2.	Allowance for Loan Losses

Our provisions for loan losses represent the periodic expense of maintaining an allowance sufficient to absorb incurred probable losses, net of expected recoveries, in the held-for-investment loan portfolios. The evaluation of the provisions for loan losses is inherently subjective, as it requires material estimates that may be susceptible to significant changes. We believe that the allowance for loan losses is appropriate to cover probable losses incurred in the loan portfolios.

We segregate our Private Education Loan portfolio into two classes of loans — traditional and non-traditional. Non-traditional loans are loans to (i) customers attending for-profit schools with an original Fair Isaac and Company (“FICO”) score of less than 670 and (ii) customers attending not-for-profit schools with an original FICO score of less than 640. The FICO score used in determining whether a loan is non-traditional is the greater of the customer or cosigner FICO score at origination. Traditional loans are defined as all other Private Education Loans that are not classified as non-traditional.

Allowance for Loan Losses Metrics


	Three Months Ended June 30, 2016
(Dollars in millions)	FFELP Loans			Private Education Loans			Other Loans			Total
Allowance for Loan Losses
Beginning balance	$	70		$	1,434		$	15		$	1,519
Total provision		10			100			—			110
Charge-offs⁽¹⁾		(18	)		(127	)		—			(145	)
Reclassification of interest reserve⁽²⁾		—			3			—			3

Ending balance	$	62		$	1,410		$	15		$	1,487


Allowance:
Ending balance: individually evaluated for impairment	$	—		$	1,163		$	11		$	1,174
Ending balance: collectively evaluated for impairment	$	62		$	247		$	4		$	313
Loans:
Ending balance: individually evaluated for impairment⁽³⁾	$	—		$	11,162		$	33		$	11,195
Ending balance: collectively evaluated for impairment⁽³⁾	$	91,719		$	15,478		$	47		$	107,244
Charge-offs as a percentage of average loans in repayment (annualized)		.10	%		2.17	%		1.32	%
Allowance coverage of charge-offs (annualized)		.9			2.8			13.5
Allowance as a percentage of the ending total loan balance		.07	%		5.29	%		18.18	%
Allowance as a percentage of the ending loans in repayment		.09	%		6.06	%		18.18	%
Ending total loans⁽³⁾	$	91,719		$	26,640		$	80
Average loans in repayment	$	72,973		$	23,561		$	82
Ending loans in repayment	$	72,058		$	23,265		$	80

⁽¹⁾

Charge-offs are reported net of expected recoveries. For Private Education Loans, the expected recovery amount is transferred to the receivable for partially charged-off loan balance. Charge-offs include charge-offs against the receivable for partially charged-off loans which represents the difference between what was expected to be recovered and any shortfalls in what was actually recovered in the period. See “Receivable for Partially Charged-Off Private Education Loans” for further discussion.

⁽²⁾

Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.

⁽³⁾

Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.


	Three Months Ended June 30, 2015
(Dollars in millions)	FFELP Loans			Private Education Loans			Other Loans			Total
Allowance for Loan Losses
Beginning balance	$	91		$	1,849		$	23		$	1,963
Total provision		7			191			—			198
Net adjustment resulting from the change in the charge-off rate⁽¹⁾		—			(330	)		—			(330	)
Net charge-offs remaining⁽²⁾		(9	)		(179	)		(2	)		(190	)

Total net charge-offs		(9	)		(509	)		(2	)		(520	)
Reclassification of interest reserve⁽³⁾		—			2			—			2

