Fair Value Measurements

6 Months Ended

Jun. 30, 2021

8. Fair Value Measurements

We use estimates of fair value in applying various accounting standards in our financial statements. We categorize our fair value estimates based on a hierarchical framework associated with three levels of price transparency utilized in measuring financial instruments at fair value. See “Note 11 – Fair Value Measurements” in our 2020 Form 10-K for a full discussion.

During the three and six months ended June 30, 2021, there were no significant transfers of financial instruments between levels, or changes in our methodology used to value our financial instruments.

8. Fair Value Measurements (Continued)

The following table summarizes the valuation of our financial instruments that are marked-to-market on a recurring basis. During second quarter 2021 and 2020, there were no significant transfers of financial instruments between levels.

	Fair Value Measurements on a Recurring Basis
	June 30, 2021											December 31, 2020
(Dollars in millions)	Level 1		Level 2			Level 3			Total			Level 1		Level 2			Level 3			Total
Assets
Derivative instruments:⁽¹⁾
Interest rate swaps	$	—	$	260		$	3		$	263		$	—	$	323		$	6		$	329
Cross-currency interest rate swaps		—		—			13			13			—		—			28			28
Total derivative assets⁽²⁾		—		260			16			276			—		323			34			357
Total	$	—	$	260		$	16		$	276		$	—	$	323		$	34		$	357
Liabilities⁽³⁾
Derivative instruments⁽¹⁾
Interest rate swaps	$	—	$	—		$	(9	)	$	(9	)	$	—	$	—		$	(14	)	$	(14	)
Floor Income Contracts		—		(139	)		—			(139	)		—		(197	)		—			(197	)
Cross-currency interest rate swaps		—		—			(121	)		(121	)		—		—			(322	)		(322	)
Other		—		—			—			—			—		—			—			—
Total derivative liabilities⁽²⁾		—		(139	)		(130	)		(269	)		—		(197	)		(336	)		(533	)
Total	$	—	$	(139	)	$	(130	)	$	(269	)	$	—	$	(197	)	$	(336	)	$	(533	)

⁽¹⁾	Fair value of derivative instruments excludes accrued interest and the value of collateral.

⁽²⁾	See "Note 4 – Derivative Financial Instruments" for a reconciliation of gross positions without the impact of master netting agreements to the balance sheet classification.

⁽³⁾	Borrowings which are the hedged item in a fair value hedge relationship and which are adjusted for changes in value due to benchmark interest rates only are not carried at full fair value and not reflected in this table.

8. Fair Value Measurements (Continued)

The following tables summarize the change in balance sheet carrying value associated with level 3 financial instruments carried at fair value on a recurring basis.

	Three Months Ended June 30,
	2021											2020
	Derivative instruments											Derivative instruments
(Dollars in millions)	Interest Rate Swaps			Cross Currency Interest Rate Swaps			Other		Total Derivative Instruments			Interest Rate Swaps			Cross Currency Interest Rate Swaps			Other		Total Derivative Instruments
Balance, beginning of period	$	(7	)	$	(225	)	$	—	$	(232	)	$	(12	)	$	(666	)	$	—	$	(678	)
Total gains/(losses):
Included in earnings⁽¹⁾		1			111			—		112			1			47			—		48
Included in other comprehensive income		—			—			—		—			—			—			—		—
Settlements		—			6			—		6			—			13			—		13
Transfers in and/or out of level 3		—			—			—		—			—			—			—		—
Balance, end of period	$	(6	)	$	(108	)	$	—	$	(114	)	$	(11	)	$	(606	)	$	—	$	(617	)
Change in mark-to-market gains/(losses) relating to instruments still held at the reporting date⁽²⁾	$	1		$	21		$	—	$	22		$	1		$	60		$	—	$	61

	Six Months Ended June 30,
	2021											2020
	Derivative instruments											Derivative instruments
(Dollars in millions)	Interest Rate Swaps			Cross Currency Interest Rate Swaps			Other		Total Derivative Instruments			Interest Rate Swaps			Cross Currency Interest Rate Swaps			Other			Total Derivative Instruments
Balance, beginning of period	$	(8	)	$	(294	)	$	—	$	(302	)	$	(17	)	$	(575	)	$	(1	)	$	(593	)
Total gains/(losses):
Included in earnings⁽¹⁾		2			173			—		175			6			(65	)		—			(59	)
Included in other comprehensive income		—			—			—		—			—			—			—			—
Settlements		—			13			—		13			—			34			1			35
Transfers in and/or out of level 3		—			—			—		—			—			—			—			—
Balance, end of period	$	(6	)	$	(108	)	$	—	$	(114	)	$	(11	)	$	(606	)	$	—		$	(617	)
Change in mark-to-market gains/(losses) relating to instruments still held at the reporting date⁽²⁾	$	2		$	(76	)	$	—	$	(74	)	$	3		$	(31	)	$	1		$	(27	)

⁽¹⁾	“Included in earnings” is comprised of the following amounts recorded in the specified line item in the consolidated statements of income:

	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in millions)	2021		2020		2021		2020
Gains (losses) on derivative and hedging activities, net	$	1	$	1	$	2	$	6
Interest expense		111		47		173		(65	)
Total	$	112	$	48	$	175	$	(59	)

⁽²⁾	Recorded in “gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.

8. Fair Value Measurements (Continued)

The following table presents the significant inputs that are unobservable or from inactive markets used in the recurring valuations of the level 3 financial instruments detailed above.

(Dollars in millions)	Fair Value at June 30, 2021			Valuation Technique	Input	Range and Weighted Average
Derivatives
Prime/LIBOR basis swaps	$	(6	)	Discounted cash flow	Constant Prepayment Rate	9%
					Bid/ask adjustment to discount rate	.08%
Cross-currency interest rate swaps		(108	)	Discounted cash flow	Constant Prepayment Rate	5%
Other		—
Total	$	(114	)

The following table summarizes the fair values of our financial assets and liabilities, including derivative financial instruments.

	June 30, 2021									December 31, 2020
(Dollars in millions)	Fair Value			Carrying Value			Difference			Fair Value			Carrying Value			Difference
Earning assets
FFELP Loans	$	57,002		$	55,550		$	1,452		$	59,117		$	58,284		$	833
Private Education Loans		20,858			19,725			1,133			22,462			21,079			1,383
Cash and investments		4,075			4,075			—			3,822			3,822			—
Total earning assets		81,935			79,350			2,585			85,401			83,185			2,216
Interest-bearing liabilities
Short-term borrowings		4,111			4,068			(43	)		6,626			6,613			(13	)
Long-term borrowings		76,156			75,814			(342	)		76,719			77,332			613
Total interest-bearing liabilities		80,267			79,882			(385	)		83,345			83,945			600
Derivative financial instruments
Floor Income Contracts		(139	)		(139	)		—			(197	)		(197	)		—
Interest rate swaps		254			254			—			315			315			—
Cross-currency interest rate swaps		(108	)		(108	)		—			(294	)		(294	)		—
Other		—			—			—			—			—			—
Excess of net asset fair value over carrying value							$	2,200								$	2,816