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 or near 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 March 31, 2017
(Dollars in millions)	FFELP Loans			Private Education Loans			Other Loans			Total
Allowance for Loan Losses
Beginning balance	$	67		$	1,351		$	15		$	1,433
Provision for loan losses		10			95			2			107
Charge-offs⁽¹⁾		(13	)		(137	)		(1	)		(151	)
Reclassification of interest reserve⁽²⁾		—			2			—			2

Ending balance	$	64		$	1,311		$	16		$	1,391

Allowance:
Ending balance: individually evaluated for impairment	$	—		$	1,176		$	10		$	1,186
Ending balance: collectively evaluated for impairment	$	64		$	135		$	6		$	205
Loans:
Ending balance: individually evaluated for impairment⁽³⁾	$	—		$	11,096		$	31		$	11,127
Ending balance: collectively evaluated for impairment⁽³⁾	$	84,513		$	13,201		$	152		$	97,866
Charge-offs as a percentage of average loans in repayment (annualized)		.07	%		2.56	%		2.06	%
Allowance coverage of charge-offs (annualized)		1.2			2.4			4.6
Allowance as a percentage of the ending total loan balance		.08	%		5.39	%		9.00	%
Allowance as a percentage of the ending loans in repayment		.09	%		6.13	%		9.00	%
Ending total loans⁽³⁾	$	84,513		$	24,297		$	183
Average loans in repayment	$	69,302		$	21,791		$	173
Ending loans in repayment	$	68,095		$	21,367		$	183

⁽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 March 31, 2016
(Dollars in millions)	FFELP Loans			Private Education Loans			Other Loans			Total
Allowance for Loan Losses
Beginning balance	$	78		$	1,471		$	15		$	1,564
Provision for loan losses		7			104			—			111
Charge-offs⁽¹⁾		(16	)		(144	)		—			(160	)
Reclassification of interest reserve⁽²⁾		—			3			—			3

Ending balance	$	69		$	1,434		$	15		$	1,518

Allowance:
Ending balance: individually evaluated for impairment	$	—		$	1,185		$	11		$	1,196
Ending balance: collectively evaluated for impairment	$	69		$	249		$	4		$	322
Loans:
Ending balance: individually evaluated for impairment	$	—		$	11,088		$	33		$	11,121
Ending balance: collectively evaluated for impairment	$	93,977		$	16,408		$	50		$	110,435
Charge-offs as a percentage of average loans in repayment (annualized)		.09	%		2.39	%		2.04	%
Allowance coverage of charge-offs (annualized)		1.1			2.5			8.6
Allowance as a percentage of the ending total loan balance		.07	%		5.22	%		17.91	%
Allowance as a percentage of the ending loans in repayment		.09	%		6.03	%		17.91	%
Ending total loans⁽³⁾	$	93,977		$	27,496		$	83
Average loans in repayment	$	73,697		$	24,180		$	85
Ending loans in repayment	$	73,630		$	23,786		$	83

⁽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 collected and any shortfalls in what was actually collected 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.

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
	March 31, 2017					December 31, 2016
(Dollars in millions)	Balance⁽³⁾		% of Balance			Balance⁽³⁾		% of Balance
Credit Quality Indicators
School Type/FICO Scores:
Traditional	$	21,601		92	%	$	22,367		92	%
Non-Traditional⁽¹⁾		1,896		8			1,966		8

Total	$	23,497		100	%	$	24,333		100	%

Cosigners:
With cosigner	$	15,024		64	%	$	15,610		64	%
Without cosigner		8,473		36			8,723		36

Total	$	23,497		100	%	$	24,333		100	%

Seasoning⁽²⁾:
1-12 payments	$	1,276		5	%	$	1,340		5	%
13-24 payments		1,130		5			1,271		5
25-36 payments		1,684		7			1,908		8
37-48 payments		2,440		10			2,723		11
More than 48 payments		15,630		67			15,698		65
Not yet in repayment		1,337		6			1,393		6

Total	$	23,497		100	%	$	24,333		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
	March 31, 2017						December 31, 2016
(Dollars in millions)	Balance			%			Balance			%
Loans in-school/grace/deferment⁽¹⁾	$	5,791					$	5,871
Loans in forbearance⁽²⁾		10,627						10,490
Loans in repayment and percentage of each status:
Loans current		60,310			88.6	%		61,977			87.8	%
Loans delinquent 31-60 days⁽³⁾		2,300			3.4			2,820			4.0
Loans delinquent 61-90 days⁽³⁾		1,204			1.8			1,325			1.9
Loans delinquent greater than 90 days⁽³⁾		4,281			6.2			4,435			6.3

Total FFELP Loans in repayment		68,095			100	%		70,557			100	%

Total FFELP Loans, gross		84,513						86,918
FFELP Loan unamortized premium		835						879

Total FFELP Loans		85,348						87,797
FFELP Loan allowance for losses		(64	)					(67	)

FFELP Loans, net	$	85,284					$	87,730

Percentage of FFELP Loans in repayment					80.6	%					81.2	%

Delinquencies as a percentage of FFELP Loans in repayment					11.4	%					12.2	%

FFELP Loans in forbearance as a percentage of loans in repayment and forbearance					13.5	%					12.9	%

⁽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
	March 31, 2017						December 31, 2016
(Dollars in millions)	Balance			%			Balance			%
Loans in-school/grace/deferment⁽¹⁾	$	1,218					$	1,271
Loans in forbearance⁽²⁾		702						700
Loans in repayment and percentage of each status:
Loans current		18,471			93.9	%		19,020			93.3	%
Loans delinquent 31-60 days⁽³⁾		362			1.8			444			2.2
Loans delinquent 61-90 days⁽³⁾		236			1.2			269			1.3
Loans delinquent greater than 90 days⁽³⁾		612			3.1			663			3.2