Ending balance	$	89		$	1,533		$	21		$	1,643

Allowance:
Ending balance: individually evaluated for impairment	$	—		$	1,257		$	17		$	1,274
Ending balance: collectively evaluated for impairment	$	89		$	276		$	4		$	369
Loans:
Ending balance: individually evaluated for impairment⁽⁴⁾	$	—		$	10,769		$	41		$	10,810
Ending balance: collectively evaluated for impairment⁽⁴⁾	$	99,207		$	19,435		$	55		$	118,697
Net charge-offs as a percentage of average loans in repayment, excluding the net adjustment resulting from the change in the charge-off rate (annualized)⁽¹⁾		.05	%		2.74	%		8.68	%
Net adjustment resulting from the change in the charge-off rate as a percentage of average loans in repayment (annualized)⁽¹⁾		—	%		5.07	%		—	%
Allowance coverage of net charge-offs, excluding the net adjustment resulting from the change in the charge-off rate (annualized)⁽¹⁾		2.3			2.1			2.4
Allowance as a percentage of the ending total loan balance		.09	%		5.08	%		21.50	%
Allowance as a percentage of the ending loans in repayment		.12	%		5.93	%		21.50	%
Ending total loans⁽⁴⁾	$	99,207		$	30,204		$	96
Average loans in repayment	$	76,325		$	26,122		$	101
Ending loans in repayment	$	75,244		$	25,865		$	96

⁽¹⁾

In the second quarter of 2015, the portion of the loan amount charged off at default on Private Education Loans increased from 73 percent to 79 percent. This did not impact the provision for loan losses as previously this had been reserved through the allowance for loan losses. This change resulted in a $330 million reduction to the balance of the receivable for partially charged-off loans.

⁽²⁾

⁽³⁾

⁽⁴⁾

Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.


	Six Months Ended June 30, 2016
(Dollars in millions)	FFELP Loans			Private Education Loans			Other Loans			Total
Allowance for Loan Losses
Beginning balance	$	78		$	1,471		$	15		$	1,564
Total provision		17			204			—			221
Charge-offs⁽¹⁾		(33	)		(271	)		—			(304	)
Reclassification of interest reserve⁽²⁾		—			6			—			6

Ending balance	$	62		$	1,410		$	15		$	1,487


Allowance:
Ending balance: individually evaluated for impairment	$	—		$	1,163		$	11		$	1,174
Ending balance: collectively evaluated for impairment	$	62		$	247		$	4		$	313
Loans:
Ending balance: individually evaluated for impairment⁽³⁾	$	—		$	11,162		$	33		$	11,195
Ending balance: collectively evaluated for impairment⁽³⁾	$	91,719		$	15,478		$	47		$	107,244
Charge-offs as a percentage of average loans in repayment (annualized)		.09	%		2.28	%		1.69	%
Allowance coverage of charge-offs (annualized)		1.0			2.6			10.4
Allowance as a percentage of the ending total loan balance		.07	%		5.29	%		18.18	%
Allowance as a percentage of the ending loans in repayment		.09	%		6.06	%		18.18	%
Ending total loans⁽³⁾	$	91,719		$	26,640		$	80
Average loans in repayment	$	73,331		$	23,871		$	83
Ending loans in repayment	$	72,058		$	23,265		$	80

⁽¹⁾

⁽²⁾

⁽³⁾

Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.


	Six Months Ended June 30, 2015
(Dollars in millions)	FFELP Loans			Private Education Loans			Other Loans			Total
Allowance for Loan Losses
Beginning balance	$	93		$	1,916		$	24		$	2,033
Total provision		12			311			—			323
Net adjustment resulting from the change in the charge-off rate⁽¹⁾		—			(330	)		—			(330	)
Net charge-offs remaining⁽²⁾		(16	)		(369	)		(3	)		(388	)

Total net charge-offs		(16	)		(699	)		(3	)		(718	)
Reclassification of interest reserve⁽³⁾		—			5			—			5

