service quality and technology provider in the student loan industry. The       
Company believes that its processing capability and service excellence are      
integral to its school-based growth strategy. As of December 31, 2000, the      
Company serviced approximately $66.7 billion of FFELP loans, including          
approximately                                                                   

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$23.9 billion of loans owned by the GSE and its affiliates, $24.7 billion owned 
by 18 securitization trusts sponsored by the GSE, $5.0 billion owned by 10      
securitization trusts sponsored by Secondary Market Services, a wholly owned    
subsidiary of the GSE, and $13.1 billion of loans owned by other parties. As of 
December 31, 2000, the Company also serviced approximately $5.8 billion in non- 
FFELP loans including approximately $2.0 billion in HEAL loans and $3.8 billion 
in private loans.                                                               

The Company currently has five loan servicing centers, located in Arizona,
Florida, Indiana, Pennsylvania and Texas. This geographic coverage, together    
with total systems integration among centers, facilitates operations and        
customer service.                                                               

The DOE and the various guarantee agencies prescribe rules and regulations
that govern the servicing of federally insured student loans. The Company's     
origination and servicing systems, internal procedures and highly trained staff 
support compliance with these regulations, and are designed to promote asset    
integrity and provide superior service to borrowers.                            

GUARANTOR SERVICING                                                             

 As a result of its acquisition of the business operations of USA Group, the
Company now provides a full complement of administrative support for loan       
guarantors, ranging from loan origination and account maintenance to default    
prevention and post-default collections. The Company provides administrative    
support to USA Funds, the nation's largest guarantor of education loans and the 
designated guarantor in Alaska, Arizona, Hawaii and the Pacific Islands,        
Indiana, Kansas, Maryland, Mississippi, Nevada and Wyoming. In addition, the    
Company has guarantor servicing contracts with guarantors serving 12 other      
states.                                                                         

During 2000, the Company processed $6.8 billion and $2.2 billion in       
education loans for USA Funds and the Company's other guarantor servicing       
customers, respectively. All of these customers use the Company's EAGLE(TM)     
guarantee system, a state-of-the-art, multi-platform operating system that      
tracks FFELP loan origination and guarantee activities that the Company         
administers on behalf of its customers.                                         

The Company has two primary contracts with USA Funds: a guarantee services
agreement under which the Company provides comprehensive outsourcing of         
guarantee operations functions including, among other things, guarantee         
processing, portfolio management, loan disbursement services, claim review and  
debt collections; and a default aversion agreement under which the Company      
provides all default aversion activities required under the FFELP as well as    
certain mutually agreed upon special default reduction activities. Each         
contract has an initial term of five years, beginning October 1, 1999. On each  
October 1 thereafter, beginning on October 1, 2000, the term of each contract   
will be automatically increased by an additional year unless a contractually    
specified prior notice is given by either party.                                

The Company currently operates its post-default collections from a        
collections center located in Nevada and performs other guarantee servicing     
operations from the loan servicing operations located in Indiana.               

FINANCING/SECURITIZATION                                                        

The GSE obtains funds for its operations primarily from the sale of debt  
securities in the domestic and overseas capital markets, and through public     
offerings and private placements of U.S. dollar denominated and foreign         
currency denominated debt of varying maturities and interest rate               
characteristics. GSE debt securities are currently rated at the highest credit  
rating level by Moody's Investors Service, Inc. ("Moody's") and Standard &      
Poor's Credit Market Services, a division of The McGraw-Hill Companies, Inc.    
("S&P").                                                                        

 The GSE uses interest rate and currency exchange agreements (collateralized
where appropriate), U.S. Treasury securities, interest rate futures contracts   
and other hedging techniques to reduce its exposure to interest rate and        
currency fluctuations arising out of its financing activities and to match the  
characteristics of its assets and liabilities. The GSE has also issued          
preferred stock to obtain funds, including preferred stock held by the Company. 
Under the Privatization Act, the GSE may issue debt with maturity dates through 

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September 30, 2008 to fund student loan and other permitted asset purchases.    
Upon the GSE's dissolution in accordance with the Privatization Act, the GSE    
must transfer any remaining GSE obligations into a defeasance trust for the     
benefit of the holders of such obligations together with cash or full faith and 
credit obligations of the United States, or an agency thereof, in amounts       
sufficient, as determined by the Secretary of the Treasury, to pay the          
principal and interest on the deposited obligations. If the GSE has             
insufficient assets to fully fund such GSE debt, the Company must transfer      
sufficient assets to the trust to account for this shortfall. The Privatization 
Act requires that upon the dissolution of the GSE on or before September 30,    
2008, the GSE shall repurchase or redeem or make proper provisions for          
repurchase or redemption of the GSE's outstanding preferred stock.              

Since late 1995, the Company has further diversified its funding sources, 
independent of its GSE borrower status, by securitizing a portion of its        
student loan assets. Securitization is an off-balance sheet funding mechanism   
that the Company effects through the sale of portfolios of student loans by the 
GSE to SLM Funding Corporation, a bankruptcy-remote, special-purpose, wholly    
owned subsidiary of the GSE. SLM Funding Corporation, in turn sells the student 
loans to an independent owner trust that issues securities to fund the purchase 
of the student loans. The securitization trusts typically issue several classes 
of debt securities rated at the highest investment grade level. The GSE has not 
guaranteed such debt securities and has no obligation to ensure their           
repayment. Because the securities issued by the trusts through securitization   
are not GSE securities, the Company has been and in the future expects to be    
able to fund its student loans to term through securitization, even for those   
assets with final maturities that extend beyond the Wind-Down Period. The DOE   
has concurred with the Company's position that a 30 basis point per annum       
offset fee imposed on loans held by the GSE does not apply to securitized       
loans. The Company anticipates that securitization will remain a primary        
student loan funding mechanism for the Company when it begins to conduct        
student loan purchase activity through a non-GSE subsidiary.                    

In addition to the foregoing, the Company obtains funding through a       
commercial paper program. In the fourth quarter of 1999, the Company            
established a $1 billion commercial paper program. This program is supported by 
a $600 million 364-day revolving credit agreement, which the Company renewed in 
the fourth quarter of 2000, and a $400 million five-year revolving credit       
agreement. Prior to the establishment of this commercial paper program, the     
Company secured credit ratings of A1, P1 and F1+ on its short term debt and A,  
A3 and A+ on its long term debt from S&P, Moody's and Fitch IBCA, Inc.,         
respectively. In addition, the Company issued a total of $1 billion of medium   
term notes in the fourth quarter of 2000 and the first quarter of 2001.         

OPERATIONS DURING THE WIND-DOWN PERIOD                                          

Privatization enables the Company to commence new business activities     
without regard to restrictions in the GSE's charter. During the Wind-Down       
Period, the GSE generally is prohibited from conducting new business except in  
connection with student loan purchases through September 30, 2007 or with other 
outstanding contractual commitments, and from issuing new debt obligations that 
mature beyond September 30, 2008. The GSE has transferred personnel and certain 
assets to the Company or other non-GSE affiliates. Student loans, warehousing   
advances and other program-related or financial assets (such as portfolio       
investments, letters of credit, swap agreements and forward purchase            
commitments) have not been transferred and are generally not expected to be     
transferred until the Wind-Down Period is close to completion. Neither the      
Company nor any of its non-GSE affiliates may make secondary market purchases   
of FFELP loans for so long as the GSE is actively acquiring insured student     
loans. During the Wind-Down Period, GSE operations will be managed under arm's- 
length service agreements between the GSE and one or more of its non-GSE        
affiliates. The Privatization Act also provides certain restrictions on         
intercompany relations between the GSE and its affiliates during the Wind-Down  
Period.                                                                         

COMPETITION                                                                     

The Company's largest competitor is the Federal Direct Loan Program. Based
on DOE reports, the Company estimates that total student loan originations for  
the federal fiscal years 1999-2000 and 1998-99                                  

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were $36.1 billion and $33.7 billion, respectively, of which FDLP originations  
represented approximately 29 percent and 32 percent, respectively. The DOE      
projects that FDLP originations will represent about one-third of total student 
loan originations in the 2000-01 federal fiscal year.                           

The Company also faces competition on a national basis from several large 
commercial banks and non-profit secondary market agencies and on a state or     
local basis from smaller banks and state-based secondary markets. The           
availability of securitization for student loan assets also fostered            
competition from new and established market participants. Based on the most     
recent information from the DOE and management estimates, at the end of fiscal  
year 1999, the GSE's share (in dollars) of outstanding FFELP loans was 35       
percent, while banks and other financial institutions held 42 percent and state 
secondary market participants held 23 percent. Management believes that market  
share in the FFELP industry has been a function of school and student desire    
for borrower benefits and superior customer service as more fully described     
above. See "PRODUCTS AND SERVICES--Strategic Lending Partners and Loan          
Origination."                                                                   

The DOE offers FFELP borrowers the opportunity to refinance or consolidate
their FFELP loans into FDLP loans if the borrowers also have a FDLP loan or     
upon certification that the holder of their FFELP loans does not offer an       
income-sensitive payment plan acceptable to the borrower. During 2000 and 1999, 
approximately $519 million and $755 million, respectively, of the GSE's FFELP   
loans were consolidated into the FDLP. In early 1995, the Company began         
offering an income-sensitive payment plan. The FDLP, however, also provides an  
income-contingent option not available under the FFELP program that may be more 
attractive to certain borrowers. Under this repayment option, the government    
will ultimately forgive student loan debt after 25 years.                       

REGULATION                                                                      

  As a government-sponsored enterprise, the GSE is organized under federal law
and its government charter restricts its operations. Although privatization     
permits the Company's private activities to expand through non-GSE              
subsidiaries, the GSE's operations continue to be subject to broad federal      
regulation during the Wind-Down Period.                                         

The Privatization Act                                                           

  The Privatization Act established the basic framework for the Reorganization
and imposes certain restrictions on the operations of the Company and its       
subsidiaries during the Wind-Down Period. The Privatization Act amends the      
GSE's charter to require certain enhanced regulatory oversight of the GSE to    
ensure its financial safety and soundness. See "--GSE Regulation."              

Reorganization. The Privatization Act required the GSE to propose to      
shareholders a plan of reorganization under which their share ownership in the  
GSE would be automatically converted to an equivalent share ownership in a      
state-chartered holding company that would own all of the common stock of the   
GSE. On July 31, 1997, the GSE's shareholders approved the Reorganization in    
fulfillment of this provision. The Privatization Act requires that the GSE be   
liquidated on or before September 30, 2008, upon which its federal charter will 
be rescinded. During the Wind-Down Period, the Company will remain a passive    
entity that supports the operations of the GSE and its other non-GSE            
subsidiaries, and any new business activities will be conducted through such    
subsidiaries.                                                                   

The Privatization Act requires all personnel and certain assets to be     
transferred to non-GSE subsidiaries of the Company in connection with the       
Reorganization, including the transfer of the GSE's interest in certain         
subsidiaries. The GSE's student loans and related contracts, warehousing        
advances and other program-related or financial assets (such as portfolio       
investments, letters of credit, swap agreements and forward purchase            

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commitments) and any non-material assets that the GSE Board determines to be    
necessary for or appropriate to continued GSE operations, may be retained by    
the GSE. Employees of the GSE were transferred to the Management Company at the 
effective time of the Reorganization. Employees who were employed by non-GSE    
subsidiaries of the GSE before the Reorganization continue to be employed by    
such subsidiaries.                                                              

During the Wind-Down Period, the GSE is restricted in the new business    
activities it may undertake. The GSE may continue to purchase student loans     
only through September 30, 2007, and warehousing advance, letter of credit and  
standby bond purchase activity by the GSE is limited to takedowns on            
contractual financing and guarantee commitments in place at the effective time  
of the Reorganization. In addition, the Company and its non-GSE subsidiaries    
may not make secondary market purchases of FFELP loans for so long as the GSE   
is actively acquiring insured student loans.                                    

  In certain circumstances, the GSE will continue to serve as a lender of last
resort and will provide secondary market support for the FFELP upon the request 
of the Secretary of Education. If and to the extent that the GSE performs such  
functions, however, it will not be required to pay a statutorily imposed 30     
basis point offset fee on such loans. The GSE may transfer assets and declare   
dividends, from time to time, if it maintains a minimum capital ratio of at     
least 2.25 percent. In the event that the GSE does not maintain the required    
minimum capital ratio, the Company is required to supplement the GSE's capital  
to achieve such minimum capital ratio.                                          

  The GSE's debt obligations, including debt obligations that were outstanding
at the time of the Reorganization, continue to be outstanding obligations of    
the GSE and will not be transferred to any other entity (except in connection   
with the defeasance trust described below). See "--GSE Dissolution After        
Reorganization." The Privatization Act provides that the Reorganization does    
not modify the attributes accorded to the debt obligations of the GSE by the    
GSE's charter. During the Wind-Down Period, the GSE can continue to issue debt  
in the government agency market to finance student loans and other permissible  
asset purchases. The maturity date of such issuances, however, may not extend   
beyond September 30, 2008, the GSE's final dissolution date. This restriction   
does not apply to debt issued to finance any lender of last resort or secondary 
market purchase activity requested by the Secretary of Education. The           
Privatization Act is clear that the Reorganization (and the subsequent transfer 
of any remaining GSE debt to the defeasance trust described below) will not     
modify the legal status of any GSE debt obligations, whether such obligations   
existed at the time of Reorganization or are subsequently issued.               

Oversight Authority. During the Wind-Down Period, the Secretary of the    
Treasury has extended oversight authority to monitor the activities of the GSE  
and, in certain cases, the Company and its non-GSE subsidiaries to the extent   
that the activities of such entities are reasonably likely to have a material   
impact on the financial condition of the GSE. The U.S. Department of the        
Treasury has established the Office of Sallie Mae Oversight to perform these    
functions. During this period, the Secretary of the Treasury may require that   
the GSE submit periodic reports regarding any potentially material financial    
risk of its associated persons and its procedures for monitoring and            
controlling such risk. The Company is expressly prohibited from transferring    
ownership of the GSE or causing the GSE to file bankruptcy without the approval 
of the Secretary of the Treasury and the Secretary of Education. The Secretary  
of Education and the Secretary of the Treasury have express authority to        
request that the Attorney General bring an action, or may bring an action under 
the direction and control of the Attorney General, in the United States         
District Court for the District of Columbia, for the enforcement of any         
provision of the GSE's safety and soundness requirements or the requirements of 
the Privatization Act in general.                                               

Restrictions on Intercompany Relations. The Privatization Act restricts   
intercompany relations between the GSE and its affiliates during the Wind-Down  
Period. Specified corporate formalities must be followed to ensure that the     
separate corporate identities of the GSE and its affiliates are maintained.     
Specifically, the Privatization Act provides that the GSE must not extend       
credit to, nor guarantee any debt obligations of, the Company or its            
subsidiaries. The Privatization Act also provides that (i) the funds and assets 
of the GSE must                                                                 

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at all times be maintained separately from the funds and assets of the Company  
and its subsidiaries, (ii) the GSE must maintain books and records that clearly 
reflect the assets and liabilities of the GSE, separate from the assets and     
liabilities of the Company or its subsidiaries, (iii) the GSE must maintain a   
corporate office that is physically separate from any office of the Company and 
its subsidiaries, (iv) no director of the GSE who is appointed by the President 
may serve as a director of the Company and (v) at least one officer of the GSE  
must be an officer solely of the GSE.                                           

Furthermore, the Privatization Act mandates that transactions between the 
GSE and the Company, including any loan servicing arrangements, shall be on     
terms no less favorable to the GSE than the GSE could obtain from an unrelated  
third party, and any amounts collected on behalf of the GSE by the Company      
under a servicing contract or other arrangement between the GSE and the Company 
shall be immediately deposited by the Company to an account under the sole      
control of the GSE.                                                             

 Limitations on Company Activities. During the Wind-Down Period, the Company
must remain a passive entity that holds the stock of its subsidiaries and       
provides funding and management support to such subsidiaries. The Privatization 
Act contemplates that until the GSE is dissolved, the Company's business        
activities will be conducted through subsidiaries. However, the Privatization   
Act extends to the Company and its subsidiaries the GSE's "eligible lender"     
status for loan consolidation and secondary market purchases.                   

The Company and its non-GSE subsidiaries generally may not begin to make  
secondary market purchases of FFELP student loans for so long as the GSE is     
actively acquiring insured student loans. Subject to the foregoing, the Company 
may elect, at any time, to transfer new student loan purchase activity from the 
GSE to one of its non-GSE subsidiaries. In addition, the Company is permitted   
to and, in the third quarter of 1998, began to originate FFELP loans. See       
"Business--Products and Services--Originations." Under the Higher Education     
Act, loans acquired after August 10, 1993 and held by the GSE are subject to a  
30 basis point per annum "offset fee." The offset fee does not apply to         
securitized loans or to loans held or securitized by the Company or its non-GSE 
subsidiaries.                                                                   

Although the GSE may not finance the activities of the Company's non-GSE  
subsidiaries, it may, subject to its minimum capital requirements, dividend     
retained earnings and surplus capital to the Company, which in turn may use     
such amounts to support its non-GSE subsidiaries. The Privatization Act further 
directs that, unless and until distributed as dividends by the GSE, under no    
circumstances shall the assets of the GSE be available or used to pay claims or 
debts of or incurred by the Company.                                            

In exchange for the payment of $5 million to the District of Columbia     
Financial Responsibility and Management Assistance Authority (the "Control      
Board"), the Company and its other subsidiaries may continue to use the name    
"Sallie Mae," but not the name "Student Loan Marketing Association," as part of 
their legal names or as a trademark or service mark. Interim disclosure         
requirements in connection with securities offerings and promotional materials  
are required to avoid marketplace confusion regarding the separateness of the   
GSE and its affiliated entities. During the Wind-Down Period and until one year 
after repayment of all outstanding GSE debt, the "Sallie Mae" name may not be   
used by any Company unit that issues debt obligations or other securities to    
any person or entity other than the Company or its subsidiaries. In addition,   
the Privatization Act required the Company to issue certain warrants to         
purchase the Company's Common Stock (the "Warrants") to the Control Board.      
These provisions of the Privatization Act were part of the terms negotiated     
with the Administration and Congress in conjunction with the GSE's              
privatization. The Company issued the Warrants on August 7, 1997.               

GSE Dissolution after Reorganization. The Privatization Act provides that 
the GSE will liquidate and dissolve on September 30, 2008, unless an earlier    
dissolution is requested by the GSE and the Secretary of Education makes no     
finding that the GSE continues to be needed as a lender of last resort under    
the GSE charter or to purchase loans under certain agreements with the          
Secretary of Education. In connection with such dissolution, the GSE must       
transfer any remaining GSE obligations into a defeasance trust for the benefit  
of the                                                                          

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holders of such obligations, along with cash or full faith and credit           
obligations of the United States, or an agency thereof, in amounts sufficient,  
as determined by the Secretary of the Treasury, to pay the principal and        
interest on the deposited obligations. As of December 31, 2000, the GSE had     
$1.4 billion in current carrying value of debt obligations outstanding with     
maturities after September 30, 2008. If the GSE has insufficient assets to fund 
fully such GSE debt obligations outstanding at the time of dissolution, the     
Company must transfer sufficient assets to the trust to account for this        
shortfall. The Privatization Act also requires that on the dissolution date,    
the GSE shall repurchase or redeem, or make proper provisions for the           
repurchase or redemption of, any outstanding shares of preferred stock, of      
which the GSE has issued Series A and B Adjustable Rate Cumulative Preferred    
Stock. The Series A Preferred Stock is carried at its liquidation value of      
$50.00 per share for a total of $214 million and pays a variable dividend that  
has been at its minimum rate of 5 percent per annum for the last several years. 
The Series B Preferred Stock is carried at its liquidation value of $500,000    
per share for a total of $100 million and pays a variable dividend that is      
equal to three-month London Interbank Offered Rate ("LIBOR") plus one percent   
per annum divided by 1.377. Upon dissolution, the GSE charter will terminate,   
and any assets that the GSE continues to hold after establishment of the trust  
or that remain in the trust after full payment of the remaining obligations of  
the GSE assumed by the trust will be transferred to the Company or its          
affiliates, as determined by the Company's Board of Directors.                  

GSE Regulation                                                                  

The GSE's structure and the scope of its business activities are set forth
in its charter. The charter, which is subject to review and change by Congress, 
sets forth certain restrictions on the GSE's business and financing activities  
and charges the federal government with certain oversight responsibilities with 
respect to these activities. The GSE's charter grants the GSE certain           
exemptions from federal and state laws. The GSE's charter's primary regulatory  
restrictions and exemptions, including certain provisions added by the          
Privatization Act, are summarized as follows:                                   

1.Seven members of the GSE's 21-member Board of Directors are appointed by the  
President of the United States. The other 14 members are elected by the Company 
as the holder of the GSE's Common Stock. The Chairman of the Board is           
designated by the President of the United States from among the Board's 21      
members.                                                                        

2.Debt obligations issued by the GSE are exempt from state taxation to the same 
extent as U.S. government obligations. The GSE is exempt from all taxation by   
any state or by any county, municipality or local taxing authority except with  
respect to real property taxes. The GSE is not exempt from federal corporate    
income taxes.                                                                   

3.All stock and other securities of the GSE are deemed to be exempt securities  
under the laws administered by the Securities and Exchange Commission (the      
"Commission") to the same extent as obligations of the United States.           

4.The GSE may conduct its business without regard to any qualification or       
similar statute in any state of the United States, including the District of    
Columbia, the Commonwealth of Puerto Rico and the territories and possessions   
of the United States (although the scope of the GSE's business is generally     
limited by its federal charter).                                                

5.The issuance of GSE debt obligations must be approved by the Secretary of the 
Treasury.                                                                       

6.The GSE is required to have its financial statements examined annually by     
independent certified public accountants and to submit a report of the          
examination to the Secretary of the Treasury. The Department of the Treasury is 
also authorized to conduct audits of the GSE and to otherwise monitor the GSE's 
financial condition. The GSE is required to submit annual reports of its        
operations and activities to the President of the United States and Congress.   
The GSE must pay up to $800,000 per year to the Department of the Treasury to   
cover the costs of its oversight.                                               

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7.The GSE is subject to certain "safety and soundness" regulations, including   
the requirement that the GSE maintain a 2.25 percent capital adequacy ratio.    
The GSE may pay dividends only upon certification that, at the time of a        
dividend declaration and after giving effect to the payment of such dividend,   
the capital adequacy ratio is satisfied.                                        

8.The Secretary of Education and the Secretary of the Treasury have certain     
enforcement powers under the GSE's charter.                                     

9.A 30 basis point annual offset fee, unique to the GSE, is payable to the      
Secretary of Education on student loans purchased and held by the GSE on or     
after August 10, 1993.                                                          

10.In certain circumstances, at the request of the Secretary of Education, the  
GSE is required to act as a lender of last resort to make FFELP loans when      
other private lenders are not available. Such loans are not subject to the 30   
basis point offset fee on loans held by the GSE.                                

Other Regulation                                                                

  Under the Higher Education Act, the GSE is an "eligible lender" for purposes
only of purchasing and holding loans made by other lenders and making           
consolidation and lender of last resort loans. Like other participants in       
insured student loan programs, the Company is subject, from time to time, to    
review of its student loan operations by the General Accounting Office, the DOE 
and certain guarantee agencies. The laws relating to insured student loan       
programs are subject to revision from time to time and changes to such laws are 
beyond the Company's control. In addition, SMSC, as a servicer of student       
loans, is subject to certain DOE regulations regarding financial responsibility 
and administrative capability that govern all third party servicers of insured  
student loans. Failure to satisfy such standards may result in the loss of the  
government guarantee of FFELP loans. Also, in connection with its guarantor     
servicing operations, the Company must comply with, on behalf of its guarantor  
servicing customers, certain DOE regulations that govern guarantor activities   
as well as agreements for reimbursement between the Secretary of Education and  
the Company's guarantor servicing customers. Failure to comply with these       
regulations or the provisions of these agreements may result in the termination 
of the Secretary of Education's reimbursement obligation. HICA, a South Dakota  
stock insurance company, is subject to the ongoing regulatory authority of the  
South Dakota Division of Insurance and that of comparable governmental agencies 
in six other states.                                                            

Non-Discrimination and Limitations on Affiliation with Depository Institutions  

 The Privatization Act also amended the Higher Education Act to provide that
the GSE and any successor entity (including the Company) functioning as a       
secondary market for federally insured student loans may not engage, directly   
or indirectly, in any pattern or practice that results in a denial of a         
borrower's access to insured loans because of the borrower's race, sex, color,  
religion, national origin, age, disability status, income, attendance at a      
particular institution, length of a borrower's educational program or the       
borrower's academic year at an eligible institution.                            

 The Omnibus Appropriations Act of 1998, signed into law by the President on
October 21, 1998, contains several provisions that amend the Federal Deposit    
Insurance Act. These provisions provide an exception to the prohibition on      
affiliations between government-sponsored entities and depository institutions  
contained in the Federal Deposit Insurance Act. This exception allows the       
Company to become affiliated with a depository institution upon certain         
conditions and with the approval of the Secretary of the Treasury. Among the    
conditions are: the dissolution of the GSE cannot be adversely affected by the  
affiliation; the dissolution of the GSE must occur within two years after the   
affiliation is consummated subject to the ability of the Secretary to extend    
such deadline for up to two one-year periods; and the GSE must be separate and  
distinct from the affiliated depository institution and cannot extend credit,   
provide credit enhancement or purchase any obligation of the depository         
institution.                                                                    

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Item 2. Properties                                                              

The following table lists the principal facilities owned by the Company:  

                                                                [Download Table]

                                                                  Approximate
Location                Function                                  Square Feet
--------                --------                                  -----------
                                                                             
Reston, VA              Operations/Headquarters                     395,000  
Fishers, IN             Loan Servicing Data Center                  450,000  
Indianapolis, IN        Former USA Group Headquarters               330,000  
Wilkes Barre, PA        Loan Servicing Center                       135,000  
Killeen, TX             Loan Servicing Center                       133,000  
Lynn Haven, FL          Loan Servicing Center                       133,000  
Castleton, IN           Loan Servicing Center                       100,000  

The Company leases approximately 7,000 square feet of office space in     
Washington, D.C. for its government relations group. The GSE leases             
approximately 115,600 square feet of office space in Washington, D.C. for its   
former headquarters. The Company has entered into subleases through the term of 
these leases, which expire in 2001, and other arrangements to terminate the     
GSE's obligations under these leases. In addition, the Company leases           
approximately 71,000 square feet for its collections center in Summerlin,       
Nevada and 65,000 square feet of space for its inbound/outbound call center in  
Chandler, Arizona. With the exception of the Pennsylvania loan servicing        
center, none of the Company's facilities is encumbered by a mortgage. The       
Company believes that its headquarters and loan servicing centers are generally 
adequate to meet its long-term student loan and new business goals. The         
Company's principal office is located in owned space at 11600 Sallie Mae Drive, 
Reston, Virginia, 20193.                                                        

As of December 31, 2000, the Company employed 6,712 employees nationwide. 

Item 3. Legal Proceedings.                                                      

The Company, together with a number of other FFELP industry participants, 
filed a lawsuit challenging the Department of Education's interpretation of and 
non-compliance with provisions in the Higher Education Act governing            
origination fees and repayment incentives on loans made under the FDLP, as well 
as interest rates for Direct Consolidation Loans. The lawsuit, which was filed  
November 3, 2000 in the United States District Court for the District of        
Columbia, alleges that the Department's interpretations of and non-compliance   
with these statutory provisions are contrary to the statute's unambiguous text, 
and are arbitrary, capricious, an abuse of discretion, or otherwise not in      
accordance with law, and violate both the HEA and the Administrative Procedure  
Act. The Company and the other plaintiffs have filed a motion for summary       
judgment. The Department of Education must file its cross-motion for summary    
judgment and opposition to the plaintiff's motion on or before April 6, 2001.   

Item 4. Submission of Matters to a Vote of Security-Holders                     

Nothing to report.                                                        

15

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PART II.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters   

The Company's Common Stock is listed and traded on the New York Stock     
Exchange under the symbol SLM. The number of holders of record of the Company's 
Common Stock as of March 12, 2001 was approximately 612. The following table    
sets forth the high and low sales prices for the Company's Common Stock for     
each full quarterly period within the two most recent fiscal years.             

COMMON STOCK PRICES                                                         

                                                                [Download Table]

              1st       2nd       3rd       4th   
            Quarter   Quarter   Quarter   Quarter 
            --------  --------  --------  --------
                                                  
1999  High  48 15/16  47 5/16   48 13/16  53 5/8  
      Low   40 1/8    40 3/8    42 7/8    41 11/16
2000  High  43 7/8    38 11/16  48 15/16  68 1/4  
      Low   28 1/2    27 13/16  36 7/8    44 7/8  

  The Company paid regular quarterly dividends of $.15 per share on the Common
Stock for the first three quarters of 1999, $.16 for the fourth quarter of 1999 
and the first three quarters of 2000 and $.175 for the fourth quarter of 2000   
and the first quarter of 2001.                                                  

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Item 6. Selected Financial Data                                                 

Selected Financial Data 1996-2000 
(Dollars in millions, except per share amounts) 

The following table sets forth selected financial and other operating     
information of the Company. The selected financial data in the table is derived 
from the consolidated financial statements of the Company. The data should be   
read in conjunction with the consolidated financial statements, related notes,  
and "Management's Discussion and Analysis of Financial Condition and Results of 
Operations" included in the Company's Form 10-K to the Securities and Exchange  
Commission.                                                                     

                                                                [Download Table]

                                    2000     1999     1998     1997     1996   
                                   -------  -------  -------  -------  ------- 
                                                                               
Operating Data:                                                                
Net interest income..............  $   642  $   694  $   651  $   781  $   894 
Net income.......................      465      501      501      508      409 
Basic earnings per common share..     2.84     3.11     2.99     2.80     2.10 
Diluted earnings per common                                                    
 share...........................     2.76     3.06     2.95     2.78     2.09 
Dividends per common share.......      .66      .61      .57      .52      .47 
Return on stockholders' equity...       49%      78%      81%      65%      50%
Net interest margin..............     1.52     1.85     1.93     1.80     1.96 
Return on assets.................     1.06     1.28     1.41     1.12      .86 
Dividend payout ratio............       24       20       19       19       22 
Average equity/average assets....     2.34     1.59     1.65     1.64     1.66 
Balance Sheet Data:                                                            
Student loans....................  $37,647  $33,809  $28,283  $29,443  $33,696 
Total assets.....................   48,792   44,025   37,210   39,832   47,572 
Total borrowings.................   45,375   41,988   35,399   37,717   45,124 
Stockholders' equity.............    1,415      841      654      675      834 
Book value per common share......     7.62     4.29     3.98     3.89     4.44 
Other Data:                                                                    
Securitized student loans                                                      
 outstanding.....................  $29,868  $19,467  $18,059  $14,262  $ 6,329 
Pro-forma "Core Cash Basis"                                                    
 Results (1):                                                                  
Net interest income..............  $ 1,039  $   927  $   892  $   937  $   939 
Net income.......................      492      405      381      384      367 
Diluted earnings per common                                                    
 share...........................     2.93     2.48     2.24     2.10     1.88 
Net interest margin..............     1.53%    1.68%    1.76%    1.75%    1.89%
Return on assets.................      .71      .71      .72      .70      .71 

--------                                                                        
(1)The pro-forma results present the Company's results of operations under the  
assumption that the securitization transactions are financings and that the     
securitized student loans were not sold. As such, no gain on sale or subsequent 
servicing and securitization revenue is recognized. Instead, the earnings of    
the student loans in the trusts and related financing costs are reflected over  
the life of the underlying pool of loans. The effect of floor income, certain   
one-time gains on sales of investment securities and student loans, certain     
one-time, non-recurring expenses incurred in 1997, a one-time integration       
charge related to the July 2000 acquisition of USA Group, and the amortization  
of goodwill from acquisitions are also excluded from net income. Management     
refers to these pro-forma results as "core cash basis" results. Management      
monitors the periodic "core cash basis" results of the Company's managed        
student loan portfolio and believes that they assist in a better understanding  
of the Company's student loan business.                                         

17

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Item 7. Management's Discussion and Analysis of Financial Condition and Results 
of Operations                                                                   

MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
Years ended December 31, 1998-2000
(Dollars in millions, except per share amounts) 

OVERVIEW                                                                        

  SLM Holding Corporation ("SLM Holding") was formed on February 3, 1997, as a
wholly owned subsidiary of the Student Loan Marketing Association (the "GSE").  
On August 7, 1997, in accordance with the Student Loan Marketing Association    
Reorganization Act of 1996 (the "Privatization Act") and approval by            
shareholders of an agreement and plan of reorganization, the GSE was            
reorganized into a subsidiary of SLM Holding (the "Reorganization"). Effective  
as of July 31, 2000, SLM Holding Corporation was renamed USA Education, Inc.    
upon the completion of the acquisition of the guarantee servicing, student loan 
servicing and secondary market operations of USA Group, Inc. ("USA Group"). USA 
Education, Inc. is a holding company that operates through a number of          
subsidiaries including the GSE. References herein to the "Company" refer to the 
GSE and its subsidiaries for periods prior to the Reorganization and to USA     
Education, Inc. and its subsidiaries for periods after the Reorganization.      

The Company is the largest source of financing and servicing for education
loans in the United States primarily through its participation in the Federal   
Family Education Loan Program ("FFELP"), formerly the Guaranteed Student Loan   
Program. The Company's products and services include student loan purchases and 
commitments to purchase student loans, student loan servicing, as well as       
operational support to originators of student loans and to post-secondary       
education institutions, guarantors and other education-related financial        
services. The Company also originates, purchases, holds and services            
unguaranteed private loans.                                                     

 The following Management's Discussion and Analysis contains forward-looking
statements and information that are based on management's current expectations  
as of the date of this document. Discussions that utilize the words "intends,"  
"anticipate," "believe," "estimate" and "expect" and similar expressions, as    
they relate to the Company's management, are intended to identify forward-      
looking statements. Such forward-looking statements are subject to risks,       
uncertainties, assumptions and other factors that may cause the actual results  
of the Company to be materially different from those reflected in such forward- 
looking statements. Such 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 such laws 
and regulations; which may reduce the volume, average term and costs of yields  
on student loans under the 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 the Company. The Company could also be  
affected by changes in the demand for educational financing and consumer        
lending or in financing preferences of lenders, educational institutions,       
students and their families; and 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.                                    

