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Fair Value Measurements | 12 Months Ended
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Dec. 31, 2023
Fair Value Disclosures [Abstract] |
Fair Value Measurements | 11. 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. The fair value of the items discussed below are separately disclosed in this footnote. During 2023, there were no significant transfers of financial instruments between levels, or changes in our methodology used to value our financial instruments. Education Loans Our FFELP Loans and Private Education Loans are accounted for at cost or at the lower of cost or market if the loan is held-for-sale. Fair values are determined by modeling loan cash flows using stated terms of the assets using mostly internally developed assumptions that are validated against market transactions when available. FFELP Loans The significant assumptions used to determine fair value of our FFELP Loans are prepayment speeds, default rates, cost of funds, discount rate, capital levels and expected Repayment Borrower Benefits to be earned. In addition, the Floor Income component of our FFELP Loan portfolio is valued with option models using both observable market inputs and internally developed inputs. A number of significant inputs into the models are internally derived and not observable in active markets. While the resulting fair value can be validated against market transactions where we are a participant, these markets are not considered active. As such, these are level 3 valuations. Private Education Loans The significant assumptions used to determine fair value of our Private Education Loans are prepayment speeds, default rates, recovery rates, cost of funds, discount rate and capital levels. A number of significant inputs into the models are internally derived and not observable in active markets. While the resulting fair value can be validated against market transactions where we are a participant, these markets are not considered active. As such, these are level 3 valuations. Cash and Investments (Including “Restricted Cash”) Cash and cash equivalents are carried at cost. Carrying value approximates fair value. The fair value of investments in commercial paper, ABCP, or demand deposits that have a remaining term of less than 90 days when purchased are estimated to equal their cost and, when needed, adjustments for liquidity and credit spreads are made depending on market conditions and counterparty credit risks. No additional adjustments were deemed necessary. These investments are level 2 valuations. Borrowings Borrowings are accounted for at cost in the financial statements except when denominated in a foreign currency or when designated as the hedged item in a fair value hedge relationship. When the hedged risk is the benchmark interest rate (which for us is SOFR) and not full fair value, the cost basis is adjusted for changes in value due to benchmark interest rates only. Foreign currency-denominated borrowings are re-measured at current spot rates in the financial statements. Fair value was determined through standard bond pricing models and option models (when applicable) using the stated terms of the borrowings, observable yield curves, foreign currency exchange rates, volatilities from active markets or from quotes from broker-dealers. Fair value adjustments for unsecured corporate debt are made based on indicative quotes from observable trades and spreads on credit default swaps specific to the Company. Fair value adjustments for secured borrowings are based on indicative quotes from broker-dealers. These adjustments for both secured and unsecured borrowings are material to the overall valuation of these items and, currently, are based on inputs from inactive markets. As such, these are level 3 valuations. 11. Fair Value Measurements (Continued) Derivative Financial Instruments All derivatives are accounted for at fair value in the financial statements. The fair value of a majority of derivative financial instruments was determined by standard derivative pricing and option models using the stated terms of the contracts and observable market inputs and are therefore classified as level 2 fair values. In some cases, we utilized internally developed inputs that are not observable in the market, and as such, classified these instruments as level 3 fair values. Complex structured derivatives or derivatives that trade in less liquid markets require significant estimates and judgment in determining fair value that cannot be corroborated with market transactions. When determining the fair value of derivatives, we take into account counterparty credit risk for positions where there is exposure to the counterparty on a net basis by