Ending balance	$	89		$	1,533		$	21		$	1,643

Allowance:
Ending balance: individually evaluated for impairment	$	—		$	1,257		$	17		$	1,274
Ending balance: collectively evaluated for impairment	$	89		$	276		$	4		$	369
Loans:
Ending balance: individually evaluated for impairment⁽⁴⁾	$	—		$	10,769		$	41		$	10,810
Ending balance: collectively evaluated for impairment⁽⁴⁾	$	99,207		$	19,435		$	55		$	118,697
Net charge-offs as a percentage of average loans in repayment, excluding the net adjustment resulting from the change in the charge-off rate (annualized)⁽¹⁾		.04	%		2.82	%		6.01	%
Net adjustment resulting from the change in the charge-off rate as a percentage of average loans in repayment (annualized)⁽¹⁾		—	%		2.53	%		—	%
Allowance coverage of net charge-offs, excluding the net adjustment resulting from the change in the charge-off rate (annualized)⁽¹⁾		2.8			2.1			3.3
Allowance as a percentage of the ending total loan balance		.09	%		5.08	%		21.50	%
Allowance as a percentage of the ending loans in repayment		.12	%		5.93	%		21.50	%
Ending total loans⁽⁴⁾	$	99,207		$	30,204		$	96
Average loans in repayment	$	76,896		$	26,382		$	103
Ending loans in repayment	$	75,244		$	25,865		$	96

⁽¹⁾

⁽²⁾

⁽³⁾

⁽⁴⁾

Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.

Key Credit Quality Indicators

FFELP Loans are substantially insured and guaranteed as to their principal and accrued interest in the event of default; therefore, the key credit quality indicator for this portfolio is loan status. The impact of changes in loan status is incorporated quarterly into the allowance for loan losses calculation.

For Private Education Loans, the key credit quality indicators are school type, FICO scores, the existence of a cosigner, the loan status and loan seasoning. The school type/FICO score are assessed at origination and maintained through the traditional/non-traditional loan designation. The other Private Education Loan key quality indicators can change and are incorporated quarterly into the allowance for loan losses calculation. The following table highlights the principal balance (excluding the receivable for partially charged-off loans) of our Private Education Loan portfolio stratified by the key credit quality indicators.


	Private Education Loans Credit Quality Indicators
	June 30, 2016					December 31, 2015
(Dollars in millions)	Balance⁽³⁾		% of Balance			Balance⁽³⁾		% of Balance
Credit Quality Indicators
School Type/FICO Scores:
Traditional	$	23,697		92	%	$	25,280		92	%
Non-Traditional⁽¹⁾		2,096		8			2,235		8

Total	$	25,793		100	%	$	27,515		100	%

Cosigners:
With cosigner	$	16,621		64	%	$	17,738		64	%
Without cosigner		9,172		36			9,777		36

Total	$	25,793		100	%	$	27,515		100	%

Seasoning⁽²⁾:
1-12 payments	$	1,448		6	%	$	1,776		7	%
13-24 payments		1,596		6			1,977		7
25-36 payments		2,486		10			2,982		11
37-48 payments		3,431		13			3,787		14
More than 48 payments		15,196		59			14,953		54
Not yet in repayment		1,636		6			2,040		7

Total	$	25,793		100	%	$	27,515		100	%

⁽¹⁾	Defined as loans to customers attending for-profit schools (with a FICO score of less than 670 at origination) and customers attending not-for-profit schools (with a FICO score of less than 640 at origination).

⁽²⁾	Number of months in active repayment for which a scheduled payment was received.

⁽³⁾	Balance represents gross Private Education Loans.

The following tables provide information regarding the loan status and aging of past due loans.


