Edgar Filing: NELNET INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2016
	or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to .

COMMISSION FILE NUMBER 001-31924

NELNET, INC.

(Exact name of registrant as specified in its charter)



NEBRASKA (State or other jurisdiction of incorporation or organization)	84-0748903 (I.R.S. Employer Identification No.)
121 SOUTH 13TH STREET, SUITE 100 LINCOLN, NEBRASKA (Address of principal executive offices)	68508 (Zip Code)

Registrant’s telephone number, including area code: (402) 458-2370

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

TITLE OF EACH CLASS: Class A Common Stock, Par Value $0.01 per Share

NAME OF EACH EXCHANGE ON WHICH REGISTERED: New York Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer [X ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

The aggregate market value of the registrant’s voting common stock held by non-affiliates of the registrant on June 30, 2016 (the last business day of the registrant’s most recently completed second fiscal quarter), based upon the closing sale price of the registrant’s Class A Common Stock on that date of $34.75 per share, was $781,008,370. For purposes of this calculation, the registrant’s directors, executive officers, and greater than 10 percent shareholders are deemed to be affiliates.

As of January 31, 2017, there were 30,627,012 and 11,476,932 shares of Class A Common Stock and Class B Common Stock, par value $0.01 per share, outstanding, respectively (excluding 11,317,364 shares of Class A Common Stock held by wholly owned subsidiaries).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement to be filed for its 2017 Annual Meeting of Shareholders, scheduled to be held May 25, 2017, are incorporated by reference into Part III of this Form 10-K.

NELNET, INC.

FORM 10-K

TABLE OF CONTENTS

December 31, 2016



	Forward-Looking and Cautionary Statements		2

PART I

	Item 1.	Business	3
	Item 1A.	Risk Factors	18
	Item 1B.	Unresolved Staff Comments	30
	Item 2.	Properties	30
	Item 3.	Legal Proceedings	31
	Item 4.	Mine Safety Disclosures	31

PART II

	Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities	31
	Item 6.	Selected Financial Data	34
	Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	35
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	64
	Item 8.	Financial Statements and Supplementary Data	69
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	69
	Item 9A.	Controls and Procedures	69
	Item 9B.	Other Information	71

PART III

	Item 10.	Directors, Executive Officers, and Corporate Governance	71
	Item 11.	Executive Compensation	71
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	71
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	72
	Item 14.	Principal Accounting Fees and Services	72

PART IV

	Item 15.	Exhibits and Financial Statement Schedules	72
	Item 16.	Form 10-K Summary	77

	Signatures		78

FORWARD-LOOKING AND CAUTIONARY STATEMENTS

This report contains forward-looking statements and information that are based on management's current expectations as of the date of this document. Statements that are not historical facts, including statements about the Company's plans and expectations for future financial condition, results of operations or economic performance, or that address management's plans and objectives for future operations, and statements that assume or are dependent upon future events, are forward-looking statements. The words “may,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” “assume,” “forecast,” “will,” and similar expressions, as well as statements in future tense, are intended to identify forward-looking statements.

The forward-looking statements are based on assumptions and analyses made by management in light of management's experience and its perception of historical trends, current conditions, expected future developments, and other factors that management believes are appropriate under the circumstances. These statements are subject to known and unknown risks, uncertainties, assumptions, and other factors that may cause the actual results and performance to be materially different from any future results or performance expressed or implied by such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in “Risk Factors” and elsewhere in this report, and include such risks and uncertainties as:

•

student loan portfolio risks such as interest rate basis and repricing risk resulting from the fact that the interest rate characteristics of the student loan assets do not match the interest rate characteristics of the funding for those assets, the risk of loss of floor income on certain student loans originated under the Federal Family Education Loan Program (the "FFEL Program" or "FFELP"), risks related to the use of derivatives to manage exposure to interest rate fluctuations, uncertainties regarding the expected benefits from purchased securitized and unsecuritized FFELP student loans and initiatives to purchase additional FFELP and private education loans, and risks from changes in levels of student loan prepayment or default rates;

•

financing and liquidity risks, including risks of changes in the general interest rate environment and in the securitization and other financing markets for student loans, including adverse changes resulting from slower than expected payments on student loans in FFELP securitization trusts, which may increase the costs or limit the availability of financings necessary to purchase, refinance, or continue to hold student loans;