18

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SELECTED FINANCIAL DATA                                                         

Condensed Statements of Income                                                  

                                                                [Download Table]

                                                     Increase (decrease)      
                                                    ------------------------- 
                                    Years ended      2000 vs.      1999 vs.   
                                   December 31,        1999          1998     
                                ------------------- ------------   ---------- 
                                2000   1999   1998    $      %       $     %  
                                ----- ------ ------ ------  ----   -----  --- 
                                                                              
Net interest income............ $ 642 $  694 $  651 $  (52)   (7)% $  43    7%
Less: provision for losses.....    32     34     36     (2)   (7)     (2)  (6)
                                ----- ------ ------ ------  ----   -----  --- 
Net interest income after                                                     
 provision for losses..........   610    660    615    (50)   (8)     45    7 
Gains on student loan                                                         
 securitizations...............    92     35    117     57   160     (82) (70)
Servicing and securitization                                                  
 revenue.......................   296    289    281      7     2       8    3 
Gains on sales of student                                                     
 loans.........................    --     27     --    (27) (100)     27  100 
Guarantor servicing fees.......   128     --     --    128   100      --   -- 
Other income...................   172    100     98     72    73       2    1 
Operating expenses and                                                        
 integration charge............   586    359    361    227    63      (2)  (1)
Income taxes...................   236    240    238     (4)   (2)      2    1 
Minority interest in net                                                      
 earnings of subsidiary .......    11     11     11     --    --      --   -- 
                                ----- ------ ------ ------  ----   -----  --- 
Net income.....................   465    501    501    (36)   (7)     --   -- 
Preferred stock dividends......    12      1     --     11   701       1  100 
                                ----- ------ ------ ------  ----   -----  --- 
Net income attributable to                                                    
 common stock.................. $ 453 $  500 $  501 $  (47)   (9)% $  (1)  --%
                                ===== ====== ====== ======  ====   =====  === 
Basic earnings per share....... $2.84 $ 3.11 $ 2.99 $ (.27)   (9)% $ .12    4%
                                ===== ====== ====== ======  ====   =====  === 
Diluted earnings per share..... $2.76 $ 3.06 $ 2.95 $ (.30)  (10)% $ .11    4%
                                ===== ====== ====== ======  ====   =====  === 
Dividends per common share..... $ .66 $  .61 $  .57 $  .05     7%  $ .04    7%
                                ===== ====== ====== ======  ====   =====  === 

Condensed Balance Sheets                                                        

                                                                [Download Table]

                                                    Increase (decrease)        
                                                 ----------------------------- 
                                                   2000 vs.        1999 vs.    
                                 December 31,        1999            1998      
                               ----------------- -------------   ------------- 
                                 2000     1999      $       %       $       %  
                               -------- -------- --------  ---   --------  --- 
                                                                               
Assets                                                                         
Student loans................  $ 37,647 $ 33,809  $ 3,838   11%   $ 5,526   20%
Warehousing advances.........       987    1,043      (56)  (5)      (500) (32)
Academic facilities                                                            
 financings..................       851    1,028     (177) (17)      (152) (13)
Cash and investments.........     5,941    5,775      166    3      1,669   41 
Other assets.................     3,366    2,370      996   42        272   13 
                               -------- -------- --------  ---   --------  --- 
Total assets.................  $ 48,792 $ 44,025 $  4,767   11%  $  6,815   18%
                               ======== ======== ========  ===   ========  === 
Liabilities and Stockholders'                                                  
 Equity                                                                        
Short-term borrowings........  $ 30,464 $ 37,491 $ (7,027) (19)% $ 10,902   41%
Long-term notes..............    14,911    4,496   10,415  232     (4,314) (49)
Other liabilities............     1,788      983      805   82         40    4 
                               -------- -------- --------  ---   --------  --- 
Total liabilities............    47,163   42,970    4,193   10      6,628   18 
                               -------- -------- --------  ---   --------  --- 
Minority interest in                                                           
 subsidiary..................       214      214       --   --         --   -- 
Stockholders' equity before                                                    
 treasury stock..............     2,550    2,025      525   26        529   35 
Common stock held in treasury                                                  
 at cost.....................     1,135    1,184      (49)  (4)       342   41 
                               -------- -------- --------  ---   --------  --- 
Total stockholders' equity...     1,415      841      574   68        187   29 
                               -------- -------- --------  ---   --------  --- 
Total liabilities and                                                          
 stockholders' equity........  $ 48,792 $ 44,025 $  4,767   11%  $  6,815   18%
                               ======== ======== ========  ===   ========  === 

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RESULTS OF OPERATIONS                                                           

EARNINGS SUMMARY                                                                

The Company's "core cash basis" net income was $492 million for the year  
ended December 31, 2000 ($2.93 diluted earnings per share) versus $405 million  
($2.48 diluted earnings per share) for the year ended December 31, 1999. (See   
"Pro-forma Statements of Income" for a detailed discussion of "core cash basis" 
net income.) During 2000, the Company acquired a record $20.6 billion of        
managed student loans including $1.4 billion of purchased student loans and     
$5.2 billion of managed student loans acquired from USA Group, and $3.1 billion 
of student loans acquired from Student Loan Funding Resources ("SLFR").         

Student loan acquisitions increased the average balance of managed loans  
outstanding by $9.7 billion for the year ending December 31, 2000. The higher   
average student loan balance, partially offset by the lower average Special     
Allowance Payment ("SAP") spreads (see "Student Loan Spread Analysis"),         
increased after-tax earnings by $107 million. In addition, after-tax fee income 
increased by $128 million, principally due to the additional guarantor and      
third party servicing fee income attributable to the acquisition of USA Group.  
(See "Other Income.") These increases to "core cash basis" net income were      
partially offset by the after-tax increase to operating expenses of $103        
million principally due to the acquisitions of USA Group and SLFR, which closed 
on July 31, 2000 and July 7, 2000, respectively.                                

  For the year ended December 31, 2000, the Company's net income calculated in
accordance with generally accepted accounting principles ("GAAP") was $465      
million ($2.76 diluted earnings per share), versus net income of $501 million   
($3.06 diluted earnings per share) in 1999. The decrease in 2000 reported net   
income from 1999 is attributable to several significant factors. While the      
Company increased the on-balance sheet average balance of student loans by $1.6 
billion, the higher interest rate environment in 2000 decreased after-tax floor 
income by $41 million. Other factors include a $148 million after-tax increase  
in operating expense including a $32 million after-tax integration charge, both 
principally due to the acquisitions of USA Group and SLFR, and an $18 million   
after-tax decrease in gains on sales of student loans. The Company did not      
complete any such sales in 2000. These decreases to net income were only        
partially offset by the increases in after-tax gain on securitizations and      
servicing and securitization revenue of $37 million and $5 million,             
respectively. After-tax fee income increased net income by $128 million,        
principally due to the additional guarantor and third party servicing fee       
income attributable to the acquisition of USA Group.                            

During 2000, the Company repurchased 7 million common shares (or 4 percent
of its outstanding shares) at a cost of $321 million, and issued approximately  
10 million shares as part of the USA Group purchase and a net 5 million shares  
from benefit plans. As a result, common shares outstanding increased to 164     
million at December 31, 2000 from 158 million at December 31, 1999.             

NET INTEREST INCOME                                                             

Net interest income is derived largely from the Company's portfolio of    
student loans that remain on-balance sheet. The "Taxable Equivalent Net         
Interest Income" analysis set forth below is designed to facilitate a           
comparison of non-taxable asset yields to taxable yields on a similar basis.    
Additional information regarding the return on the Company's student loan       
portfolio is set forth under "Student Loans--Student Loan Spread Analysis."     

 Taxable equivalent net interest income for the year ended December 31, 2000
versus the year ended December 31, 1999 decreased by $59 million while the net  
interest margin decreased by 33 basis points. The decrease in taxable           
equivalent net interest income for the year ended December 31, 2000 was         
primarily due to the higher interest rate environment in 2000, which led to a   
decrease of $63 million in floor income. The net interest margin decrease is    
reflective of the higher average balance of investments as a percentage of      
average total earning assets. In addition, the increase in the Company's        
portfolio of lower-yielding loans due to the acquisition of loans earlier in    
their life cycles has decreased the average SAP in the student loan yield.      

20

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 Taxable equivalent net interest income for the year ended December 31, 1999
versus the year ended December 31, 1998 increased by $39 million. The increase  
in taxable equivalent net interest income for the year ended December 31, 1999  
was principally due to the $5.4 billion increase in the average balance of      
student loans over 1998. The decrease in the net interest margin for the year   
ended December 31, 1999 was mainly due to the decrease in the student loan      
spread (discussed in more detail below), partially offset by the reduction in   
the average balance of lower-yielding investments and warehousing advances.     

Taxable Equivalent Net Interest Income                                          

The amounts in this table and 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.                              

                                                                [Download Table]

                                                      Increase (decrease)     
                                                      ----------------------- 
                               Years ended December   2000 vs.     1999 vs.   
                                        31,             1999         1998     
                              ----------------------- ----------   ---------- 
                               2000    1999    1998     $     %      $     %  
                              ------- ------- ------- -----  ---   -----  --- 
                                                                              
Interest income                                                               
  Student loans.............. $ 2,854 $ 2,426 $ 2,095 $ 428   18%  $ 331   16%
  Warehousing advances.......      56      68     102   (12) (17)    (34) (33)
  Academic facilities                                                         
   financings................      67      74      85    (7) (10)    (11) (13)
  Investments................     501     240     295   261  109     (55) (19)
  Taxable equivalent                                                          
   adjustment................      25      32      34    (7) (22)     (2)  (8)
                              ------- ------- ------- -----  ---   -----  --- 
Total taxable equivalent                                                      
 interest income.............   3,503   2,840   2,611   663   23     229    9 
Interest expense.............   2,837   2,115   1,925   722   34     190   10 
                              ------- ------- ------- -----  ---   -----  --- 
Taxable equivalent net                                                        
 interest income............. $   666 $   725 $   686 $ (59)  (8)% $  39    6%
                              ======= ======= ======= =====  ===   =====  === 

Average Balance Sheets                                                          

 The following table reflects the rates earned on earning assets and paid on
liabilities for the years ended December 31, 2000, 1999 and 1998.               

                                                                [Download Table]

                                          Years ended December 31,            
                                  ------------------------------------------- 
                                      2000           1999           1998      
                                  -------------  -------------  ------------- 
                                  Balance  Rate  Balance  Rate  Balance  Rate 
                                  -------- ----  -------- ----  -------- ---- 
                                                                              
Average Assets                                                                
  Student loans.................. $ 34,637 8.24% $ 33,028 7.35% $ 27,589 7.59%
  Warehousing advances...........      825 6.84     1,173 5.78     1,718 5.93 
  Academic facilities                                                         
   financings....................      974 8.50     1,144 8.16     1,318 8.15 
  Investments....................    7,486 6.81     3,932 6.42     4,843 6.34 
                                  -------- ----  -------- ----  -------- ---- 
Total interest earning assets....   43,922 7.98%   39,277 7.23%   35,468 7.36%
                                           ====           ====           ==== 
Non-interest earning assets......    2,711          2,166          2,012      
                                  --------       --------       --------      
Total assets..................... $ 46,633       $ 41,443       $ 37,480      
                                  ========       ========       ========      
Average Liabilities and                                                       
 Stockholders' Equity                                                         
  Six month floating rate notes..  $ 4,660 6.49%  $ 4,644 5.38%  $ 2,898 5.40%
  Other short-term borrowings....   30,670 6.40    28,560 5.30    21,384 5.34 
  Long-term notes................    8,636 6.61     6,292 5.60    11,194 5.60 
                                  -------- ----  -------- ----  -------- ---- 
Total interest bearing                                                        
 liabilities.....................   43,966 6.45%   39,496 5.35%   35,476 5.43%
                                           ====           ====           ==== 
Non-interest bearing                                                          
 liabilities.....................    1,574          1,287          1,385      
Stockholders' equity.............    1,093            660            619      
                                  --------       --------       --------      
Total liabilities and                                                         
 stockholders' equity............ $ 46,633       $ 41,443       $ 37,480      
                                  ========       ========       ========      
Net interest margin..............          1.52%          1.85%          1.93%
                                           ====           ====           ==== 

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Rate/Volume Analysis                                                            

  The Rate/Volume Analysis below shows the relative contribution of changes in
interest rates and asset volumes.                                               

                                                                [Download Table]

                                                              Increase   
                                                             (decrease)  
                                                  Taxable   attributable 
                                                 equivalent to change in 
                                                  increase  -------------
                                                 (decrease) Rate   Volume
                                                 ---------- -----  ------
                                                                         
2000 vs. 1999                                                            
Taxable equivalent interest income..............   $ 663    $ 327  $ 336 
Interest expense................................     722      431    291 
                                                   -----    -----  ----- 
Taxable equivalent net interest income..........   $ (59)   $(104) $  45 
                                                   =====    =====  ===== 
1999 vs. 1998                                                            
Taxable equivalent interest income..............   $ 229    $ (66) $ 295 
Interest expense................................     190       (9)   199 
                                                   -----    -----  ----- 
Taxable equivalent net interest income..........   $  39    $ (57) $  96 
                                                   =====    =====  ===== 

Student Loans                                                                   

Student Loan Spread Analysis                                                    

The following table analyzes the reported earnings from student loans both
on-balance sheet and those off-balance sheet in securitization trusts. For      
student loans off-balance sheet, the Company will continue to earn servicing    
fee revenues over the life of the securitized student loan portfolios. The off- 
balance sheet information presented in "Securitization Program--Servicing and   
Securitization Revenue" analyzes the on-going servicing revenue and residual    
interest earned on the securitized portfolios of student loans. For an analysis 
of the Company's student loan spread for the entire portfolio of managed        
student loans on a similar basis to the on-balance sheet analysis, see "'Core   
Cash Basis' Student Loan Spread and Net Interest Income."                       

                                                                [Download Table]

                                                Years ended December     
                                                         31,             
                                               ------------------------- 
                                                2000     1999     1998   
                                               -------  -------  ------- 
                                                                         
On-Balance Sheet                                                         
Student loan yields...........................    8.91%    8.02%    8.24%
Consolidated loan rebate fees.................    (.27)    (.22)    (.23)
Offset fees...................................    (.13)    (.15)    (.11)
Borrower benefits.............................    (.07)    (.06)    (.08)
Premium amortizations.........................    (.20)    (.24)    (.23)
                                               -------  -------  ------- 
Student loan income...........................    8.24     7.35     7.59 
Cost of funds.................................   (6.42)   (5.32)   (5.34)
                                               -------  -------  ------- 
Student loan spread...........................    1.82%    2.03%    2.25%
                                               =======  =======  ======= 
Off-Balance Sheet                                                        
Servicing and securitization revenue..........    1.15%    1.65%   1.65% 
                                               =======  =======  ======= 
Average Balances (in millions of dollars)                                
Student loans................................. $34,637  $33,028  $27,589 
Securitized loans.............................  25,711   17,670   17,203 
                                               -------  -------  ------- 
Managed student loans......................... $60,348  $50,698  $44,792 
                                               =======  =======  ======= 

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The Company's portfolio of student loans originated under the FFELP has a 
variety of unique interest rate characteristics. The Company earns interest at  
the greater of the borrower's rate or a floating rate determined by reference   
to the average of the applicable floating rates (91-day Treasury bill,          
commercial paper or 52-week Treasury bill) in a calendar quarter, plus a fixed  
spread, which is dependent upon the loan origination date. If the floating rate 
exceeds the borrower rate, the Department of Education pays the difference      
directly to the Company. If the floating rate is less than the rate the         
borrower is obligated to pay, the Company simply earns interest at the borrower 
rate. In all cases, the rate a borrower is obligated to pay sets a minimum rate 
for determining the yield that the Company earns on the loan. Borrowers'        
interest rates are either fixed to term or are reset annually on July 1 of each 
year depending on when the loan was originated.                                 

  The Company generally finances its student loan portfolio with floating rate
debt tied to the average of the 91-day Treasury bill auctions, either directly  
or through the use of derivative financial instruments intended to mimic the    
interest rate characteristics of the student loans. Such borrowings, however,   
generally do not have minimum rates. As a result, in periods of declining       
interest rates, the portfolio of managed student loans may be earning at the    
minimum borrower rate while the Company's funding costs (exclusive of funding   
spreads) will generally decline along with Treasury bill rates. For loans where 
the borrower's interest rate is fixed to term, declining interest rates may     
benefit the spread earned on student loans for extended periods of time. For    
loans where the borrower's interest rate is reset annually, any benefit of a    
low interest rate environment will only enhance student loan spreads through    
the next annual reset of the borrower's interest rates, which occurs on July 1  
of each year. Higher average Treasury bill rates in 2000 decreased the          
Company's benefit from student loans earning at the minimum borrower rate       
included in student loan income, net of payments under Floor Revenue Contracts, 
to $3 million, of which $2 million was attributable to student loans with       
minimum borrower rates fixed to term and $1 million was attributable to student 
loans with minimum borrower rates adjusting annually. Low average Treasury bill 
rates in 1999 benefited the Company's on-balance sheet student loan income, net 
of payments under Floor Interest Contracts (discussed below), by $66 million of 
which $47 million was attributable to student loans with minimum borrower rates 
fixed to term and $19 million was attributable to student loans with minimum    
borrower rates adjusting annually. In 1998, low average Treasury bill rates     
increased the Company's on-balance sheet student loan income, net of payments   
under Floor Interest Contracts, by $63 million of which $40 million was         
attributable to student loans with minimum borrower rates fixed to term and $23 
million was attributable to student loans with minimum borrower rates adjusting 
annually.                                                                       

The 21 basis point decrease in the student loan spread in 2000 versus 1999
is due primarily to the decrease in floor income. The student loan spread in    
1999 decreased by 22 basis points from 1998. This was due mainly to higher      
financing spreads which decreased the 1999 student loan spread by 20 basis      
points, and to lower SAP rates which reduced the student loan spread by 7 basis 
points. The Company's restructuring of its joint venture with Chase Manhattan   
Bank ("the Joint Venture") in December of 1998, which replaced lower yielding   
participations with student loans, increased the 1999 student loan spread by 5  
basis points.                                                                   

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The following table analyzes the ability of the FFELP student loans in the
Company's managed student loan portfolio to earn at the minimum borrower        
interest rate at December 31, 2000 and 1999, based on the last Treasury bill    
auction of the year (5.86 percent in 2000 and 5.46 percent in 1999).            

                                                        [Enlarge/Download Table]

                                December 31, 2000              December 31, 1999       
                          -----------------------------  ----------------------------- 
                           Fixed                          Fixed                        
                          Borrower Annually Reset        Borrower Annually Reset       
                            Rate   Borrower Rate  Total    Rate   Borrower Rate  Total 
                          -------- -------------- -----  -------- -------------- ----- 
                                                                                       
Student loans eligible                                                                 
 to earn at the minimum                                                                
 borrower rate..........   $16.3       $37.4      $53.7   $13.0       $28.6      $41.6 
Less notional amount of                                                                
 floor interest                                                                        
 contracts..............    (5.8)         --       (5.8)   (3.4)       (3.1)      (6.5)
                           -----       -----      -----   -----       -----      ----- 
Net student loans                                                                      
 eligible to earn at the                                                               
 minimum borrower rate..   $10.5       $37.4      $47.9   $ 9.6       $25.5      $35.1 
                           =====       =====      =====   =====       =====      ===== 
Net student loans                                                                      
 earning at the minimum                                                                
 borrower rate..........   $ 0.9       $ 5.1      $ 6.0   $ 5.0          --      $ 5.0 
                           =====       =====      =====   =====       =====      ===== 

Student Loan Floor Revenue Contracts                                            

Periodically, the Company has entered into contracts with third parties to
monetize the value of the minimum borrower interest rate feature of its         
portfolio of FFELP student loans. Under these contracts, referred to as "Floor  
Revenue Contracts", the Company receives an upfront payment and agrees to pay   
the difference between (1) the minimum borrower interest rate less the          
applicable SAP rate ("the strike rate") and (2) the average of the 91-day       
Treasury bill rates over the period of the contract. If the strike rate is less 
than the average of the Treasury Bill rates, then no payment is required. These 
upfront payments are amortized over the average life of the contracts. Floor    
Revenue Contracts sold on loans where the borrower rate is reset annually have  
historically had terms through the next reset date, a period of one year or     
less, while Floor Revenue Contracts sold on loans where the borrower rate is    
fixed to term have multi-year terms. The $5.8 billion of outstanding fixed      
borrower rate Floor Revenue Contracts at December 31, 2000 have expiration      
dates through the year 2007.                                                    

For the years ended December 31, 2000, 1999 and 1998, the amortization of 
the upfront payments received from the sale of Floor Revenue Contracts on the   
Company's on-balance sheet student loans with fixed borrower rates was $23      
million, $20 million and $28 million, respectively, and for Floor Revenue       
Contracts with annually reset borrower rates was $1 million, $21 million and    
$24 million, respectively. At December 31, 2000, unamortized payments received  
from the sale of Floor Revenue Contracts totaled $85 million, all of which      
related to contracts on fixed rate loans.                                       

  Effective December 31, 2000, in anticipation of the adoption of Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative 
Instruments and Hedging Activities," the Floor Revenue Contracts were de-       
designated as effective hedges and marked-to-market. The net effect of the fair 
market value of these contracts and the unamortized upfront payment totaled     
$104 million and was reclassified to student loan premium and will be amortized 
over the average life of the student loan portfolio.                            

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On-Balance Sheet Funding Costs                                                  

 The Company's borrowings are generally variable-rate indexed principally to
the 91-day Treasury bill rate. The following table summarizes the average       
balance of on-balance sheet debt (by index, after giving effect to the impact   
of interest rate swaps) for the years ended December 31, 2000, 1999 and 1998    
(dollars in millions).                                                          

                                                                [Download Table]

                                       Years ended December 31,            
                            -----------------------------------------------
                                 2000            1999            1998      
                            --------------- --------------- ---------------
                            Average Average Average Average Average Average
          Index             Balance  Rate   Balance  Rate   Balance  Rate  
          -----             ------- ------- ------- ------- ------- -------
                                                                           
Treasury bill, principally                                                 
 91-day...................  $32,946   6.48% $31,043   5.35% $27,306   5.33%
LIBOR.....................    1,900   6.49    2,597   5.14    4,111   5.49 
Discount notes............    5,300   6.26    3,424   4.90    2,328   5.27 
Fixed.....................    1,429   5.99    1,171   5.94      622   6.95 
Zero coupon...............      171  11.17      153  11.14      140  11.13 
Commercial paper..........      969   6.65      302   5.69       --     -- 
Auction rate securities...      653   5.65       --     --       --     -- 
Other.....................      598   6.25      806   5.08      969   5.47 
                            -------  -----  -------  -----  -------  ----- 
Total.....................  $43,966   6.45% $39,496   5.35% $35,476   5.43%
                            =======  =====  =======  =====  =======  ===== 

The following table details the spreads for the Company's Treasury bill   
indexed borrowings principally to the 91-day Treasury bill rate and London      
Interbank Offered Rate ("LIBOR") indexed borrowings:                            

                                                                [Download Table]

                             Years ended        
Indexed borrowings          December 31,        
------------------        --------------------- 
                          2000    1999    1998  
                          -----   -----   ----- 
                                                
Treasury Bill                                   
Weighted Average                                
 Treasury bill..........   5.96%   4.84%   5.04%
Borrowing spread........    .52     .51     .29 
                          -----   -----   ----- 
Weighted average                                
 borrowing rate.........   6.48%   5.35%   5.33%
                          =====   =====   ===== 
LIBOR                                           
Weighted average LIBOR..   6.63%   5.34%   5.73%
Borrowing spread........   (.14)   (.20)   (.24)
                          -----   -----   ----- 
Weighted average                                
 borrowing rate.........   6.49%   5.14%   5.49%
                          =====   =====   ===== 

Securitization Program                                                          

In 2000, the Company completed four securitization transactions in which a
total of $8.8 billion of student loans were sold to a special purpose finance   
subsidiary and by that subsidiary to trusts that issued asset-backed securities 
to fund the student loans to term. In addition, the Company acquired the        
securitization revenue streams of $5.2 billion of student loans previously      
securitized by USA Group. This increased the percentage of average securitized  
loans to average managed student loans to 43 percent for 2000 versus 35 percent 
for 1999. In 1999, the Company completed three securitization transactions in   
which a total of $4.0 billion of student loans were securitized and in 1998,    
the Company completed two securitization transactions in which a total of $6.0  
billion of student loans were securitized. The Company accounts for its         
securitization transactions in accordance with Statement of Financial           
Accounting Standards No. 125 "Accounting for Transfers and Servicing of         
Financial Assets and Extinguishments of Liabilities" ("SFAS 125"), which        
establishes the accounting for certain financial asset transfers, including     
securitization transactions. Under SFAS 125, the Company records a gain on sale 
based upon the difference between the cost basis of the assets sold and the     
fair value of the assets received. At the same time, the Company records an     
asset (the "Interest Residual") equal to the present value of the expected net  
cash flows from the trust to the Company over the life of the portfolio         

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securitized. The gain is reduced by write-offs of certain assets related to the 
portfolio sold and by transaction costs. In addition, the Company continues to  
service the loans in the trusts, through SMSC, for a fee, and earns that fee    
over the life of the portfolio. When the contract servicing fee is greater than 
current market servicing rates, the present value of such excess servicing fees 
is recognized as a servicing asset and amortized over the life of the portfolio 
serviced.                                                                       

Gains on Student Loan Securitizations                                           

For the years ended December 31, 2000, 1999 and 1998, the Company recorded
pre-tax securitization gains of $92 million, $35 million and $117 million,      
respectively. Gains for the years ended December 31, 2000, 1999 and 1998,       
measured as a percentage of the securitized portfolios, were 1.04 percent, .88  
percent, and 1.95 percent, respectively. During 2000, the Company continued its 
securitization activity due to the lower financing spreads and securitized $4.8 
billion more than in 1999. The increase in the gains in 2000 versus 1999 is due 
to lower financing spreads and increased volume. The decrease in the gains in   
1999 versus 1998 was mainly due to the reduction in securitization activity and 
to portfolio characteristics and higher financing spreads. Gains on future      
securitizations will continue to vary depending on the size and the loan        
characteristics of the loan portfolios securitized and the funding costs        
prevailing in the securitization debt markets.                                  

Servicing and Securitization Revenue                                            

The following table summarizes the components of servicing and            
securitization revenue:                                                         

                                                                [Download Table]

                                               Years ended December  
                                                       31,           
                                               ----------------------
                                                2000    1999    1998 
                                               ------  ------  ------
                                                                     
Servicing revenue less amortization of                               
 servicing asset..............................  $ 219   $ 158   $ 156
Securitization revenue........................     77     131     125
                                               ------  ------  ------
Total servicing and securitization revenue.... $  296  $  289  $  281
                                               ======  ======  ======

The increase in servicing revenue is mainly due to the increase in the    
average balance of securitized student loans to $25.7 billion in 2000 from      
$17.5 billion in 1999 and $17.0 billion in 1998. The average balance of the     
Interest Residual was $849 million in 2000, $701 million in 1999 and $616       
million in 1998. The Company's securitized loan portfolio benefits from low     
average Treasury bill rates in a manner similar to the on-balance sheet         
portfolio of student loans when the student loans earn at the minimum borrower  
rate. In 1999 and 1998, low average Treasury bill rates enhanced securitization 
revenue by $42 million and $31 million, respectively. The increase in Treasury  
bill rates during 2000 reduced these earnings to $0.2 million for the year      
ended December 31, 2000 and was the principal cause of the reduction in         
securitization revenue in 2000 versus 1999.                                     

Gain on Sale of Student Loans                                                   

 During the fourth quarter of 1999, the Company sold $900 million of student
loan assets and recorded a pre-tax gain of $27 million. As part of the          
transaction the Company entered into long-term servicing agreements with four   
companies to service the loans sold. In addition, the four companies have       
contractual incentives to deliver $700 million of additional student loans for  
servicing by the Company over a two-year period. No such sales occurred in      
2000.                                                                           

OTHER INCOME                                                                    

 Other income, exclusive of gains on student loan securitizations, servicing
and securitization income and gains on sales of student loans, totaled $300     
million in 2000 versus $100 million in 1999 and $98 million in 1998. Other      
income mainly includes late fees earned on student loans, gains and losses on   
sales of investment securities, revenue the Company receives from servicing     
third party portfolios of student loans, commitment                             

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10-K405 27th Page of 95 TOC 1st Previous Next ↓Bottom Just 27th
fees for letters of credit and beginning in August 2000, guarantor servicing    
fees. Guarantor servicing fees arise primarily from four categories of services 
that correspond to the student loan life cycle. They include loan originations, 
the maintenance of the guarantee on the loan, default prevention, and           
collection revenues. Included in year-to-date 2000 other income is $31 million, 
$20 million, $33 million and $44 million, respectively, representing those four 
categories for the five months August through December 2000. As the guarantee   
fee business follows the loan life cycle, these fees are not necessarily        
indicative of a prorated amount for the entire calendar year. In the second     
half of 1998 the Company began assessing late fees and earned $46 million in    
2000, versus $38 million in 1999 and $7 million in 1998. Gains on sales of      
investment securities in 2000 totaled $19 million versus $16 million in 1999    
and $11 million in 1998.                                                        

 In 2000, the Company entered into LIBOR Floor Revenue Contracts that are an
effective economic hedge of a segment of its student loan portfolio. These      
positions do not meet the hedge effectiveness requirements under GAAP and were  
marked-to-market which resulted in a $25 million pre-tax loss recorded on the   
GAAP financial statements for year ended December 31, 2000. No such             
transactions were in effect for 1999 or 1998.                                   

In December 1998, the Company restructured its Joint Venture with Chase   
Manhattan Bank and, as a result, student loans in the Joint Venture are no      
longer co-owned by the Company and Chase and serviced by the Company for a fee. 
Instead, the Company now purchases all loans originated by Chase. The Company   
also purchased the $5 billion of loans that were co-owned in the Joint Venture  
at the time of the restructuring. Since the Company now owns the loans, it no   
longer receives servicing fees from the Joint Venture that were previously      
included in other income. For the year ended December 31, 1998, the Company     
recorded $25 million in servicing fee income from the Joint Venture.            

OPERATING EXPENSES                                                              

The following table summarizes the components of operating expenses:      

                                                                [Download Table]

                                                           Years ended  
                                                           December 31, 
                                                          --------------
                                                          2000 1999 1998
                                                          ---- ---- ----
                                                                        
Servicing and acquisition expenses....................... $329 $239 $273
General and administrative expenses......................  204  120   88
Integration charge.......................................   53   --   --
                                                          ---- ---- ----
Total operating expenses................................. $586 $359 $361
                                                          ==== ==== ====

Operating expenses include costs to service the Company's managed student 
loan portfolio, operational costs incurred in the process of acquiring student  
loan portfolios, general and administrative expenses, and beginning in August   
2000, operational costs associated with its guarantor servicing operations. The 
Company recorded an integration charge of $53 million in 2000 to cover          
severance costs, costs to close facilities and move functional responsibilities 
as well as costs to align system capabilities and move the Company's data       
center. Exclusive of this one-time integration charge, operating expenses for   
the years ended December 31, 2000, 1999 and 1998 were $533 million, $359        
million and $361 million, respectively. Operating expenses increased            
significantly during 2000 as a direct result of the acquisitions of SLFR and    
the business operations of USA Group. The acquisition of USA Group increased    
general and administrative expenses by $37 million and servicing and            
acquisition expenses by $79 million, and the acquisition of SLFR increased      
general and administrative expenses by $6 million and servicing and acquisition 
expenses by $8 million. The Company has maintained an aggressive integration    
plan that is designed to eliminate the duplicate operations and merge the       
complimentary operations of all the consolidated entities. However, management  
anticipates that the most significant reductions in operating expenses will not 
be realized until mid-2001. While in total, operating expenses decreased        
slightly in 1999 versus 1998, servicing and acquisition expenses decreased by   
$34 million as the Company realized a full year's benefit from the 1998         
restructuring of servicing operations including the closing of two satellite    
servicing centers, for which the Company took a charge in 1998 of $12 million.  
These expense reductions were offset by an increase in general and              
administrative expenses of $32 million which                                    

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included $11 million of expenses related to Nellie Mae, acquired in the third   
quarter of 1999, $7 million of expenses of the SLM Financial subsidiary which   
commenced operations in the first quarter of 1999, $5 million related to the    
development of E-commerce initiatives, and the ramping up of SLM Solutions      
operations which added $4 million, including the expenses of Exeter Software    
acquired in the fourth quarter of 1999.                                         

STUDENT LOAN PURCHASES                                                          

 The following table summarizes the components of the Company's student loan
purchase activity:                                                              

                                                                [Download Table]

                                                   Years ended December 
                                                           31,          
                                                  ----------------------
                                                   2000    1999    1998 
                                                  ------- ------- ------
                                                                        
Control channels................................. $ 6,595 $ 7,161 $5,665
Other commitment clients.........................   1,405   1,788  1,411
Spot purchases...................................     885     115    291
Consolidations...................................     824     920    132
Other............................................   1,149   1,111    918
USA Group acquisition............................   1,421      --     --
SLFR acquisition.................................   3,103      --     --
Nellie Mae acquisition...........................      --   2,585     --
                                                  ------- ------- ------
Subtotal.........................................  15,382  13,680  8,417
Managed loans acquired...........................   5,181      --     --
                                                  ------- ------- ------
Total............................................ $20,563 $13,680 $8,417
                                                  ======= ======= ======

 The Company purchased $15.4 billion and acquired the securitization revenue
streams of $5.2 billion of managed loans for a record total of $20.6 billion of 
student loans in 2000 compared with $13.7 billion in 1999 and $8.4 billion in   
1998. Included in the 2000 purchases are $1.4 billion of student loans acquired 
from USA Group and $3.1 billion of student loans acquired from SLFR. Included   
in the 1999 purchases are $2.6 billion of student loans acquired in the Nellie  
Mae acquisition. The Company's control channels represent all loans originated  
on the Company's origination systems. Included in control channel purchase      
volume for 1999 is $1.6 billion representing Chase's one-half interest in       
student loans in the Joint Venture at the time of the restructuring. (See       
"Other Income" for an additional discussion of the restructuring of the Joint   
Venture.)                                                                       

The increase in the purchase volume in 1999 versus 1998, exclusive of the 
Nellie Mae acquisition and the restructuring of the Company's Joint Venture     
with Chase, is principally attributable to the resumption of the Company's      
consolidation loan program in October 1998, a program which was suspended from  
the fourth quarter of 1997 through the third quarter of 1998 due to legislated  
changes in the profitability of consolidation.                                  