	FFELP Loan Delinquencies
	June 30, 2016						December 31, 2015
(Dollars in millions)	Balance			%			Balance			%
Loans in-school/grace/deferment⁽¹⁾	$	7,149					$	8,257
Loans in forbearance⁽²⁾		12,512						13,298
Loans in repayment and percentage of each status:
Loans current		62,581			86.8	%		62,651			84.7	%
Loans delinquent 31-60 days⁽³⁾		2,668			3.7			3,285			4.5
Loans delinquent 61-90 days⁽³⁾		1,605			2.3			1,856			2.5
Loans delinquent greater than 90 days⁽³⁾		5,204			7.2			6,142			8.3

Total FFELP Loans in repayment		72,058			100	%		73,934			100	%

Total FFELP Loans, gross		91,719						95,489
FFELP Loan unamortized premium		961						1,087

Total FFELP Loans		92,680						96,576

FFELP Loan allowance for losses		(62	)					(78	)

FFELP Loans, net	$	92,618					$	96,498

Percentage of FFELP Loans in repayment					78.6	%					77.4	%

Delinquencies as a percentage of FFELP Loans in repayment					13.2	%					15.3	%

FFELP Loans in forbearance as a percentage of loans in repayment and forbearance					14.8	%					15.2	%

⁽¹⁾

Loans for customers who may still be attending school or engaging in other permitted educational activities and are not yet required to make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as loans for customers who have requested and qualify for other permitted program deferments such as military, unemployment, or economic hardships.

⁽²⁾	Loans for customers who have used their allowable deferment time or do not qualify for deferment, that need additional time to obtain employment or who have temporarily ceased making full payments due to hardship or other factors.

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


	Traditional Private Education Loan Delinquencies
	June 30, 2016						December 31, 2015
(Dollars in millions)	Balance			%			Balance			%
Loans in-school/grace/deferment⁽¹⁾	$	1,489					$	1,859
Loans in forbearance⁽²⁾		792						863
Loans in repayment and percentage of each status:
Loans current		20,225			94.4	%		21,085			93.5	%
Loans delinquent 31-60 days⁽³⁾		401			1.9			491			2.2
Loans delinquent 61-90 days⁽³⁾		242			1.1			292			1.3
Loans delinquent greater than 90 days⁽³⁾		548			2.6			690			3.0

Total traditional loans in repayment		21,416			100	%		22,558			100	%

Total traditional loans, gross		23,697						25,280
Traditional loans unamortized discount		(431	)					(470	)

Total traditional loans		23,266						24,810
Traditional loans receivable for partially charged-off loans		541						560
Traditional loans allowance for losses		(1,186	)					(1,236	)

Traditional loans, net	$	22,621					$	24,134

Percentage of traditional loans in repayment					90.4	%					89.2	%

Delinquencies as a percentage of traditional loans in repayment					5.6	%					6.5	%

Loans in forbearance as a percentage of loans in repayment and forbearance					3.6	%					3.7	%

⁽¹⁾	Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not yet required to make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation.

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

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


	Non-Traditional Private Education Loan Delinquencies
	June 30, 2016						December 31, 2015
(Dollars in millions)	Balance			%			Balance			%
Loans in-school/grace/deferment⁽¹⁾	$	147					$	181
Loans in forbearance⁽²⁾		100						110
Loans in repayment and percentage of each status:
Loans current		1,618			87.5	%		1,646			84.7	%
Loans delinquent 31-60 days⁽³⁾		66			3.6			86			4.4
Loans delinquent 61-90 days⁽³⁾		45			2.4			56			2.9
Loans delinquent greater than 90 days⁽³⁾		120			6.5			156			8.0

Total non-traditional loans in repayment		1,849			100	%		1,944			100	%

Total non-traditional loans, gross		2,096						2,235
Non-traditional loans unamortized discount		(58	)					(61	)

Total non-traditional loans		2,038						2,174
Non-traditional loans receivable for partially charged-off loans		306						321
Non-traditional loans allowance for losses		(224	)					(235	)

Non-traditional loans, net	$	2,120					$	2,260

Percentage of non-traditional loans in repayment					88.2	%					87.0	%

Delinquencies as a percentage of non-traditional loans in repayment					12.5	%					15.3	%

Loans in forbearance as a percentage of loans in repayment and forbearance					5.1	%					5.4	%

⁽¹⁾	Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not yet required to make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation.

