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Fair Value Measurements | 9 Months Ended
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Sep. 30, 2022
Fair Value Disclosures [Abstract] |
Fair Value Measurements | 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 2021 Form 10-K for a full discussion. During the three and nine months ended September 30, 2022, 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 the third quarters of 2022 and 2021, there were no significant transfers of financial instruments between levels.
|  | Fair Value Measurements on a Recurring Basis |
|  | September 30, 2022 |  |  | December 31, 2021 |
(Dollars in millions) |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative instruments:(1) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  |  | — |  |  |  | 56 |  |  |  | — |  |  |  | 56 |  |  |  | — |  |  |  | 223 |  |  |  | 1 |  |  |  | 224 |
Cross-currency interest rate swaps |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total derivative assets(2) |  |  | — |  |  |  | 56 |  |  |  | — |  |  |  | 56 |  |  |  | — |  |  |  | 223 |  |  |  | 1 |  |  |  | 224 |
Total |  | $ | — |  |  | $ | 56 |  |  | $ | — |  |  | $ | 56 |  |  | $ | — |  |  | $ | 223 |  |  | $ | 1 |  |  | $ | 224 |
Liabilities(3) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative instruments(1) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | — |  |  |  | (7 | ) |  | $ | (2 | ) |  | $ | (9 | ) |  | $ | — |  |  | $ | — |  |  | $ | (5 | ) |  | $ | (5 | )
Floor Income Contracts |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (65 | ) |  |  | — |  |  |  | (65 | )
Cross-currency interest rate swaps |  |  | — |  |  |  | — |  |  |  | (407 | ) |  |  | (407 | ) |  |  | — |  |  |  | — |  |  |  | (190 | ) |  |  | (190 | )
Total derivative liabilities(2) |  |  | — |  |  |  | (7 | ) |  |  | (409 | ) |  |  | (416 | ) |  |  | — |  |  |  | (65 | ) |  |  | (195 | ) |  |  | (260 | )
Total |  | $ | — |  |  | $ | (7 | ) |  | $ | (409 | ) |  | $ | (416 | ) |  | $ | — |  |  | $ | (65 | ) |  | $ | (195 | ) |  | $ | (260 | )
(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 September 30, |
|  | 2022 |  |  | 2021 |
|  | 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 |  | $ | (3 | ) |  | $ | (279 | ) |  | $ | — |  |  | $ | (282 | ) |  | $ | (6 | ) |  | $ | (108 | ) |  | $ | — |  |  | $ | (114 | )
Total gains/(losses): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings(1) |  |  | 1 |  |  |  | (141 | ) |  |  | — |  |  |  | (140 | ) |  |  | 1 |  |  |  | (53 | ) |  |  | — |  |  |  | (52 | )
Included in other comprehensive income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Settlements |  |  | — |  |  |  | 13 |  |  |  | — |  |  |  | 13 |  |  |  | — |  |  |  | 5 |  |  |  | — |  |  |  | 5 |
Transfers in and/or out of level 3 |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Balance, end of period |  | $ | (2 | ) |  | $ | (407 | ) |  | $ | — |  |  | $ | (409 | ) |  | $ | (5 | ) |  | $ | (156 | ) |  | $ | — |  |  | $ | (161 | )
Change in mark-to-market gains/(losses) relating to instruments still held at the reporting date(2) |  | $ | 1 |  |  | $ | (128 | ) |  | $ | — |  |  | $ | (127 | ) |  | $ | 1 |  |  | $ | (48 | ) |  | $ | — |  |  | $ | (47 | )
|  | Nine Months Ended September 30, |
|  | 2022 |  |  | 2021 |
|  | 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 |  | $ | (4 | ) |  | $ | (190 | ) |  | $ | — |  |  | $ | (194 | ) |  | $ | (8 | ) |  | $ | (294 | ) |  | $ | — |  |  | $ | (302 | )
Total gains/(losses): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings(1) |  |  | 1 |  |  |  | (244 | ) |  |  | — |  |  |  | (243 | ) |  |  | 2 |  |  |  | 120 |  |  |  | — |  |  |  | 122 |