  In 2000, the Company's controlled channels of loan originations totaled $7.3
billion versus $5.1 billion in 1999. The pipeline of loans currently serviced   
and committed for purchase by the Company was $3.9 billion at December 31, 2000 
versus $3.5 billion at December 31, 1999. Included in the pipeline at December  
31, 1998 were $1.6 billion of student loans that were owned by Chase and sold   
to the Company in connection with the restructuring of the Joint Venture.       

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The following table summarizes the activity in the Company's managed      
portfolio of student loans for the years ended December 31, 2000, 1999 and      
1998.                                                                           

                                                                [Download Table]

                                           Years ended December 31,    
                                          ---------------------------- 
                                            2000      1999      1998   
                                          --------  --------  -------- 
                                                                       
Beginning balance........................ $ 53,276  $ 46,342  $ 43,705 
Purchases................................   20,563    13,680     8,417 
Capitalized interest on securitized                                    
 loans...................................      731       457       353 
Repayments, claims, other................   (5,852)   (5,135)   (5,397)
Loan sales...............................     (137)     (910)      (11)
Capitalization of floor revenue                                        
 contracts...............................      104        --        -- 
Loans consolidated from USA Education,                                 
 Inc.....................................   (1,170)   (1,158)     (725)
                                          --------  --------  -------- 
Ending balance........................... $ 67,515  $ 53,276  $ 46,342 
                                          ========  ========  ======== 

PRO-FORMA STATEMENTS OF INCOME                                                  

Under GAAP, the Company's securitization transactions have been treated as
sales. At the time of sale, in accordance with SFAS 125, the Company records an 
asset equal to the present value of the estimated future net cash flows from    
the portfolio of loans sold and a gain equal to the difference between that     
asset and the allocated cost basis of the loans sold. Interest earned on the    
Interest Residual and fees earned for servicing the loan portfolios are         
recognized over the life of the securitization transaction as servicing and     
securitization revenue. Under SFAS 125, income recognition is effectively       
accelerated through the recognition of a gain at the time of sale while the     
ultimate realization of such income remains dependent on the actual             
performance, over time, of the loans that were securitized.                     

  Management believes that in addition to results of operations as reported in
accordance with GAAP, another important performance measure is pro-forma        
results of operations under the assumption that the securitization transactions 
are financings and that the securitized student loans were not sold. The pro-   
forma results of operations also exclude the effect of floor revenue, certain   
one-time gains on sales of investment securities and student loans, certain     
integration charges and the amortization of goodwill. The following pro-forma   
statements of income present the Company's results of operations under the      
assumption that the securitization transactions are financings and that the     
securitized student loans were not sold. As such, no gain on sale or subsequent 
servicing and securitization revenue is recognized. Instead, the earnings of    
the student loans in the trusts and related financing costs are reflected over  
the life of the underlying pool of loans. The effect of floor revenue and       
certain one-time gains on sales of investment securities and student loans are  
also excluded from net income. Management refers to these pro-forma results as  
"core cash basis" statements of income. Management monitors and reports the     
periodic "core cash basis" earnings of the Company's managed student loan       
portfolio and believes that they assist in a better understanding of the        
Company's student loan business.                                                

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 The following table presents the "core cash basis" statements of income and
reconciliations to GAAP net income as reflected in the Company's consolidated   
statements of income.                                                           

                                                                [Download Table]

                                                       Years ended December     
                                                                31,             
                                                      ------------------------- 
                                                       2000     1999     1998   
                                                      -------  -------  ------- 
                                                                                
"Core Cash Basis" Statements of Income:                                         
Insured student loans................................ $ 5,015  $ 3,642  $ 3,311 
Advances/Facilities/Investments......................     652      386      486 
                                                      -------  -------  ------- 
Total interest income................................   5,667    4,028    3,797 
Interest expense.....................................  (4,628)  (3,101)  (2,905)
                                                      -------  -------  ------- 
Net interest income..................................   1,039      927      892 
Less: provision for losses...........................      53       51       53 
                                                      -------  -------  ------- 
Net interest income after provision for losses.......     986      876      839 
                                                      -------  -------  ------- 
Other Income:                                                                   
  Gains on sales of securities.......................       1        1       -- 
  Guarantor servicing fees...........................     128       --       -- 
  Other..............................................     152       83       87 
                                                      -------  -------  ------- 
Total other income...................................     281       84       87 
Total operating expenses.............................     514      356      361 
                                                      -------  -------  ------- 
Income before taxes and minority interest in net                                
 earnings of subsidiary..............................     753      604      565 
Income taxes.........................................     250      188      173 
Minority interest in net earnings of subsidiary......      11       11       11 
                                                      -------  -------  ------- 
"Core cash basis" net income.........................     492      405      381 
Preferred stock dividends............................      12        1       -- 
                                                      -------  -------  ------- 
"Core cash basis" net income attributable to common                             
 stock............................................... $   480  $   404  $   381 
                                                      =======  =======  ======= 
"Core cash basis" diluted earnings per share......... $  2.93  $  2.48  $  2.24 
                                                      =======  =======  ======= 

                                                       Years ended December     
                                                                31,             
                                                      ------------------------- 
                                                       2000     1999     1998   
                                                      -------  -------  ------- 
                                                                                
Reconciliation of GAAP net income to "core cash                                 
 basis" net income:                                                             
GAAP net income...................................... $   465  $   501  $   501 
"Core cash basis" adjustments:                                                  
  Gains on student loan securitizations..............     (92)     (35)    (117)
  Servicing and securitization revenue...............    (296)    (289)    (281)
  Net interest income, excluding floor income........     400      340      335 
  Floor income.......................................      (3)    (107)     (94)
  Provision for losses...............................     (21)     (17)     (17)
  Goodwill amortization..............................      19        3       -- 
  Integration charge.................................      53       --       -- 
  Gains/losses on sales of student loans.............      --      (27)      -- 
  Gains/losses on sales of securities................     (18)     (14)     (10)
  Other..............................................      --       (1)      -- 
                                                      -------  -------  ------- 
Total "core cash basis" adjustments..................      42     (147)    (184)
Net tax effect (A)...................................     (15)      51       64 
                                                      -------  -------  ------- 
"Core cash basis" net income......................... $   492  $   405  $   381 
                                                      =======  =======  ======= 

(A) Such tax effect is based upon the Company's marginal tax rate for the       
respective period.                                                              

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"Core Cash Basis" Student Loan Spread and Net Interest Income                   

The following table analyzes the reported earnings from the Company's     
portfolio of managed student loans, which includes those loans on-balance sheet 
and those loans off-balance sheet in securitization trusts.                     

                                                                [Download Table]

                                                Years ended December     
                                                         31,             
                                               ------------------------- 
                                                2000     1999     1998   
                                               -------  -------  ------- 
                                                                         
"Core cash basis" student loan yields.........    8.92%    7.78%    7.98%
Consolidated loan rebate fees.................    (.18)    (.15)    (.15)
Offset fees...................................    (.08)    (.09)    (.07)
Borrower benefits.............................    (.09)    (.08)    (.09)
Premium amortization..........................    (.26)    (.28)    (.28)
                                               -------  -------  ------- 
Student loan income...........................    8.31     7.18     7.39 
Cost of funds.................................   (6.61)   (5.40)   (5.45)
                                               -------  -------  ------- 
"Core cash basis" student loan spread.........    1.70%    1.78%    1.94%
                                               =======  =======  ======= 
Average Balances                                                         
Managed student loans......................... $60,348  $50,698  $44,792 
                                               =======  =======  ======= 

While the Company may earn floor income, depending on the interest rate   
environment, on its student loan portfolio (see "Student Loan Spread Analysis"  
above), these earnings are excluded from "core cash basis" results. However,    
the amortization of the upfront payments received from the Floor Revenue        
Contracts is included as an addition to student loan income in the "core cash   
basis" results.                                                                 

For the years ended December 31, 2000, 1999 and 1998, the amortization of 
the upfront payments received from the Floor Revenue Contracts with fixed       
borrower rates was $23 million, $20 million and $28 million, respectively and   
for Floor Revenue Contracts with annually reset borrower rates was $1 million,  
$25 million and $28 million, respectively.                                      

  The 8 basis point decrease in the 2000 "core cash basis" student loan spread
versus 1999 was mainly due to higher financing spreads relative to the Treasury 
bill, including the impact of lower offset fees, which decreased the "core cash 
basis" student loan spread by 5 basis points and to lower SAP rates which       
decreased the "core cash basis" student loan spread by 4 basis points. The      
Company expects further declines in the student loan spread as new loans with   
lower SAP rates replace older loans with higher SAP rates. (See "Other Related  
Events--Legislative Developments" for a discussion on Higher Education          
Amendments of 1998.)                                                            

  In 2000, "core cash basis" financing spreads, relative to the Treasury bill,
increased by 6 basis points versus 1999. This was due to wider financing        
spreads in both the GSE and securitization debt markets and to the higher       
percentage of the student loan portfolio being funded by the Company's asset-   
backed securities. The Company's asset-backed securities have a higher cost of  
funds than the Company's GSE debt because they are term match-funded and do not 
benefit from the GSE's status. The higher funding costs on the Company's asset- 
backed securities is partially mitigated by the absence of offset fees on       
securitized loans. The net effect of increased funding costs and lower offset   
fees in 2000 versus 1999 was 5 basis points.                                    

In 2000, net interest income, on a "core cash basis," was $1.0 billion    
compared with $927 million in 1999 and $892 million in 1998. The increase in    
net interest income for the year ended December 31, 2000 versus the year-ago    
period was due to the increase in the average balance of managed student loans  
of $9.7 billion. The reduction in the student loan spread for 2000 partially    
offset the benefit from the increase in the average balance of managed student  
loans. The increase in net interest income in 1999 over 1998 is mainly due to   
the increase in the average balance of managed student loans.                   

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"Core Cash Basis" Provision and Allowance for Loan Losses                       

The provision for losses represents the periodic expense of maintaining an
allowance sufficient to absorb losses, net of recoveries, inherent in the       
managed portfolio of student loans. The Company evaluates the adequacy of the   
provision for losses on its federally insured portfolio of managed student      
loans separately from its non-federally insured portfolio. For the federally    
insured portfolio, the Company primarily considers trends in student loan       
claims rejected for payment by guarantors due to servicing defects as well as   
overall default rates on those FFELP student loans subject to the 2 percent     
risk-sharing. Once a student loan is charged off as a result of an unpaid       
claim, the Company's policy is to continue to pursue the recovery of principal  
and interest. The Company currently writes off an unpaid claim once it has aged 
to two years.                                                                   

For the non-federally insured portfolio of student loans, the Company     
primarily considers recent trends in delinquencies, charge-offs and recoveries, 
historical trends in loan volume by program, economic conditions and credit and 
underwriting policies. A large percentage of the Company's non-federally        
insured loans have not matured to a point at which predictable loan loss        
patterns have developed. Accordingly, the evaluation of the provision for loan  
losses is inherently subjective as it requires material estimates that may be   
susceptible to significant changes. Management believes that the provision for  
loan losses is adequate to cover anticipated losses in the student loan         
portfolio. An analysis of the Company's allowance for loan losses is presented  
in the following table.                                                         

"Core Cash Basis" Activity in the Allowance for Loan Losses                     

                                                                [Download Table]

                                               Years ended December     
                                                        31,             
                                              ------------------------- 
                                               2000     1999     1998   
                                              -------  -------  ------- 
                                                                        
Balance at beginning of year................  $   260  $   237  $   203 
Provisions for losses.......................       51       51       53 
Reserves acquired in acquisition............       23        9       -- 
Charge-offs:                                                            
  Non-federally insured loans...............      (11)     (16)      (9)
  Federally insured loans...................      (20)     (29)     (20)
                                              -------  -------  ------- 
    Total charge-offs.......................      (31)     (45)     (29)
Recoveries:                                                             
  Non-federally insured loans...............        1        3        3 
  Federally insured loans...................       31        7        7 
                                              -------  -------  ------- 
    Total recoveries........................       32       10       10 
Net charge-offs.............................        1      (35)     (19)
                                              -------  -------  ------- 
Reduction for sales of student loans........       --       (2)      -- 
                                              -------  -------  ------- 
Balance at end of year......................  $   335  $   260  $   237 
                                              =======  =======  ======= 
Allocation of the allowance for loan losses:                            
Non-federally insured loans.................  $   150  $   148  $   138 
Federally insured loans.....................      185      112       99 
                                              -------  -------  ------- 
  Total.....................................  $   335  $   260  $   237 
                                              =======  =======  ======= 
Net charge-offs as a percentage of average                              
 managed student loans......................       --      .07%     .05%
Total allowance as a percentage of average                              
 managed student loans......................      .59%     .51%     .53%
Non-federally insured allowance as a                                    
 percentage of the ending balance of non-                               
 federally insured loans....................     4.94%    6.77%    8.09%
Average managed student loans...............  $60,348  $50,698  $44,792 
Ending managed student loans................  $67,515  $53,276  $46,342 

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The 2000 "core cash basis" provision for losses includes $6 million for   
potential losses on the non-federally insured student loans and $45 million for 
potential losses due to risk-sharing and other claims on FFELP loans. The 1999  
"core cash basis" provision included $12 million for potential losses on the    
non-federally insured portfolio and $39 million for potential losses due to     
risk-sharing and other claims on FFELP loans. The 1998 provision included $10   
million for write-offs for unusual loan prepayments at amounts less than        
carrying value in connection with the legislation reauthorizing the Higher      
Education Act, which allowed borrowers to consolidate student loans under the   
FDLP at advantageous rates. Applications from borrowers, who applied for        
consolidation prior to January 31, 1999, were processed through the third       
quarter of 1999.                                                                

Delinquencies--Non-federally Insured Student Loans                              

The following table shows the loan delinquency trends for the years       
presented on the Company's non-federally insured student loan portfolio.        
Delinquencies will impact earnings if the account is charged-off.               

                                                                [Download Table]

                                                           Years ended   
                                                          December 31,   
                                                        -----------------
                                                         2000   1999     
                                                        ------ ------    
                                                                         
Loans in school/deferment.............................. $  865 $  614    
Loans in repayment                                                       
  Loans current........................................  1,665  1,068    
  Loans current in forbearance.........................    208    247    
  Loans delinquent 30-59 days..........................    201     70    
  Loans delinquent 60-89 days..........................     36     19    
  Loans delinquent greater than 90 days................     74     57    
                                                        ------ ------    
  Total loans in repayment.............................  2,184  1,461    
                                                        ------ ------    
Ending loan portfolio.................................. $3,049 $2,075    
                                                        ====== ======    

"Core Cash Basis" Funding Costs                                                 

The following table details the spreads for the Company's Treasury bill   
indexed borrowings principally to the 91-day Treasury bill rate and LIBOR       
indexed borrowings on a "core cash basis":                                      

                                                                [Download Table]

                                                         Years ended     
Indexed borrowings                                       December 31,    
------------------                                      ---------------- 
                                                        2000  1999  1998 
                                                        ----  ----  ---- 
                                                                         
Treasury Bill                                                            
Weighted average Treasury bill......................... 5.98% 4.82% 5.00%
Borrowing spread.......................................  .64   .59   .44 
                                                        ----  ----  ---- 
Weighted average borrowing rate........................ 6.62% 5.41% 5.44%
                                                        ====  ====  ==== 
LIBOR                                                                    
Weighted average LIBOR................................. 6.57% 5.39% 5.73%
Borrowing spread.......................................  .34  (.03) (.24)
                                                        ----  ----  ---- 
Weighted average borrowing rate........................ 6.91% 5.36% 5.49%
                                                        ====  ====  ==== 

 The positive LIBOR borrowing spread for the year ended December 31, 2000 is
due mainly to the use of basis swaps and futures contracts to manage the        
combined interest rate risk of both on and off-balance sheet liabilities which  
began in late 1999 and continued throughout 2000 due to the use of LIBOR        
financings in the securitization trusts. In addition, the USA Education, Inc.   
$500 million Senior Note offering in October 2000 at a positive borrowing       
spread of 22 basis points contributed to the overall increase of the LIBOR      
borrowing spread.                                                               

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FEDERAL AND STATE TAXES                                                         

The Company maintains a portfolio of tax-advantaged assets principally to 
support education-related financing activities. That portfolio was primarily    
responsible for the decrease in the effective federal income tax rate from the  
statutory rate of 35 percent to 32 percent in 2000, 1999 and 1998. The GSE is   
exempt from all state, local, and District of Columbia income, franchise, sales 
and use, personal property and other taxes, except for real property taxes.     
However, this tax exemption applies only to the GSE and does not apply to USA   
Education, Inc. or its other operating subsidiaries. Under the Privatization    
Act, the Company's GSE and non-GSE activities are separated, with non-GSE       
activities being subject to taxation at the state and local level. State taxes  
for the year ended December 31, 2000 increased the overall tax rate to 33       
percent. State taxes were immaterial during the two years ended December 31,    
1999 and 1998 as the majority of the Company's income during that time was      
generated through the GSE.                                                      

As increasing business activity occurs outside of the GSE, the impact of  
state and local taxes will increase accordingly. Ultimately all business        
activities will occur outside of the GSE, which could increase the Company's    
effective income tax rate by as much as five percentage points. The loss of the 
GSE tax exemption for sales and use and personal property taxes could increase  
operating costs by one percentage point.                                        

LIQUIDITY AND CAPITAL RESOURCES                                                 

General                                                                         

The Company's primary requirements for capital are to fund the Company's  
operations, to purchase student loans and to repay its debt obligations while   
continuing to meet the GSE's statutory capital adequacy ratio test. The         
Company's primary sources of liquidity are through debt issuances by the GSE,   
off-balance sheet financings through securitizations, borrowings under its      
commercial paper and senior notes program, cash generated by its subsidiaries'  
operations and distributed through dividends to the Company, and bank           
borrowings.                                                                     

GSE Financing Activities                                                        

 The GSE secures financing to fund its on-balance sheet portfolio of student
loans, along with its other operations, by issuing debt securities in the       
domestic and overseas capital markets, through public offerings and private     
placements of U.S. dollar-denominated and foreign currency-denominated debt of  
varying maturities and interest rate characteristics, and through               
securitizations of its student loans. The GSE's debt securities are currently   
rated at the highest credit rating level by both Moody's and S&P. Historically, 
the agencies' ratings of the GSE have been largely a factor of its status as a  
government-sponsored enterprise. Since the Privatization Act did not modify the 
attributes of debt issued by the GSE, management anticipates that the GSE will  
retain its current credit ratings.                                              

  The Company's unsecured financing requirements are driven by three principal
factors: refinancing of existing liabilities as they mature; financing of       
student loan portfolio growth; and the Company's level of securitization        
activity.                                                                       

Securitization Activities                                                       

In addition to the GSE debt, student loan securitization has been an      
important source of funding for the Company's managed student loan portfolio    
since 1995. As student loans are securitized, the need for long-term financing  
of these on-balance sheet assets decreases. Over the long term, securitization  
is expected to provide the principal source of long-term funding for the        
Company's managed portfolio of student loans. Management believes that          
securitizations represent an efficient source of funding.                       

 The Company's asset-backed securities generally have a higher cost of funds
than its traditional on-balance sheet financing because the asset-backed        
securities are term match-funded and do not benefit from the                    

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GSE's status. However, the increased funding costs of the asset-backed          
securities are mitigated by the absence of the Offset Fees on securitized       
loans. Securitization also allows the Company to obtain term financing at a     
lower cost than otherwise would be achievable without the GSE's government-     
sponsored status. Securitizations to date have been structured to achieve an    
"AAA" credit rating on over 96 percent of its securities sold (with an "A"      
credit rating on the remaining subordinated securities). In 2000, the Company   
completed four securitization transactions totaling $8.8 billion in student     
loans.                                                                          

In both late 1998 and early 1999, the Russian bond default in August 1998 
caused financing spreads on the Company's securitization transactions to be     
wider and thus more costly than previous years' transactions. As a result, the  
Company did not enter into a securitization transaction from September 1998     
through May of 1999. Financial market conditions did improve to a point at      
which it was economical to securitize student loans, and in the second quarter  
of 1999, the Company reentered the asset-backed securities market by completing 
a $1.0 billion securitization. In 1999, the Company completed three             
securitization transactions totaling $4.0 billion in student loans. During      
1999, demand for Treasury bill securities remained high causing Treasury bill   
rates to remain low relative to other market indices. As a consequence, the     
Company issued $3.8 billion in LIBOR based asset-backed securities, the first   
issuances indexed to LIBOR in the history of the program. The Company's 2000    
securitization transactions continue to be indexed to LIBOR. The Company is     
managing this off-balance sheet basis risk through on-balance sheet financing   
activities, principally through basis swaps.                                    

Other Financing Activities                                                      

In order to finance non-GSE activities and in preparation for the eventual
wind-down of the GSE, USA Education is developing additional financing          
vehicles. While continued use of the securitization market will be the core of  
the Company's financing strategy, these efforts will be supplemented by         
commercial paper, asset-backed commercial paper, bank lines of credit,          
underwritten long-term debt, and a medium-term note program. In the third       
quarter of 1999, the Company received credit ratings that will facilitate its   
access to the private funding markets: short-term debt ratings of A-1, F1+ and  
P-1, and long-term senior unsecured debt ratings of A, A+ and A3 were issued by 
S&P, Moody's and Fitch IBCA, Inc., respectively. Upon receiving its initial     
credit ratings, the Company initiated its commercial paper program. Effective   
October 27, 2000, the Company renewed its $600 million 364-day revolving credit 
facility for an additional 364-day period. Liquidity support for the Company's  
commercial paper program is provided by this $600 million 364-day revolving     
credit facility which matures on October 26, 2001, and a $400 million 5-year    
revolving credit facility which matures on October 29, 2004.                    

 On October 3, 2000, the Company issued $500,000,000 of its Senior Notes due
September 16, 2002. The proceeds to the Company from the sale of these notes,   
before expenses, were $498,750,000 and were used for general corporate          
purposes.                                                                       

  During 2000, the Company used the proceeds from student loan securitizations
of $8.8 billion, repayments and claim payments on student loans of $2.8         
billion, and the net proceeds from sales of student loans to purchase student   
loans of $10.9 billion and to reduce total debt by $1.5 billion.                

Operating activities provided net cash inflows of $745 million in 2000, an
increase of $406 million from the net cash inflows of $338 million in 1999.     

During 2000, the GSE issued $17.2 billion of long-term notes to refund    
maturing and repurchased obligations. At December 31, 2000, the GSE had $14.9   
billion of outstanding long-term debt issues of which $534 million had stated   
maturities that could be accelerated through call provisions. The Company uses  
interest rate and foreign currency swaps (collateralized where appropriate),    
purchases of U.S. Treasury securities and other hedging techniques to reduce    
its exposure to interest rate and currency fluctuations that arise from its     
financing activities and to match the variable interest rate characteristics of 
its earning assets. (See "Interest Rate Risk Management.")                      

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Until the GSE is dissolved, the Privatization Act places a number of      
limitations on the Company. Under the Privatization Act, the GSE must wind down 
its operations and dissolve on or before September 30, 2008. Any GSE debt       
obligations outstanding at the date of such dissolution are required to be      
defeased through creation of a fully collateralized trust, consisting of U.S.   
government or agency obligations with cash flows matching the interest and      
principal obligations of the defeased debt. The Privatization Act requires that 
on the dissolution date of September 30, 2008, the GSE shall repurchase or      
redeem, or make proper provisions for repurchase or redemption of any           
outstanding preferred stock. The Company has the option of effecting an earlier 
dissolution of the GSE if certain conditions are met. Also upon the GSE's       
dissolution, all of its remaining assets will transfer to the Company.          

The Privatization Act effectively requires that the GSE maintain a minimum
statutory capital adequacy ratio (the ratio of stockholders' equity to total    
assets plus 50 percent of the credit equivalent amount of certain off-balance   
sheet items) of at least 2.25 percent or be subject to certain "safety and      
soundness" requirements designed to restore such statutory ratio. While the GSE 
may not finance the activities of its non-GSE affiliates, it may, subject to    
its minimum capital requirements, dividend retained earnings and surplus        
capital to USA Education, Inc., which in turn may contribute such amounts to    
its non-GSE subsidiaries. The Privatization Act requires management to certify  
to the Secretary of the Treasury that, after giving effect to the payment of    
dividends, the statutory capital ratio test would have been met at the time the 
dividend was declared. At December 31, 2000, the GSE's statutory capital        
adequacy ratio, after the effect of the dividends to be paid in the first       
quarter of 2001, was 2.28 percent.                                              

  The Privatization Act imposes certain restrictions on intercompany relations
between the GSE and its affiliates during the wind-down period. In particular,  
the GSE must not extend credit to, nor guarantee, any debt obligations of USA   
Education, Inc. or its non-GSE subsidiaries.                                    

The Privatization Act provides that the GSE may continue to issue new debt
obligations maturing on or before September 30, 2008. The legislation further   
provides that the legal status and attributes of the GSE's debt obligations,    
including the Commission registration and state tax exemptions, will be fully   
preserved until their respective maturities. Such debt obligations will remain  
GSE debt obligations, whether such obligations were outstanding at the time of, 
or issued subsequent to, the Reorganization. The obligations of USA Education   
do not have GSE status.                                                         

Interest Rate Risk Management                                                   

Interest Rate Gap Analysis                                                      

  The Company's principal objective in financing its operations is to minimize
its sensitivity to changing interest rates by matching the interest rate        
characteristics of its borrowings to specific assets in order to lock in        
spreads. The Company funds its floating rate managed loan assets (most of which 
have weekly rate resets) with variable rate debt and fixed rate debt converted  
to variable rates with interest rate swaps. The Company also uses interest rate 
cap agreements, foreign currency swaps, options on securities, and financial    
futures contracts to further reduce interest rate risk and foreign currency     
exposure on certain of its borrowings. Investments are funded on a "pooled"     
approach, i.e., the pool of liabilities that funds the investment portfolio has 
an average rate and maturity or reset date that corresponds to the average rate 
and maturity or reset date of the investments which they fund.                  

In addition to term match funding, $11.1 billion of the Company's asset-  
backed securities match the interest rate characteristics of the majority of    
the student loans in the trusts by being indexed to the 91-day Treasury bill.   
At December 31, 2000, there were approximately $3.5 billion of PLUS student     
loans outstanding in the trusts, which have interest rates that reset annually  
based on the final auction of 52-week Treasury bills before each July 1. In     
addition, at December 31, 2000, there were approximately $15.3 billion of       
asset-backed securities indexed to LIBOR. In its securitization transactions,   
the Company retains this basis risk and manages it within the trusts through    
its on-balance sheet financing activities. The effect of this basis risk        
management is included in the following table as the impact of securitized      
student loans.                                                                  

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In the table below the Company's variable rate assets and liabilities are 
categorized by reset date of the underlying index. Fixed rate assets and        
liabilities are categorized based on their maturity dates. An interest rate gap 
is the difference between volumes of assets and volumes of liabilities maturing 
or repricing during specific future time intervals. The following gap analysis  
reflects rate-sensitive positions at December 31, 2000 and is not necessarily   
reflective of positions that existed throughout the period.                     

                                                                [Download Table]

                                   Interest Rate Sensitivity Period              
                            ---------------------------------------------------- 
                                                    6                            
                                      3 months   months   1 to                   
                            3 months     to        to       2    2 to 5  Over 5  
                            or less   6 months   1 year   years  years    years  
                            --------  --------   -------  -----  ------  ------- 
                                                                                 
Assets                                                                           
Student loans.............  $ 35,061  $ 2,099    $   487  $  --  $   --  $    -- 
Warehousing advances......       973       --         --     --       2       12 
Academic facilities                                                              
 financings...............         5       60         20    117     258      391 
Cash and investments......     3,970        1         12     16     138    1,804 
Other assets..............        37       43         86    131     331    2,738 
                            --------  -------    -------  -----  ------  ------- 
  Total assets............    40,046    2,203        605    264     729    4,945 
                            --------  -------    -------  -----  ------  ------- 
Liabilities and                                                                  
 Stockholders' Equity                                                            
Short-term borrowings.....    28,435    1,311        718     --      --       -- 
Long-term notes...........    13,346       --         --    811     230      524 
Other liabilities.........        --       --         --     --      --    1,788 
Minority interest in                                                             
 subsidiary...............        --       --         --     --      --      214 
Stockholders' equity......        --       --         --     --      --    1,415 
                            --------  -------    -------  -----  ------  ------- 
  Total liabilities and                                                          
   stockholders' equity ..    41,781    1,311        718    811     230    3,941 
                            --------  -------    -------  -----  ------  ------- 
Off-balance Sheet                                                                
 Financial Instruments                                                           
Interest rate swaps.......     3,943   (1,423)    (1,805)   250      38   (1,003)
Impact of securitized                                                            
 student loans............    (3,459)   3,459         --     --      --       -- 
                            --------  -------    -------  -----  ------  ------- 
Total off-balance sheet                                                          
 financial instruments ...       484    2,036     (1,805)   250      38   (1,003)
                            --------  -------    -------  -----  ------  ------- 
Period gap................  $ (1,251) $ 2,928    $(1,918) $(297) $  537  $     1 
                            ========  =======    =======  =====  ======  ======= 
Cumulative gap............  $ (1,251) $ 1,677    $  (241) $(538) $   (1) $    -- 
                            ========  =======    =======  =====  ======  ======= 
Ratio of interest-                                                               
 sensitive assets to                                                             
 interest-sensitive                                                              
 liabilities..............      95.8%   164.8%      72.3%  16.4%  173.0%   421.2%
                            ========  =======    =======  =====  ======  ======= 
Ratio of cumulative gap to                                                       
 total assets.............       2.6%    (3.4)%       .5%   1.1%     --%      --%
                            ========  =======    =======  =====  ======  ======= 

Interest Rate Sensitivity Analysis                                              

The effect of short-term movements in interest rates on the Company's     
results of operations and financial position has been limited through the       
Company's risk-management activities. The Company performed a sensitivity       
analysis to determine the annual effect of a hypothetical increase in 2000      
market interest rates of 10 percent on the Company's variable rate assets and   
liabilities and a hypothetical 10 percent increase in spreads to their          
underlying index. Based on this analysis an increase in rates and spreads of    
this magnitude would reduce net income by approximately $16 million or $.10     
diluted earnings per share. The decline in net income would be primarily due to 
the reduction on the spread earned on student loans as financing costs would    
increase while a significant portion of the Company's student loan portfolio    
would continue to earn at the minimum borrower rate.                            

 The fair value of the Company's interest-sensitive assets and its long-term
debt and hedging instruments are also subject to change as a result of          
potential changes in market rates and prices. A separate analysis was performed 
to determine the effects of a hypothetical 10 percent rise in market interest   
rates on the fair value of                                                      

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the Company's financial instruments. The effect of the 10 percent rise in rates 
on fair values would be a decrease in the fair market value of student loans of 
approximately $39 million, and a decrease in the fair market value of non-      
student loan assets of approximately $38 million. The decrease in the fair      
market value of these assets would be partially offset by an increase in the    
fair market value of the Company's debt and hedging instruments by $95 million. 
The net effect of a 10 percent rise in rates on fair market values would        
therefore be an $18 million increase in net assets. This change from a $35      
million decrease in net assets in 1999 to an $18 million increase in net assets 
in 2000 is partially due to the increased issuance of floor contracts during    
2000 which reduced the Company's exposure to interest rate volatility by $20    
million. In addition, the increase in the balance and percentage of long-term   
floating rate debt and basis swaps to total debt reduced the Company's exposure 
to interest rate volatility by $23 million.                                     