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

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

Receivable for Partially Charged-Off Private Education Loans

At the end of each month, for loans that are 212 or more days past due, we charge off the estimated loss of a defaulted loan balance. Actual recoveries are applied against the remaining loan balance that was not charged off. We refer to this remaining loan balance as the “receivable for partially charged-off loans.” If actual periodic recoveries are less than expected, the difference is immediately charged off through the allowance for Private Education Loan losses with an offsetting reduction in the receivable for partially charged-off Private Education Loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount originally expected to be recovered. The financial crisis, which began in 2007, impacted our collections on defaulted loans and as a result, Private Education Loans which defaulted from 2007 through March 31, 2015, experienced collection performance below our pre-financial crisis experience. For that reason, until we gained enough data and experience to determine the long-term, post-default recovery rate of 21 percent in second-quarter 2015, we established a reserve for potential shortfalls in recoveries. In the second quarter of 2015, the portion of the loan amount charged off at default increased from 73 percent to 79 percent. This did not impact the provision for loan losses as previously this had been reserved through the allowance for loan losses. This change resulted in a $330 million reduction to the balance of the receivable for partially charged-off loans. We no longer expect to have significant periodic recovery shortfalls as a result of this change; however, it is possible we may continue to experience such shortfalls.

The following table summarizes the activity in the receivable for partially charged-off Private Education Loans.


	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in millions)	2016			2015			2016			2015
Receivable at beginning of period	$	867		$	1,236		$	881		$	1,245
Expected future recoveries of current period defaults⁽¹⁾		32			46			68			108
Recoveries⁽²⁾		(52	)		(50	)		(102	)		(102	)
Net adjustment resulting from the change in the charge-off rate⁽³⁾		—			(330	)		—			(330	)
Net charge-offs remaining		—			—			—			(19	)

Total net charge-offs		—			(330	)		—			(349	)

Receivable at end of period	$	847		$	902		$	847		$	902

⁽¹⁾

Represents the difference between the defaulted loan balance and our estimate of the amount to be collected in the future.

⁽²⁾

Current period cash collections.

⁽³⁾

Prior to second-quarter 2015, charge-offs represent the current period recovery shortfall — the difference between what was expected to be collected and what was actually collected. In the second quarter of 2015, the portion of the loan amount charged off at default increased from 73 percent to 79 percent. This change resulted in a $330 million reduction to the balance of the receivable for partially charged-off loans. These amounts are included in total charge-offs as reported in the “Allowance for Private Education Loan Losses” table.

Troubled Debt Restructurings (“TDRs”)

We sometimes modify the terms of loans for certain customers when we believe such modifications may increase the ability and willingness of a customer to make payments and thus increase the ultimate overall amount collected on a loan. These modifications generally take the form of a forbearance, a temporary interest rate reduction or an extended repayment plan. For customers experiencing financial difficulty, certain Private Education Loans for which we have granted either a forbearance of greater than three months, an interest rate reduction or an extended repayment plan are classified as TDRs. Approximately 58 percent and 56 percent of the loans granted forbearance have qualified as a TDR loan at June 30, 2016 and December 31, 2015, respectively. The unpaid principal balance of TDR loans that were in an interest rate reduction plan as of June 30, 2016 and December 31, 2015 was $2.8 billion and $2.5 billion, respectively.

At June 30, 2016 and December 31, 2015, all of our TDR loans had a related allowance recorded. The following table provides the recorded investment, unpaid principal balance and related allowance for our TDR loans.


	TDR Loans
(Dollars in millions)	Recorded Investment⁽¹⁾		Unpaid Principal Balance		Related Allowance
June 30, 2016
Private Education Loans — Traditional	$	9,351	$	9,404	$	964
Private Education Loans — Non-Traditional		1,409		1,415		199

Total	$	10,760	$	10,819	$	1,163

December 31, 2015
Private Education Loans — Traditional	$	9,134	$	9,200	$	995
Private Education Loans — Non-Traditional		1,441		1,442		214

Total	$	10,575	$	10,642	$	1,209

⁽¹⁾

The recorded investment is equal to the unpaid principal balance and accrued interest receivable net of unamortized deferred fees and costs.