•

risks from changes in the educational credit and services markets resulting from changes in applicable laws, regulations, and government programs and budgets, such as the expected decline over time in FFELP loan interest income and fee-based revenues due to the discontinuation of new FFELP loan originations in 2010 and potential government initiatives or legislative proposals to consolidate existing FFELP loans to the Federal Direct Loan Program or otherwise allow FFELP loans to be refinanced with Federal Direct Loan Program loans, risks related to adverse changes in the Company's volumes allocated under the Company's loan servicing contract with the U.S. Department of Education (the "Department"), which accounted for approximately 20 percent of the Company's revenue in 2016, risks related to the Department's initiative to procure a new contract for federal student loan servicing to acquire a single servicing platform to service all loans owned by the Department, including the risk that the Company's joint venture with Great Lakes Educational Loan Services, Inc. ("Great Lakes") may not be awarded the contract, and risks related to the Company's ability to comply with agreements with third-party customers for the servicing of FFELP, Federal Direct Loan Program, and private education and consumer loans;


•	risks related to a breach of or failure in the Company's operational or information systems or infrastructure, or those of third-party vendors, including cybersecurity risks related to the potential disclosure of confidential student loan borrower and other customer information;


•	uncertainties inherent in forecasting future cash flows from student loan assets and related asset-backed securitizations;


•	the uncertain nature of the expected benefits from the acquisition of Allo Communications LLC and the ability to integrate its communications operations and successfully expand its fiber network in existing service areas and additional communities and manage related construction risks;


•	risks and uncertainties related to initiatives to pursue additional strategic investments and acquisitions, including investments and acquisitions that are intended to diversify the Company both within and outside of its historical core education-related businesses; and

•

risks and uncertainties associated with litigation matters and with maintaining compliance with the extensive regulatory requirements applicable to the Company's businesses, reputational and other risks, including the risk of increased regulatory costs, resulting from the recent politicization of student loan servicing, and uncertainties inherent in the estimates and assumptions about future events that management is required to make in the preparation of the Company's consolidated financial statements.

All forward-looking statements contained in this report are qualified by these cautionary statements and are made only as of the date of this document. Although the Company may from time to time voluntarily update or revise its prior forward-looking statements to reflect actual results or changes in the Company's expectations, the Company disclaims any commitment to do so except as required by securities laws.

PART I.

ITEM 1. BUSINESS

Overview

Nelnet, Inc. (the “Company”) is a diverse company with a focus on delivering education-related products and services and student loan asset management. The largest operating businesses engage in student loan servicing, tuition payment processing and school information systems, and communications. A significant portion of the Company's revenue is net interest income earned on a portfolio of federally insured student loans. The Company also makes investments to further diversify the Company both within and outside of its historical core education-related businesses, including, but not limited to, investments in real estate and start-up ventures. Substantially all revenue from external customers is earned, and all long-lived assets are located, in the United States.

The Company was formed as a Nebraska corporation in 1978 to service federal student loans for two local banks. The Company built on this initial foundation as a servicer to become a leading originator, holder, and servicer of federal student loans, principally consisting of loans originated under the FFEL Program. A detailed description of the FFEL Program is included in Appendix A to this report.

The Health Care and Education Reconciliation Act of 2010 (the “Reconciliation Act of 2010”) eliminated new loan originations under the FFEL Program effective July 1, 2010 and requires that all new federal student loan originations be made through the Federal Direct Loan Program. This law does not alter or affect the terms and conditions of existing FFELP loans.

As a result of the Reconciliation Act of 2010, the Company no longer originates new FFELP loans. However, a significant portion of the Company's income continues to be derived from its existing FFELP student loan portfolio. As of December 31, 2016, the Company had a $24.9 billion student loan portfolio that will amortize over the next approximately 25 years. Interest income on the Company's existing FFELP loan portfolio will decline over time as the portfolio is paid down. However, since July 1, 2010, the effective date on and after which no new loans could be originated under the FFEL Program, the Company has purchased $21.1 billion of FFELP loans from other FFELP loan holders looking to adjust their FFELP businesses. The Company believes there may be additional opportunities to purchase FFELP portfolios to generate incremental earnings and cash flow. However, since all FFELP loans will eventually run off, a key objective of the Company is to reposition the Company for the post-FFELP environment.

To reduce its reliance on interest income on student loans, the Company has expanded its services and products. This expansion has been accomplished through internal growth and innovation as well as business acquisitions. In addition, in 2009, the Company began servicing federally-owned student loans for the Department. As of December 31, 2016, the Company was servicing $162.5 billion of student loans for 6.0 million borrowers on behalf of the Department.

Operating Segments

The Company has four reportable operating segments as summarized below.