These amounts have been determined after considering the impact of a      
hypothetical shift in interest rates and the use of this methodology to         
quantify the market risk of such instruments with no other changes in the       
Company's financial structure. The analysis is limited because it does not take 
into account the overall level of economic activity, other operating            
transactions and other management actions that could be taken to further        
mitigate the Company's exposure to risk.                                        

Average Terms to Maturity                                                       

  The following table reflects the average terms to maturity for the Company's
managed earning assets and liabilities at December 31, 2000:                    

Average Terms to Maturity (in years)

                                                                [Download Table]

                                           On-Balance Off-Balance        
                                             Sheet       Sheet    Managed
                                           ---------- ----------- -------
                                                                         
Earning assets                                                           
Student loans.............................    7.2         4.3       5.9  
Warehousing advances......................    5.7          --       5.7  
Academic facilities financings............    6.8          --       6.8  
Cash and investments......................    4.5          --       4.5  
                                              ---         ---       ---  
Total earning assets......................    6.8         4.3       5.8  
                                              ===         ===       ===  
Borrowings                                                               
Short-term borrowings.....................     .4          --        .4  
Long-term borrowings......................    3.3         4.3       4.0  
                                              ---         ---       ---  
Total borrowings..........................    1.3         4.3       2.5  
                                              ===         ===       ===  

In the above table, Treasury receipts and variable rate asset-backed      
securities, although generally liquid in nature, extend the weighted average    
remaining term to maturity of cash and investments to 4.5 years. As student     
loans are securitized, the need for long-term on-balance sheet financing will   
decrease.                                                                       

Common Stock                                                                    

As a result of the USA Group acquisition, the Company issued approximately
10 million shares during the third quarter of 2000. The Company repurchased 7   
million shares during 2000 through open market purchases and settlement of      
outstanding equity forward contracts. The Company also issued a net 5 million   
shares through its benefit plans. The net result was an increase in outstanding 
shares to 164 million at December 31, 2000. At December 31, 2000, the total     
common shares that could potentially be acquired over the next five years under 
outstanding equity forward contracts was 18 million shares, and the Company has 
remaining authority to enter into additional share repurchases and equity       
forward contracts for 5 million shares.                                         

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                                                                [Download Table]

                                                           Years ended   
                                                          December 31,   
                                                          -------------- 
                                                           2000    1999  
                                                          ------  ------ 
                                                                         
Common shares repurchased:                                               
  Open market............................................    2.1     2.9 
  Equity forwards........................................    4.9     5.3 
                                                          ------  ------ 
Total shares repurchased.................................    7.0     8.2 
                                                          ------  ------ 
Average purchase price per share......................... $44.26  $41.78 
                                                          ======  ====== 
Equity forward contracts:                                                
Outstanding at beginning of year.........................   21.4    20.5 
New contracts............................................    1.7     6.2 
Exercises................................................   (4.9)   (5.3)
                                                          ------  ------ 
Outstanding at end of year...............................   18.2    21.4 
                                                          ======  ====== 
Board of director authority at end of year...............    4.8     3.6 
                                                          ======  ====== 

As of December 31, 2000, the expiration dates and range of purchase prices
for outstanding equity forward contracts are as follows:                        

                                                                [Download Table]

                                              Outstanding Range of Market
Year of Maturity                               Contracts      Prices     
----------------                              ----------- ---------------
                                                                         
2001.........................................     6.3     $32.11 - $45.71
2002.........................................     5.0      41.01 -  45.55
2003.........................................     4.0      41.20 -  47.50
2004.........................................     1.7      39.82 -  45.62
2005.........................................     1.2      30.00 -  36.04
                                                 ----                    
                                                 18.2                    
                                                 ====                    

Recently Issued Accounting Pronouncements                                       

See Note 2 to the Consolidated Financial Statements, "Significant         
Accounting Policies--Recently Issued Accounting Pronouncements."                

Item 7a. Quantitative and Qualitative Disclosures about Market Risk             

 Included within Management's Discussion and Analysis of Financial Condition
and Results of Operations.                                                      

Item 8. Financial Statements and Supplementary Data                             

 Reference is made to the financial statements listed under the heading "(a)
1. Financial Statements" of Item 15 hereof, which financial statements are      
incorporated by reference in response to this Item 8.                           

Item 9. Changes in and Disagreements with Accountants on Accounting and         
Financial Disclosure                                                            

Not applicable.                                                           

39  

10-K405 40th Page of 95 TOC 1st Previous Next ↓Bottom Just 40th
PART III. 

Item 10. Directors and Executive Officers of the Registrant                     

The information as to the directors and executive officers of the Company 
set forth under the captions "PROPOSAL 2--ELECTION OF DIRECTORS--Information    
Concerning Nominees" and "Executive Officers" in the Proxy Statement to be      
filed on Schedule 14A relating to the Company's Annual Meeting of Stockholders  
scheduled to be held on May 10, 2001 (the "Proxy Statement") is incorporated    
into this Report by reference.                                                  

Item 11. Executive Compensation                                                 

 The information set forth under the caption "Executive Compensation" in the
Proxy Statement is incorporated into this Report by reference.                  

Item 12. Security Ownership of Certain Beneficial Owners and Management         

  The information set forth under the caption "COMMON STOCK INFORMATION--Board
and Management Ownership" and "--Principal Holders" in the Proxy Statement is   
incorporated into this Report by reference thereto. There are no arrangements   
known to the Company, the operation of which may at a subsequent date result in 
a change in control of the Company.                                             

Item 13. Certain Relationships and Related Transactions                         

  The information set forth under the caption "EXECUTIVE COMPENSATION--Certain
Transactions" in the Proxy Statement is incorporated into this Report by        
reference.                                                                      

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K        

(a)1. Financial Statements                                                      

The following consolidated financial statements of USA Education. Inc. and
the Report of the Independent Auditors thereon are included in Item 8 above:    

                                                                [Download Table]
                                                                              
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999.............. F-3
Consolidated Statements of Income for the years ended December 31, 2000,      
 1999 and 1998............................................................ F-4
Consolidated Statements of Changes in Stockholders' Equity for the years      
 ended December 31, 2000, 1999 and 1998................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,        
 2000, 1999 and 1998...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7

2. Financial Statement Schedules                                            

All schedules are omitted because they are not applicable or the required 
information is shown in the consolidated financial statements or notes thereto. 

3. Exhibits                                                                 

The exhibits listed in the accompanying index to exhibits are filed or    
incorporated by reference as part of this annual report.                        

  Attached as Exhibit 3.2 are the Company's amended By-laws. The Company's By-
laws provide that the By-laws may be amended by the Board of Directors and that 
any amendments will become effective on the date of the next shareholder        
meeting provided that notice is provided to shareholders before the date of the 
meeting.                                                                        

40

10-K405 41st Page of 95 TOC 1st Previous Next ↓Bottom Just 41st
The amendments will:                                                      

.  Change the definition of "independence," affecting Board members who are 
former Sallie Mae employees. The change parallels the New York Stock  
Exchange listing requirement and provides that former employees are   
considered "independent" three years after they have terminated       
employment with the Corporation.                                      

.  Provide for electronic notices of shareholder and director meetings, as  
recently permitted by Delaware corporate law; and                     

.  Make administrative changes and corrections, including clarifications    
regarding Board compensation and officer positions.                   

The Company will furnish at cost a copy of any exhibit filed with or      
incorporated by reference into this Form 10-K. Oral or written requests for     
copies of any exhibits should be directed to the Corporate Secretary.           

(b)Reports on Form 8-K                                                          

We filed four Current Reports on Form 8-K with the Commission during the  
quarter ended December 31, 2000 or thereafter. They were filed on:              

.  October 5, 2000 in connection with the issuance of $500,000,000 of our   
Senior Notes due September 16, 2002                                   

.  February 22, 2001 in connection with our press release announcing our    
earnings for the fourth quarter ended December 31, 2000 and our       
supplemental financial information for the same period                

.  February 27, 2001 in connection with the issuance of $500,000,000 of our 
Senior Notes due February 10, 2003                                    

.  March 7, 2001 in connection with the sale of 7,241,513 of our common     
stock by the Lumina Foundation for Education, Inc.                    

(c)Exhibits                                                                     

                                                                [Download Table]
                                                                              
   *2    Agreement and Plan of Reorganization by and among the Student Loan   
         Marketing Association, SLM Holding Corporation, and Sallie Mae Merger
         Company                                                              
  **3.1  Amended and Restated Certificate of Incorporation of the Registrant  
   +3.2  By-Laws of the Registrant                                            
  **4    Warrant Certificate No. W-2, dated as of August 7, 1997              
  *10.1  Board of Directors Restricted Stock Plan                             
  *10.2  Board of Directors Stock Option Plan                                 
  *10.3  Deferred Compensation Plan for Directors                             
  *10.4  Incentive Performance Plan                                           
  *10.5  Stock Compensation Plan                                              
  *10.6  1993-1998 Stock Option Plan                                          
  *10.7  Supplemental Pension Plan                                            
  *10.8  Supplemental Employees' Thrift & Savings Plan (Sallie Mae 401(K)     
         Supplemental Savings Plan)                                           
***10.9  Directors Stock Plan                                                 
***10.10 Management Incentive Plan                                            
  *21    Subsidiaries of the Registrant                                       
  +23    Consent of Arthur Andersen LLP                                       

--------                                                                        
*Incorporated by reference to the correspondingly numbered exhibits to the      
Registrant's Registration Statement on Form S-4, as amended (File No. 333-      
21217)                                                                          
**Incorporated by reference to the correspondingly numbered exhibits to the     
Registrant's Registration on Form S-1 (File No. 333-38391)                      
***Incorporated by reference to the Registrant's Definitive Proxy Statement on  
Schedule 14A, as filed with the Securities and Exchange Commission on April 10, 
1998 (File No. 001-13251)                                                       
+Filed with the Securities and Exchange Commission with this Form 10-K          

41

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.            

Dated: March 29, 2001                                                           

                       USA EDUCATION, INC.

                                          /s/ Albert L. Lord
                                         By: _________________________________
                                          Albert L. Lord
                                           Chief Executive Officer

Pursuant to the requirement of the Securities Exchange Act of 1934, this  
report has been signed below by the following persons on behalf of the          
Registrant and in the capacities indicated on the dates indicated.              

                                                                [Download Table]

              Signature                          Title              Date        
              ---------                          -----              ----        

                                                                                
         /s/ Albert L. Lord            Chief Executive Officer    March 29, 2001
______________________________________  (Principal Executive                    
            Albert L. Lord              Officer) and Director                   

        /s/ John F. Remondi            Executive Vice President   March 29, 2001
______________________________________  and Chief Financial                     
           John F. Remondi              Officer (Principal                      
                                        Financial and Accounting                
                                        Officer)                                

         /s/ Edward A. Fox                                        March 29, 2001
______________________________________ Chairman of the Board of                 
            Edward A. Fox               Directors                               

        /s/ Charles L. Daley                                      March 29, 2001
______________________________________                                          
           Charles L. Daley            Director                                 

  /s/ William M. Diefenderfer, III                                March 29, 2001
______________________________________                                          
     William M. Diefenderfer, III      Director                                 

     /s/ Thomas J. Fitzpatrick                                    March 29, 2001
______________________________________                                          
        Thomas J. Fitzpatrick          Director                                 

     /s/ Diane Suitt Gilleland                                    March 29, 2001
______________________________________                                          
        Diane Suitt Gilleland          Director                                 

         /s/ Earl A. Goode                                        March 29, 2001
______________________________________                                          
            Earl A. Goode              Director                                 

        /s/ Ann Torre Grant                                       March 29, 2001
______________________________________                                          
           Ann Torre Grant             Director                                 

         /s/ Ronald F. Hunt                                       March 29, 2001
______________________________________                                          
            Ronald F. Hunt             Director                                 

42

10-K405 43rd Page of 95 TOC 1st Previous Next ↓Bottom Just 43rd
                                                                [Download Table]
                                                               
    /s/ Benjamin J. Lambert, III                 March 29, 2001
______________________________________                         
       Benjamin J. Lambert, III        Director                

      /s/ James C. Lintzenich                    March 29, 2001
______________________________________                         
         James C. Lintzenich           Director                

        /s/ Barry A. Munitz                      March 29, 2001
______________________________________                         
           Barry A. Munitz             Director                

    /s/ A. Alexander Porter, Jr.                 March 29, 2001
______________________________________                         
       A. Alexander Porter, Jr.        Director                

      /s/ Wolfgang Schoellkopf                   March 29, 2001
______________________________________                         
         Wolfgang Schoellkopf          Director                

       /s/ Steven L. Shapiro                     March 29, 2001
______________________________________                         
          Steven L. Shapiro            Director                

       /s/ Barry L. Williams                     March 29, 2001
______________________________________                         
          Barry L. Williams            Director                

43

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CONSOLIDATED FINANCIAL STATEMENTS 

INDEX 

                                                                [Download Table]

                                                                            Page
                                                                            ----
                                                                                
Report of Independent Public Accountants................................... F-2 
Consolidated Balance Sheets................................................ F-3 
Consolidated Statements of Income.......................................... F-4 
Consolidated Statements of Changes in Stockholders' Equity................. F-5 
Consolidated Statements of Cash Flows...................................... F-6 
Notes to Consolidated Financial Statements................................. F-7 

F-1 

10-K405 45th Page of 95 TOC 1st Previous Next ↓Bottom Just 45th
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                        

To the Board of Directors and Stockholders of                                   
USA Education, Inc.:                                                            

We have audited the accompanying consolidated balance sheets of USA       
Education, Inc., formerly SLM Holding Corporation, and subsidiaries as of       
December 31, 2000 and 1999, and the related consolidated statements of income,  
changes in stockholders' equity and cash flows for each of the three years in   
the period ended December 31, 2000. These financial statements are the          
responsibility of the Company's management. Our responsibility is to express an 
opinion on these financial statements based on our audits.                      

We conducted our audits in accordance with auditing standards generally   
accepted in the United States. Those standards require that we plan and perform 
an audit to obtain reasonable assurance about whether the financial statements  
are free of material misstatement. An audit includes examining, on a test       
basis, evidence supporting the amounts and disclosures in the financial         
statements. An audit also includes assessing the accounting principles used and 
significant estimates made by management, as well as evaluating the overall     
financial statement presentation. We believe that our audits provide a          
reasonable basis for our opinion.                                               

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of USA Education, Inc. and     
subsidiaries as of December 31, 2000 and 1999, and the consolidated results of  
their operations and their cash flows for each of the three years in the period 
ended December 31, 2000 in conformity with accounting principles generally      
accepted in the United States.                                                  

Arthur Andersen LLP                                                             
Vienna, VA                                                                      
January 17, 2001                                                                

F-2 

10-K405 46th Page of 95 TOC 1st Previous Next ↓Bottom Just 46th
USA EDUCATION, INC. 
CONSOLIDATED BALANCE SHEETS 
(Dollars in thousands, except share and per share amounts)

                                                                [Download Table]

                                                              December 31,      
                                                         -----------------------
                                                            2000        1999    
                                                         ----------- -----------
                                                                                
Assets                                                                          
Student loans, net.....................................  $37,647,297 $33,808,867
Warehousing advances...................................      987,352   1,042,695
Academic facilities financings                                                  
  Bonds--available-for-sale............................      498,775     640,498
  Loans................................................      352,393     387,267
                                                         ----------- -----------
Total academic facilities financings...................      851,168   1,027,765
Investments                                                                     
  Available-for-sale...................................    4,244,762   4,396,776
  Held-to-maturity.....................................      961,260     788,180
                                                         ----------- -----------
Total investments......................................    5,206,022   5,184,956
Cash and cash equivalents..............................      734,468     589,750
Other assets, principally accrued interest receivable..    3,365,481   2,370,751
                                                         ----------- -----------
Total assets...........................................  $48,791,788 $44,024,784
                                                         =========== ===========
Liabilities                                                                     
Short-term borrowings..................................  $30,463,988 $37,491,251
Long-term notes........................................   14,910,939   4,496,267
Other liabilities......................................    1,787,642     982,469
                                                         ----------- -----------
Total liabilities......................................   47,162,569  42,969,987
                                                         ----------- -----------
Commitments and contingencies                                                   
Minority interest in subsidiary........................      213,883     213,883

Stockholders' equity                                                            
Preferred stock, Series A, par value $.20 per share,                            
 20,000,000 shares authorized, 3,300,000 shares issued                          
 at stated value of $50 per share......................      165,000     165,000
Common stock, par value $.20 per share, 250,000,000                             
 shares authorized: 190,851,936 and 186,069,619 shares                          
 issued, respectively..................................       38,170      37,214
Additional paid-in capital.............................      225,211      62,827
Unrealized gains on investments (net of tax of $167,624                         
 and $160,319, respectively)...........................      311,301     297,735
Retained earnings......................................    1,810,902   1,462,034
                                                         ----------- -----------
Stockholders' equity before treasury stock.............    2,550,584   2,024,810
Common stock held in treasury at cost:                                          
 26,707,091 and 28,493,072 shares, respectively........    1,135,248   1,183,896
                                                         ----------- -----------
Total stockholders' equity.............................    1,415,336     840,914
                                                         ----------- -----------
Total liabilities and stockholders' equity.............  $48,791,788 $44,024,784
                                                         =========== ===========

See accompanying notes to consolidated financial statements.

F-3 

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USA EDUCATION, INC. 
CONSOLIDATED STATEMENTS OF INCOME 
(Dollars and shares in thousands, except per share amounts) 

                                                                [Download Table]

                                               Years ended December 31,       
                                           ---------------------------------- 
                                              2000        1999        1998    
                                           ----------  ----------  ---------- 
                                                                              
Interest income:                                                              
  Student loans........................... $2,854,231  $2,426,506  $2,094,488 
  Warehousing advances....................     56,410      67,828     101,905 
  Academic facilities financings:                                             
    Taxable...............................     36,819      39,123      44,224 
    Tax-exempt............................     29,890      35,235      41,064 
                                           ----------  ----------  ---------- 
  Total academic facilities financings....     66,709      74,358      85,288 
  Investments.............................    501,309     239,883     294,602 
                                           ----------  ----------  ---------- 
Total interest income.....................  3,478,659   2,808,575   2,576,283 

Interest expense:                                                             
  Short-term debt.........................  2,266,229   1,762,147   1,297,753 
  Long-term debt..........................    570,642     352,638     627,244 
                                           ----------  ----------  ---------- 
Total interest expense....................  2,836,871   2,114,785   1,924,997 
                                           ----------  ----------  ---------- 
Net interest income.......................    641,788     693,790     651,286 
Less: provision for losses................     32,119      34,358      36,597 
                                           ----------  ----------  ---------- 
Net interest income after provision for                                       
 losses...................................    609,669     659,432     614,689 
                                           ----------  ----------  ---------- 

Other income:                                                                 
  Gains on student loan securitizations...     91,846      35,280     117,068 
  Servicing and securitization revenue....    295,646     288,584     280,863 
  Gains on sales of student loans.........         67      27,169          -- 
  Gains on sales of securities............     18,555      15,832      10,734 
  Guarantor servicing fees................    127,522          --          -- 
  Other...................................    153,996      83,925      87,646 
                                           ----------  ----------  ---------- 
Total other income........................    687,632     450,790     496,311 
                                           ----------  ----------  ---------- 

Operating expenses:                                                           
  Salaries and benefits...................    280,886     138,571     189,917 
  Other...................................    251,824     219,999     170,952 
  Integration charge......................     53,000          --          -- 
                                           ----------  ----------  ---------- 
Total operating expenses..................    585,710     358,570     360,869 
                                           ----------  ----------  ---------- 

Income before income taxes and minority                                       
 interest in net earnings of subsidiary...    711,591     751,652     750,131 
                                           ----------  ----------  ---------- 

Income taxes:                                                                 
  Current.................................    267,837     360,494     306,310 
  Deferred................................    (31,957)   (120,367)    (68,337)
                                           ----------  ----------  ---------- 
Total income taxes........................    235,880     240,127     237,973 
Minority interest in net earnings of                                          
 subsidiary...............................     10,694      10,694      10,694 
                                           ----------  ----------  ---------- 
Net income................................    465,017     500,831     501,464 
Preferred stock dividends.................     11,522       1,438          -- 
                                           ----------  ----------  ---------- 
Net income attributable to common stock... $  453,495  $  499,393  $  501,464 
                                           ==========  ==========  ========== 
Basic earnings per common share........... $     2.84  $     3.11  $     2.99 
                                           ==========  ==========  ========== 
Average common shares outstanding.........    159,482     160,577     167,684 
                                           ==========  ==========  ========== 
Diluted earnings per common share......... $     2.76  $     3.06  $     2.95 
                                           ==========  ==========  ========== 
Average common and common equivalent                                          
 shares outstanding.......................    164,355     163,158     170,066 
                                           ==========  ==========  ========== 

See accompanying notes to consolidated financial statements.

F-4 

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USA EDUCATION, INC. 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY  
(Dollars in thousands, except share and per share amounts)  

                                                        [Enlarge/Download Table]

                    Preferred         Common Stock Shares                             Additional                         
                      Stock   ------------------------------------  Preferred Common   Paid-In    Retained    Treasury   
                     Shares     Issued     Treasury    Outstanding    Stock    Stock   Capital    Earnings      Stock    
                    --------- ----------- -----------  -----------  --------- ------- ---------- ----------  ----------- 
                                                                                                                         
Balance at                                                                                                               
December 31,                                                                                                             
1997..............            183,632,694 (10,221,757) 173,410,937  $     --  $36,726  $ 28,838  $  654,135  $  (423,863)
 Comprehensive                                                                                                           
 income:                                                                                                                 
 Net income.......                                                                                  501,464              
 Other                                                                                                                   
 comprehensive                                                                                                           
 income, net of                                                                                                          
 tax:                                                                                                                    
  Change in                                                                                                              
  unrealized gains                                                                                                       
  (losses) on                                                                                                            
  investments, net                                                                                                       
  of tax..........                                                                                                       
 Comprehensive                                                                                                           
 income...........                                                                                                       
 Cash dividends                                                                                                          
 ($.57 per                                                                                                               
 share)...........                                                                                  (95,265)             
 Issuance of                                                                                                             
 common shares....                821,172                  821,172                165    21,129                          
 Tax benefit                                                                                                             
 related to                                                                                                              
 employee stock                                                                                                          
 option and                                                                                                              
 purchase plan....                                                                        4,093                          
 Premiums on                                                                                                             
 equity forward                                                                                                          
 purchase                                                                                                                
 contracts........                                                                      (27,189)                         
 Repurchase of                                                                                                           
 common shares....                        (10,105,456) (10,105,456)                                             (418,346)
                    --------- ----------- -----------  -----------  --------  -------  --------  ----------  ----------- 
Balance at                                                                                                               
December 31,                                                                                                             
1998..............            184,453,866 (20,327,213) 164,126,653  $     --  $36,891  $ 26,871  $1,060,334  $  (842,209)
 Comprehensive                                                                                                           
 income:                                                                                                                 
 Net income.......                                                                                  500,831              
 Other                                                                                                                   
 comprehensive                                                                                                           
 income, net of                                                                                                          
 tax:                                                                                                                    
  Change in                                                                                                              
  unrealized gains                                                                                                       
  (losses) on                                                                                                            
  investments, net                                                                                                       
  of tax..........                                                                                                       
 Comprehensive                                                                                                           
 income...........                                                                                                       
 Cash dividends:                                                                                                         
 Common stock                                                                                                            
 ($.61 per                                                                                                               
 share)...........                                                                                  (97,693)             
 Preferred stock                                                                                                         
 ($.44 per                                                                                                               
 share)...........                                                                                   (1,438)             
 Issuance of                                                                                                             
 common shares....              1,615,753                1,615,753                323    61,464                          
 Issuance of                                                                                                             
 preferred                                                                                                               
 shares...........  3,300,000                                        165,000             (3,397)                         
 Tax benefit                                                                                                             
 related to                                                                                                              
 employee stock                                                                                                          
 option and                                                                                                              
 purchase plan....                                                                        7,510                          
 Premiums on                                                                                                             
 equity forward                                                                                                          
 purchase                                                                                                                
 contracts........                                                                      (29,621)                         
 Repurchase of                                                                                                           
 common shares....                         (8,165,859)  (8,165,859)                                             (341,687)
                    --------- ----------- -----------  -----------  --------  -------  --------  ----------  ----------- 
Balance at                                                                                                               
December 31,                                                                                                             
1999..............  3,300,000 186,069,619 (28,493,072) 157,576,547  $165,000  $37,214  $ 62,827  $1,462,034  $(1,183,896)
 Comprehensive                                                                                                           
 income:                                                                                                                 
 Net income.......                                                                                  465,017              
 Other                                                                                                                   
 comprehensive                                                                                                           
 income, net of                                                                                                          
 tax..............                                                                                                       
 Change in                                                                                                               
 unrealized gains                                                                                                        
 (losses) on                                                                                                             
 investments, net                                                                                                        
 of tax...........                                                                                                       
 Comprehensive                                                                                                           
 income...........                                                                                                       
 Cash dividends...                                                                                                       
 Common stock                                                                                                            
 ($.66 per                                                                                                               
 share)...........                                                                                 (104,627)             
 Preferred stock                                                                                                         
 ($3.49 per                                                                                                              
 share)...........                                                                                  (11,522)             
 Issuance of                                                                                                             
 common shares....              4,782,317   9,084,505   13,866,822                956   201,958                  372,366 
 Tax benefit                                                                                                             
 related to                                                                                                              
 employee stock                                                                                                          
 option and                                                                                                              
 purchase plan....                                                                       25,393                          
 Premiums on                                                                                                             
 equity forward                                                                                                          
 purchase                                                                                                                
 contracts........                                                                      (64,967)                         
 Repurchase of                                                                                                           
 common shares....                         (7,298,524)  (7,298,524)                                             (323,718)
                    --------- ----------- -----------  -----------  --------  -------  --------  ----------  ----------- 
Balance at                                                                                                               
December 31,                                                                                                             
2000..............  3,300,000 190,851,936 (26,707,091) 164,144,845  $165,000  $38,170  $225,211  $1,810,902  $(1,135,248)
                    ========= =========== ===========  ===========  ========  =======  ========  ==========  =========== 

                    Unrealized                                                                                           
                       Gains        Total                                                                                
                    (Losses) On Stockholders'                                                                            
                    Investments    Equity                                                                                
                    ----------- -------------                                                                            
                                                                                                                         
Balance at                                                                                                               
December 31,                                                                                                             
1997..............   $378,736    $  674,572                                                                              
 Comprehensive                                                                                                           
 income:                                                                                                                 
 Net income.......                  501,464                                                                              
 Other                                                                                                                   
 comprehensive                                                                                                           
 income, net of                                                                                                          
 tax:                                                                                                                    
  Change in                                                                                                              
  unrealized gains                                                                                                       
  (losses) on                                                                                                            
  investments, net                                                                                                       
  of tax..........     (6,997)       (6,997)                                                                             
                                -------------                                                                            
 Comprehensive                                                                                                           
 income...........                  494,467                                                                              
 Cash dividends                                                                                                          
 ($.57 per                                                                                                               
 share)...........                  (95,265)                                                                             
 Issuance of                                                                                                             
 common shares....                   21,294                                                                              
 Tax benefit                                                                                                             
 related to                                                                                                              
 employee stock                                                                                                          
 option and                                                                                                              
 purchase plan....                    4,093                                                                              
 Premiums on                                                                                                             
 equity forward                                                                                                          
 purchase                                                                                                                
 contracts........                  (27,189)                                                                             
 Repurchase of                                                                                                           
 common shares....                 (418,346)                                                                             
                    ----------- -------------                                                                            
Balance at                                                                                                               
December 31,                                                                                                             
1998..............   $371,739    $  653,626                                                                              
 Comprehensive                                                                                                           
 income:                                                                                                                 
 Net income.......                  500,831                                                                              
 Other                                                                                                                   
 comprehensive                                                                                                           
 income, net of                                                                                                          
 tax:                                                                                                                    
  Change in                                                                                                              
  unrealized gains                                                                                                       
  (losses) on                                                                                                            
  investments, net                                                                                                       
  of tax..........    (74,004)      (74,004)                                                                             
                                -------------                                                                            
 Comprehensive                                                                                                           
 income...........                  426,827                                                                              
 Cash dividends:                                                                                                         
 Common stock                                                                                                            
 ($.61 per                                                                                                               
 share)...........                  (97,693)                                                                             
 Preferred stock                                                                                                         
 ($.44 per                                                                                                               
 share)...........                   (1,438)                                                                             
 Issuance of                                                                                                             
 common shares....                   61,787                                                                              
 Issuance of                                                                                                             
 preferred                                                                                                               
 shares...........                  161,603                                                                              
 Tax benefit                                                                                                             
 related to                                                                                                              
 employee stock                                                                                                          
 option and                                                                                                              
 purchase plan....                    7,510                                                                              
 Premiums on                                                                                                             
 equity forward                                                                                                          
 purchase                                                                                                                
 contracts........                  (29,621)                                                                             
 Repurchase of                                                                                                           
 common shares....                 (341,687)                                                                             
                    ----------- -------------                                                                            
Balance at                                                                                                               
December 31,                                                                                                             
1999..............   $297,735    $  840,914                                                                              
 Comprehensive                                                                                                           
 income:                                                                                                                 
 Net income.......                  465,017                                                                              
 Other                                                                                                                   
 comprehensive                                                                                                           
 income, net of                                                                                                          
 tax..............                                                                                                       
 Change in                                                                                                               
 unrealized gains                                                                                                        
 (losses) on                                                                                                             
 investments, net                                                                                                        
 of tax...........     13,566        13,566                                                                              
                                -------------                                                                            
 Comprehensive                                                                                                           
 income...........                  478,583                                                                              
 Cash dividends...                                                                                                       
 Common stock                                                                                                            
 ($.66 per                                                                                                               
 share)...........                 (104,627)                                                                             
 Preferred stock                                                                                                         
 ($3.49 per                                                                                                              
 share)...........                  (11,522)                                                                             
 Issuance of                                                                                                             
 common shares....                  575,280                                                                              
 Tax benefit                                                                                                             
 related to                                                                                                              
 employee stock                                                                                                          
 option and                                                                                                              
 purchase plan....                   25,393                                                                              
 Premiums on                                                                                                             
 equity forward                                                                                                          
 purchase                                                                                                                
 contracts........                  (64,967)                                                                             
 Repurchase of                                                                                                           
 common shares....                 (323,718)                                                                             
                    ----------- -------------                                                                            
Balance at                                                                                                               
December 31,                                                                                                             
2000..............   $311,301    $1,415,336                                                                              
                    =========== =============                                                                            

See accompanying notes to consolidated financial statements.  

F-5 

10-K405 49th Page of 95 TOC 1st Previous Next ↓Bottom Just 49th
USA EDUCATION, INC. 
CONSOLIDATED STATEMENTS OF CASH FLOWS 
(Dollars in thousands)

                                                                [Download Table]

                                           Years ended December 31,            
                                   ------------------------------------------- 
                                       2000           1999           1998      
                                   -------------  -------------  ------------- 
                                                                               
Operating activities                                                           
 Net income....................... $     465,017  $     500,831  $     501,464 
 Adjustments to reconcile net                                                  
  income to net cash provided by                                               
  operating activities:                                                        
   Gains on student loan                                                       
   securitizations................       (91,846)       (35,280)      (117,068)
   Gains on sales of student                                                   
   loans..........................           (67)       (27,169)            -- 
   Gains on sales of securities...       (18,555)       (15,832)       (10,734)
   Provision for losses...........        32,119         34,358         36,597 
   Integration charge.............        53,000             --             -- 
   Decrease (increase) in accrued                                              
   interest receivable............        46,709       (165,048)        84,749 
   (Decrease) increase in accrued                                              
   interest payable...............       (11,606)         4,347       (122,053)
   (Increase) decrease in other                                                
   assets.........................      (152,761)        20,208        (83,905)
   Increase (decrease) in other                                                
   liabilities....................       422,637         21,809       (169,449)
                                   -------------  -------------  ------------- 
 Total adjustments................       279,630       (162,607)      (381,863)
                                   -------------  -------------  ------------- 
Net cash provided by operating                                                 
 activities.......................       744,647        338,224        119,601 
                                   -------------  -------------  ------------- 
Investing activities                                                           
 Student loans purchased..........   (10,857,818)   (11,095,260)    (8,417,086)
 Reduction of student loans:                                                   
  Installment payments............     2,362,634      2,760,492      2,785,731 
  Claims and resales..............       481,829        474,105        782,041 
  Proceeds from securitization of                                              
   student loans..................     8,805,758      4,085,540      6,035,218 
  Proceeds from sales of student                                               
   loans..........................       136,944        926,123             -- 
 Warehousing advances made........    (1,075,067)      (876,728)      (851,837)
 Warehousing advance repayments...     1,130,410      1,016,765      1,177,759 
 Academic facilities financings                                                
  made............................       (11,609)       (35,919)        (4,302)
 Academic facilities financings                                                
  repayments......................       190,608        163,635        203,936 
 Investments purchased............   (55,750,718)   (12,972,279)    (9,853,778)
 Proceeds from sale or maturity of                                             
  investments.....................    55,887,600     11,699,915     10,917,744 
Purchase of subsidiaries, net of                                               
 cash acquired (Note 3)...........      (448,754)      (317,722)            -- 
                                   -------------  -------------  ------------- 
Net cash provided by (used in)                                                 
 investing activities.............       851,817     (4,171,333)     2,775,426 
                                   -------------  -------------  ------------- 
Financing activities                                                           
 Short-term borrowings issued.....   689,320,696    510,412,470    478,111,748 
 Short-term borrowings repaid.....  (690,106,439)  (508,290,421)  (473,466,628)
 Long-term notes issued...........    17,162,579     12,234,054      5,527,280 
 Long-term notes repaid...........   (17,924,421)    (9,809,617)   (12,490,124)
 Equity forward contracts and                                                  
  stock issued....................       535,706        201,279         (1,802)
 Common stock repurchased.........      (323,718)      (341,687)      (418,346)
 Common dividends paid............      (104,627)       (97,693)       (95,265)
 Preferred dividends paid.........       (11,522)        (1,438)            -- 
                                   -------------  -------------  ------------- 
Net cash (used in) provided by                                                 
 financing activities.............    (1,451,746)     4,306,947     (2,833,137)
                                   -------------  -------------  ------------- 
Net increase in cash and cash                                                  
 equivalents......................       144,718        473,838         61,890 
Cash and cash equivalents at                                                   
 beginning of year................       589,750        115,912         54,022 
                                   -------------  -------------  ------------- 
Cash and cash equivalents at end                                               
 of year.......................... $     734,468  $     589,750  $     115,912 
                                   =============  =============  ============= 
Cash disbursements made for:                                                   
  Interest........................ $   2,432,427  $   1,794,629  $   1,868,975 
                                   =============  =============  ============= 
  Income taxes.................... $     140,000  $     398,500  $     339,336 
                                   =============  =============  ============= 

See accompanying notes to consolidated financial statements.