The following tables provide the average recorded investment and interest income recognized for our TDR loans.


	Three Months Ended June 30,
	2016				2015
(Dollars in millions)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Private Education Loans — Traditional	$	9,320	$	138	$	8,943	$	135
Private Education Loans — Non-Traditional		1,418		27		1,466		29

Total	$	10,738	$	165	$	10,409	$	164


	Six Months Ended June 30,
	2016				2015
(Dollars in millions)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Private Education Loans — Traditional	$	9,271	$	276	$	8,900	$	267
Private Education Loans — Non-Traditional		1,425		54		1,471		58

Total	$	10,696	$	330	$	10,371	$	325

The following table provides information regarding the loan status and aging of TDR loans that are past due.


	TDR Loan Delinquencies
	June 30, 2016					December 31, 2015
(Dollars in millions)	Balance		%			Balance		%
Loans in deferment⁽¹⁾	$	609				$	706
Loans in forbearance⁽²⁾		648					695
Loans in repayment and percentage of each status:
Loans current		8,424		88.1	%		7,885		85.3	%
Loans delinquent 31-60 days⁽³⁾		356		3.7			414		4.5
Loans delinquent 61-90 days⁽³⁾		228		2.4			263		2.8
Loans delinquent greater than 90 days⁽³⁾		554		5.8			679		7.4

Total TDR loans in repayment		9,562		100	%		9,241		100	%

Total TDR loans, gross	$	10,819				$	10,642

⁽¹⁾	Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not yet required to make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation.

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

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

The following table provides the amount of loans modified in the periods presented that resulted in a TDR. Additionally, the table summarizes charge-offs occurring in the TDR portfolio, as well as TDRs for which a payment default occurred in the current period within 12 months of the loan first being designated as a TDR. We define payment default as 60 days past due for this disclosure. The majority of our loans that are considered TDRs involve a temporary forbearance of payments and do not change the contractual interest rate of the loan or do not involve an extended repayment plan.


	Three Months Ended June 30,
	2016						2015
(Dollars in millions)	Modified Loans⁽¹⁾		Charge- Offs⁽²⁾		Payment Default		Modified Loans⁽¹⁾		Charge- Offs⁽²⁾		Payment Default
Private Education Loans — Traditional	$	286	$	74	$	56	$	339	$	101	$	83
Private Education Loans — Non-Traditional		25		20		10		36		30		14

Total	$	311	$	94	$	66	$	375	$	131	$	97


	Six Months Ended June 30,
	2016						2015
(Dollars in millions)	Modified Loans⁽¹⁾		Charge- Offs⁽²⁾		Payment Default		Modified Loans⁽¹⁾		Charge- Offs⁽²⁾		Payment Default
Private Education Loans — Traditional	$	628	$	154	$	118	$	768	$	192	$	183
Private Education Loans — Non-Traditional		52		42		21		79		58		32

Total	$	680	$	196	$	139	$	847	$	250	$	215

⁽¹⁾	Represents period ending balance of loans that have been modified during the period and resulted in a TDR.

⁽²⁾	Represents loans that charged off that were classified as TDRs.

Accrued Interest Receivable

The following table provides information regarding accrued interest receivable on our Private Education Loans.


(Dollars in millions)	Accrued Interest Receivable		Allowance for Uncollectible Interest
June 30, 2016
Private Education Loans — Traditional	$	385	$	25
Private Education Loans — Non-Traditional		49		8

Total	$	434	$	33

December 31, 2015
Private Education Loans — Traditional	$	433	$	26
Private Education Loans — Non-Traditional		57		9

Total	$	490	$	35