Loan Systems and Servicing


•	Referred to as Nelnet Diversified Solutions (“NDS”)


•	Focuses on student loan servicing, consumer loan origination and servicing, student loan servicing-related technology solutions, and outsourcing services for lenders, guaranty agencies, and other entities


•	Includes the brands Nelnet Loan Servicing, Firstmark Services, GreatNet Solutions, and Proxi

Tuition Payment Processing and Campus Commerce


•	Commonly known as Nelnet Business Solutions (“NBS”)


•	Focuses on tuition payment plans, financial needs assessment services, online payment and refund processing, and school information system software


•	Includes the brands FACTS Management, Nelnet Campus Commerce, and RenWeb

Communications


•	Includes the operations of Allo Communications LLC ("Allo")


•	Focuses on providing fiber optic service directly to homes and businesses for internet, broadband, telephone, and television services

Asset Generation and Management


•	Includes the acquisition and management of the Company's student loan assets

Segment Operating Results

The Company's reportable operating segments are defined by the products and services they offer or the types of customers they serve, and they reflect the manner in which financial information is currently evaluated by management. The Company includes separate financial information about its reportable segments, including revenues, net income or loss, and total assets for each of the Company's reportable segments, for the last three fiscal years in note 14 of the notes to consolidated financial statements included in this report. For segment reporting purposes, business activities and operating segments that are not reportable are combined and included in "Corporate and Other Activities."

Loan Systems and Servicing

The primary service offerings of this operating segment include:


•	Servicing federally-owned student loans for the Department


•	Servicing FFELP loans


•	Originating and servicing private education and consumer loans


•	Providing student loan servicing software and other information technology products and services


•	Providing outsourced services including call center, processing, and marketing services

In addition, this segment provided servicing and outsourcing services for FFELP guaranty agencies, including FFELP guaranty collection services, through June 30, 2016.

As of December 31, 2016, the Company serviced $194.8 billion of student loans for 7.6 million borrowers. See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Loan Systems and Servicing Operating Segment - Results of Operations - Student Loan Servicing Volumes" for additional information related to the Company's servicing volume.

Servicing federally-owned student loans for the Department

The Company is one of four private sector companies (referred to as Title IV Additional Servicers, or "TIVAS") awarded a student loan servicing contract by the Department in June 2009 to provide additional servicing capacity for loans owned by the Department, with new loan volume historically allocated among the four servicers based on certain performance metrics established by the Department beginning in 2010. These loans include Federal Direct Loan Program loans originated directly by the Department and FFEL Program loans purchased by the Department. Under the servicing contract, the Company earns a monthly fee from the Department for each unique borrower who has loans owned by the Department and serviced by the Company. The amount paid per each unique borrower is dependent on the status of the borrower (such as in school or in repayment). The servicing contract with the Department expires on June 16, 2019.

In April 2016, the Department's Office of Federal Student Aid released information regarding a new contract procurement process for the Department to acquire a single servicing system platform with multiple customer service providers to manage all student loans owned by the Department. The contract solicitation process was divided into two phases.

On May 6, 2016, the Company and Great Lakes submitted a joint response to Phase I as part of a newly created joint venture to respond to the contract solicitation process and to provide services under the new contract in the event that the Department selects it to be awarded with the contract. The joint venture will operate as a new legal entity called GreatNet Solutions, LLC ("GreatNet"). The Company and Great Lakes each own 50 percent of the ownership interests of GreatNet. In addition to the Company, Great Lakes is currently one of four TIVAS that has a student loan servicing contract with the Department to provide servicing for loans owned by the Department. GreatNet was one of three entities selected to respond to Phase II of the procurement selection process. On January 6, 2017, GreatNet submitted its Phase II response to the Department and is currently awaiting announcement from the new administration on the next steps in the procurement process.

As of December 31, 2016, the Company was servicing $162.5 billion of student loans for 6.0 million borrowers under this contract. The Department is the Company's largest customer, representing approximately 20 percent of the Company's revenue in 2016.

The Department also has contracts with 31 not-for-profit ("NFP") entities to service student loans, although currently five NFP servicers service the volume allocated to these 31 entities. While previously these entities have only serviced existing loans, effective January 1, 2015 they began to receive 25 percent of new borrower loan volume. On March 2, 2016, the Department announced that, for the period March 1, 2016 through June 30, 2016 and for the period July 1, 2016 through February 2017 month end, new student loan servicing volume would be allocated for servicing among the then group of ten TIVAS and NFP servicers on the basis of the currently established performance metrics as compared among all ten loan servicers in that group. The amended allocation methodology of new borrower loan volume has and may continue to decrease new allocation volume for the Company. However, the Company did and will continue to benefit from the allocation of additional borrowers to the three NFP servicers to which the Company licenses its remote-hosted servicing software. One NFP servicer exited the Federal Direct Loan Program servicing business, transferring its 188,956 borrowers to Nelnet for servicing in August 2016.

The Department currently allocates new loan volume among the nine servicers based on the following performance metrics:


•	Two metrics measure the satisfaction among separate customer groups, including borrowers (35 percent) and Federal Student Aid personnel who work with the servicers (5 percent).