F-6 

10-K405 50th Page of 95 TOC 1st Previous Next ↓Bottom Just 50th
USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)

1. Organization and Privatization                                               

USA Education, Inc., formerly SLM Holding Corporation ("SLM Holding"), was
formed on February 3, 1997 as a wholly owned subsidiary of the Student Loan     
Marketing Association (the "GSE"). On August 7, 1997, pursuant to the Student   
Loan Marketing Association Reorganization Act of 1996 (the "Privatization Act") 
and approval by shareholders of an agreement and plan of reorganization, the    
GSE was reorganized into a subsidiary of SLM Holding (the "Reorganization").    
Effective as of July 31, 2000, SLM Holding Corporation was renamed USA          
Education, Inc. upon the completion of the acquisition of the guarantee         
servicing, student loan servicing and secondary market operations of USA Group, 
Inc. ("USA Group"). USA Education, Inc. is a holding company that operates      
through a number of subsidiaries including the GSE. References herein to the    
"Company" refer to the GSE and its subsidiaries for periods prior to the        
Reorganization and to USA Education, Inc. ("USA Education") and its             
subsidiaries for periods after the Reorganization.                              

Under the terms of the Reorganization each outstanding share of common    
stock, par value $.20 per share, of the GSE was converted into one share of     
common stock, par value $.20 per share, of USA Education, Inc. The GSE          
transferred all employees to non-GSE subsidiaries on August 7, 1997 and also    
transferred certain assets, including stock in certain subsidiaries, to USA     
Education, Inc. or one of its non-GSE subsidiaries on December 31, 1997. This   
transfer of the subsidiaries and assets and the related exchange of stock was   
accounted for at historical cost similar to a pooling of interests and          
therefore all prior period financial statements and related disclosures         
presented have been restated as if the Reorganization took place at the         
beginning of such periods.                                                      

The GSE was chartered by Congress to provide liquidity for originators of 
student loans made under federally sponsored student loan programs and          
otherwise to support the credit needs of students and educational institutions. 
The GSE is predominantly engaged in the purchase of student loans insured under 
federally sponsored programs. The GSE also makes secured loans (warehousing     
advances) to providers of education credit, and provides financing to           
educational institutions for their physical plant and equipment (academic       
facilities financings).                                                         

The Privatization Act provides that the GSE may continue to issue new debt
obligations maturing on or before September 30, 2008. The legislation further   
provides that the legal status and attributes of the GSE's debt obligations,    
including the Commission registration and state tax exemptions, will be fully   
preserved until their respective maturities. Such debt obligations will remain  
GSE debt obligations, whether such obligations were outstanding at the time of, 
or issued subsequent to, the Reorganization. The obligations of USA Education   
do not have GSE status. The GSE will wind down its operations and dissolve on   
or before September 30, 2008. Any GSE debt obligations outstanding at the date  
of such dissolution will be defeased through creation of a fully collateralized 
trust, consisting of U.S. government or agency obligations with cash flows      
matching the interest and principal obligations of the defeased debt. The       
Privatization Act further requires that the GSE's outstanding adjustable rate   
cumulative preferred stock be redeemed on September 30, 2008 or at such earlier 
time when the GSE is dissolved. Also upon the GSE's dissolution, all of its     
remaining assets will transfer to the Company.                                  

 The Omnibus Appropriations Act of 1998, signed into law by the President on
October 21, 1998, amends the Federal Deposit Insurance Act by, among other      
things, providing an exception to its current prohibition on affiliations       
between government-sponsored entities and depository institutions. This         
exception allows USA Education, Inc. to become affiliated with a depository     
institution upon satisfaction of certain conditions and with the approval of    
the Secretary of the Treasury. Among the conditions are that: the dissolution   
of the GSE cannot be adversely affected by the affiliation; the dissolution of  
the GSE must occur within two years after the affiliation is consummated        
subject to the ability of the Secretary to extend such deadline for up to two   
one-year                                                                        

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10-K405 51st Page of 95 TOC 1st Previous Next ↓Bottom Just 51st
USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

1. Organization and Privatization (Continued)                                   

periods; and the GSE must be separate and distinct from the affiliated          
depository institution and cannot extend credit, provide credit enhancement or  
purchase any obligation of the depository institution.                          

2. Significant Accounting Policies                                              

Loans                                                                           

 Loans, consisting of federally insured student loans, non-federally insured
student loans, student loan participations, warehousing advances, and academic  
facilities financings are carried at their purchase price which, for student    
loans, includes unamortized premiums and unearned purchase discounts.           

Student Loan Income                                                             

  The Company recognizes student loan income as earned, including amortization
of premiums and the accretion of discounts. In 1998, interest income earned on  
student loan participations was recognized in accordance with the terms of the  
joint venture agreement with the Chase Manhattan Bank (the "Joint Venture")     
which effectively reflects the underlying interest income earned on the student 
loans less servicing costs and the general and administrative expenses of the   
Joint Venture. The Company's investment in the Joint Venture is accounted for   
using the equity method of accounting. In December 1998, the Company and Chase  
restructured the Joint Venture, whereby the Company now purchases all loans     
originated by Chase. Previously, the Joint Venture funded the Chase-originated  
loans through sales of student loan participations that entitled the Company    
and Chase to one-half interest in the loans.                                    

Allowance for Losses                                                            

The Company has established an allowance for potential losses on the      
existing on-balance sheet portfolio of student loans and academic facilities    
financings. These assets are presented net of the allowance on the balance      
sheet. In evaluating the adequacy of the allowance for losses, the Company      
considers several factors including trends in student loan claims rejected for  
payment by guarantors, default rates on non-federally insured student loans and 
the amount of FFELP loans subject to 2 percent risk-sharing. The allowance is   
based on periodic evaluations of its loan portfolios considering past           
experience, changes to federal student loan programs, current economic          
conditions and other relevant factors. The allowance is maintained at a level   
that management believes is adequate to provide for estimated credit losses.    
This evaluation is inherently subjective as it requires estimates that may be   
susceptible to significant changes.                                             

Cash and Cash Equivalents                                                       

  Cash and cash equivalents includes term federal funds and bank deposits with
original terms to maturity less than three months.                              

Investments                                                                     

Investments are held to provide liquidity, to economically hedge certain  
financing activities and to serve as a source of short-term income. Securities  
that are actively traded are accounted for at fair market value with unrealized 
gains and losses included in investment income. Securities that are intended to 
be held-to-maturity are accounted for at amortized cost. Securities that fall   
outside of the two previous categories are considered as available-for-sale.    
Such securities are carried at market value, with the after-tax unrealized gain 
or loss, along                                                                  

F-8 

10-K405 52nd Page of 95 TOC 1st Previous Next ↓Bottom Just 52nd
USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

2. Significant Accounting Policies (Continued)                                  

with after-tax unrealized gain or loss on instruments which hedge such          
securities, carried as a separate component of stockholders' equity. The        
amortized cost of debt securities in this category is adjusted for amortization 
of premiums and accretion of discounts.                                         

Goodwill                                                                        

Goodwill at December 31, 2000 and 1999 was $620 million and $117 million, 
respectively, and was included in other assets. Goodwill is amortized on a      
straight-line basis over a 10 to 20 year period. For the years ended December   
31, 2000, 1999, and 1998, goodwill amortization totaled approximately $19       
million, $3 million and $2 million, respectively.                               

Interest Expense                                                                

Interest expense is based upon contractual interest rates adjusted for net
payments under derivative financial instruments with off-balance sheet risks,   
which include interest rate swap agreements and foreign currency exchange       
agreements and the amortization of debt issuance costs and deferred gains and   
losses on hedge transactions entered into to reduce interest rate risk.         

Interest Rate Swaps                                                             

The Company utilizes interest rate swap agreements ("interest rate swaps")
principally for hedging purposes to alter the interest rate characteristics of  
its debt and assets in order to manage interest rates. This enables the Company 
to match the interest rate characteristics of borrowings to specific assets in  
order to mitigate the impact of interest rate fluctuations. The Company does    
not hold or issue interest rate swaps for trading purposes.                     

Amounts paid or received under swaps that are used to alter the interest  
rate characteristics of its interest-sensitive liabilities and assets are       
accrued and recognized as an adjustment of the interest expense on the related  
borrowing or asset. The related net receivable or payable from counterparties   
is included in other assets or other liabilities. Gains and losses associated   
with the termination of swaps for designated positions are deferred and         
amortized over the remaining life of the designated instrument as an adjustment 
to interest expense or income.                                                  

 The Company's credit exposure on swaps is limited to their unrealized gains
in the event of nonperformance by the counterparties. The Company manages the   
credit risk associated with these instruments by performing credit reviews of   
counterparties and monitoring market conditions to establish counterparty,      
sovereign and instrument-type credit lines and, when appropriate, requiring     
collateral.                                                                     

Floor Revenue Contracts                                                         

The Company enters into Floor Revenue Contracts with third parties, under 
which the Company receives an up-front payment and agrees to pay the difference 
between the minimum borrower interest rate less the applicable Special          
Allowance Payment ("SAP") rate ("the Strike Rate") and the average of 91-day    
Treasury bill rates over the period of the contract. If the Strike Rate is less 
than the average Treasury bill rate, then no payment is required. These upfront 
payments were being amortized to student loan income over the average life of   
the contracts, which is approximately 6 years, 6 months and 10 months for the   
2000, 1999 and 1998 contracts, respectively. Effective December 31, 2000, in    
anticipation of the adoption of "SFAS 133" (defined below), the Treasury bill   
Floor Revenue Contracts were de-designated as effective hedges and marked-to-   

F-9 

10-K405 53rd Page of 95 TOC 1st Previous Next ↓Bottom Just 53rd
USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

2. Significant Accounting Policies (Continued)                                  

market. The net effect of the fair market value of these contracts and the      
unamortized upfront payment was reclassified to student loan premium and will   
be amortized to student loan income over the average life of the student loan   
portfolio.                                                                      

 In 2000, the Company entered into LIBOR Floor Revenue Contracts that are an
effective economic hedge of a segment of the Company's student loan portfolio.  
These positions do not meet the hedge effectiveness requirements under GAAP and 
were marked-to-market at December 31, 2000. No such transactions were in effect 
for 1999 or 1998.                                                               

Income Taxes                                                                    

The Company accounts for income taxes in accordance with SFAS No. 109,    
"Accounting for Income Taxes," using the asset and liability method. Under the  
asset and liability method, deferred tax assets and liabilities are determined  
for temporary differences between the carrying amounts of assets or liabilities 
for book purposes versus tax purposes, based on the enacted tax rates which are 
expected to be in effect when the underlying items of income and expense are    
expected to be realized. The Company and its eligible subsidiaries file a       
consolidated U.S. federal income tax return.                                    

Earnings per Common Share                                                       

 Basic earnings per common share were computed using the weighted average of
common shares outstanding during the year. Diluted earnings per common share    
were computed using the weighted average of common and common equivalent shares 
outstanding during the year. Common equivalent shares include shares issuable   
upon exercise of incentive stock options, and in 1998 warrants for voting       
common stock. Equity forward transactions are included in common equivalent     
shares if the average market price of the Company's stock is less than the      
forward contract's exercise price.                                              

Consolidation                                                                   

  The consolidated financial statements include the accounts of USA Education,
Inc. and its subsidiaries, after eliminating intercompany accounts and          
transactions.                                                                   

Use of Estimates                                                                

The preparation of financial statements in conformity with generally      
accepted accounting principles requires management to make estimates and        
assumptions that affect the reported amounts of assets and liabilities,         
reported amounts of revenues and expenses and other disclosures. Actual results 
could differ from those estimates.                                              

Reclassifications                                                               

Certain reclassifications have been made to the balances as of and for the
years ended December 31, 1999 and 1998, to be consistent with classifications   
adopted for 2000.                                                               

Recently Issued Accounting Pronouncements                                       

Derivative Accounting                                                       

In June 1998, the FASB issued Statement of Financial Accounting Standards 
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging        
Activities," which requires that every derivative                               

F-10

10-K405 54th Page of 95 TOC 1st Previous Next ↓Bottom Just 54th
USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

2. Significant Accounting Policies (Continued)                                  

instrument, including certain derivative instruments embedded in other          
contracts, be recorded in the balance sheet as either an asset or liability     
measured at its fair value. SFAS 133, as amended by Statement of Financial      
Accounting Standards No. 137, "Accounting for Derivative Instruments and        
Hedging Activities-Deferral of Effective Date of FASB Statement No. 133," is    
effective for the Company's financial statements beginning January 1, 2001.     

Upon adoption, all derivatives will be recognized on the balance sheet at 
their fair value. On the date the derivative contract is entered into, the      
Company designates the derivative as (1) a hedge of the fair value of a         
recognized asset or liability or of an unrecognized firm commitment ("fair      
value hedge"), (2) a hedge of a forecasted transaction or of the variability of 
cash flows to be received or paid related to a recognized asset or liability    
("cash flow hedge"), or (3) hedge accounting not sought by the Company          
("trading"). In order to qualify as a fair value or cash flow hedge, the        
derivative must be highly effective in mitigating the value or cash flow        
fluctuation of the hedged item. Changes in the fair value of a derivative that  
is highly effective as--and that is designated and qualifies as--a fair value   
hedge, along with the gain or loss on the hedged asset or liability that is     
attributable to the hedged risk (including gains or losses on the firm          
commitments), are recorded in current period earnings. Changes in the fair      
value of a derivative that is highly effective as--and that is designated and   
qualifies as--a cash flow hedge are recorded in other comprehensive income      
until earnings are affected by the variability of cash flows (e.g., when        
periodic settlements on a variable-rate asset or liability are recorded in      
earnings). Last, changes in the fair value of derivative instruments where      
hedge accounting is not sought are reported in current period earnings.         

The Company occasionally purchases a financial instrument that contains a 
derivative instrument that is "embedded" in the financial instrument. Upon      
purchasing the instrument, the Company assesses whether the economic            
characteristics of the embedded derivative are clearly and closely related to   
the economic characteristics of the remaining component of the financial        
instrument (i.e., the host contract) and whether a separate instrument with the 
same terms as the embedded instrument would meet the definition of a derivative 
instrument. When it is determined that (1) the embedded derivative possesses    
economic characteristics that are not clearly and closely related to the        
economic characteristics of the host contract, and (2) a separate instrument    
with the same terms would qualify as a derivative instrument, the embedded      
derivative is separated from the host contract, carried at fair value, and      
designated as a fair value or cash flow hedge, or as trading in the case where  
no hedge accounting is being sought. However, in cases where (1) the host       
contract is measured at fair value, with changes in fair value reported in      
current earnings or (2) the Company is unable to reliably identify and measure  
an embedded derivative for separation from its host contract, the entire        
contract is carried on the balance sheet at fair value and is not designated as 
a hedging instrument.                                                           

  The Company formally documents all relationships between hedging instruments
and hedged items, as well as its risk-management objective and strategy for     
undertaking various hedge transactions. This process includes linking all       
derivatives that are designated as fair value or cash flow hedges to specific   
assets and liabilities on the balance sheet or to specific firm commitments or  
forecasted transactions. The Company formally assesses, both at the hedge's     
inception and on an ongoing quarterly basis, whether the derivatives that are   
used in hedging transactions have been highly effective in offsetting changes   
in fair values or cash flows of hedged items and whether they are expected to   
continue to be highly effective in the future period. When it is determined     
that a derivative is not highly effective as a hedge or that it has ceased to   
be a highly effective hedge, the Company will discontinue hedge accounting      
prospectively, as discussed below.                                              

The Company will discontinue hedge accounting prospectively when (1) the  
derivative is determined to be ineffective in offsetting changes in the fair    
value or cash flows of a hedged item (including firm commitments                

F-11

10-K405 55th Page of 95 TOC 1st Previous Next ↓Bottom Just 55th
USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

2. Significant Accounting Policies (Continued)                                  

or forecasted transactions); (2) the derivative expires or is sold, terminated, 
or exercised; (3) the derivative is de-designated as a hedge instrument,        
because it is unlikely that a forecasted transaction will occur; (4) the        
hedged-firm commitment no longer meets the definition of a firm commitment; or  
(5) the designation of the derivative as a hedge instrument is determined to be 
inappropriate by management.                                                    

When hedge accounting is discontinued because it is determined that the   
derivative no longer qualifies as an effective fair value hedge, the derivative 
will continue to be carried on the balance sheet at its fair value, and the     
hedged asset or liability will no longer be adjusted for changes in fair value. 
When hedge accounting is discontinued because the hedged item no longer meets   
the definition of a firm commitment, the derivative will continue to be carried 
on the balance sheet at its fair value, and any asset or liability that was     
recorded pursuant to recognition of the firm commitment will be removed from    
the balance sheet and recognized as a gain or loss in current period earnings.  
When hedge accounting is discontinued because it is probable that a forecasted  
transaction will not occur, the derivative will continue to be carried on the   
balance sheet at its fair value, and gains and losses that were accumulated in  
other comprehensive income will be recognized immediately in earnings. In all   
other situations in which hedge accounting is discontinued, the derivative will 
be carried at its fair value on the balance sheet, with changes in its fair     
value recognized in current period earnings.                                    

In accordance with the transition provisions of FAS 133, the Company will 
record at January 1, 2001 a net-of-tax cumulative-effect-type loss of $27       
million in earnings to recognize at fair value all derivatives that are         
designated as fair value hedging instruments. The Company will also record a    
net-of-tax cumulative-effect-type gain of $28 million in earnings to recognize  
the difference between the carrying values and fair values of related hedged    
assets and liabilities.                                                         

At January 1, 2001, the Company will also record a net-of-tax cumulative- 
effect-type loss of $2 million in accumulated other comprehensive income to     
recognize at fair value all the derivatives that are designated as cash flow    
hedging instruments. Net losses on derivatives of $57 million that had been     
previously deferred will be de-recognized from the balance sheet through net-   
of-tax cumulative-effect-type loss of $37 million to other comprehensive        
income. Gains and losses on derivatives that were previously deferred as        
adjustments to the carrying amount of hedged items will not be adjusted.        

Equity Derivative Accounting                                                

  On March 16, 2000, the Emerging Issues Task Force ("EITF") issued EITF Issue
No. 00-7 ("EITF No. 00-7"), "Application of Issue No. 96-13, 'Accounting for    
Derivative Financial Instruments Indexed to, and Potentially Settled in, a      
Company's Own Stock,' to Equity Derivative Instruments That Contain Certain     
Provisions That Require Net Cash Settlement If Certain Events Occur." The EITF  
announced a consensus that any equity derivative contract that could require    
net cash settlement (as defined in EITF Issue No. 96-13) must be accounted for  
as an asset or liability and cannot be included in the permanent equity of the  
Company. In addition, any equity derivative contracts that could require        
physical settlement by a cash payment to the counterparty in exchange for the   
issuer's shares, must be accounted for as temporary equity as defined by the    
Commission under Accounting Series Release ("ASR") No. 268, "Presentation in    
Financial Statements of Redeemable Preferred Stocks." EITF No. 00-7 is          
effective immediately for all new contracts entered into after March 16, 2000.  
The EITF met on July 19, 2000 to discuss various issues and questions           
concerning EITF No. 00-7. Following that meeting, the EITF issued EITF Issue    
No. 00-19 ("EITF No. 00-19"), "Determination of Whether Share Settlement is     
within the Control of the Issuer for Purposes of Applying Issue No. 96-13." On  
September 20, 2000, the EITF reached a final consensus on EITF Issue No. 00-19. 
EITF Issue No. 00-19 provides that in order for the contract to be accounted    
for as permanent equity, the contract's provisions should                       

F-12

10-K405 56th Page of 95 TOC 1st Previous Next ↓Bottom Just 56th
USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

2. Significant Accounting Policies (Continued)                                  

put the company's counterparty in no better position than the company's common  
shareholders. The EITF also confirmed the effective date of EITF Issue No. 00-7 
to be June 30, 2001 for contracts entered into before September 20, 2000. If    
the contract is entered into after September 20, 2000, EITF Issue No. 00-19 is  
applicable at contract inception. As of December 31, 2000, the Company had      
amended all of its equity forward contracts to satisfy the requirements of EITF 
No. 00-7 and EITF No. 00-19 to allow accounting through permanent equity.       

Securitization Accounting                                                   

In October 2000, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 140 ("SFAS 140"), "Accounting for         
Transfers and Servicing of Financial Assets and Extinguishments of              
Liabilities--a Replacement of FASB Statement No. 125." SFAS 140 requires new    
disclosures about securitizations and retained interests in securitized         
financial assets and revises the criteria involving qualifying special purpose  
entities. Under SFAS 140, entities will be required to disclose information     
about securitizations regarding accounting policies, securitization             
characteristics, key assumptions used, and cash flows between the               
securitization special purpose entities and the transferor. Additionally,       
entities will be required to disclose information related to retained interests 
in securitized financial assets, regarding accounting policies for subsequent   
measuring of retained interests, key assumptions used in subsequent fair value  
measurements, sensitivity analysis showing hypothetical effects on fair values  
based on unfavorable variations from key assumptions and general                
characteristics of the securitized assets such as principal balances,           
delinquencies and credit losses. These new disclosure requirements are included 
in Note 9. Additionally, SFAS 140 revises the criteria involving qualifying     
special purpose entities. These revisions related to special purpose entities   
are to be applied prospectively to transfers of financial assets and            
extinguishments of liabilities occurring after March 31, 2001.                  

In July 2000, FASB issued EITF No. 99-20, "Recognition of Interest Income 
and Impairment on Purchased and Retained Beneficial Interests in Securitized    
Financial Assets." This statement requires that all changes in assumptions      
regarding expected future cash flows related to such assets that are used to    
calculate income yields be recognized prospectively through revised income      
yields unless impairment is required to be recognized, at which time an         
investment is written down to fair value. EITF No. 99-20 impacts the Company's  
income recognition for its student loan portfolio. Currently, the Company       
recognizes changes in income yields due to changes in expected prepayment       
speeds as a cumulative catch-up in the period of change. In addition, the       
Company recognizes changes related to expected future cash flows due to credit  
losses prospectively if the change results in less credit losses and as a       
cumulative catch-up if the change results in more credit losses, unless         
impairment is required to be recognized at which time the student loans are     
written down to fair value. The Company does not believe EITF No. 99-20 will    
have a material impact on its results of operations as the Company has not      
historically recorded significant cumulative catch-ups due to changes in        
expected future cash flows. EITF No. 99-20 is effective on April 1, 2001.       

3. Acquisitions                                                                 

In July 1999, the Company completed the purchase of Nellie Mae Corporation
for $332 million in cash and stock in an acquisition accounted for as a         
purchase. As a result of the purchase, the Company recorded $90 million in      
goodwill. At the time of the acquisition, Nellie Mae had an outstanding student 
loan portfolio of $2.6 billion and in 1998, Nellie Mae originated more than     
$375 million in student loans. Nellie Mae's pro-forma results of operations for 
the years ended December 31, 1999 and 1998 were immaterial to the Company's     

F-13

10-K405 57th Page of 95 TOC 1st Previous Next ↓Bottom Just 57th
USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

3. Acquisitions (Continued)                                                     

financial position and its results of operations. The fair value of Nellie      
Mae's assets and liabilities at the date of acquisition are presented below     
(dollars in millions):                                                          

                                                                [Download Table]
                                                                         
Student loans.................................................. $  2,585 
Cash and investments...........................................       15 
Goodwill.......................................................       90 
Other assets...................................................       97 
Short-term borrowings..........................................   (1,373)
Long-term notes................................................   (1,029)
Other liabilities..............................................      (53)
                                                                -------- 
Net assets acquired............................................ $    332 
                                                                ======== 

Effective as of July 7, 2000, the Company completed the acquisition of    
Student Loan Funding Resources, Inc. ("SLFR") from the Thomas J. Conlan         
Education Foundation for $117 million in cash. SLFR was the eighth largest      
holder of federal student loans in the nation with a $3.1 billion portfolio.    
Based on a preliminary allocation of the purchase price, the Company recorded   
$48 million in goodwill. SLFR's pro-forma results of operations for the years   
ended December 31, 2000 and 1999 were immaterial to the Company's financial     
position and its results of operations. The fair value of SLFR's assets and     
liabilities at the date of acquisition are presented below (dollars in          
millions):                                                                      

                                                                [Download Table]
                                                                         
Student loans.................................................. $  3,103 
Cash and investments...........................................      368 
Goodwill.......................................................       48 
Other assets...................................................      112 
Short-term borrowings..........................................     (753)
Long-term notes................................................   (2,692)
Other liabilities..............................................      (69)
                                                                -------- 
Net assets acquired............................................ $    117 
                                                                ======== 

 Effective as of July 31, 2000, the Company completed the acquisition of the
guarantee servicing, student loan servicing and secondary market operations of  
USA Group, Inc. ("USA Group"). The acquisition price was $800 million in cash   
and stock. Based on a preliminary allocation of the purchase price, the Company 
recorded $466 million in goodwill. The purchase consideration included          
approximately one million shares of restricted stock with the exercise          
contingent upon the combined company's achievement of certain income and cost   
reduction goals. USA Group's pro-forma results of operations for the years      
ended December 31, 2000 and 1999 were immaterial to the Company's financial     
position and its results of operations. The fair value of USA Group's assets    
and liabilities at the date of acquisition are presented below (dollars in      
millions):                                                                      

                                                                [Download Table]
                                                                         
Student loans.................................................. $  1,421 
Cash and investments...........................................      217 
Goodwill.......................................................      466 
Other assets...................................................      345 
Long-term notes................................................   (1,489)
Other liabilities..............................................     (160)
                                                                -------- 
Net assets acquired............................................ $    800 
                                                                ======== 

F-14

10-K405 58th Page of 95 TOC 1st Previous Next ↓Bottom Just 58th
USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

4. Student Loans                                                                

 The Company purchases student loans from originating lenders. The Company's
portfolio consists principally of loans originated under two federally          
sponsored programs--the Federal Family Education Loan Program ("FFELP") and the 
Health Education Assistance Loan Program ("HEAL"). The Company also originates  
private loans.                                                                  

There are three principal categories of FFELP loans: Stafford loans, PLUS 
loans, and consolidation loans. Generally, Stafford and PLUS loans have         
repayment periods of between five and ten years. Consolidation loans have       
repayment periods of twelve to thirty years. FFELP loans obligate the borrower  
to pay interest at a stated fixed rate or an annually reset variable rate that  
has a cap. The interest rates are either fixed to term or reset annually on     
July 1 of each year depending on when the loan was originated. The Company      
earns interest at the greater of the borrower's rate or a floating rate. If the 
floating rate exceeds the borrower rate, the Department of Education makes a    
payment directly to the Company based upon the Special Allowance Payment        
("SAP") formula. SAP is generally paid whenever the average of all of the       
applicable floating rates (91-day Treasury bill, commercial paper and 52-week   
Treasury bill) in a calendar quarter, plus a spread of between 1.74 and 3.50    
percentage points depending on the loan status and origination date, exceeds    
the rate of interest which the borrower is obligated to pay. (See "Appendix A-- 
Special Allowance Payments.") If the floating rate determined by the SAP        
formula is less than the rate the borrower is obligated to pay, the Company     
simply earns interest at the borrower rate. In all cases, the rate a borrower   
is obligated to pay sets a minimum rate for determining the yield that the      
Company earns on the loan.                                                      

  The Company generally finances its student loan portfolio with floating rate
debt tied to the average of the 91-day Treasury bill auctions, either directly  
or through the use of derivative financial instruments, which are intended to   
mimic the interest rate characteristics of the student loans. These borrowings, 
however, generally do not have minimum rates like the student loans they        
finance, rather they float over all interest rate ranges. As a result, in       
periods of declining interest rates the portfolio of managed student loans may  
be earning at the minimum rate, which is the rate the borrower is obligated to  
pay, while the Company's funding costs generally continue to decline along with 
Treasury bill rates. For loans where the borrower's interest rate is fixed to   
term, declining interest rates may benefit the spread earned on student loans   
for extended periods of time. For loans where the borrower's interest rate is   
reset annually, any benefit of declining interest rates will only benefit       
student loan spreads through the next annual reset of the borrower's interest   
rates, which occurs on July 1 of each year.                                     

  The Company is required to pay a 30 basis point "offset fee" on Stafford and
PLUS loans purchased and held after August 10, 1993, and a 105 basis point      
consolidation loan rebate fee on all consolidation loans purchased and held     
after October 1, 1993 or a 62 basis point consolidation loan rebate fee on all  
applications received between October 1, 1998 and January 31, 1999. Also, all   
loans acquired after October 1, 1993 are subject to risk sharing on claim       
payments under which the loan is guaranteed for 98 percent of the balance plus  
accrued interest.                                                               

The estimated average remaining term of student loans in the Company's    
portfolio was approximately 7.2 years and 6.5 years at December 31, 2000 and    
1999, respectively. The following table reflects the distribution of the        
Company's student loan portfolio by program.                                    

F-15

10-K405 59th Page of 95 TOC 1st Previous Next ↓Bottom Just 59th
USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

4. Student Loans (Continued)                                                    

                                                                [Download Table]

                                                      December 31,      
                                                 -----------------------
                                                    2000        1999    
                                                 ----------- -----------
                                                                        
FFELP--Stafford................................. $18,844,378 $17,387,612
FFELP--PLUS/SLS.................................   1,992,605   2,385,646
FFELP--Consolidation loans......................  11,692,286   9,752,831
HEAL............................................   2,069,064   2,208,078
Non-federally insured...........................   3,048,964   2,074,700
                                                 ----------- -----------
Total student loans............................. $37,647,297 $33,808,867
                                                 =========== ===========

As of December 31, 2000 and 1999, 81 percent and 84 percent, respectively,
of the Company's on-balance sheet student loan portfolio was in repayment.      

Holders of FFELP loans are insured against the borrower's default, death, 
disability or bankruptcy. Insurance on FFELP loans is provided by certain state 
or non-profit guarantee agencies, which are reinsured by the federal            
government. FFELP loans originated prior to October 1, 1993 are reinsured 100   
percent by the federal government, while FFELP loans originated after October   
1, 1993 except in cases of death, disability and bankruptcy, are reinsured for  
98 percent of their unpaid balance resulting in 2 percent risk-sharing for      
holders of these loans. At December 31, 2000 and 1999, the Company owned $18.3  
billion and $14.4 billion of 100 percent reinsured FFELP loans, and $14.2       
billion and $15.1 billion of 98 percent reinsured loans, respectively. HEAL     
loans are directly insured by the federal government.                           

  Both FFELP and HEAL loans are subject to regulatory requirements relating to
servicing. In the event of default on a student loan or the borrower's death,   
disability or bankruptcy, the Company files a claim with the insurer or         
guarantor of the loan, who, provided the loan has been properly originated and  
serviced, and in the case of HEAL, litigated, pays the Company the unpaid       
principal balance and accrued interest on the loan less risk-sharing, where     
applicable.                                                                     

Claims not immediately honored by the guarantor because of servicing or   
origination defects are returned for remedial servicing, during which period    
income is not earned. On certain paid claims, guarantors assess a penalty for   
minor servicing defects. Costs associated with claims on defaulted student      
loans, which include such penalties, reduced interest income on student loans   
by $5 million, $5 million and $10 million for the years ended December 31,      
2000, 1999 and 1998, respectively.                                              

  Non-federally insured loans are primarily education-related student loans to
students attending post-secondary educational institutions. The Company bears   
all risk of loss on these loans.                                                

F-16

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USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

5. Allowance for Losses                                                         

The following table summarizes changes in the allowance for losses for the
years ended December 31, 2000, 1999 and 1998, respectively.                     