assessing exposure net of collateral held. See “Note 7 — Derivative Financial Instruments” for further discussion on methodology. The net credit risk adjustment (adjustments for our exposure to counterparties net of adjustments for the counterparties’ exposure to us) decreased the valuations at December 31, 2023 by $5 million. Inputs specific to each class of derivatives disclosed in the table below are as follows: • Interest rate swaps — Fair value is determined using standard derivative cash flow models. Derivatives that swap fixed interest payments and SOFR interest payments are valued using the SOFR swap yield curve which is an observable input from an active market. These derivatives are level 2 fair value estimates in the hierarchy. Other derivatives swapping SOFR interest payments for another variable interest payment (primarily Prime) are valued using the SOFR swap yield curve and observable market spreads for the specified index. The markets for these swaps are generally illiquid as indicated by a wide bid/ask spread. The adjustment made for liquidity decreased the valuations by $1 million at December 31, 2023. These derivatives are level 3 fair value estimates. • Cross-currency interest rate swaps — Fair value is determined using standard derivative cash flow models. Derivatives hedging foreign-denominated bonds are valued using the SOFR swap yield curve (for both USD and the foreign-denominated currency), cross-currency basis spreads and forward foreign currency exchange rates. These inputs are observable inputs from active markets. In addition, these amortizing notional derivatives (derivatives whose notional amounts change based on changes in the balance of, or pool of, assets or debt) hedging trust debt use internally derived assumptions for the trust assets’ prepayment speeds and default rates to model the notional amortization. Management makes assumptions concerning the extension features of derivatives hedging rate-reset notes denominated in a foreign currency. These inputs are not market observable; therefore, these derivatives are level 3 fair value estimates. • Floor Income Contracts — Derivatives are valued using an option pricing model. Inputs to the model include the SOFR swap yield curve and SOFR interest rate volatilities. The inputs are observable inputs in active markets and these derivatives are level 2 fair value estimates. The carrying value of borrowings designated as the hedged item in a fair value hedge is adjusted for changes in fair value due to benchmark interest rates and foreign-currency exchange rates. These valuations are determined through standard bond pricing models and option models (when applicable) using the stated terms of the borrowings, and observable yield curves, foreign currency exchange rates and volatilities. 11. Fair Value Measurements (Continued) The following table summarizes the valuation of our financial instruments that are marked-to-market on a recurring basis. During 2023 and 2022, there were no significant transfers of financial instruments between levels.
|  | Fair Value Measurements on a Recurring Basis |
|  | December 31, 2023 |  |  | December 31, 2022 |
(Dollars in millions) |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative instruments:(1) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  |  | — |  |  |  | 55 |  |  |  | — |  |  |  | 55 |  |  |  | — |  |  |  | 55 |  |  |  | 1 |  |  |  | 56 |
Cross-currency interest rate swaps |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total derivative assets(2) |  |  | — |  |  |  | 55 |  |  |  | — |  |  |  | 55 |  |  |  | — |  |  |  | 55 |  |  |  | 1 |  |  |  | 56 |
Total |  | $ | — |  |  | $ | 55 |  |  | $ | — |  |  | $ | 55 |  |  | $ | — |  |  | $ | 55 |  |  | $ | 1 |  |  | $ | 56 |
Liabilities(3) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative instruments(1) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | — |  |  | $ | — |  |  | $ | (1 | ) |  | $ | (1 | ) |  | $ | — |  |  | $ | (2 | ) |  | $ | (3 | ) |  | $ | (5 | )
Floor Income Contracts |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Cross-currency interest rate swaps |  |  | — |  |  |  | — |  |  |  | (189 | ) |  |  | (189 | ) |  |  | — |  |  |  | — |  |  |  | (253 | ) |  |  | (253 | )
Total derivative liabilities(2) |  |  | — |  |  |  | — |  |  |  | (190 | ) |  |  | (190 | ) |  |  | — |  |  |  | (2 | ) |  |  | (256 | ) |  |  | (258 | )
Total |  | $ | — |  |  | $ | — |  |  | $ | (190 | ) |  | $ | (190 | ) |  | $ | — |  |  | $ | (2 | ) |  | $ | (256 | ) |  | $ | (258 | )
(1) Fair value of derivative instruments excludes accrued interest and the value of collateral. (2) See “Note 7 — 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. 11. 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.