•

Three metrics measure the success of keeping borrowers in an on-time repayment status and helping borrowers avoid default as reflected by the percentage of borrowers in current repayment status (30 percent), percentage of borrowers more than 90 days but less than 271 days delinquent (15 percent), and percentage of borrowers over 270 days and less than 361 days delinquent (15 percent). The loans are evaluated in 15 different loan portfolio stratifications to account for differences in portfolios.

The allocation of ongoing volume is determined twice each year based on the performance of each servicer in relation to the other servicers. Quarterly results are compiled for each servicer. The average of the September and December quarter end results are used to allocate volume for the period from March 1 to August 31, and the average of the March and June quarter end results are used to allocate volume for the period from September 1 to February month end, of each year.

The following table shows the Company's rankings and percent of new volume allocated to the Company since the inception of the Department's allocations of new loan volume based on performance metrics methodologies under this contract:



	Initial Metrics (a)						New Metrics, NFPs received 25% of volume (b)		Current Metrics (TIVAS and NFPs using common metrics)

Performance Evaluation Period	1	2	3	4	5		6	7	8	9
Defaulted borrower #	4	4	1	1	2	Borrower survey	2	2	1	4
Defaulted borrower $	4	4	1	1	2	FSA survey	2	2	2	4
Borrower survey	4	4	3	2	2	Current repay %	4	4	10	3
School survey	2	2	2	3	2	91-270 Repay %	4	4	10	6
FSA survey	3	3	3	3	4	271-360 Repay %	4	4	10	9
Overall ranking	4	4	1	1	2		4	4	8	5
Allocation	16%	16%	30%	30%	26%		14%	13%	8%	12%
Allocation period	August 15, 2010 - August 14, 2011	August 15, 2011 - August 14, 2012	August 15, 2012 - August 14, 2013	August 15, 2013 - August 14, 2014	August 15, 2014 - February 28, 2015		March 1, 2015 - August 31, 2015	September 1, 2015 - February 29, 2016	March 1, 2016 - June 30, 2016	July 1, 2016 - February 28, 2017


(a)	During the first five years of the servicing contract, the Department allocated new loan volume among the four TIVAS based on the following performance metrics:


◦	Two performance metrics measured the success of default prevention efforts as reflected by the percentage of borrowers (20 percent) and percentage of dollars (20 percent) in each servicer's portfolio that went into default.


◦	Three metrics measured the satisfaction among separate borrower groups, including borrowers (20 percent), financial aid personnel at postsecondary schools participating in federal student loan programs (20 percent), and Federal Student Aid and other federal agency personnel or contractors who worked with the servicers (20 percent).


(b)	For these performance evaluation periods (6 and 7 in the above table), the numerical rankings are among the four TIVAS, since the NFPs received a fixed 25 percent of new loan volume.

Incremental revenue components earned by the Company from the Department (in addition to loan servicing revenues) include:

•

Administration of the Total and Permanent Disability (TPD) Discharge program. The Company processes applications for the TPD Discharge program and is responsible for discharge, monitoring, and servicing of TPD loans. Individuals who are totally and permanently disabled may qualify for a discharge of their federal student loans, and the Company processes applications under the program and receives a fee from the Department on a per application basis, as well as a monthly servicing fee during the monitoring period. The Company is the exclusive provider of this service to the Department.

•

Origination of consolidation loans. Beginning in 2014, the Department implemented a process to outsource the origination of consolidation loans whereby each of the four TIVAS receives Federal Direct Loan consolidation origination volume based on borrower choice. The Department pays the Company a fee for each completed consolidation loan application it processes. The Company services the consolidation volume it originates.

Servicing FFELP loans

The Loan Systems and Servicing operating segment provides for the servicing of the Company's student loan portfolio and the portfolios of third parties. The loan servicing activities include loan conversion activities, application processing, borrower updates, customer service, payment processing, due diligence procedures, funds management reconciliations, and claim processing. These activities are performed internally for the Company's portfolio, in addition to generating external fee revenue when performed for third-party clients.

The Company's student loan servicing division uses proprietary systems to manage the servicing process. These systems provide for automated compliance with most of the federal student loan regulations adopted under Title IV of the Higher Education Act of 1965, as amended (the “Higher Education Act”).

The Company serviced FFELP loans on behalf of 25 third-party servicing customers as of December 31, 2016. The Company's FFELP servicing customers include national and regional banks, credit unions, and various state and non-profit secondary markets.

The majority of the Company's external FFELP loan servicing activities are performed under “life of loan” contracts. Life of loan contract servicing essentially provides that as long as the loan exists, the Company shall be the sole servicer of that loan; however, the agreement may contain “deconversion” provisions where, for a fee, the lender may move the loan to another servicer.

The elimination of new FFELP loan originations in July 2010 has caused and will continue to cause FFELP servicing revenue to decline as FFELP loan portfolios are paid down. However, the Company believes there may be opportunities to service additional FFELP loan portfolios from current FFELP participants as the program winds down.