                                                                [Download Table]

                                           Years ended December 31,    
                                          ---------------------------- 
                                            2000      1999      1998   
                                          --------  --------  -------- 
                                                                       
Balance at beginning of year............. $303,743  $293,185  $273,412 
Additions                                                              
  Provisions for losses..................   32,119    34,358    36,597 
  Recoveries.............................   29,338    25,894    25,961 
Deductions                                                             
  Reductions for student loan sales and                                
   securitizations.......................  (16,648)   (8,445)   (7,474)
  Write-offs.............................  (26,496)  (41,249)  (35,311)
                                          --------  --------  -------- 
Balance at end of year................... $322,056  $303,743  $293,185 
                                          ========  ========  ======== 

6. Investments                                                                  

At December 31, 2000 and 1999, all investments that are classified as     
available-for-sale securities are carried at fair market value. The fair market 
value of U.S. Treasury securities is adjusted for unrealized gains and losses   
on $1.1 billion of interest rate swaps (see Note 10), which are held to reduce  
interest rate risk related to these securities ($54 million of unrealized       
losses at December 31, 2000 and $40 million of unrealized gains at December 31, 
1999). Securities classified as held-to-maturity are carried at cost. A summary 
of investments at December 31, 2000 and 1999 follows:                           

F-17

10-K405 61st Page of 95 TOC 1st Previous Next ↓Bottom Just 61st
USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

6. Investments (Continued)                                                      

                                                                [Download Table]

                                                 December 31, 2000             
                                    -------------------------------------------
                                                 Gross      Gross              
                                    Amortized  Unrealized Unrealized   Market  
                                       Cost      Gains      Losses     Value   
                                    ---------- ---------- ---------- ----------
                                                                               
Available-for-sale                                                             
 U.S. Treasury and other U.S.                                                  
  government agencies obligations                                              
  U.S. Treasury securities......... $  975,995  $506,205   $(54,491) $1,427,709
 State and political subdivisions                                              
  of the U. S.                                                                 
  student loan revenue bonds.......    123,765     2,172         --     125,937
 Asset-backed and other securities                                             
  Asset-backed securities..........  1,440,451       894     (7,640)  1,433,705
  Commercial paper.................  1,109,955        --         --   1,109,955
  Third party repurchase                                                       
   agreements......................    108,600        --         --     108,600
  Discount notes...................     34,558        27         (1)     34,584
  Other securities.................      5,143        --       (871)      4,272
                                    ----------  --------   --------  ----------
  Total investment securities                                                  
   available-for-sale.............. $3,798,467  $509,298   $(63,003) $4,244,762
                                    ==========  ========   ========  ==========
Held-to-maturity                                                               
 Other............................. $  961,260  $    130   $    (75) $  961,315
                                    ----------  --------   --------  ----------
Total investment securities held-                                              
 to-maturity....................... $  961,260  $    130   $    (75) $  961,315
                                    ==========  ========   ========  ==========

                                                 December 31, 1999             
                                    -------------------------------------------
                                                 Gross      Gross              
                                    Amortized  Unrealized Unrealized   Market  
                                       Cost      Gains      Losses     Value   
                                    ---------- ---------- ---------- ----------
                                                                               
Available-for-sale                                                             
U.S. Treasury and other U.S.                                                   
 government agencies obligations                                               
 U.S. Treasury securities.......... $1,033,500  $446,228   $   (141) $1,479,587
 State and political subdivisions                                              
  of the U. S.                                                                 
  student loan revenue bonds.......     97,901     1,945        (64)     99,782
 Asset-backed and other securities                                             
  Asset-backed securities..........  1,143,585       300    (12,992)  1,130,893
  Commercial paper.................  1,682,420        --         --   1,682,420
  Other securities.................      4,094        --         --       4,094
                                    ----------  --------   --------  ----------
Total investment securities                                                    
 available-for-sale................ $3,961,500  $448,473   $(13,197) $4,396,776
                                    ==========  ========   ========  ==========
Held-to-maturity                                                               
 Other............................. $  788,180  $    172   $    (11) $  788,341
                                    ----------  --------   --------  ----------
Total investment securities held-                                              
 to-maturity....................... $  788,180  $    172   $    (11) $  788,341
                                    ==========  ========   ========  ==========

  The Company sold available-for-sale securities with a carrying value of $960
million, $194 million and $3.6 billion for the years ended December 31, 2000,   
1999 and 1998, respectively.                                                    

F-18

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USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

6. Investments (Continued)                                                      

 As of December 31, 2000, stated maturities and maturities if accelerated to
the put or call dates for investments are shown in the following table:         

                                                                [Download Table]

                                                   December 31, 2000       
                                             ------------------------------
                                             Held-to-                      
                                             Maturity  Available-for-Sale  
                                             -------- ---------------------
                                                                  Maturity 
                                              Stated    Stated   to Put or 
Year of Maturity                             Maturity  Maturity  Call Date 
----------------                             -------- ---------- ----------
                                                                           
2001........................................ $  7,697 $1,307,471 $1,307,471
2002........................................   89,579     91,232    107,686
2003........................................    1,403     42,475     35,596
2004........................................   21,504     23,598     15,053
2005........................................   10,558    142,101    147,553
2006-2010...................................  375,534  1,900,047  1,893,565
After 2010..................................  454,985    737,838    737,838
                                             -------- ---------- ----------
Total....................................... $961,260 $4,244,762 $4,244,762
                                             ======== ========== ==========

7. Short-Term Borrowings                                                        

 Short-term borrowings have an original or remaining term to maturity of one
year or less. The following tables summarize outstanding short-term notes at    
December 31, 2000, 1999 and 1998, the weighted average interest rates at the    
end of each period, and the related average balances, weighted average interest 
rates and weighted average effective interest rates, which include the effects  
of related off-balance sheet financial instruments (see Note 10) during the     
periods.                                                                        

                                                                [Download Table]

                            At December 31, 2000  Year ended December 31, 2000 
                            -------------------- ------------------------------
                                                                      Weighted 
                                        Weighted             Weighted  Average 
                                        Average              Average  Effective
                              Ending    Interest   Average   Interest Interest 
                              Balance     Rate     Balance     Rate     Rate   
                            ----------- -------- ----------- -------- ---------
                                                                               
Six month floating rate                                                        
 notes....................  $ 5,199,084   6.56%  $ 4,659,778   6.41%    6.49%  
Other floating rate                                                            
 notes....................   10,408,129   6.62    10,851,918   6.54     6.54   
Discount notes............    6,274,994   6.33     5,808,364   6.19     6.24   
Fixed rate notes..........      360,000   6.54     2,043,618   5.96     6.01   
Commercial paper..........      619,248   6.75       600,781   6.47     6.89   
Securities sold--not yet                                                       
 purchased and repurchase                                                      
 agreements...............           --     --       123,948   6.96     6.96   
Short-term portion of                                                          
 long-term notes..........    7,602,533   6.37    11,242,038   6.28     6.40   
                            -----------   ----   -----------   ----     ----   
Total short-term                                                               
 borrowings...............  $30,463,988   6.49%  $35,330,445   6.35%    6.41%  
                            ===========   ====   ===========   ====     ====   
Maximum outstanding at any                                                     
 month end................  $39,064,856                                        
                            ===========                                        

F-19

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USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

7. Short-Term Borrowings (Continued)                                            

                                                                [Download Table]

                            At December 31, 1999  Year ended December 31, 1999 
                            -------------------- ------------------------------
                                                                      Weighted 
                                        Weighted             Weighted  Average 
                                        Average              Average  Effective
                              Ending    Interest   Average   Interest Interest 
                              Balance     Rate     Balance     Rate     Rate   
                            ----------- -------- ----------- -------- ---------
                                                                               
Six month floating rate                                                        
 notes....................  $ 4,849,106   5.81%  $ 4,644,440   5.30%    5.38%  
Other floating rate                                                            
 notes....................   12,478,317   5.83    10,223,891   5.35     5.42   
Discount notes............    1,406,163   5.45     4,407,311   4.90     5.00   
Fixed rate notes..........    3,777,793   5.84     3,370,924   5.41     5.20   
Commercial paper..........      394,968   6.47        56,822   5.82     6.10   
Securities sold--not yet                                                       
 purchased and repurchase                                                      
 agreements...............           --     --        94,575   4.87     4.91   
Short-term portion of                                                          
 long-term notes..........   14,584,904   5.84    10,405,996   5.43     5.33   
                            -----------   ----   -----------   ----     ----   
Total short-term                                                               
 borrowings...............  $37,491,251   5.76%  $33,203,959   5.31%    5.31%  
                            ===========   ====   ===========   ====     ====   
Maximum outstanding at any                                                     
 month end................  $39,618,707                                        
                            ===========                                        


                            At December 31, 1998  Year ended December 31, 1998 
                            -------------------- ------------------------------
                                                                      Weighted 
                                        Weighted             Weighted  Average 
                                        Average              Average  Effective
                              Ending    Interest   Average   Interest Interest 
                              Balance     Rate     Balance     Rate     Rate   
                            ----------- -------- ----------- -------- ---------
                                                                               
Six month floating rate                                                        
 notes....................  $ 3,249,352   5.14%  $ 2,898,495   5.32%    5.40%  
Other floating rate                                                            
 notes....................    7,361,686   5.11     3,663,277   5.39     5.41   
Discount notes............    4,429,756   5.06     2,556,366   5.22     5.27   
Fixed rate notes..........    4,724,823   5.41     6,531,461   5.64     5.40   
Commercial paper..........           --     --            --     --       --   
Securities sold--not yet                                                       
 purchased and repurchase                                                      
 agreements...............        5,600   5.50       213,871   5.63     5.63   
Short-term portion of                                                          
 long-term notes..........    6,817,287   5.05     8,418,547   5.48     5.24   
                            -----------   ----   -----------   ----     ----   
Total short-term                                                               
 borrowings...............  $26,588,504   5.14%  $24,282,017   5.47%    5.34%  
                            ===========   ====   ===========   ====     ====   
Maximum outstanding at any                                                     
 month end................  $27,142,913                                        
                            ===========                                        

  At December 31, 1999, the short-term portion of long-term notes included one
instrument totaling $219 million that required the payment of interest and      
principal in a foreign currency. To eliminate its exposure to the effect of     
currency fluctuations on this contractual obligation, the Company entered into  
a foreign currency agreement with an independent party (see Note 10). This      
instrument matured in August of 2000. No similar instruments were outstanding   
at December 31, 2000.                                                           

  To match the interest rate characteristics of short-term notes with the rate
characteristics of its assets, the Company enters into interest rate swaps with 
independent parties. Under these agreements, the Company makes periodic         
payments, indexed to the related asset rates, in exchange for periodic payments 
which generally match the Company's interest obligations on fixed or variable   
rate notes (see Note 10).                                                       

F-20

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USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

8. Long-Term Notes                                                              

The following tables summarize outstanding long-term notes at December 31,
2000 and 1999, the weighted average interest rates and related notional amount  
of derivatives at the end of the periods, and the related average balances and  
weighted average effective interest rates, which include the effects of related 
off-balance sheet financial instruments (see Note 10), during the periods.      

                                                                [Download Table]

                                                                Year ended     
                                At December 31, 2000        December 31, 2000  
                          -------------------------------- --------------------
                                                                      Weighted 
                                      Weighted                         Average 
                                      Average   Notional              Effective
                            Ending    Interest  Amount of   Average   Interest 
                            Balance     Rate   Derivatives  Balance     Rate   
                          ----------- -------- ----------- ---------- ---------
                                                                               
Floating rate notes:                                                           
 U.S. dollar denominated:                                                      
  Interest bearing, due                                                        
   2002-2047............. $13,345,844   6.50%  $  441,650  $6,846,997    6.55% 
                          -----------  -----   ----------  ----------   -----  
Fixed rate notes:                                                              
 U.S. dollar denominated:                                                      
  Interest bearing, due                                                        
   2002-2019.............   1,384,060   6.32      650,000   1,617,895    6.39  
  Zero coupon, due 2014-                                                       
   2022..................     181,035  11.79           --     171,313   11.17  
                          -----------  -----   ----------  ----------   -----  
Total fixed rate notes...   1,565,095   6.95      650,000   1,789,208    6.85  
                          -----------  -----   ----------  ----------   -----  
Total long-term notes.... $14,910,939   6.55%  $1,091,650  $8,636,205    6.61% 
                          ===========  =====   ==========  ==========   =====  


                                                                Year ended     
                                At December 31, 1999        December 31, 1999  
                          -------------------------------- --------------------
                                                                      Weighted 
                                      Weighted                         Average 
                                      Average   Notional              Effective
                            Ending    Interest  Amount of   Average   Interest 
                            Balance     Rate   Derivatives  Balance     Rate   
                          ----------- -------- ----------- ---------- ---------
                                                                               
Floating rate notes:                                                           
 U.S. dollar denominated:                                                      
  Interest bearing, due                                                        
   2001-2003............. $ 1,897,082   5.95%  $  216,427  $2,566,524    5.33% 
                          -----------  -----   ----------  ----------   -----  
Fixed rate notes:                                                              
 U.S. dollar denominated:                                                      
  Interest bearing, due                                                        
   2001-2018.............   2,437,290   6.00    2,785,701   3,433,009    5.60  
  Zero coupon, due 2014-                                                       
   2022..................     161,895  11.79           --     153,224   11.14  
 Foreign currency:                                                             
  Interest bearing, due                                                        
   2000..................          --     --           --     139,200    4.82  
                          -----------  -----   ----------  ----------   -----  
Total fixed rate notes...   2,599,185   6.36    2,785,701   3,725,433    5.80  
                          -----------  -----   ----------  ----------   -----  
Total long-term notes.... $ 4,496,267   6.19%  $3,002,128  $6,291,957    5.60% 
                          ===========  =====   ==========  ==========   =====  

F-21

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USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

8. Long-Term Notes (Continued)                                                  

  At December 31, 2000, the Company had outstanding long-term debt issues with
call features totaling $534 million. As of December 31, 2000, the stated        
maturities and maturities if accelerated to the call dates for long-term notes  
are shown in the following table:                                               

                                                                [Download Table]

                                                     December 31, 2000   
                                                  -----------------------
                                                    Stated    Maturity to
Year of Maturity                                   Maturity    Call Date 
----------------                                  ----------- -----------
                                                                         
2001.............................................          --     253,100
2002.............................................  12,473,045  12,371,345
2003.............................................     254,201     102,801
2004.............................................     159,725     159,725
2005.............................................     259,835     259,835
2006-2047........................................   1,764,133   1,764,133
                                                  ----------- -----------
                                                  $14,910,939 $14,910,939
                                                  =========== ===========

To match the interest rate characteristics of its long-term notes with the
interest rate characteristics of its assets, the Company enters into interest   
rate swaps with independent parties. Under these agreements, the Company makes  
periodic payments, indexed to the related asset rates, in exchange for periodic 
payments which generally match the Company's interest obligations on fixed or   
variable rate borrowings (see Note 10).                                         

9. Student Loan Securitization                                                  

 The Company has engaged in several transactions in which debt is considered
to be extinguished by in-substance defeasance as governed by the provisions of  
SFAS No. 76, "Extinguishment of Debt." In these transactions, the Company       
irrevocably placed assets with an escrow agent in a trust to be used solely for 
satisfying scheduled payments of both the interest and principal of the         
defeased debt. The possibility that the Company will be required to make future 
payments on that debt is considered to be remote. The trusts are restricted to  
owning only monetary assets that are essentially risk-free as to the amount,    
timing and collection of interest and principal. As of December 31, 2000, the   
amount of debt considered to be extinguished was $867 million.                  

When the Company sells receivables in securitizations of student loans, it
retains interest-only strips, servicing rights and, in some cases, a cash       
reserve account, all of which are retained interests in the securitized         
receivables. At December 31, 2000 and 1999, the balance of these assets was     
$961 million and $758 million, respectively, and was included in other assets.  
Gain or loss on sale of the receivables depends in part on the previous         
carrying amount of the financial assets involved in the transfer, allocated     
between the assets sold and the retained interests based on their relative fair 
values at the date of transfer. To obtain fair values, quoted market prices are 
used if available. However, quotes are generally not available for retained     
interests so the Company estimates fair value, both initially and on a          
quarterly basis going forward, based on the present value of future expected    
cash flows estimated using management's best estimates of the key assumptions-- 
credit losses, prepayment speeds and discount rates commensurate with the risks 
involved.                                                                       

During 2000 and 1999, the Company sold student loan receivables in        
securitization transactions. In those securitizations, the Company retained     
servicing responsibilities. The Company receives annual servicing fees of 0.9   
percent per annum of the outstanding balance of student loans other than        
consolidation loans and 0.5 percent per annum of the outstanding balance of     
consolidation loans for the securitization transactions engaged in by its       
subsidiary, the Student Loan Marketing Association. The Company also receives   
rights to future cash                                                           

F-22

10-K405 66th Page of 95 TOC 1st Previous Next ↓Bottom Just 66th
USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

9. Student Loan Securitization (Continued)                                      

flows arising after the investors in the trust have received the return for     
which they have contracted. Trust investors and the securitization trusts have  
no recourse to the Company's other assets. The Company's retained interests are 
subordinate to investors' interests. Their value is subject to credit,          
prepayment, and interest rate risks. Interest rate risks exist to the extent    
that the securitized assets, which are Treasury bill-based, are utilized as     
collateral for either LIBOR-based debt or Treasury bill-based debt that resets  
on dates that are not consistent with the securitized asset reset dates.        

  For the years ended December 31, 2000, 1999 and 1998, the Company recognized
pre-tax securitization gains of $92 million, $35 million and $117 million.      

Key economic assumptions used in measuring the fair value of retained     
interests at the date of securitization resulting from student loan             
securitizations completed during the year 2000 (weighted based on principal     
amounts securitized) were as follows:                                           

                                                                [Download Table]
                                                                         
Prepayment speed............................................ 7% per annum
Weighted-average life.......................................  4.6 years  
Expected credit losses......................................     0.5%    
Residual cash flows discounted at...........................    12.0%    

Expected credit losses resulting from loans securitized in 2000 are       
dependent on the portfolio's expected rate of defaulted loans, the level of     
insurance guarantee which range from 98 percent to 100 percent of the unpaid    
principal and interest of the defaulted loan, and the expected level of         
defaulted loans not eligible for insurance guarantee due to servicing           
deficiencies (approximately 1 percent of defaulted loans). The expected dollar  
amount of credit losses is divided by the portfolio's principal balance to      
arrive at the expected credit loss percentage.                                  

The following table summarizes the cash flows received from (paid to)     
securitization trusts during the year ended December 31, 2000 (dollars in       
millions):                                                                      

                                                                [Download Table]
                                                                        
Proceeds from new securitizations................................ $8,673
Collections used by trust to purchase new balances in                   
 revolving securitizations.......................................    133
Servicing fees received..........................................    227
Cash flows received on interest-only strips......................    200
Cash received upon release from reserve accounts.................    203
Servicing advances...............................................     --
Reimbursements of servicing advances.............................     --
Prepayment interest shortfalls paid out as compensating                 
 interest........................................................     --

F-23

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USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

9. Student Loan Securitization (Continued)                                      

  Static pool losses are calculated by summing the actual and projected future
credit losses and dividing them by the original balance of each pool of assets. 
The following table reflects static pool losses for the years ended December    
31, 2000, 1999 and 1998. Amounts shown are calculated based on all              
securitizations occurring in that year.                                         

                                                                [Download Table]

                                                          Student Loans   
                                                          Securitized in  
                                                          ----------------
                                                          2000  1999  1998
                                                          ----  ----  ----
                                                                          
Actual and projected credit losses (%) as of:                             
December 31, 2000                                                         
Actual to date........................................... .01%  .04%  .11%
Projected................................................ .55   .55   .23 
                                                          ---   ---   --- 
Total.................................................... .56%  .59%  .34%
                                                          ===   ===   === 
December 31, 1999                                                         
Actual to date...........................................  --%   --%  .08%
Projected................................................  --   .53   .35 
                                                          ---   ---   --- 
Total....................................................  --%  .53%  .43%
                                                          ===   ===   === 
December 31, 1998                                                         
Actual to date...........................................  --%   --%  .03%
Projected................................................  --    --   .46 
                                                          ---   ---   --- 
Total....................................................  --%   --%  .49%
                                                          ===   ===   === 

 The following table reflects key economic assumptions at December 31, 2000,
and the sensitivity of the current fair value of residual cash flows to         
immediate 10 percent and 20 percent adverse changes in those assumptions        
(dollars in millions):                                                          

                                                                [Download Table]

                                                                 Student
                                                                  Loans 
                                                                 -------
                                                                        
Balance sheet carrying value of retained interests - fair value         
 (millions)..................................................... $940.0 
Weighted-average life (in years)................................    4.2 
Prepayment speed assumptions (annual rate)                              
  Impact on fair value of 10% adverse change....................  (17.0)
  Impact on fair value of 20% adverse change....................  (33.8)
Expected default rate                                                   
  Impact on fair value of 10% adverse change....................  (10.3)
  Impact on fair value of 20% adverse change....................  (20.6)
Residual cash flows discount rate (annual)                              
  Impact on fair value of 10% adverse change....................  (33.7)
  Impact on fair value of 20% adverse change....................  (66.7)
Difference between Treasury bill and LIBOR swap spread*                 
  Impact on fair value of 10% adverse change....................  (42.7)
  Impact on fair value of 20% adverse change....................  (85.4)

* Changes impact LIBOR indexed debt only.                                       

F-24

10-K405 68th Page of 95 TOC 1st Previous Next ↓Bottom Just 68th
USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

9. Student Loan Securitization (Continued)                                      

 These sensitivities are hypothetical and should be used with caution. Also,
in this table the effect of a variation in a particular assumption on the fair  
value of the retained interest is calculated without changing any other         
assumption. In reality, changes in one factor may result in changes in another  
(for example, increases in market interest rates may result in lower            
prepayments and increased credit losses), which might magnify or counteract the 
sensitivities.                                                                  

  The following table reflects the historical loss and delinquency amounts for
the managed portfolio for the year ended December 31, 2000 (dollars in          
millions):                                                                      

                                                                [Download Table]

                                                                    Year ended  
                                                At December 31,    December 31, 
                                                     2000              2000     
                                              ------------------- --------------
                                                Total                           
                                              Principal Principal               
                                              Amount of in Claim  Average Credit
                                                Loans    Status   Balance Losses
                                              --------- --------- ------- ------
                                                                                
Student loan receivables                                                        
Comprised of:                                                                   
Loans held in portfolio......................  $37,647    $111    $34,637  $10  
Loans securitized............................   29,868     101     25,711    9  
                                               -------    ----    -------  ---  
Total loans managed..........................  $67,515    $212    $60,348  $19  
                                               =======    ====    =======  ===  

10. Derivative Financial Instruments                                            

Derivative Financial Instruments Held or Issued for Purposes Other than Trading 

  The Company enters into various financial instruments with off-balance sheet
risk in the normal course of business primarily to reduce interest rate         
exposure on certain borrowings. These financial instruments include interest    
rate swaps, interest rate cap agreements, foreign currency swaps, forward       
currency exchange agreements, options on currency exchange agreements, options  
on securities and financial futures contracts.                                  

The Company enters into three general types of interest rate swaps under  
which it pays the following: 1) a floating rate in exchange for a fixed rate    
(standard swaps); 2) a fixed rate in exchange for a floating rate (reverse      
swaps); and 3) a floating rate in exchange for another floating rate, based     
upon different market indices (basis/reverse basis swaps). At December 31,      
2000, the Company had outstanding $2.1 billion, $3.5 billion and $11.5 billion  
of notional principal amount of standard swaps, reverse swaps and basis/reverse 
basis swaps, respectively. Of the Company's $17.1 billion notional amount of    
interest rate swaps outstanding at December 31, 2000, $4.9 billion was related  
to debt and $12.2 billion was related to assets. At December 31, 1999, the      
Company had notional principal outstanding of $8.1 billion, $2.7 billion and    
$13.5 billion of standard swaps, reverse swaps and basis/reverse basis swaps,   
respectively. Of the Company's $24.3 billion notional amount of interest rate   
swaps outstanding at December 31, 1999, $21.1 billion was related to debt and   
$3.2 billion was related to assets.                                             

F-25

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USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

10. Derivative Financial Instruments (Continued)                                

The following tables summarize the ending balances of the borrowings that 
have been matched with the notional amount of interest rate swaps and foreign   
currency agreements at December 31, 2000 and 1999 (dollars in billions).        

                                                                [Download Table]

                                           At December 31, 2000                  
                         --------------------------------------------------------
                                            Swaps                                
                                    ----------------------  Foreign              
                                                Basis/      Currency     Total   
                         Borrowings Standard Reverse Basis Agreements Derivatives
                         ---------- -------- ------------- ---------- -----------
                                                                                 
Short-term borrowings                                                            
Six month floating rate                                                          
 notes..................    $ --      $ --       $ --         $ --       $ --    
Other floating rate                                                              
 notes..................      .2        --         .2           --         .2    
Discount notes..........      .8        --         .8           --         .8    
Fixed rate notes........      .4        .4         --           --         .4    
Short term portion of                                                            
 long term notes........     1.5       1.4        1.0           --        2.4    
                            ----      ----       ----         ----       ----    
   Total short-term                                                              
    borrowings..........     2.9       1.8        2.0           --        3.8    
                            ----      ----       ----         ----       ----    
Long-term notes                                                                  
Floating rate notes:                                                             
 U.S. dollar                                                                     
  denominated:                                                                   
  Interest bearing......      .4        --         .4           --         .4    
Fixed rate notes:                                                                
 U.S. dollar                                                                     
  denominated:                                                                   
  Interest bearing......      .4        .4         .3           --         .7    
Foreign currency:                                                                
 Interest bearing.......      --        --         --           --         --    
                            ----      ----       ----         ----       ----    
   Total long-term                                                               
    notes...............      .8        .4         .7           --        1.1    
                            ----      ----       ----         ----       ----    
   Total notes..........    $3.7      $2.2       $2.7         $ --       $4.9    
                            ====      ====       ====         ====       ====    

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10-K405 70th Page of 95 TOC 1st Previous Next ↓Bottom Just 70th
USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

10. Derivative Financial Instruments (Continued)                                

                                                                [Download Table]

                                           At December 31, 1999                  
                         --------------------------------------------------------
                                            Swaps                                
                                    ----------------------  Foreign              
                                                Basis/      Currency     Total   
                         Borrowings Standard Reverse Basis Agreements Derivatives
                         ---------- -------- ------------- ---------- -----------
                                                                                 
Short-term borrowings                                                            
Six month floating rate                                                          
 notes..................   $  --      $ --       $  --        $--        $  --   
Other floating rate                                                              
 notes..................     2.1        --         3.7         --          3.7   
Discount notes..........     1.0        .6          .9         --          1.5   
Fixed rate notes........     3.3       3.3         2.2         --          5.5   
Short-term portion of                                                            
 long-term notes........     4.0       2.7         4.7         .2          7.6   
                           -----      ----       -----        ---        -----   
   Total short-term                                                              
    borrowings..........    10.4       6.6        11.5         .2         18.3   
                           -----      ----       -----        ---        -----   
Long-term notes                                                                  
Floating rate notes:                                                             
 U.S. dollar                                                                     
  denominated:                                                                   
  Interest bearing......      .2        --          .2         --           .2   
Fixed rate notes:                                                                
 U.S. dollar                                                                     
  denominated:                                                                   
  Interest bearing......     1.5       1.5         1.3         --          2.8   
Foreign currency:                                                                
 Interest bearing.......      --        --          --         --           --   
                           -----      ----       -----        ---        -----   
   Total long-term                                                               
    notes...............     1.7       1.5         1.5         --          3.0   
                           -----      ----       -----        ---        -----   
   Total notes..........   $12.1      $8.1       $13.0        $.2        $21.3   
                           =====      ====       =====        ===        =====   

 The following table summarizes the activity for the Company's interest rate
swaps, foreign currency agreements and futures contracts held or issued for     
purposes other than trading for the years ended December 31, 1998, 1999 and     
2000 (dollars in millions).                                                     

                                                                [Download Table]

                                                  Notional Principal           
                                                 ---------------------         
                                                 Interest    Foreign   Futures 
                                                   Rate      Currency  Contract
                                                   Swaps    Agreements  Amount 
                                                 ---------  ---------- --------
                                                                               
Balance, December 31, 1997...................... $  35,807     $257    $   999 
  Issuances/Opens...............................    14,524       --      2,737 
  Maturities/Expirations........................   (18,332)      --         -- 
  Terminations/Closes...........................    (1,400)     (38)    (3,170)
                                                 ---------     ----    ------- 
Balance, December 31, 1998...................... $  30,599     $219    $   566 
  Issuances/Opens...............................    13,634       --      4,314 
  Maturities/Expirations........................   (19,863)      --         -- 
  Terminations/Closes...........................       (30)      --     (3,850)
                                                 ---------     ----    ------- 
Balance, December 31, 1999...................... $  24,340     $219    $ 1,030 
  Issuances/Opens...............................    10,524        2     66,566 
  Maturities/Expirations........................   (17,662)    (219)        -- 
  Terminations/Closes...........................      (104)      --    (38,762)
                                                 ---------     ----    ------- 
Balance, December 31, 2000...................... $  17,098     $  2    $28,834 
                                                 =========     ====    ======= 

F-27

10-K405 71st Page of 95 TOC 1st Previous Next ↓Bottom Just 71st
USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

10. Derivative Financial Instruments (Continued)                                

Interest Rate Swaps                                                             

Net payments related to the debt-related swaps are recorded in interest   
expense. For the year ended December 31, 2000, the Company made net payments on 
debt-related swaps increasing interest expense by $5 million. For the years     
ended December 31, 1999 and 1998, the Company received net payments on debt-    
related swaps reducing interest expense by $26 million and $74 million,         
respectively. At December 31, 2000, the Company had outstanding $6.6 billion of 
forward interest rate swaps which were priced in November and December of 2000  
but are not effective until 2001.                                               

 At December 31, 2000, the Company had interest rate swaps with put features
totaling $350 million. As of December 31, 2000, stated maturities of interest   
rate swaps and maturities, if accelerated to the put dates, are shown in the    
following table (dollars in millions). The maturities of interest rate swaps    
generally coincide with the maturities of the associated assets or borrowings.  

                                                                [Download Table]

                                                        December 31, 2000
                                                        -----------------
                                                                 Maturity
                                                         Stated   to Put 
Year of Maturity/Put                                    Maturity   Date  
--------------------                                    -------- --------
                                                                         
2001................................................... $10,592  $10,792 
2002...................................................   4,987    4,887 
2003...................................................     130       30 
2004...................................................      --       -- 
2005...................................................      64       64 
2006-2008..............................................   1,325    1,325 
                                                        -------  ------- 
                                                        $17,098  $17,098 
                                                        =======  ======= 

Foreign Currency Agreements                                                     

  At December 31, 1999, the Company had borrowings with principal repayable in
foreign currencies totaling $219 million. These borrowings were hedged by       
notional principal of $219 million of foreign currency swaps. The foreign       
currency derivative agreements typically mature concurrently with the           
maturities of the debt. No such borrowings were outstanding at December 31,     
2000. The following table summarizes the outstanding amount of these borrowings 
and their currency translation value at December 31, 2000 and 1999, using spot  
rates at the respective date (dollars in millions).                             

                                                                [Download Table]

                                                          December 31, 
                                                          -------------
                                                           2000   1999 
                                                          ------ ------
                                                                       
Carrying value of outstanding foreign currency debt...... $   -- $  219
Currency translation value of outstanding foreign                      
 currency debt........................................... $   -- $  196

At December 31, 2000, the Company had outstanding a $4 million Canadian   
dollar forward currency exchange agreement totaling $2 million based upon an    
initial spot rate of 1.435. This agreement was entered into to hedge the future 
stream of dividends associated with an investment in a Canadian joint venture.  

Futures Contracts                                                               

The Company enters into financial futures contracts to hedge the risk of  
future interest rate changes. The contracts provide a better matching of        
interest rate reset dates on debt with the Company's assets. They are also      

F-28

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USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

10. Derivative Financial Instruments (Continued)                                

used as anticipatory hedges of debt to be issued to fund the Company's assets,  
mainly the portfolio of student loans in the PLUS program. These student loans  
pay interest rates that are generally indexed to the one-year Treasury bill,    
reset annually on the final auction prior to July 1. The gains and losses on    
these hedging transactions are deferred and included in other assets and will   
be recognized as an adjustment to interest expense. At December 31, 2000 and    
1999, the Company had futures contracts that hedged approximately $28.8 billion 
and $1.0 billion of assets and liabilities, respectively. Approximately $57     
million of realized losses and $3 million of realized gains had been deferred   
at December 31, 2000 and 1999, respectively, related to futures contracts.      

Floor Revenue Contracts                                                         

  During 2000, 1999 and 1998, the Company entered into Floor Revenue Contracts
with principal balances of $10 billion, $5 billion and $23 billion,             
respectively, in exchange for upfront payments of $122 million, $6 million and  
$38 million, respectively. For the years ended December 31, 2000, 1999 and      
1998, the amortization of the upfront payments on fixed and variable Floor      
Revenue Contracts increased student loan income by $24 million, $41 million and 
$52 million, respectively, of which $23 million, $20 million and $28 million,   
respectively, related to contracts with fixed borrower rates and $1 million,    
$21 million and $24 million, respectively, related to contracts with annually   
reset borrower rates. For the years ended December 31, 2000, 1999 and 1998,     
payments by the Company to Floor Revenue Contract counterparties under the      
contracts totaled $1 million, $60 million and $48 million, respectively. At     
December 31, 2000, the Company had outstanding $1.2 billion of forward Floor    
Revenue Contracts which were priced in November and December of 2000 but are    
not effective until January 2001.                                               

 Effective December 31, 2000, in anticipation of the adoption of "SFAS 133,"
the Treasury bill Floor Revenue Contracts were de-designated as effective       
hedges and marked-to-market. The net effect of the fair market value of these   
contracts and the unamortized upfront payment of $104 million was reclassified  
to student loan premium and will be amortized to student loan income over the   
average life of the student loan portfolio.                                     

 In 2000, the Company entered into LIBOR Floor Revenue Contracts that are an
effective economic hedge of a segment of the Company's student loan portfolio.  
These positions do not meet the hedge effectiveness requirements under GAAP and 
were marked-to-market at December 31, 2000, which resulted in a pre-tax loss of 
$25 million included in other income. No such transactions were in effect for   
1999 or 1998.                                                                   

Derivative Financial Instruments Held or Issued for Trading Purposes            

From time to time, the Company maintains trading positions in derivative  
financial instruments which are designed to generate additional income based on 
market conditions. As of December 31, 2000, no trading positions were           
outstanding. Trading results for these positions were immaterial to the         
Company's financial statements for the years ended December 31, 2000, 1999 and  
1998.                                                                           

11. Fair Values of Financial Instruments                                        

SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"    
requires estimation of the fair values of financial instruments. The following  
is a summary of the assumptions and methods used to estimate those values.      

F-29

10-K405 73rd Page of 95 TOC 1st Previous Next ↓Bottom Just 73rd
USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

11. Fair Values of Financial Instruments (Continued)                            

Student Loans                                                                   

Fair value was determined by analyzing amounts that the Company has paid  
recently to acquire similar loans in the secondary market.                      

Warehousing Advances and Academic Facilities Financings                         

The fair values of both warehousing advances and academic facilities      
financings were determined through standard bond pricing formulas using current 
interest rates and credit spreads.                                              

Cash and Investments                                                            

 For investments with remaining maturities of three months or less, carrying
value approximated fair value. Investments in U.S. Treasury securities were     
valued at market quotations. All other investments were valued through standard 
bond pricing formulas using current interest rates and credit spreads.          

Short-term Borrowings and Long-term Notes                                       

For borrowings with remaining maturities of three months or less, carrying
value approximated fair value. In 1999, the fair value of financial liabilities 
was determined from market quotations where available. If market quotations     
were unavailable, standard bond pricing formulas were applied using current     
interest rates and credit spreads. Beginning in 2000, the fair value of         
financial liabilities was determined from market quotations using standard bond 
pricing formulas.                                                               

On and Off-Balance Sheet Financial Instruments                                  

In 1999, the fair value of off-balance sheet financial instruments was    
estimated at the amount that would be required to terminate such agreements,    
taking into account current interest rates and credit spreads. Beginning in     
2000, the fair value of on and off-balance sheet financial instruments was      
determined from market quotations using standard bond pricing formulas.         