Included in other comprehensive income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Settlements |  |  | 1 |  |  |  | 27 |  |  |  | — |  |  |  | 28 |  |  |  | 1 |  |  |  | 18 |  |  |  | — |  |  |  | 19 |
Transfers in and/or out of level 3 |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Balance, end of period |  | $ | (2 | ) |  | $ | (407 | ) |  | $ | — |  |  | $ | (409 | ) |  | $ | (5 | ) |  | $ | (156 | ) |  | $ | — |  |  | $ | (161 | )
Change in mark-to-market gains/(losses) relating to instruments still held at the reporting date(2) |  | $ | 1 |  |  | $ | (217 | ) |  | $ | — |  |  | $ | (216 | ) |  | $ | 2 |  |  | $ | (122 | ) |  | $ | — |  |  | $ | (120 | )
(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 September 30, |  |  | Nine Months Ended September 30, |
(Dollars in millions) |  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Gains (losses) on derivative and hedging activities, net |  | $ | 1 |  |  | $ | 1 |  |  | $ | 1 |  |  | $ | 2 |
Interest expense |  |  | (141 | ) |  |  | (53 | ) |  |  | (244 | ) |  |  | 120 |
Total |  | $ | (140 | ) |  | $ | (52 | ) |  | $ | (243 | ) |  | $ | 122 |
(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 September 30, 2022 |  |  | Valuation Technique |  | Input |  | Range and Weighted Average |
Derivatives |  |  |  |  |  |  |  |  |  |  |  |
Prime/LIBOR basis swaps |  | $ | (2 | ) |  | Discounted cash flow |  | Constant Prepayment Rate |  | 10% |
|  |  |  |  |  |  |  | Bid/ask adjustment to discount rate |  | .08% |
Cross-currency interest rate swaps |  |  | (407 | ) |  | Discounted cash flow |  | Constant Prepayment Rate |  | 5% |
Other |  |  | — |  |  |  |  |  |  |  |  |
Total |  | $ | (409 | ) |  |  |  |  |  |  |  |
The following table summarizes the fair values of our financial assets and liabilities, including derivative financial instruments.
|  | September 30, 2022 |  |  | December 31, 2021 |
(Dollars in millions) |  | Fair Value |  |  | Carrying Value |  |  | Difference |  |  | Fair Value |  |  | Carrying Value |  |  | Difference |
Earning assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
FFELP Loans |  | $ | 44,627 |  |  | $ | 46,891 |  |  | $ | (2,264 | ) |  | $ | 53,632 |  |  | $ | 52,641 |  |  | $ | 991 |
Private Education Loans |  |  | 18,287 |  |  |  | 19,151 |  |  |  | (864 | ) |  |  | 21,140 |  |  |  | 20,171 |  |  |  | 969 |
Cash and investments |  |  | 4,088 |  |  |  | 4,088 |  |  |  | — |  |  |  | 3,845 |  |  |  | 3,845 |  |  |  | — |
Total earning assets |  |  | 67,002 |  |  |  | 70,130 |  |  |  | (3,128 | ) |  |  | 78,617 |  |  |  | 76,657 |  |  |  | 1,960 |
Interest-bearing liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Short-term borrowings |  |  | 5,684 |  |  |  | 5,677 |  |  |  | (7 | ) |  |  | 2,492 |  |  |  | 2,490 |  |  |  | (2 | )
Long-term borrowings |  |  | 60,787 |  |  |  | 63,998 |  |  |  | 3,211 |  |  |  | 74,548 |  |  |  | 74,488 |  |  |  | (60 | )
Total interest-bearing liabilities |  |  | 66,471 |  |  |  | 69,675 |  |  |  | 3,204 |  |  |  | 77,040 |  |  |  | 76,978 |  |  |  | (62 | )
Derivative financial instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Floor Income Contracts |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (65 | ) |  |  | (65 | ) |  |  | — |
Interest rate swaps |  |  | 47 |  |  |  | 47 |  |  |  | — |  |  |  | 219 |  |  |  | 219 |  |  |  | — |
Cross-currency interest rate swaps |  |  | (407 | ) |  |  | (407 | ) |  |  | — |  |  |  | (190 | ) |  |  | (190 | ) |  |  | — |
Other |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Excess of net asset fair value over carrying value |  |  |  |  |  |  |  |  |  | $ | 76 |  |  |  |  |  |  |  |  |  |  | $ | 1,898 |

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