Originating and servicing private education and consumer loans

The Loan Systems and Servicing operating segment conducts origination and servicing activities for consumer loans which include both private education and personal loan products.

Private education loans are loans to students or their families that are non-federal loans; as such, the loans are not issued or guaranteed by the federal government. These loans are used primarily to bridge the gap between the cost of higher education and the amount funded through financial aid, federal loans, or the borrowers' personal resources. Although similar in terms of activities and functions as FFELP loan servicing (i.e., application processing, disbursement processing, payment processing, customer service, statement distribution, and reporting), private education loan servicing activities are not required to comply with provisions of the Higher Education Act and may be more customized to individual client requirements.

The Company has invested in modernizing key technologies and services to position the business for the long-term, expanding services to include personal loan products and other consumer installment assets. Improvements allow for diversified products to be both originated and serviced with state of the art application and servicing platforms to drive growth for the Company's client partners. Presenting a very wide market opportunity of new entrants and existing players, consumer lending is a key growth area. In both backup servicing, and full servicing partnerships, the Company is a valuable resource for consumer lenders and asset holders as it allows for leveraged economies of scale, high compliance, and secure service to client partners.

The Company serviced private education and consumer loans on behalf of 24 third-party servicing customers as of December 31, 2016. In addition, the Company provides back-up servicing arrangements to assist nine entities for more than 200,000 borrowers. For a monthly fee, these arrangements require 30 to 90 day notice from a triggering event to transfer the customer's servicing volume to the Company's platform and becoming a full servicing customer.

Providing student loan servicing software and other information technology products and services

The Loan Systems and Servicing operating segment provides data center services and student loan servicing software for servicing private education and federal loans. These proprietary software systems are used internally by the Company and licensed to third-party student loan holders and servicers. These software systems have been adapted so they can be offered as hosted servicing software solutions that can be used by third-parties to service various types of student loans, including Federal Direct Loan Program and FFEL Program loans. The Company earns a monthly fee from its remote hosting customers for each unique borrower on the Company's platform, with a minimum monthly charge for most contracts. As of December 31, 2016, 2.2 million borrowers were hosted on the Company's hosted servicing software solution platforms.

Providing outsourced services including call center, processing, and marketing services

The Company provides business process outsourcing specializing in contact center management. The contact center solutions and services include taking inbound calls, helping with outreach campaigns and sales, and interacting with customers through multi-channels.

Servicing and outsourcing services for FFELP guaranty agencies, including FFELP guaranty collection services

A significant amount of the Company's guaranty servicing revenue historically came from a single guaranty servicing client, College Assist, the Colorado state-designated guarantor. The contract with College Assist expired on October 31, 2015, and was not renewed. FFELP guaranty servicing and FFELP guaranty collection revenue recognized by the Company from College Assist for the years ended December 31, 2015 and 2014 was $37.4 million, and $48.8 million, respectively.

The Company’s second largest guaranty servicing client, Tennessee Student Assistance Corporation ("TSAC"), exited the FFELP guaranty business at the end of their contract term on June 30, 2016. FFELP guaranty servicing and FFELP guaranty collection

revenue recognized by the Company from TSAC for the years ended December 31, 2016, 2015, and 2014 was $9.6 million, $19.5 million, and $17.9 million, respectively.

After the expiration of TSAC's contract, the Company has no remaining guaranty revenue.

Competition

The Company's scalable servicing platform allows it to provide compliant, efficient, and reliable service at a low cost, giving the Company a competitive advantage over others in the industry for all of this segment's services, the competitive environment for which is discussed below.

Loan servicing

The principal competitor for existing and prospective FFELP and private education loan servicing business is Navient Corporation ("Navient"). Navient is the largest for-profit provider of servicing functions. In contrast to its competitors, the Company has segmented its private education loan servicing on a distinct platform, created specifically to meet the needs of private education student loan borrowers, their families, the schools they attend, and the lenders who serve them. This ensures access to specialized teams with a dedicated focus on servicing these borrowers.

With the elimination of new loan originations under the FFEL Program, four servicers, including the Company, were named by the Department in 2009 as servicers of federally-owned loans. The three other servicers are Great Lakes, FedLoan Servicing (Pennsylvania Higher Education Assistance Agency ("PHEAA")), and Navient. In addition, the Department has contracts with 31 NFP entities to service student loans that are serviced by five prime servicers. These NFP entities were authorized in 2012 to begin servicing loans for existing borrower accounts. While previously these entities have only serviced existing loans, effective January 1, 2015 they began to receive a portion of new borrower loan activity. The Company currently licenses its hosted servicing software to three prime servicers that represent 13 NFP organizations. PHEAA is the only other TIVAS servicer offering a hosted Federal Direct Loan Program servicing solution to the NFP servicers.