F-30

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USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

11. Fair Values of Financial Instruments (Continued)                            

The following table summarizes the fair values of the Company's financial 
assets and liabilities, including off-balance sheet financial instruments       
(dollars in millions):                                                          

                                                                [Download Table]

                              December 31, 2000             December 31, 1999       
                         ----------------------------- -----------------------------
                          Fair    Carrying              Fair    Carrying            
                          Value    Value    Difference  Value    Value    Difference
                         -------  --------  ---------- -------  --------  ----------
                                                                                    
Earning assets                                                                      
Student loans........... $38,039  $37,647     $ 392    $34,182  $33,809      $373   
Warehousing advances....     990      987         3      1,030    1,043       (13)  
Academic facilities                                                                 
 financings.............     857      851         6      1,027    1,028        (1)  
Cash and investments....   5,941    5,940         1      5,775    5,775        --   
                         -------  -------     -----    -------  -------      ----   
Total earning assets....  45,827   45,425       402     42,014   41,655       359   
                         -------  -------     -----    -------  -------      ----   
Interest bearing                                                                    
 liabilities                                                                        
Short-term borrowings...  30,463   30,464         1     37,456   37,491        35   
Long-term notes.........  15,037   14,911      (126)     4,550    4,496       (54)  
                         -------  -------     -----    -------  -------      ----   
Total interest bearing                                                              
 liabilities............  45,500   45,375      (125)    42,006   41,987       (19)  
                         -------  -------     -----    -------  -------      ----   
On-balance sheet                                                                    
 financial instruments                                                              
Floor revenue                                                                       
 contracts..............    (235)    (235)       --         --       --        --   
Off-balance sheet                                                                   
 financial instruments                                                              
Interest rate swaps and                                                             
 options................     (58)      --       (58)         6       --         6   
Forward exchange                                                                    
 agreements and foreign                                                             
 currency swaps.........      --       --        --        (29)      --       (29)  
Floor revenue                                                                       
 contracts..............      --       --        --         (8)     (22)       14   
                                              -----                          ----   
Excess of fair value                                                                
 over carrying value....                      $ 219                          $331   
                                              =====                          ====   

12. Commitments and Contingencies                                               

  The GSE has committed to purchase student loans during specified periods and
to lend funds under the warehousing advance commitments, academic facilities    
financing commitments and letters of credit programs.                           

 Letters of credit support the issuance of state student loan revenue bonds.
They represent unconditional guarantees of the GSE to repay holders of the      
bonds in the event of a default. In the event that letters of credit are drawn  
upon, such loans are collateralized by the student loans underlying the bonds.  
Under the terms of the Privatization Act, any future activity under warehousing 
advance commitments, academic facilities financing commitments and letter of    
credit activity by the GSE is limited to guarantee commitments which were in    
place on August 7, 1997.                                                        

Commitments outstanding are summarized below:                             

                                                                [Download Table]

                                                      December 31,      
                                                 -----------------------
                                                    2000        1999    
                                                 ----------- -----------
                                                                        
Student loan purchase commitments............... $16,422,898 $16,462,327
Warehousing advance commitments.................   2,794,215   2,870,759
Letters of credit...............................   3,534,301   4,453,631
                                                 ----------- -----------
                                                 $22,751,414 $23,786,717
                                                 =========== ===========

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10-K405 75th Page of 95 TOC 1st Previous Next ↓Bottom Just 75th
USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

12. Commitments and Contingencies (Continued)                                   

 The following schedule summarizes expirations of commitments to the earlier
of call date or maturity date outstanding at December 31, 2000:                 

                                                                [Download Table]

                                          December 31, 2000              
                            ---------------------------------------------
                              Student                Academic            
                               Loan     Warehousing Facilities Letters of
                             Purchases   Advances   Financings   Credit  
                            ----------- ----------- ---------- ----------
                                                                         
2001....................... $ 3,502,047 $1,094,214    $  --    $2,239,287
2002.......................   9,969,958  1,700,001       --     1,036,344
2003.......................   2,689,194         --       --            --
2004.......................     261,699         --       --       213,151
2005.......................          --         --       --        45,519
                            ----------- ----------    -----    ----------
  Total.................... $16,422,898 $2,794,215    $  --    $3,534,301
                            =========== ==========    =====    ==========

Minimum Statutory Capital Adequacy Ratio                                        

The Privatization Act effectively requires that the GSE maintain a minimum
statutory capital adequacy ratio (the ratio of stockholders' equity to total    
assets plus 50 percent of the credit equivalent amount of certain off-balance   
sheet items) of at least 2.25 percent or be subject to certain "safety and      
soundness" requirements designed to restore such statutory ratio. Management    
anticipates being able to fund the increase in required capital from the GSE's  
current and retained earnings. While the GSE may not finance the activities of  
its non-GSE affiliates, it may, subject to its minimum capital requirements,    
dividend retained earnings and surplus capital to USA Education, Inc., which in 
turn may contribute such amounts to its non-GSE subsidiaries. The Privatization 
Act requires management to certify to the Secretary of the Treasury that, after 
giving effect to the payment of dividends, the statutory capital ratio test     
would have been met at the time the dividend was declared. At December 31,      
2000, the GSE's statutory capital adequacy ratio, after the effect of the       
dividends to be paid in the first quarter of 2001, was 2.28 percent.            

13. Minority Interest                                                           

 Upon the Reorganization on August 7, 1997, each outstanding share of common
stock of the GSE was converted into one share of common stock of SLM Holding.   
The outstanding preferred stock of the GSE was not affected by the              
Reorganization and is reflected as minority interest in the consolidated        
financial statements.                                                           

 The GSE's preferred stock dividends are cumulative and payable quarterly at
4.50 percentage points below the highest yield of certain long-term and short-  
term U.S. Treasury obligations. The dividend rate for any dividend period will  
not be less than 5 percent per annum nor greater than 14 percent per annum. For 
the years ended December 31, 2000, 1999 and 1998, the GSE's preferred dividend  
rate was 5 percent and reduced net income by $11 million. The Privatization Act 
requires that on the dissolution date of September 30, 2008, the GSE shall      
repurchase or redeem, or make proper provisions for repurchase or redemption of 
any outstanding preferred stock. The Company has the option of effecting an     
earlier dissolution of the GSE if certain conditions are met.                   

14. Preferred Stock                                                             

On November 10, 1999, the Company sold 3.3 million shares of 6.97%        
Cumulative Redeemable Preferred Stock, Series A in a registered public          
offering. The sale of the shares of the Series A Preferred Stock settled on     

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USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

14. Preferred Stock (Continued)                                                 

November 16, 1999. The proceeds from the sale to the Company, before expenses,  
were $165 million and were used for general corporate purposes. The shares do   
not have any maturity date but are subject to the Company's option, beginning   
November 16, 2009, to redeem the shares at any time, in whole or in part, at    
the redemption price of $50 plus accrued and unpaid dividends up to the         
redemption date. The shares have no preemptive or conversion rights.            

Dividends on the shares of the Series A Preferred Stock are not mandatory.
Holders of the Series A Preferred Stock will be entitled to receive cumulative, 
quarterly cash dividends at the annual rate of $3.485 per share, when, as, and  
if declared by the Board of Directors of the Company. For the years ended       
December 31, 2000 and 1999, dividends paid on Series A Preferred Stock reduced  
net income by $12 million and $1 million, respectively.                         

15. Common Stock                                                                

  The Board of Directors has authorized and reserved up to 33.4 million common
shares for issuance under various compensation and benefit plans. At December   
31, 2000, under these authorizations, the Company had 27.2 million shares in    
reserve and a remaining authority for issuance of 14.6 million shares.          

The Company has engaged in repurchases of its common stock since 1986. In 
2000 and 1999, the Company supplemented its open market common stock purchases  
by entering into equity forward transactions to purchase 1.7 million and 6.2    
million shares, respectively, on a cash or net share settled basis. In July     
2000, the Board of Directors increased the common share repurchase authority    
including equity forward contracts by 5 million shares. At December 31, 2000,   
the total common shares that could be potentially acquired over the next five   
years under outstanding equity forward contracts was 18.2 million shares, and   
the Company had remaining authority to enter into additional share repurchases  
and equity forward contracts for 4.8 million shares.                            

The following table summarizes the Company's common share repurchase and  
equity-forward activity for the years ended December 31, 2000 and 1999. (All    
amounts in the tables are common shares in millions.)                           

                                                                [Download Table]

                                                         Years ended    
                                                         December 31,   
                                                        --------------- 
                                                         2000     1999  
                                                        -------  ------ 
                                                                        
Common shares repurchased:                                              
  Open market..........................................     2.1     2.9 
  Equity forwards......................................     4.9     5.3 
                                                        -------  ------ 
Total shares repurchased...............................     7.0     8.2 
                                                        -------  ------ 
Average purchase price per share....................... $ 44.26  $41.78 
                                                        =======  ====== 
Equity forward contracts:                                               
Outstanding at beginning of year.......................    21.4    20.5 
New contracts..........................................     1.7     6.2 
Exercises..............................................    (4.9)   (5.3)
                                                        -------  ------ 
Outstanding at end of year.............................    18.2    21.4 
                                                        =======  ====== 
Remaining board of director authority at end of year...     4.8     3.6 
                                                        =======  ====== 

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USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

15. Common Stock (Continued)                                                    

As of December 31, 2000, the expiration dates and range of purchase prices
for outstanding equity forward contracts are as follows:                        

                                                                [Download Table]

                                               Outstanding    Range of   
Year of Maturity                                Contracts  Market Prices 
----------------                               ----------- --------------
                                                                         
2001..........................................     6.3     $32.11--$45.71
2002..........................................     5.0      41.01-- 45.55
2003..........................................     4.0      41.20-- 47.50
2004..........................................     1.7      39.82-- 45.62
2005..........................................     1.2      30.00-- 36.04
                                                  ----                   
                                                  18.2                   
                                                  ====                   

Basic earnings per common share ("Basic EPS") are calculated using the    
weighted average number of shares of common stock outstanding during each       
period. Diluted earnings per common share ("Diluted EPS") reflect the potential 
dilutive effect of additional common shares that are issuable upon exercise of  
outstanding stock options and warrants, determined by the treasury stock        
method, and equity forwards, determined by the reverse treasury stock method,   
as follows:                                                                     

                                                                [Download Table]

                                              Net Income                      
                                             Attributable             Earnings
                                              to Common     Average     per   
                                                Stock       Shares     Share  
                                             ------------ ----------- --------
                                             (thousands)  (thousands)         
                                                                              
Year ended December 31, 2000                                                  
Basic EPS...................................  $ 453,495     159,482    $ 2.84 
Dilutive effect of stock options, warrants                                    
 and equity forwards........................         --       4,873      (.08)
                                              ---------     -------    ------ 
Diluted EPS.................................  $ 453,495     164,355    $ 2.76 
                                              =========     =======    ====== 
Year ended December 31, 1999                                                  
Basic EPS...................................  $ 499,393     160,577    $ 3.11 
Dilutive effect of stock options, warrants                                    
 and equity forwards........................         --       2,581      (.05)
                                              ---------     -------    ------ 
Diluted EPS.................................  $ 499,393     163,158    $ 3.06 
                                              =========     =======    ====== 
Year ended December 31, 1998                                                  
Basic EPS...................................  $ 501,464     167,684    $ 2.99 
Dilutive effect of stock options, warrants                                    
 and equity forwards........................         --       2,382      (.04)
                                              ---------     -------    ------ 
Diluted EPS.................................   $501,464     170,066     $2.95 
                                              =========     =======    ====== 

16. Stock Option Plans                                                          

USA Education, Inc. maintains stock option plans for its employees that   
permit grants of stock options for the purchase of common stock with exercise   
prices equal to or greater than the market value on the date of grant.          

After the change in management control in August 1997, the Board of       
Directors granted options, which have ten-year terms and vest in one-third      
increments, to officers and key employees under the 1993-1998 Stock Option      
Plan. Options granted to executive management under this plan vest in one year  
and upon the occurrence of (1) one-third on the date that the Company's common  
stock closes above $42.86 per share for                                         

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USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

16. Stock Option Plans (Continued)                                              

five business days; (2) one-third on the date that the Company's common stock   
closes above $57.14 per share for five business days; and (3) one-third on the  
date that the Company's common stock price closes above $71.43 per share for    
five business days. Options granted to officers and key employees in November   
1997 vest: (1) one-third, one year from the date of grant; (2) one-third on the 
later of one year or the date that the Company's common stock closes above      
$57.14 per share for five business days; and (3) one-third on the later of one  
year or the date that the Company's common stock price closes above $71.43 per  
share for five business days. In the event that the Company's common stock      
price does not close above the predetermined prices, all outstanding options    
will vest eight years after the date of grant. Under this plan, the Company was 
originally authorized to grant up to 17.8 million shares. Options granted by    
prior Boards of Directors generally have ten-year terms and vest one year after 
the date of grant.                                                              

In May 1998, shareholders approved a Management Incentive Plan, which     
replaced the 1993-1998 Stock Option Plan. Under this plan, the Board may confer 
certain awards to officers and employees, which may be in the form of stock     
options, performance stock, and incentive bonuses. The Board authorized up to   
11.5 million shares of the Company's common stock that could be issued under    
such awards and at December 31, 2000, this plan had remaining authority of 5.8  
million shares. In 2000, options granted under this plan have ten-year terms    
and vest the latter of one year from date of issuance or when the closing stock 
price equals 120 percent of the strike price of the option. In 1999 and 1998,   
options granted under this plan have ten-year terms and vest in one-third       
increments identical to those of the options granted in November 1997 to        
officers and key employees. In the event that the Company's common stock price  
does not close above the predetermined prices, all outstanding options will     
vest eight years after the date of grant.                                       

The Company's Board of Directors authorized the grant of options for up to
14 million shares of common stock under the Employee Stock Option Plan, of      
which there is remaining authority of 4.7 million shares at December 31, 2000.  
Stock options were granted under this plan to all non-officer employees of the  
Company and have ten-year terms with one-half of the options vesting one year   
from the date of grant and one-half vesting two years from the date of grant.   

  The following table summarizes the employee stock option plans for the years
ended December 31, 2000, 1999 and 1998. The weighted average fair value of      
options granted during the year is based on an option pricing model.            

                                                        [Enlarge/Download Table]

                                          Years ended December 31,                   
                          -----------------------------------------------------------
                                 2000                1999                1998        
                          ------------------- ------------------- -------------------
                                      Average             Average             Average
                           Options     Price   Options     Price   Options     Price 
                          ----------  ------- ----------  ------- ----------  -------
                                                                                     
Outstanding at beginning                                                             
 of year................  11,243,895  $41.04   9,666,906  $39.58   8,365,532  $37.30 
Granted.................   8,940,698   40.42   3,643,226   43.25   2,935,893   43.91 
Exercised...............  (3,360,197)  39.73  (1,100,933)  35.69    (598,248)  29.89 
Canceled................  (2,250,290)  41.14    (965,304)  40.85  (1,036,271)  39.04 
                          ----------  ------  ----------  ------  ----------  ------ 
Outstanding at end of                                                                
 year...................  14,574,106  $40.94  11,243,895  $41.04   9,666,906  $39.58 
                          ==========  ======  ==========  ======  ==========  ====== 
Exercisable at end of                                                                
 year...................   4,099,257  $41.05   3,869,624  $38.87   3,077,332  $35.88 
                          ==========  ======  ==========  ======  ==========  ====== 
Weighted-average fair                                                                
 value of options                                                                    
 granted during the                                                                  
 year...................              $18.97              $19.49              $17.63 
                                      ======              ======              ====== 

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USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

16. Stock Option Plans (Continued)                                              

The following table summarizes the number, average exercise prices (which 
ranged from $11 per share to $59 per share) and average remaining contractual   
life of the employee stock options outstanding at December 31, 2000.            

                                                                [Download Table]

                                                Average Average Remaining
Exercise Prices                       Options    Price  Contractual Life 
---------------                      ---------- ------- -----------------
                                                                         
Under $35...........................    279,456 $26.14      5.2 Yrs.     
$35-$45............................. 12,561,847  39.85      8.6          
Above $45...........................  1,732,794  51.27      8.7          
                                     ---------- ------      --------     
Total............................... 14,574,097 $40.94      8.5 Yrs.     
                                     ========== ======      ========     

  In May 1996, shareholders approved the Board of Directors Stock Option Plan,
which authorized the grant of options to acquire up to 700,000 shares of common 
stock. Options under this plan are exercisable on the date of grant and have    
ten-year terms. In May 1998, the shareholders approved a Directors Stock Plan,  
which replaced the Board of Directors Stock Option Plan. Under the Directors    
Stock Plan, the Board authorized the grant of options to acquire up to 3.5      
million shares of common stock, of which there is remaining authority of 1.6    
million shares. Options granted under this plan have ten-year terms and vest in 
one-third increments identical to those of the August 1997 executive management 
options except there is no one-year minimum vesting requirement. In the event   
that the Company's common stock price does not close above the predetermined    
prices, all outstanding options will vest eight years after the date of grant.  

  The following table summarizes the Board of Directors Stock Option Plans for
the years ended December 31, 2000, 1999 and 1998.                               

                                                                [Download Table]

                                        Years ended December 31,                  
                          --------------------------------------------------------
                                2000               1999               1998        
                          ------------------ ------------------ ------------------
                                     Average            Average            Average
                           Options    Price   Options    Price   Options    Price 
                          ---------  ------- ---------  ------- ---------  -------
                                                                                  
Outstanding at beginning                                                          
 of year................  1,645,866  $38.67  1,622,366  $38.48  1,657,775  $38.49 
Granted.................    415,000   42.34     52,500   43.31         --      -- 
Exercised...............   (345,700)  40.23    (29,000)  36.79     (2,000)  30.86 
Canceled................         --      --         --      --    (33,409)  39.34 
                          ---------  ------  ---------  ------  ---------  ------ 
Outstanding at end of                                                             
 year...................  1,715,166  $39.24  1,645,866  $38.67  1,622,366  $38.48 
                          =========  ======  =========  ======  =========  ====== 
Exercisable at end of                                                             
 year...................  1,192,730  $39.14    601,275  $37.26    612,775  $37.07 
                          =========  ======  =========  ======  =========  ====== 
Weighted-average fair                                                             
 value of options                                                                 
 granted during the                                                               
 year...................             $20.50             $18.73             $   -- 
                                     ======             ======             ====== 

At December 31, 2000, the outstanding Board of Directors options had a    
weighted-average remaining contractual life of 7.0 years.                       

USA Education. Inc. accounts for its stock option plans in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to     
Employees," which results in no compensation expense for stock options granted  
under the plans. The following table summarizes pro-forma disclosures for the   
years ended December 31, 2000, 1999 and 1998, as if the Company had accounted   
for employee and Board of Directors stock options granted subsequent to         
December 31, 1994 under the fair market value method as set                     

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USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

16. Stock Option Plans (Continued)                                              

forth in SFAS No. 123, "Accounting for Stock-Based Compensation." The fair      
value for these options was estimated at the date of grant using an option      
pricing model, with the following weighted average assumptions for the years    
ended December 31, 2000, 1999 and 1998, respectively: risk-free interest rate   
of 6 percent, 6 percent and 5 percent; volatility factor of the expected market 
price of the Company's common stock of 34 percent, 34 percent and 32 percent;   
expected dividend rate of 2 percent; and the time of the expected life of the   
option of ten years. Vesting for options with vesting periods tied to the       
Company's stock price is assumed to occur annually in one-third increments.     

                                                                [Download Table]

                                                      Years ended December 31, 
                                                     --------------------------
                                                       2000     1999     1998  
                                                     -------- -------- --------
                                                                               
Net income attributable to common stock............. $465,017 $499,393 $501,464
                                                     ======== ======== ========
Pro-forma net income attributable to common stock... $415,116 $473,386 $469,470
                                                     ======== ======== ========
Basic earnings per share............................ $   2.84 $   3.11 $   2.99
                                                     ======== ======== ========
Pro-forma basic earnings per share.................. $   2.53 $   2.95 $   2.80
                                                     ======== ======== ========
Diluted earnings per share.......................... $   2.76 $   3.06 $   2.95
                                                     ======== ======== ========
Pro-forma diluted earnings per share................ $   2.46 $   2.90 $   2.76
                                                     ======== ======== ========

17. Benefit Plans                                                               

Pension Plans                                                                   

 Effective October 1, 1999, the Company converted its Pension Plan to a cash
balance plan. The present value of accrued benefits for eligible employees      
under the Company's regular and supplemental pension plans was converted to an  
opening "account balance" and benefits now accrue under a cash balance formula. 
Under the cash balance formula, each participant has an account, for record     
keeping purposes only, to which credits are allocated each payroll period based 
on a percentage of the participant's compensation for the current pay period.   
The applicable percentage is determined by the number of years of service the   
participant has with the Company. The conversion to a cash balance plan did not 
have a material effect on the Company's pension expense or its accrued pension  
cost.                                                                           

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USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

17. Benefit Plans (Continued)                                                   

The following tables provide a reconciliation of the changes in the plan's
benefit obligations and fair value of assets over the two-year period ending    
December 31, 2000, and a statement of the funded status as of December 31 of    
both years:                                                                     

                                                                [Download Table]

                                                       December 31,     
                                                     ------------------ 
                                                       2000      1999   
                                                     --------  -------- 
                                                                        
Change in Benefit Obligation                                            
Projected benefit obligation at beginning of year..  $103,641  $ 99,349 
Service cost.......................................     7,108     5,033 
Interest cost......................................     7,983     6,651 
Amendments.........................................        --       (43)
Acquisitions.......................................    22,580        -- 
Actuarial (gain)/loss..............................    (7,781)   (6,353)
Benefits paid......................................    (7,437)     (996)
                                                     --------  -------- 
Benefit obligation at end of year..................   126,094   103,641 
                                                     --------  -------- 
Change in Plan Assets                                                   
Fair value of plan assets at beginning of year.....   130,108   116,836 
Actual return on plan assets.......................    23,670    15,563 
Acquisitions.......................................    19,407        -- 
Benefits paid......................................    (7,437)     (996)
Administrative payments............................    (1,341)   (1,295)
                                                     --------  -------- 
Fair value of plan assets at end of year...........   164,407   130,108 
                                                     --------  -------- 
Funded Status                                                           
Funded status at end of year.......................    38,313    26,467 
Unrecognized net actuarial gain....................   (50,994)  (37,156)
Unrecognized prior service cost and transition                          
 asset.............................................    (1,891)   (2,154)
                                                     --------  -------- 
Accrued pension cost...............................  $(14,572) $(12,843)
                                                     ========  ======== 

                                                                [Download Table]

                                                            December 31, 
                                                            -------------
                                                             2000   1999 
                                                            ------ ------
                                                                         
Weighted-average assumptions as of December 31                           
Discount rate..............................................  7.75%  7.75%
Expected return on plan assets............................. 10.00% 10.00%
Rate of compensation increase..............................  5.50%  5.50%

Net periodic pension cost included the following components:              

                                                                [Download Table]

                                          Years ended December 31,    
                                          --------------------------- 
                                            2000      1999     1998   
                                          --------  --------  ------- 
                                                                      
Service cost--benefits earned during the                              
 period.................................. $  7,108  $  5,033  $11,624 
Interest cost on project benefit                                      
 obligations.............................    7,983     6,651    5,961 
Expected return on plan assets...........  (13,593)  (11,606)  (9,183)
Net amortization and deferral............   (2,922)   (1,805)  (1,271)
                                          --------  --------  ------- 
Net periodic pension cost................ $ (1,424) $ (1,727) $ 7,131 
                                          ========  ========  ======= 

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USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

17. Benefit Plans (Continued)                                                   

 The Company maintains a nonqualified pension plan for certain key employees
as designated by the Board of Directors and a nonqualified pension plan for its 
Board of Directors. The nonqualified pension plans were the only pension plans  
with an accumulated benefit obligation in excess of plan assets. There are no   
plan assets in the nonqualified plans due to the nature of the plans. The       
accumulated benefit obligations for these plans at December 31, 2000 and 1999   
were $14 million and $7 million, respectively.                                  

401(k) Plans                                                                    

The Company's 401(k) Savings Plan ("the Plan") is a defined contribution  
plan that is intended to qualify under section 401(k) of the Internal Revenue   
Code. The Plan covers substantially all employees of the Company. Participating 
employees may contribute up to 10 percent of compensation. Up to 6 percent of   
these contributions are matched 100 percent by the Company after one year of    
service.                                                                        

  During 2000, the Company provided an additional employer contribution to the
401(k) Savings Plan for employees who were not in other company incentive       
plans. The Company also acquired USA Group, Inc., whose employees were          
immediately eligible for participation in the plan.                             

The Company also maintains a non-qualified Plan to ensure that designated 
participants receive the full amount of benefits to which they would have been  
entitled under the 401(k) Plan except for limits on compensation and            
contribution levels imposed by the Internal Revenue Code.                       

Total expenses related to the 401(k) plans were $9 million, $5 million and
$7 million in 2000, 1999 and 1998, respectively.                                

18. Income Taxes                                                                

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting  
purposes and the amounts used for income tax purposes. Significant components   
of the Company's deferred tax liabilities and assets as of December 31, 2000    
and 1999 are as follows:                                                        

                                                                [Download Table]

                                                         December 31,   
                                                       -----------------
                                                         2000     1999  
                                                       -------- --------
                                                                        
Deferred tax liabilities:                                               
  Leases.............................................. $295,018 $308,956
  Unrealized investment gains.........................  246,811  186,459
  Other...............................................   28,069   38,431
                                                       -------- --------
                                                        569,898  533,846
                                                       -------- --------
Deferred tax assets:                                                    
  ExportSS operating costs............................   74,245   39,865
  Student loan reserves...............................   48,800   59,346
  In-substance defeasance transactions................   27,446   30,251
  Asset valuation allowances..........................    8,093   20,901
  Securitization transactions.........................   60,834   64,793
  Other...............................................   93,609   77,894
                                                       -------- --------
                                                        313,027  293,050
                                                       -------- --------
Net deferred tax liabilities.......................... $256,871 $240,796
                                                       ======== ========

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USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  
(Dollars in thousands, except per share amounts)  

18. Income Taxes (Continued)                                                    

The GSE is exempt from all state, local and District of Columbia taxes    
except for real property taxes. USA Education, Inc. and its other subsidiaries  
are subject to state and local taxes that increased the effective tax rate by   
1.5 percent in 2000 and were immaterial in 1999 and 1998. Deferred tax assets   
on in-substance defeasance transactions resulted from premiums on the debt      
extinguished. These premiums are capitalized and amortized over the life of     
the defeasance trust for tax purposes. As of December 31, 2000, 1999 and 1998,  
all of the state tax expense is classified as current.                          

Reconciliations of the statutory U.S. federal income tax rates to the     
Company's effective tax rate follow:                                            

                                                                [Download Table]

                          Years ended     
                          December 31,    
                         ---------------- 
                         2000  1999  1998 
                         ----  ----  ---- 
                                          
Statutory rate.......... 35.0% 35.0% 35.0%
Tax exempt interest and                   
 dividends received                       
 deduction.............. (2.2) (2.8) (3.0)
State tax, net of                         
 federal................  1.5    .7    .6 
Other, net.............. (1.1) (1.0)  (.9)
                         ----  ----  ---- 
Effective tax rate...... 33.2% 31.9% 31.7%
                         ====  ====  ==== 

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USA EDUCATION, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)

19. Quarterly Financial Information (unaudited)                                 

                                                                [Download Table]

                                                          2000                
                                           -----------------------------------
                                            First    Second   Third    Fourth 
                                           Quarter  Quarter  Quarter  Quarter 
                                           -------- -------- -------- --------
                                                                              
Net interest income....................... $161,869 $161,641 $160,333 $157,945
Less: provision for losses................    9,438    7,900    5,428    9,354
                                           -------- -------- -------- --------
Net interest income after provision for                                       
 losses...................................  152,431  153,741  154,905  148,591
Other income..............................  175,591  125,314  205,916  180,812
Operating expenses........................   96,238   95,044  220,116  174,312
Income taxes..............................   75,461   60,844   45,813   53,762
Minority interest in net earnings of                                          
 subsidiary...............................    2,674    2,673    2,674    2,673
                                           -------- -------- -------- --------
Net income................................  153,649  120,494   92,218   98,656
Preferred stock dividends.................    2,907    2,886    2,865    2,864
                                           -------- -------- -------- --------
Net income attributable to common stock... $150,742 $117,608 $ 89,353 $ 95,792
                                           ======== ======== ======== ========
Basic earnings per common share........... $    .96 $    .75 $    .56 $    .58
                                           ======== ======== ======== ========
Diluted earnings per common share......... $    .93 $    .73 $    .55 $    .56
                                           ======== ======== ======== ========


                                                          1999                
                                           -----------------------------------
                                            First    Second   Third    Fourth 
                                           Quarter  Quarter  Quarter  Quarter 
                                           -------- -------- -------- --------
                                                                              
Net interest income....................... $157,652 $172,706 $184,358 $179,074
Less: provision for losses................    7,636   13,029    6,545    7,148
                                           -------- -------- -------- --------
Net interest income after provision for                                       
 losses...................................  150,016  159,677  177,813  171,926
Other income..............................  106,639  111,631   95,310  137,210
Operating expenses........................   86,268   86,410   91,520   94,372
Income taxes..............................   53,905   58,561   57,524   70,137
Minority interest in net earnings of                                          
 subsidiary...............................    2,673    2,674    2,674    2,673
                                           -------- -------- -------- --------
Net income................................  113,809  123,663  121,405  141,954
Preferred stock dividends.................       --       --       --    1,438
                                           -------- -------- -------- --------
Net income attributable to common stock... $113,809 $123,663 $121,405 $140,516
                                           ======== ======== ======== ========
Basic earnings per common share........... $    .70 $    .77 $    .76 $    .89
                                           ======== ======== ======== ========
Diluted earnings per common share......... $    .69 $    .76 $    .75 $    .87
                                           ======== ======== ======== ========


                                                          1998                
                                           -----------------------------------
                                            First    Second   Third    Fourth 
                                           Quarter  Quarter  Quarter  Quarter 
                                           -------- -------- -------- --------
                                                                              
Net interest income....................... $174,577 $166,318 $149,876 $160,515
Less: provision for losses................    9,494    2,183    6,685   18,235
                                           -------- -------- -------- --------
Net interest income after provision for                                       
 losses...................................  165,083  164,135  143,191  142,280
Other income..............................  134,383  145,805  104,322  111,801
Operating expenses........................   90,862   93,732   86,540   89,735
Income taxes..............................   66,923   69,303   50,487   51,260
Minority interest in net earnings of                                          
 subsidiary...............................    2,673    2,674    2,674    2,673
                                           -------- -------- -------- --------
Net income................................  139,008  144,231  107,812  110,413
Preferred stock dividends                        --       --       --       --
                                           -------- -------- -------- --------
Net income attributable to common stock... $139,008 $144,231 $107,812 $110,413
                                           ======== ======== ======== ========
Basic earnings per common share........... $    .81 $    .86 $    .65 $    .67
                                           ======== ======== ======== ========
Diluted earnings per common share......... $    .80 $    .84 $    .64 $    .66
                                           ======== ======== ======== ========

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APPENDIX A

FEDERAL FAMILY EDUCATION LOAN PROGRAM                                           

General                                                                         

  The Federal Family Education Loan Program, known as FFELP, under Title IV of
the Higher Education Act, provides for loans to students who are enrolled in    
eligible institutions, or to parents of dependent students, to finance their    
educational costs. Payment of principal and interest on the student loans is    
guaranteed by a state or not-for-profit guarantee agency against:               

.  default of the borrower;                                           

  .  the death, bankruptcy or permanent, total disability of the borrower;

.  closing of the borrower's school prior to the end of the academic  
period;                                                                     

.  false certification by the borrower's school of his eligibility for
the loan; and                                                               

.  an unpaid school refund.                                           

In addition to the guarantee, the holder of student loans is entitled to  
receive interest subsidy payments and special allowance payments from the U.S.  
Department of Education on eligible student loans. Special allowance payments   
raise the yield to student loan lenders when the statutory borrower interest    
rate is below an indexed market value. Subject to conditions, a program of      
federal reinsurance under the Higher Education Act entitles guarantee agencies  
to reimbursement from the Department of Education for between 75% and 100% of   
the amount of each guarantee payment.                                           

Four types of student loans are currently authorized under the Higher     
Education Act:                                                                  

  .  Subsidized Stafford Loans to students who demonstrate requisite financial
need;                                                                           

.  Unsubsidized Stafford Loans to students who either do not demonstrate  
financial need or require additional loans to supplement their Subsidized       
Stafford Loans;                                                                 

.  Parent Loans for Undergraduate Students, known as "PLUS Loans," to     
parents of dependent students whose estimated costs of attending school exceed  
other available financial aid; and                                              

.  Consolidation Loans, which consolidate into a single loan a borrower's 
obligations under various federally authorized student loan programs.           

Before July 1, 1994, the Higher Education Act also authorized loans called
"Supplemental Loans to Students" or "SLS Loans" to independent students and,    
under some circumstances, dependent undergraduate students, to supplement their 
Subsidized Stafford Loans. The SLS program was replaced by the Unsubsidized     
Stafford Loan program.                                                          

 This appendix describes or summarizes the material provisions of the Higher
Education Act, the FFELP and related statutes and regulations. It, however, is  
not complete and is qualified in its entirety by reference to each actual       
statute, and regulation. Both the Higher Education Act and the related          
regulations have been the subject of extensive amendments in recent years.      
Accordingly, we can not predict whether future amendments or modifications      
might materially change any of the programs described in this appendix or the   
statutes and regulations that implement them.                                   

Legislative Matters                                                             

The FFELP is subject to comprehensive reauthorization every 6 years and to
frequent statutory and regulatory changes. The most recent reauthorization was  
the Higher Education Amendments of 1998. Since the 1998 reauthorization, the    
Higher Education Act has been amended by the Ticket to Work and Work Incentives 
Improvement Act of 1999 and the Consolidated Appropriations Act of 2001.        