Total traditional loans in repayment		19,681			100	%		20,396			100	%

Total traditional loans, gross		21,601						22,367
Traditional loans unamortized discount		(381	)					(402	)

Total traditional loans		21,220						21,965
Traditional loans receivable for partially charged-off loans		518						526
Traditional loans allowance for losses		(1,107	)					(1,138	)

Traditional loans, net	$	20,631					$	21,353

Percentage of traditional loans in repayment					91.1	%					91.2	%

Delinquencies as a percentage of traditional loans in repayment					6.1	%					6.7	%

Loans in forbearance as a percentage of loans in repayment and forbearance					3.4	%					3.3	%

⁽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
	March 31, 2017						December 31, 2016
(Dollars in millions)	Balance			%			Balance			%
Loans in-school/grace/deferment⁽¹⁾	$	119					$	122
Loans in forbearance⁽²⁾		91						90
Loans in repayment and percentage of each status:
Loans current		1,447			85.9	%		1,486			84.8	%
Loans delinquent 31-60 days⁽³⁾		62			3.6			78			4.5
Loans delinquent 61-90 days⁽³⁾		43			2.5			52			2.9
Loans delinquent greater than 90 days⁽³⁾		134			8.0			138			7.8

Total non-traditional loans in repayment		1,686			100	%		1,754			100	%

Total non-traditional loans, gross		1,896						1,966
Non-traditional loans unamortized discount		(53	)					(55	)

Total non-traditional loans		1,843						1,911
Non-traditional loans receivable for partially charged-off loans		282						289
Non-traditional loans allowance for losses		(204	)					(213	)

Non-traditional loans, net	$	1,921					$	1,987

Percentage of non-traditional loans in repayment					88.9	%					89.2	%

Delinquencies as a percentage of non-traditional loans in repayment					14.1	%					15.2	%

Loans in forbearance as a percentage of loans in repayment and forbearance					5.1	%					4.9	%

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


	Three Months Ended March 31,
(Dollars in millions)	2017			2016
Receivable at beginning of period	$	815		$	881
Expected future recoveries of current period defaults⁽¹⁾		34			36
Recoveries⁽²⁾		(44	)		(47	)
Charge-offs⁽³⁾		(5	)		(3	)

Receivable at end of period	$	800		$	867

⁽¹⁾	Represents our estimate of the amount to be collected in the future.

⁽²⁾	Current period cash collections.

⁽³⁾	Represents the current period recovery shortfall – the difference between what was expected to be collected and what was actually collected. 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 62 percent and 61 percent of the loans granted forbearance have qualified as a TDR loan at March 31, 2017 and December 31, 2016, respectively. The unpaid principal balance of TDR loans that were in an interest rate reduction plan as of March 31, 2017 and December 31, 2016 was $2.5 billion and $2.6 billion, respectively.

At March 31, 2017 and December 31, 2016, 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
March 31, 2017
Private Education Loans — Traditional	$	9,336	$	9,376	$	994
Private Education Loans — Non-Traditional		1,348		1,351		182

Total	$	10,684	$	10,727	$	1,176

December 31, 2016
Private Education Loans — Traditional	$	9,386	$	9,429	$	1,003
Private Education Loans — Non-Traditional		1,373		1,376		187

Total	$	10,759	$	10,805	$	1,190

⁽¹⁾	The recorded investment is equal to the unpaid principal balance and accrued interest receivable net of unamortized deferred fees and costs.

The following table provides the average recorded investment and interest income recognized for our TDR loans.


	Three Months Ended March 31,
	2017				2016
(Dollars in millions)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Private Education Loans — Traditional	$	9,367	$	145	$	9,221	$	138
Private Education Loans — Non-Traditional		1,361		27		1,434		27

Total	$	10,728	$	172	$	10,655	$	165

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


	TDR Loan Delinquencies
	March 31, 2017					December 31, 2016
(Dollars in millions)	Balance		%			Balance		%
Loans in deferment⁽¹⁾	$	580				$	579
Loans in forbearance⁽²⁾		598					588
Loans in repayment and percentage of each status:
Loans current		8,309		87.0	%		8,273		85.8	%
Loans delinquent 31-60 days⁽³⁾		346		3.6			412		4.3
Loans delinquent 61-90 days⁽³⁾		237		2.5			267		2.8
Loans delinquent greater than 90 days⁽³⁾		657		6.9			686		7.1

Total TDR loans in repayment		9,549		100	%		9,638		100	%

Total TDR loans, gross	$	10,727				$	10,805

⁽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.


	Three Months Ended March 31,
	2017						2016
(Dollars in millions)	Modified Loans⁽¹⁾		Charge- Offs⁽²⁾		Payment Default		Modified Loans⁽¹⁾		Charge- Offs⁽²⁾		Payment Default
Private Education Loans — Traditional	$	199	$	86	$	47	$	341	$	80	$	62
Private Education Loans — Non-Traditional		16		20		7		27		22		11

Total	$	215	$	106	$	54	$	368	$	102	$	73

⁽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		Greater Than 90 Days Past Due		Allowance for Uncollectible Interest
March 31, 2017
Private Education Loans — Traditional	$	326	$	23	$	20
Private Education Loans — Non-Traditional		45		7		6

Total	$	371	$	30	$	26

December 31, 2016
Private Education Loans — Traditional	$	344	$	26	$	23
Private Education Loans — Non-Traditional		47		7		7

Total	$	391	$	33	$	30