As described above, the Company's contract with the Department expires on June 16, 2019. In April 2016, the Department's Office of Federal Student Aid released information regarding a new contract procurement process for the Department to acquire a single servicing system platform with multiple customer service providers to manage all student loans owned by the Department. The contract solicitation process is divided into two phases, and the Company and Great Lakes submitted a joint response to Phase I as part of a newly created joint venture to respond to the contract solicitation process and to provide services under the new contract in the event that the Department selects it to be awarded with the contract. On June 30, 2016, the Department announced which entities were selected to respond to Phase II of the procurement selection process. GreatNet was one of three entities selected, and PHEAA and Navient were also selected to respond to Phase II. On January 6, 2017, GreatNet submitted its Phase II response to the Department and is currently awaiting announcement from the new administration on the next steps in the procurement process.

Software and technology

The Company is one of the leaders in the development of servicing software for guaranty agencies, consumer loan programs, the Federal Direct Loan Program, and FFELP student loans. Many student loan lenders and servicers utilize the Company's software either directly or indirectly. The Company believes the investments it has made to scale its systems and to create a secure infrastructure to support the Department's servicing volume and requirements increase its competitive advantage as a long-term partner in the loan servicing market.

Tuition Payment Processing and Campus Commerce

The Company's Tuition Payment Processing and Campus Commerce operating segment provides products and services to help students and families manage the payment of education costs at all levels (K-12 and higher education). It also provides innovative education-focused technologies, services, and support solutions to help schools automate administrative processes and collect and process commerce data. The majority of this segment's customers are located in the United States; however, the Company has begun providing its products and services in Australia and currently believes there are opportunities to increase its customer base and revenue in Australia.

See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Tuition Payment Processing and Campus Commerce Operating Segment - Results of Operations" for a discussion of the seasonality of the business in this operating segment.

K-12

In the K-12 market, the Company offers tuition management services, school information systems, and assistance with financial needs assessment and donor management. The Company provides services for nearly 13,500 K-12 schools and serves over two million families representing over three million students.

The Company is the market leader in actively managed tuition payment plans. Tuition management services include payment plan administration, incidental billing, accounts receivable management, and record keeping. K-12 educational institutions contract with the Company to administer deferred payment plans that allow families to make monthly payments generally over 6 to 12 months. The Company collects a fee from either the institution or the payer as an administration fee.

The Company's financial needs assessment service helps K-12 schools evaluate and determine the amount of financial aid to disburse to the families it serves. The Company's donor services allow schools to assess and deliver strategic fundraising solutions using the latest technology.

On June 3, 2014, the Company purchased 100 percent of the ownership interests of RenWeb. RenWeb provides school information systems to help schools automate administrative processes such as admissions, enrollment, scheduling, student billing, attendance, and grade book management. RenWeb's information systems software is sold as a subscription service to schools. The combination of RenWeb’s school administration software and the Company’s tuition management and financial needs assessment services has significantly increased the value of the Company’s offerings in this area, allowing the Company to deliver a comprehensive suite of solutions to schools.

Higher Education

The Company offers two principal products to the higher education market: actively managed tuition payment plans, and campus commerce technologies and payment processing. The Company provides service for 970 colleges and universities world-wide and serves over 7 million students and families.

Higher education institutions contract with the Company to administer actively managed payment plans that allow the student and family to make monthly payments on either a semester or annual basis. The Company collects a fee from the student or family as an administration fee.

The Company's suite of campus commerce solutions provides services that allow for families' electronic billing and payment of campus charges. Campus commerce includes cashiering for face-to-face transactions, campus-wide commerce management, and refunds management, among other activities. The Company earns revenue for e-billing, hosting and maintenance, credit card processing fees, and e-payment transaction fees, which are powered by the Company's secure payment processing systems.

The Company's campus commerce products are sold as a subscription service to colleges and universities. The systems process payments through the appropriate channels in the banking or credit card networks to make deposits into the client's bank account. The systems can be further deployed to other departments around campus as requested (e.g., application fees, alumni giving, parking, events, etc.).

Competition

The Company is the largest provider of tuition management services to the private and faith-based K-12 market in the United States. Competitors include financial institutions, tuition management providers, financial needs assessment providers, accounting firms, and a myriad of software companies.

In the higher education market, the Company targets business offices at colleges and universities. In this market, the primary competition is limited to only a few campus commerce and tuition payment providers, as well as solutions developed in-house by colleges and universities.

The Company's principal competitive advantages are (i) the customer service it provides to institutions and consumers, (ii) the technology provided with the Company's service, and (iii) the Company's ability to integrate its technology with the institution

clients and their third party service providers. The Company believes its clients select products primarily based on technology features and functionality and the ability to integrate with other systems, but price and service also impact the selection process.