In 1993 Congress created the William D. Ford Federal Direct Loan Program  
("FDLP") under which Stafford, PLUS and Consolidation Loans are funded directly 
by the U.S. Department of Treasury.                                             

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 The 1998 reauthorization extended the principal provisions of the FFELP and
the FDLP to October 1, 2003. This legislation, as modified by the 1999 act,     
lowered both the borrower interest rate on Stafford Loans to a formula based on 
the 91-day Treasury bill rate plus 2.3 percent (1.7 percent during in-school    
and grace periods) and the lender's rate after special allowance payments to    
the 91-day Treasury bill rate plus 2.8 percent (2.2 percent during in-school    
and grace periods) for loans originated on or after October 1, 1998 and before  
July 1, 2003. The borrower interest rate on PLUS loans originated during this   
period is equal to the 91-day Treasury bill rate plus 3.1 percent.              

  The 1999 act changed the financial index on which special allowance payments
are computed on new loans from the 91-day Treasury bill rate to the three-month 
commercial paper rate (financial) for FFELP loans disbursed on or after January 
1, 2000 and before July 1, 2003. For these FFELP loans, the special allowance   
payments to lenders are based upon the three-month commercial paper (financial) 
rate plus 2.34% (1.74% during in-school and grace periods). The 1999 act did    
not change the rate that the borrower pays on FFELP loans.                      

  The 2001 act changed the financial index on which the interest rate for some
borrowers of SLS and PLUS loans are computed. The index was changed from the 1- 
year Treasury bill rate to the weekly average one-year constant maturity        
Treasury yield.                                                                 

 The 1998 reauthorization maintained interest rates for borrowers of Federal
Direct Consolidation Loans whose applications were received prior to February   
1, 1999 at 7.46 percent, which rates are adjusted annually based on a formula   
equal to the 91-day Treasury bill rate plus 2.3 percent. The borrower interest  
rates on Federal Direct Consolidation Loans for borrowers whose applications    
are received on or after February 1, 1999 and before July 1, 2003 is a fixed    
rate equal to the lesser of the weighted average of the interest rates of the   
loans consolidated, adjusted up to the nearest one-eighth of one percent, and   
8.25%. This is the same rate that the 1998 legislation set on FFELP             
Consolidation Loans for borrowers whose applications are received on or after   
October 1, 1998 and before July 1, 2003. The 1998 legislation, as modified by   
the 1999 act, sets the special allowance payment rate for FFELP Consolidation   
Loans at the three-month commercial paper rate plus 2.64% for loans disbursed   
on or after January 1, 2000 and before July 1, 2003. Lenders of FFELP           
Consolidation Loans pay a reinsurance fee to the US Department of Education.    
All other guaranty fees may be passed on to the borrower.                       

Eligible Lenders, Students and Educational Institutions                         

Lenders eligible to make loans under the FFELP generally include banks,   
savings and loan associations, credit unions, pension funds and, under some     
conditions, schools and guarantors. A student loan may be made to, or on behalf 
of, a "qualified student". A "qualified student" is an individual who           

.  is a United States citizen, national or permanent resident;            

.  has been accepted for enrollment or is enrolled and is maintaining     
satisfactory academic progress at a participating educational institution;      

.  is carrying at least one-half of the normal full-time academic workload
for the course of study the student is pursuing; and                            

.  meets the financial need requirements for the particular loan program. 

Eligible schools include institutions of higher education, including      
proprietary institutions, meeting the standards provided in the Higher          
Education Act. For a school to participate in the program, the Department of    
Education must approve its eligibility under standards established by           
regulation.                                                                     

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Financial Need Analysis                                                         

Subject to program limits and conditions, student loans generally are made
in amounts sufficient to cover the student's estimated costs of attending       
school, including tuition and fees, books, supplies, room and board,            
transportation and miscellaneous personal expenses as determined by the         
institution. Each Stafford Loan applicant (and parents in the case of a         
dependent child) must undergo a financial need analysis. This requires the      
applicant (and parents in the case of a dependent child) to submit a financial  
data to a federal processor. The federal processor evaluates the parents' and   
student's financial condition under federal guidelines and calculates the       
amount that the student and the family are expected to contribute towards the   
student's cost of education. After receiving information on the family          
contribution, the institution then subtracts the family contribution from the   
student's costs to attend the institution to determine the student's need for   
financial aid. Some of this need is met by grants, scholarships, institutional  
loans and work assistance. A student's "unmet need" is further reduced by the   
amount of Stafford Loans for which the borrower is eligible.                    

Special Allowance Payments                                                      

The Higher Education Act provides for quarterly special allowance payments
to be made by the Department of Education to holders of student loans to the    
extent necessary to ensure that they receive at least specified market interest 
rates of return. The rates for special allowance payments depend on formulas    
that vary according to the type of loan, the date the loan was made and the     
type of funds, tax-exempt or taxable, used to finance the loan. The Department  
makes a special allowance payment for each calendar quarter.                    

The special allowance payment equals the average unpaid principal balance,
including interest which has been capitalized, of all eligible loans held by a  
holder during the quarterly period multiplied by the special allowance          
percentage.                                                                     

For student loans disbursed before January 1, 2000, the special allowance 
percentage is computed by:                                                      

 (1) determining the average of the bond equivalent rates of 91-day Treasury
bills auctioned for that quarter;                                               

(2) subtracting the applicable borrower interest rate;                    

(3) adding the applicable special allowance margin described in the table 
below; and                                                                      

(4) dividing the resultant percentage by 4.                               

If the result is negative, the special allowance payment is zero.         

                                                        [Enlarge/Download Table]

Date of First                                                                             
Disbursement                                Special Allowance Margin                      
-------------          -------------------------------------------------------------------
                                                                                          
Before 10/17/86        3.50%                                                              
From 10/17/86 through                                                                     
 09/30/92              3.25%                                                              
From 10/01/92 through                                                                     
 06/30/95              3.10%                                                              
From 07/01/95 through  2.50% for Stafford Loans that are in In--School, Grace or Deferment
 06/30/98                                                                                 
                       3.10% for Stafford Loans that are in Repayment and all other loans 
From 07/01/98 through                                                                     
 12/31/99              2.20% for Stafford Loans that are in In--School,Grace or Deferment 
                       2.80% for Stafford Loans that are in Repayment                     
                       3.10% for PLUS, SLS and Consolidation loans                        

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For student loans disbursed after January 1, 2000, the special allowance  
percentage is computed by:                                                      

(1) determining the average of the bond equivalent rates of 3-month       
commercial paper (financial) rates quoted for that quarter;                     

(2) subtracting the applicable borrower interest rate;                    

(3) adding the applicable special allowance margin described in the table 
below; and                                                                      

(4) dividing the resultant percentage by 4.                               

If the result is negative, the special allowance payment is zero.         

                                                        [Enlarge/Download Table]

Date of First                                                                            
Disbursement                                Special Allowance Margin                     
-----------------      ------------------------------------------------------------------
                                                                                         
From 01/01/00 through                                                                    
 06/30/03              1.74% for Stafford Loans that are in In-School, Grace or Deferment
                       2.34% for Stafford Loans that are in Repayment                    
                       2.64% for PLUS and Consolidation loans                            

  Special allowance payments are available on variable rate PLUS Loans and SLS
Loans made on or after July 1, 1987 and before July 1, 1994 and on any PLUS     
Loans made on or after July 1, 1998, only if the variable rate, which is reset  
annually, based on the weekly average one-year constant maturity Treasury yield 
for loans made before July 1, 1998 and based on the 91-day Treasury bill for    
loans made on or after July 1, 1998, exceeds the applicable maximum borrower    
rate. The maximum borrower rate is between 9% and 12%.                          

Stafford Loan Program                                                           

For Stafford Loans, the Higher Education Act provides for:                

.  federal insurance or reinsurance of Stafford Loans made by eligible      
lenders to qualified students;                                        

.  federal interest subsidy payments on Subsidized Stafford Loans paid by 
the Department of Education to holders of the loans in lieu of the borrowers'   
making interest payments; and                                                   

  .  special allowance payments representing an additional subsidy paid by the
Department to the holders of eligible Stafford Loans.                           

We refer to all three types of assistance as "federal assistance".        

Interest. The borrower's interest rate on a Stafford Loan can be fixed or 
variable. Stafford Loan interest rates are presented below.                     

                                                        [Enlarge/Download Table]

                                                          Maximum                                      
                                                         Borrower                                      
Trigger Date                   Borrower Rate               Rate              Interest Rate Margin      
---------------        ----------------------------- ----------------- --------------------------------
                                                                                                       
Before 01/01/81        7%                            7%                N/A                             
From 01/01/81 through                                                                                  
09/12/83               9%                            9%                N/A                             
From 09/13/83 through                                                                                  
06/30/88               8%                            8%                N/A                             
From 07/01/88 through  8% for 48 months;             8% for 48 months, 3.25% for loans made before     
09/30/92               thereafter, 91-day Treasury + then 10%          7/23/92 and for loans made on   
                       Interest Rate Margin                            or before 10/1/92 to new student
                                                                       borrowers;                      
                                                                       3.10% for loans made after      
                                                                       7/23/92 and before 7/1/94 to    
                                                                       borrowers with outstanding FFELP
                                                                       loans                           

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                                                                [Download Table]

                                            Maximum                               
Trigger                                     Borrower                              
Date                      Borrower Rate       Rate       Interest Rate Margin     
---------------        -------------------- -------- -----------------------------
                                                                                  
From 10/01/92 through  91-day Treasury +     9%      3.10%                        
06/30/94               Interest Rate Margin                                       
From 07/01/94 through  91-day Treasury +     8.25%   3.10%                        
 06/30/95              Interest Rate Margin                                       
From 07/01/95 through  91-day Treasury +     8.25%   2.50% (In-School, Grace or   
 06/30/98              Interest Rate Margin          Deferment); 3.10% (Repayment)
From 07/01/98          91-day Treasury +     8.25%   1.70% (In-School, Grace or   
                       Interest Rate Margin          Deferment); 2.30% (Repayment)

  The trigger date for Stafford Loans made before October 1, 1992 is the first
day of the enrollment period for which the borrower's first Stafford Loan is    
made. The trigger date for Stafford Loans made on or after October 1, 1992 is   
the date of the disbursement of the borrower's first Stafford Loan. All         
Stafford Loans made on or after July 1, 1994 have a variable interest rate      
regardless of the applicable rate on any prior loans.                           

  The rate for variable rate Stafford Loans applicable for any 12-month period
beginning on July 1 and ending on June 30 is determined on the preceding June 1 
and is equal to the lesser of:                                                  

.  the applicable maximum borrower rate and                                 

.  the sum of                                                               

 .  the bond equivalent rate of 91-day Treasury bills auctioned at the final
auction held before that June 1, and                                            

.  the applicable interest rate margin.                                     

Interest Subsidy Payments. The Department of Education is responsible for 
paying interest on Subsidized Stafford Loans:                                   

.  while the borrower is a qualified student,                               

.  during the grace period, and                                             

.  during prescribed deferral periods.                                      

  The Department of Education makes quarterly interest subsidy payments to the
owner of a Subsidized Stafford Loan in an amount equal to the interest that     
accrues on the unpaid balance of that loan before repayment begins or during    
any deferral periods. The Higher Education Act provides that the owner of an    
eligible Subsidized Stafford Loan has a contractual right against the United    
States to receive interest subsidy and special allowance payments in. However,  
receipt of interest subsidy and special allowance payments is conditioned on    
compliance with the requirements of the Higher Education Act, including the     
following:                                                                      

.  satisfaction of need criteria, and                                       

.  continued eligibility of the loan for federal reinsurance.               

If the loan is not held by an eligible lender in accordance with the      
requirements of the Higher Education Act and the applicable guarantee           
agreement, the loan may lose its federal assistance.                            

Lenders generally receive interest subsidy and special allowance payments 
within 45 days to 60 days after submitting the applicable data for any given    
calendar quarter to the Department of Education. However, there can be no       
assurance that payments will, in fact, be received from the Department within   
that period.                                                                    

Loan Limits. The Higher Education Act generally requires that lenders     
disburse student loans in at least two equal disbursements. The Act limits the  
amount a student can borrow in any academic year. The following chart shows     
current and historic loan limits.                                               

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                                                                [Download Table]

                                                          Independent Students 
                                                          ---------------------
Borrower's Academic Level             All Students        Additional   Maximum 
Base Amount Subsidized    Subsidized  Subsidized          Unsubsidized Annual  
and Unsubsidized on       on or after and Unsubsidized    only on or   Total   
or after 10/1/93          1/1/87      on or after 10/1/93 after 7/1/94 Amount  
------------------------- ----------- ------------------- ------------ --------
                                                                               
Undergraduate (per year):                                                      
  1st year...............   $ 2,625         $ 2,625         $ 4,000    $  6,625
  2nd year...............   $ 2,625         $ 3,500         $ 4,000    $  7,500
  3rd year and above.....   $ 4,000         $ 5,500         $ 5,000    $ 10,000
Graduate (per year)......   $ 7,500         $ 8,500         $10,000    $ 18,500
Aggregate Limit:                                                               
  Undergraduate..........   $17,250         $23,000         $23,000    $ 46,000
  Graduate (including                                                          
   undergraduate)........   $54,750         $65,500         $73,000    $138,500

For the purposes of the table above:                                      

.  The loan limits include both FFELP and FDLP loans.                       

.  The amounts in the middle column represent the combined maximum loan   
amount per year for Subsidized and Unsubsidized Stafford Loans. Accordingly,    
the maximum amount that a student may borrow under an Unsubsidized Stafford     
Loan is the difference between the combined maximum loan amount and the amount  
the student received in the form of a Subsidized Stafford Loan.                 

Independent undergraduate students, graduate students and professional    
students may borrow the additional amounts shown in the next to last column.    
Dependent undergraduate students may also receive these additional loan amounts 
if their parents are unable to provide the family contribution amount and it is 
unlikely that the will qualify for a PLUS Loan.                                 

.  Students attending certain medical schools are eligible for higher       
annual and aggregate loan limits.                                     

  .  The annual loan limits are sometimes reduced when the student is enrolled
in a program of less than one academic year or has less than a full academic    
year remaining in his program.                                                  

Repayment. In general, repayment of principal on a Stafford Loan does not 
begin while the borrower remains a qualified student, but only after the        
applicable grace period, usually 6 months. In general, each loan must be        
scheduled for repayment over a period of not more than 10 years after repayment 
begins. New borrowers on or after October 7, 1998 who accumulate outstanding    
loans under the FFELP totaling more than $30,000 are entitled to extend         
repayment for up to 25 years, subject to minimum repayment amounts and          
Consolidation loan borrowers may be scheduled for repayment up to 30 years      
depending on the borrower's indebtedness. The Higher Education Act currently    
requires minimum annual payments of $600, unless the borrower and the lender    
agree to lower payments, except that negative amortization is not allowed. The  
Act and related regulations require lenders to offer the choice of a standard,  
graduated, income-sensitive and extended repayment schedule, if applicable, to  
all borrowers entering repayment.                                               

 Grace Periods, Deferral Periods and Forbearance Periods. After the borrower
stops pursuing at least a half-time course of study, he generally must begin to 
repay principal of a Stafford Loan following the grace period. However, no      
principal repayments need be made, subject to some conditions, during deferment 
and forbearance periods.                                                        

For borrowers whose first loans are disbursed on or after July 1, 1993,   
repayment of principal may be deferred, subject to a maximum deferment of 3     
years:                                                                          

  .  while the borrower returns to school at least half-time or is enrolled in
an approved graduate fellowship program or rehabilitation program; or           

.  when the borrower is seeking, but unable to find, full-time employment;  
or                                                                    

.  when the lender determines that repayment will cause the borrower      
economic hardship, as defined in the Act.                                       

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The Higher Education Act also permits, and in some cases requires,        
"forbearance" periods from loan collection in some circumstances. Interest that 
accrues during forbearance is never subsidized.                                 

PLUS and SLS Loan Programs                                                      

The Higher Education Act authorizes PLUS Loans to be made to parents of   
eligible dependent students and previously authorized SLS Loans to be made to   
the categories of students now served by the Unsubsidized Stafford Loan         
program. Only parents who have no adverse credit history or who are able to     
secure an endorser without an adverse credit history are eligible for PLUS      
Loans. The basic provisions applicable to PLUS and SLS Loans are similar to     
those of Stafford Loans for federal insurance and reinsurance. However,         
interest subsidy payments are not available under the PLUS and SLS programs     
and, in some instances, special allowance payments are more restricted.         

Loan Limits. PLUS and SLS Loans disbursed before July 1, 1993 were limited
to $4,000 per academic year with a maximum aggregate amount of $20,000. The     
annual loan limits for SLS Loans first disbursed on or after July 1, 1993 range 
from $4,000 for first and second year undergraduate borrowers to $10,000 for    
graduate borrowers, with a maximum aggregate amount of $23,000 for              
undergraduate borrowers and $73,000 for graduate and professional borrowers.    

The annual and aggregate amounts of PLUS Loans first disbursed on or after
July 1, 1993 are limited only to the difference between the cost of the         
student's education and other financial aid received, including scholarship,    
grants and other student loans.                                                 

Interest. The interest rate for a PLUS or SLS Loan depends on the date of 
disbursement a period of enrollment. The interest rates for PLUS Loans and SLS  
Loans are presented in the following chart. Until July 1, 2001, the 1-year      
index is the bond equivalent rate of 52-week Treasury bills auctioned at the    
final auction held prior to each June 1. Beginning July 1, 2001, the 1-year     
index is the weekly average 1-year constant maturity Treasury yield determined  
the preceding June 26.                                                          

                                                        [Enlarge/Download Table]

                                                                   Maximum                          
                                                                  Borrower                          
Trigger Date                       Borrower Rate                    Rate        Interest Rate Margin
---------------------  -------------------------------------- ----------------- --------------------
                                                                                                    
Before 10/01/81        9%                                     9%                       N/A          
From 10/01/81 through                                                                               
 10/30/82              14$                                    14$                      N/A          
From 11/01/82 through                                                                               
 06/30/87              12%                                    12%                      N/A          
From 07/01/87 through                                                                               
 09/30/92              1-year Index + Interest Rate Margin    12%                      3.25%        
From 10/01/92 through  1-year Index + Interest Rate Margin    PLUS 10%, SLS 11%        3.10%        
 06/30/94                                                                                           
From 07/01/94 through  1-year Index + Interest Rate Margin    9%                       3.10%        
 06/30/98                                                                                           
After 6/30/98          91-day Treasury + Interest Rate Margin 9%                       3.10%        

 For PLUS and SLS Loans made before October 1, 1992, the trigger date is the
first day of the enrollment period for which the loan was made. For PLUS and    
SLS Loans made on or after October 1, 1992, the trigger date is the date of the 
disbursement of the loan.                                                       

For PLUS or SLS Loans that bear a variable rate, the rate is set annually 
for 12-month periods, from July 1 through June 30, on the preceding June 1 and  
is equal to the lesser of:                                                      

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.  the applicable maximum borrower rate                                     

and                                                                   

.  the sum of:                                                              

.  the 1-year Index or the bond equivalent rate of 3-month Treasury     
bills, as applicable,                                             

and                                                               

.  the applicable interest rate margin.                                 

A holder of a PLUS or SLS Loan is eligible to receive special allowance   
payments during any quarter if:                                                 

.  the borrower rate is set at the maximum borrower rate and                

.  the sum of the average of the bond equivalent rates of 3-month Treasury
bills auctioned during that quarter and the applicable interest rate margin     
exceeds the maximum borrower rate.                                              

 Repayment, Deferments. Borrowers begin to repay principal of their PLUS and
SLS Loans no later than 60 days after the final disbursement, subject to        
deferment and forbearance provisions. Borrowers may defer and capitalize        
repayment of interest during periods of educational enrollment, unemployment    
and economic hardship, as defined in the Act. Maximum loan repayment periods    
and minimum payment amounts for PLUS and SLS Loans are the same as those for    
Stafford Loans.                                                                 

Consolidation Loan Program                                                      

The Higher Education Act also authorizes a program under which borrowers  
may consolidate one or more of their student loans into a single Consolidation  
Loan that is insured and reinsured on a basis similar to Stafford and PLUS      
Loans. Consolidation Loans are made in an amount sufficient to pay outstanding  
principal, unpaid interest, late charges and collection costs on all federally  
reinsured student loans incurred under the FFELP that the borrower selects for  
consolidation, as well as loans made under various other federal student loan   
programs and loans made by different lenders. Under this program, a lender may  
make a Consolidation Loan to an eligible borrower who requests it so long as    
the lender holds all the outstanding FFELP loans of the borrower; or the        
borrower has multiple holders of his outstanding student loans or his holder    
does not offer Consolidation loans. Under certain circumstances, a FFELP        
borrower may obtain a Consolidation Loan under the FDLP.                        

Consolidation Loans made on or after July 1, 1994 have no minimum loan    
amount, although Consolidation Loans for less than $7,500 do not enjoy an       
extended repayment period. Applications for Consolidation Loans received on or  
after January 1, 1993 but before July 1, 1994 were available only to borrowers  
who had aggregate outstanding student loan balances of at least $7,500. For     
applications received before January 1, 1993, Consolidation Loans were          
available only to borrowers who had aggregate outstanding student loan          
balances of at least $5,000.                                                    

To obtain a Consolidation Loan, the borrower must be either in repayment  
status or in a grace period before repayment begins. In addition, for           
applications received before January 1, 1993, the borrower must not have been   
delinquent by more than 90 days on any student loan payment; and for            
applications received on or after January 1, 1993, delinquent or defaulted      
borrowers are eligible to obtain Consolidation Loans only if they re-enter      
repayment through loan consolidation. For applications received on or after     
January 1, 1993, married couples who agree to be jointly and severally liable   
will be treated as one borrower for purposes of loan consolidation              
eligibility.                                                                    

Consolidation Loans bear interest at a fixed rate equal to the greater of 
the weighted average of the interest rates on the unpaid principal balances of  
the consolidated loans and 9% for loans originated before July 1, 1994. For     
Consolidation Loans made on or after July 1, 1994 and for which applications    
were received before November 13, 1997, the weighted average interest rate is   
rounded up to the nearest whole percent. Consolidation Loans made on or after   
July 1, 1994 for which applications were received on or after November 13,      
1997 through September 30, 1998 bear interest at the annual variable rate       
applicable to Stafford Loans                                                    

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subject to a cap of 8.25%. Consolidation Loans for which the application is     
received on or after October 1, 1998 bear interest at a fixed rate equal to the 
weighted average interest rate of the loans being consolidated rounded up to    
the nearest one-eighth of one percent, subject to a cap of 8.25%.               

Interest on Consolidation Loans accrues and, for applications received    
before January 1, 1993, is paid without interest subsidy by the Department. For 
Consolidation Loans for which applications were received between January 1 and  
August 10, 1993, all interest of the borrower is paid during all deferral       
periods. Consolidation Loans for which applications were received on or after   
August 10, 1993 are only subsidized if all of the underlying loans being        
consolidated were Subsidized Stafford Loans. In the case of Consolidation Loans 
made on or after November 13, 1997, the portion of a Consolidation Loan that is 
comprised of Subsidized Stafford Loans retains subsidy benefits during deferral 
periods.                                                                        

  No insurance premium is charged to a borrower or a lender in connection with
a Consolidation Loan. However, lenders must pay a monthly rebate fee to the     
Department at an annualized rate of 1.05% on principal and interest on          
Consolidation Loans for loans disbursed on or after October 1, 1993, and at an  
annualized rate of 0.62% for Consolidation Loan applications received between   
October 1, 1998 and January 31, 1999. The rate for special allowance payments   
for Consolidation Loans is determined in the same manner as for other FFELP     
loans.                                                                          

A borrower must begin to repay his Consolidation Loan within 60 days after
his consolidated loans have been discharged. For applications received on or    
after January 1, 1993, repayment schedule options include graduated or income-  
sensitive repayment plans, and loans are repaid over periods determined by the  
sum of the Consolidation Loan and the amount of the borrower's other eligible   
student loans outstanding. The lender may, at its option, include graduated and 
income-sensitive repayment plans in connection with student loans for which the 
applications were received before that date. The maximum maturity schedule is   
30 years for indebtedness of $60,000 or more.                                   

  A borrower must consolidate his loans with his current lender if he has only
FFELP loans, they are all held by the same holder and that holder makes         
Consolidation Loans. Otherwise, the borrower may consolidate his loans with any 
lender or, if he has FDLP loans or applies for an income-sensitive repayment    
plan, with the FDLP.                                                            

Guarantee Agencies under the FFELP                                              

  Under the FFELP, guarantee agencies guarantee loans made by eligible lending
institutions. Student loans are guaranteed as to 100% of principal and accrued  
interest against death or discharge. The guarantor also pays 100% of the unpaid 
principal and accrued interest on PLUS Loans, where the student on whose behalf 
the loan was borrowed dies. Guarantee agencies also guarantee lenders against   
default. For loans that were made before October 1, 1993, lenders are insured   
for 100% of the principal and unpaid accrued interest. Since October 1, 1993,   
lenders are insured for 98% of principal and accrued interest.                  

 The Secretary of Education reinsures guarantors for amounts paid to lenders
on loans that are discharged or default. The reimbursement on discharged loans  
is for 100% of the amount paid to the holder. The reimbursement rate for        
defaulted loans decreases as a guarantor's default rate increases. The first    
trigger for a lower reinsurance rate is when the amount of defaulted loan       
reimbursements exceeds 5% of the amount of all loans guaranteed by the agency   
in repayment status at the beginning of the federal fiscal year. The second     
trigger is when the amount of defaults exceeds 9% of the loans in repayment.    
Guarantee agency reinsurance rates are presented in the table below.            

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                                                                [Download Table]

                 Claims Paid Date                  Maximum 5% Trigger 9% Trigger
                 ----------------                  ------- ---------- ----------
                                                                                
Before October 1, 1993............................  100%      90%        80%    
October 1, 1993--September 30, 1998...............   98%      88%        78%    
On or after October 1, 1998.......................   95%      85%        75%    

After the Secretary reimburses a guarantor for a default claim, the       
guarantor attempts to collect the loan from the borrower. However, the          
Secretary requires that the defaulted guaranteed loans be assigned to the       
Department of Education when the guarantor is not successful. A guarantor also  
refers defaulted guaranteed loans to the Secretary to "offset" any federal      
income tax refunds or other federal reimbursement which may be due the          
borrowers. Some states have similar offset programs.                            

 To be eligible for federal reinsurance, guaranteed loans must be made by an
eligible lender and meet the requirements of the regulations issued under the   
Higher Education Act. Generally, these regulations require that lenders         
determine whether the applicant is an eligible borrower attending an eligible   
institution, explain to borrowers their responsibilities under the loan, ensure 
that the promissory notes evidencing the loan are executed by the borrower; and 
disburse the loan proceeds as required. After the loan is made, the lender must 
establish repayment terms with the borrower, properly administer deferrals and  
forbearances and credit the borrower for payments made. If a borrower becomes   
delinquent in repaying a loan, a lender must perform collection procedures that 
vary depending upon the length of time a loan is delinquent. The collection     
procedures consist of telephone calls, demand letters, skiptracing procedures   
and requesting assistance from the guarantor.                                   

A lender may submit a default claim to the guarantor after the related    
student loan has been delinquent for at least 270 days. The guarantor must      
review and pay the claim within 90 days after the lender filed it. The          
guarantor will pay the lender interest accrued on the loan for up to 450 days   
after delinquency. The guarantor must file a reimbursement claim with the       
Secretary within 45 days after the guarantor paid the lender for the default    
claim.                                                                          

Student Loan Discharges                                                         

 FFELP loans are not generally dischargeable in bankruptcy. Under the United
States Bankruptcy Code, before a student loan may be discharged, the borrower   
must demonstrate that repaying it would cause the borrower or his family undue  
hardship. When a FFELP borrower files for bankruptcy, collection of the loan is 
suspended during the time of the proceeding. If the borrower files under the    
"wage earner" provisions of the Bankruptcy Code or files a petition for         
discharge on the ground of undue hardship, then the lender transfers the loan   
to the guarantee agency which then participates in the bankruptcy proceeding.   
When the proceeding is complete, unless there was a funding of undue hardship,  
the loan is transferred back to the lender and collection resumes.              

  Student loans are discharged if the borrower becomes totally and permanently
disabled. A physician must certify eligibility for discharge.                   

 If a school closes while a student is enrolled, or within 90 days after the
student withdrew, loans made for that enrollment period are discharged. If a    
school falsely certifies that a borrower is eligible for the loan, the loan may 
be discharged. And if a school fails to make a refund to which a student is     
entitled, the loan is discharged to the extent of the unpaid refund.            

Rehabilitation of Defaulted Loans                                               

The Secretary of Education is authorized to enter into agreements with the
guarantor under which the guarantor may sell defaulted loans that are eligible  
for rehabilitation to an eligible lender. For a loan to be eligible for         
rehabilitation, the guarantor must have received reasonable and affordable      
payments for 12 months, then the borrower may request that the loan be sold.    
Because monthly payments are usually greater after rehabilitation, not all      
borrowers opt for rehabilitation. Upon rehabilitation, a loan is eligible for   
all the benefits under the Higher Education Act for which it would have been    
eligible had no default occurred and the negative credit record is expunged. No 
student loan may be rehabilitated more than once.                               

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Guarantor Funding                                                               

In addition to providing the primary guarantee on FFELP loans, guarantee  
agencies are charged, under the Higher Education Act, with responsibility for   
maintaining records on all loans on which it has issued a guarantee ("account   
maintenance"), assisting lenders to prevent default by delinquent borrowers     
("default aversion"), post-default loan administration and collections and      
program awareness and oversight. These activities are funded by revenues from   
the following statutorily prescribed sources plus earnings on investments.      

                                                        [Enlarge/Download Table]

Source                                                         Basis                                       
-----------------        ----------------------------------------------------------------------------------
                                                                                                           
Insurance Premium        Up to 1% of the principal amount guaranteed, withheld from                        
                         the proceeds of each loan disbursement.                                           
Loan Processing and      0.65% of the principal amount guaranteed, paid by the Department of Education.    
Origination Fee                                                                                            
Account Maintenance Fee  0.10% of the original principal amount of loans outstanding,paid by the           
                         Department of Education.                                                          
Default Aversion Fee     1% of the outstanding amount of loans that were reported delinquent but did       
                         not default within 300 days thereafter, paid by transfers out of the Student      
                         Loan Reserve Fund.                                                                
Collection Retention     24% of the amount collected on loans on which reinsurance has been paid (18.5%    
                         collected for a defaulted loan that is purchased by a lender for rehabilitation or
                         consolidation), withheld from gross receipts.                                     
-----------------------------------------------------------------------------------------------------------

  Under the Higher Education Act, the Loan Processing and Origination Fee will
decline to 0.40% and the Collection Retention will decline to 23% beginning     
October 1, 2003.                                                                

The Act requires guaranty agencies to establish two funds: a Student Loan 
Reserve Fund and an Agency Operating Fund. The Student Loan Reserve Fund        
contains the reinsurance payments received from the Department, Insurance       
Premiums and the Collection Retention. The fund is federal property and its     
assets may only be used to pay insurance claims and to pay Default Aversion     
Fees. The Agency Operating Fund is the guarantor's property and is not subject  
to strict limitations on its use.                                               

Department of Education Oversight                                               

The Secretary of Education has oversight powers over guarantors. If the   
Department of Education determines that a guarantor is unable to meet its       
insurance obligations, the holders of loans guaranteed by that guarantor may    
submit claims directly to the Department and the Department is required to pay  
the full guarantee payments due, in accordance with guarantee claim processing  
standards no more stringent than those applied by the terminated guarantor.     
However, the Department's obligation to pay guarantee claims directly in this   
fashion is contingent upon its making the determination referred to above.      

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Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘10-K405’ Filing	Date	First	Last	Other Filings

	11/16/09	76
	9/30/08	2	75	10-Q, 8-K, FWP
	9/30/07	9	11	10-Q
	10/29/04	35		4, 424B3
	10/1/03	86	95	11-K, 424B3
	7/1/03	86
	2/10/03	41		5
	9/16/02	35	41
	10/26/01	35
	7/1/01	91
	6/30/01	56		10-Q
	5/10/01	1	40	DEF 14A, PRE 14A
	4/6/01	15
Filed on:	4/2/01
	4/1/01	56
	3/31/01	56		10-Q
	3/29/01	42	43
	3/12/01	16		4
	3/7/01	41		8-K
	2/28/01	1
	2/27/01	41		424B5, 8-K
	2/22/01	41		8-K
	1/17/01	45
	1/1/01	54	55
For Period End:	12/31/00	1	83
	11/3/00	15
	10/27/00	35
	10/5/00	41		8-K
	10/3/00	35		8-K
	10/1/00	8
	9/30/00	4	5	10-Q, 10-Q/A
	9/20/00	55	56
	7/31/00	2	57
	7/19/00	55
	7/7/00	20	57
	6/30/00	5		10-Q
	3/16/00	55
	1/1/00	86	88
	12/31/99	5	83	10-K, 10-K/A
	11/16/99	76
	11/10/99	75		8-A12B, 8-K
	10/1/99	8	80
	2/1/99	86
	1/31/99	33	93
	12/31/98	18	83	10-K
	10/21/98	14	50
	10/7/98	3	90	S-3/A
	10/1/98	58	94
	9/30/98	92	94	10-Q
	7/1/98	88
	4/10/98	41		DEF 14A
	12/31/97	48	70	10-K
	11/13/97	92	93
	8/7/97	2	75	8-A12B, 8-K, 8-K/A
	7/31/97	2	10
	2/3/97	18	50
	12/31/94	79
	9/30/94	4
	7/1/94	85	92
	10/1/93	58	94
	8/10/93	12	93
	7/1/93	90	91
	1/1/93	92	93
	10/1/92	89	91
				List all Filings

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Filing Submission 0000928385-01-500211 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

SLM Corp – ‘10-K405’ for 12/31/00

On: Monday, 4/2/01, at 10:16am ET · For: 12/31/00 · Accession #: 928385-1-500211 · File #: 1-13251

Annual Report — [x] Reg. S-K Item 405 — Form 10-KFiling Table of Contents

10-K405 — Annual Report — [x] Reg. S-K Item 405Document Table of Contents

Dates Referenced Herein and Documents Incorporated by Reference

Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents

10-K405 — Annual Report — [x] Reg. S-K Item 405
Document Table of Contents