|  | Year Ended December 31, 2023 |
|  | Derivative Instruments |
(Dollars in millions) |  | Interest Rate Swaps |  |  | Cross Currency Interest Rate Swaps |  |  | Other |  |  | Total Derivative Instruments |
Balance, beginning of period |  | $ | (2 | ) |  | $ | (253 | ) |  | $ | — |  |  | $ | (255 | )
Total gains/(losses): |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings(1) |  |  | 1 |  |  |  | 17 |  |  |  | — |  |  |  | 18 |
Included in other comprehensive income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Settlements |  |  | — |  |  |  | 47 |  |  |  | — |  |  |  | 47 |
Transfers in and/or out of level 3 |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Balance, end of period |  | $ | (1 | ) |  | $ | (189 | ) |  | $ | — |  |  | $ | (190 | )
Change in mark-to-market gains/(losses) relating to instruments still held at the reporting date(2) |  | $ | 1 |  |  | $ | 64 |  |  | $ | — |  |  | $ | 65 |
|  | Year Ended December 31, 2022 |
|  | Derivative Instruments |
(Dollars in millions) |  | Interest Rate Swaps |  |  | Cross Currency Interest Rate Swaps |  |  | Other |  |  | Total Derivative Instruments |
Balance, beginning of period |  | $ | (4 | ) |  | $ | (190 | ) |  | $ | — |  |  | $ | (194 | )
Total gains/(losses): |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings(1) |  |  | 1 |  |  |  | (105 | ) |  |  | — |  |  |  | (104 | )
Included in other comprehensive income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Settlements |  |  | 1 |  |  |  | 42 |  |  |  | — |  |  |  | 43 |
Transfers in and/or out of level 3 |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Balance, end of period |  | $ | (2 | ) |  | $ | (253 | ) |  | $ | — |  |  | $ | (255 | )
Change in mark-to-market gains/(losses) relating to instruments still held at the reporting date(2) |  | $ | 1 |  |  | $ | (63 | ) |  | $ | — |  |  | $ | (62 | )
|  | Year Ended December 31, 2021 |
|  | Derivative Instruments |
(Dollars in millions) |  | Interest Rate Swaps |  |  | Cross Currency Interest Rate Swaps |  |  | Other |  |  | Total Derivative Instruments |
Balance, beginning of period |  | $ | (8 | ) |  | $ | (294 | ) |  | $ | — |  |  | $ | (302 | )
Total gains/(losses): |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings(1) |  |  | 3 |  |  |  | 81 |  |  |  | — |  |  |  | 84 |
Included in other comprehensive income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Settlements |  |  | 1 |  |  |  | 23 |  |  |  | — |  |  |  | 24 |
Transfers in and/or out of level 3 |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Balance, end of period |  | $ | (4 | ) |  | $ | (190 | ) |  | $ | — |  |  | $ | (194 | )
Change in mark-to-market gains/(losses) relating to instruments still held at the reporting date(2) |  | $ | 3 |  |  | $ | (157 | ) |  | $ | — |  |  | $ | (154 | )
(1) “Included in earnings” is comprised of the following amounts recorded in the specified line item in the consolidated statements of income:
|  | Years Ended December 31, |
(Dollars in millions) |  | 2023 |  |  | 2022 |  |  | 2021 |
Gains (losses) on derivative and hedging activities, net |  | $ | 1 |  |  | $ | 1 |  |  | $ | 3 |
Interest expense |  |  | 17 |  |  |  | (105 | ) |  |  | 81 |
Total |  | $ | 18 |  |  | $ | (104 | ) |  | $ | 84 |
(2) Recorded in “gains (losses) on derivative and hedging activities, net” in the consolidated statements of income. 11. 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 December 31, 2023 |  |  | Valuation Technique |  | Input |  | Range and Weighted Average
Derivatives |  |  |  |  |  |  |  |  |
Prime basis swaps |  | $ | (1 | ) |  | Discounted cash flow |  | Constant Prepayment Rate |  | 10%
|  |  |  |  |  |  | Bid/ask adjustment to discount rate |  | 0.08%
Cross-currency interest rate swaps |  |  | (189 | ) |  | Discounted cash flow |  | Constant Prepayment Rate |  | 5%