Communications

On December 31, 2015, the Company acquired the majority of the membership interests of Allo. Allo derives its revenue primarily from the sale of advanced telecommunication services, including internet, broadband, telephone, and television services, to business and residential customers in Nebraska, and specializes in high-speed internet and broadband services available through its all-fiber network. Allo currently serves the Scottsbluff, Gering, Bridgeport, North Platte, Ogallala, and Alliance communities in Nebraska. In September 2016, Allo began providing services in Lincoln, Nebraska, as part of a multi-year project to pass substantially all commercial and residential properties in the community. Allo currently plans to expand to additional communities in Nebraska and possibly surrounding states over the next several years.

Internet, broadband, and television services

Internet, broadband, and television services include data and video products and services to residential and business subscribers. Allo data services provide high-speed internet access over Allo's all-fiber network at various symmetrical speeds up to 1 gigabit per second, depending on the nature of the network facilities that are available, the level of service selected, and the geographic market availability. Allo also offers a variety of data connectivity services, including Ethernet services capable of connecting multiple connections over Allo's fiber-based networks. Allo's Internet Protocol Television Video ("IPTV") services range from limited basic service to advanced television, which includes several plans each with hundreds of local, national, and music channels, including premium and pay-per-view channels, as well as video on demand service. Subscribers may also subscribe to Allo's advanced video services, which consist of high-definition television, digital video recorders (“DVR”), and/or a whole home DVR. Allo's whole home DVR gives customers the ability to watch recorded shows on any television in the house, record multiple shows at one time, and utilize an intuitive on-screen guide and user interface.

Allo expects that internet and broadband services will continue to increase as a more significant component of its overall services, and offset the anticipated decline in traditional residential telephone and television services.

Telephone services

Local calling services include a full suite of telephone services, including basic services, primary rate interface ("PRI"), and session initiation protocol ("SIP"). Allo's service plans include options for voice-mail and other enhanced custom calling features including hunting, caller ID, call forwarding, and call waiting, among others. Services are charged at a fixed monthly rate or can be bundled with selected services at a discounted rate. Allo provides a hosted private branch exchange ("PBX") package, which utilizes a soft switch and allows the customer the flexibility of utilizing new telephone technology and features without investing in a new telephone system. The package bundles local service, calling features, and internet protocol (“IP”) business telephones.

Long-distance services include traditional domestic and international long distance which enables customers to make calls that terminate outside their local calling area. These services also include toll free calls and conference calling. Allo offers a variety of long-distance plans, including unlimited flat-rate calling plans, and offers a combination of subscription and usage fees.

Sales and Marketing

The key components of Allo's overall marketing strategy include:


•	Promoting the advantages of an all-fiber network connected directly to homes and businesses that delivers synchronous internet speeds of one gigabit per second (about 100 times faster than standard broadband connections with copper or coaxial cable)


•	Building complete fiber communities by passing all homes and businesses within their network


•	Organizing sales and marketing activities around consumer, enterprise, and carrier customers


•	Positioning Allo as a single point of contact for customers’ communications needs


•	Providing customers with a broad array of internet, broadband, television, and telephone services and bundling these services whenever possible


•	Providing excellent customer service, including 24/7/365 centralized customer support to coordinate installation of new services, repair, and maintenance functions


•	Developing and delivering new services to meet evolving customer needs and market demands


•	Utilizing proven modern technology to deliver services

Allo currently offers services through direct marketing, call centers, its website, communication centers, and commissioned sales representatives. Allo markets its services both individually and as bundled services, including its triple-play offering of internet, television, and telephone services. By bundling service offerings, Allo is able to offer and sell a more complete and competitive package of services, which simultaneously increases its margin per customer and adds value for the consumer. Allo also believes that bundling leads to increased customer loyalty and retention.

Network Architecture and Technology

Allo has made significant investments in its technologically advanced telecommunications networks. As a result, Allo is able to deliver high-quality, reliable internet, broadband, telephone, and television services through fiber optics. Allo's wide-ranging network and extensive use of fiber provide an easy reach into existing and new areas. By bringing the fiber network to the customer premises, Allo can increase its service offerings, quality, and bandwidth services. Allo's existing fiber network enables it to efficiently respond and adapt to changes in technology and is capable of supporting the rising customer demand for bandwidth in order to support the growing amount of internet devices in the home. Allo's all-fiber network enhances its operating efficiencies by facilitating new network and technology choices that provide for lower costs to operate. Allo's networks are supported by an advanced digital telephone switch and IPTV service platform. The digital switch provides all local telephone customers with access to a full suite of telecommunication products, custom calling features, and value-added services. Allo's fiber network utilizes fiber-to-the-premise (“FTTP”) networks to offer bundled residential and commercial services. Allo leverages its high definition IPTV headend equipment to distribute content across its network allowing Allo to provide a sharp video picture, and to better manage costs of future channel additions and upgrades. Allo's network provides substantially all of its marketable homes and businesses with bandwidth of 1 gigabit per second.