Other |  |  | — |  |  |  |  |  |  |
Total |  | $ | (190 | ) |  |  |  |  |  |
The significant inputs that are unobservable or from inactive markets related to our level 3 derivatives detailed in the table above would be expected to have the following impacts to the valuations: • Prime basis swaps — These swaps do not actively trade in the markets as indicated by a wide bid/ask spread. A wider bid/ask spread will result in a decrease in the overall valuation. In addition, the unobservable inputs include Constant Prepayment Rates of the underlying securitization trust the swap references. A decrease in this input will result in a longer weighted average life of the swap which will increase the value for swaps in a gain position and decrease the value for swaps in a loss position, everything else equal. The opposite is true for an increase in the input. • Cross-currency interest rate swaps — The unobservable inputs used in these valuations are Constant Prepayment Rates of the underlying securitization trust the swap references. A decrease in this input will result in a longer weighted average life of the swap. All else equal in a typical currency market, this will result in a decrease to the valuation due to the delay in the cash flows of the currency exchanges as well as diminished liquidity in the forward exchange markets as you increase the term. The opposite is true for an increase in the input. The following table summarizes the fair values of our financial assets and liabilities, including derivative financial instruments.
|  | December 31, 2023 |  |  | December 31, 2022 |
(Dollars in millions) |  | Fair Value |  |  | Carrying Value |  |  | Difference |  |  | Fair Value |  |  | Carrying Value |  |  | Difference |
Earning assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
FFELP Loans |  | $ | 36,590 |  |  | $ | 37,925 |  |  | $ | (1,335 | ) |  | $ | 41,426 |  |  | $ | 43,525 |  |  | $ | (2,099 | )
Private Education Loans |  |  | 16,287 |  |  |  | 16,902 |  |  |  | (615 | ) |  |  | 17,880 |  |  |  | 18,725 |  |  |  | (845 | )
Cash and investments |  |  | 2,939 |  |  |  | 2,939 |  |  |  | — |  |  |  | 4,974 |  |  |  | 4,974 |  |  |  | — |
Total earning assets |  |  | 55,816 |  |  |  | 57,766 |  |  |  | (1,950 | ) |  |  | 64,280 |  |  |  | 67,224 |  |  |  | (2,944 | )
Interest-bearing liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Short-term borrowings |  |  | 4,237 |  |  |  | 4,226 |  |  |  | (11 | ) |  |  | 5,879 |  |  |  | 5,870 |  |  |  | (9 | )
Long-term borrowings |  |  | 51,566 |  |  |  | 53,402 |  |  |  | 1,836 |  |  |  | 57,652 |  |  |  | 61,026 |  |  |  | 3,374 |
Total interest-bearing liabilities |  |  | 55,803 |  |  |  | 57,628 |  |  |  | 1,825 |  |  |  | 63,531 |  |  |  | 66,896 |  |  |  | 3,365 |
Derivative financial instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Floor Income Contracts |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Interest rate swaps |  |  | 54 |  |  |  | 54 |  |  |  | — |  |  |  | 51 |  |  |  | 51 |  |  |  | — |
Cross-currency interest rate swaps |  |  | (189 | ) |  |  | (189 | ) |  |  | — |  |  |  | (253 | ) |  |  | (253 | ) |  |  | — |
Other |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Excess of net asset fair value over carrying value |  |  |  |  |  |  |  | $ | (125 | ) |  |  |  |  |  |  |  | $ | 421 |

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- Definition The entire disclosure of the fair value measurement of assets and liabilities, which includes financial instruments measured at fair value that are classified in shareholders' equity, which may be measured on a recurring or nonrecurring basis. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 820 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//820/tableOfContent + Details
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