Growth Strategy

As discussed above, Allo plans to increase its customer base with its superior all-fiber network by increasing market share in existing markets and entering additional markets currently served by carriers using traditional copper and coaxial cable in their telecommunications network, including Lincoln, Nebraska and additional communities in Nebraska and possibly surrounding states. Although the initial capital expenditures for these expansion efforts are expected to be significant, Allo believes that its service delivery model will continue to generate customer demand sufficient to provide attractive returns on the capital investment. In addition, Allo is focused on increasing revenues per customer by capitalizing on increased demand for bandwidth by commercial and residential customers.

Competition

Telecommunications businesses are highly competitive and continue to face increased competition as a result of technology changes and industry legislative and regulatory developments. Allo faces actual or potential competition from many existing and emerging companies, including incumbent and competitive local telephone companies, long-distance carriers and resellers, wireless companies, internet service providers ("ISPs"), satellite companies, cable television companies, and in some cases by new forms of providers who are able to offer competitive services through software applications, requiring a comparatively small initial investment. Due to consolidation and strategic alliances within the industry, Allo cannot predict the number of competitors it will face at any given time. The wireless business has expanded significantly and has caused many residential subscribers of traditional telephone services to discontinue those services and to rely exclusively on wireless service. Consumers are finding individual television shows of interest to them through the internet and are watching content that is downloaded to their computers. Some providers, including television and cable television content owners, have initiated what are referred to as “over-the-top” services that deliver video content to televisions and computers over the internet. Over-the-top services can include episodes of highly-rated television series in their current broadcast seasons. They also can include content that is related to broadcast or sports content that Allo carries, but that is distinct and may be available only through the alternative source. Finally, the transition to digital broadcast television has allowed many consumers to obtain high definition local broadcast television signals (including many network affiliates) over-the-air, using a simple antenna. Consumers can pursue each of these options without foregoing any of the other options. The incumbent telephone carriers in the markets Allo serves enjoy certain business advantages, including size, financial resources, favorable regulatory position, a more diverse product mix, brand recognition, and connection to virtually all of Allo's customers and potential customers. The largest cable operators also enjoy certain business advantages, including size, financial resources, ownership of or superior access to desirable programming and other content, a more diverse product mix, brand recognition, and first-in-the-field advantages with a customer base that generates positive cash flow for its operations. Allo's competitors continue to add features and adopt aggressive pricing and packaging for services comparable to the services Allo offers. Their success in selling some services competitive with Allo's can lead to revenue erosion in other related areas. Allo faces

intense competition in its markets for long-distance, internet access, and other ancillary services that are important to Allo's business and to its growth strategy.

Asset Generation and Management

The Asset Generation and Management operating segment includes the acquisition, management, and ownership of the Company's student loan assets. As of December 31, 2016, the Company's student loan portfolio was $24.9 billion. The Company generates a substantial portion of its earnings from the spread, referred to as the Company's student loan spread, between the yield it receives on its student loan portfolio and the associated costs to finance such portfolio. See Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset Generation and Management Operating Segment - Results of Operations - Student Loan Spread Analysis,” for further details related to the student loan spread. The student loan assets are held in a series of education lending subsidiaries and associated securitization trusts designed specifically for this purpose. In addition to the student loan spread earned on its portfolio, all costs and activity associated with managing the portfolio, such as servicing of the assets and debt maintenance, are included in this segment.

Student loans consist of federally insured student loans and private education loans. Federally insured student loans were originated under the FFEL Program. The Company's portfolio of federally insured student loans is subject to minimal credit risk, as these loans are guaranteed by the Department at levels ranging from 97 percent to 100 percent. Substantially all of the Company's loan portfolio (98.9 percent as of December 31, 2016) is federally insured. The Company's portfolio of private education loans is subject to credit risk similar to other consumer loan assets.

The Higher Education Act regulates every aspect of the federally insured student loan program, including certain communications with borrowers, loan originations, and default aversion. Failure to service a student loan properly could jeopardize the guarantee on federal student loans. In the case of death, disability, or bankruptcy of the borrower, the guarantee covers 100 percent of the loan's principal and accrued interest.

FFELP loans are guaranteed by state agencies or non-profit companies designated as guarantors, with the Department providing reinsurance to the guarantor. Guarantors are responsible for performing certain functions necessary to ensure the program's soundness and accountability. Generally, the guarantor is responsible for ensuring that loans are serviced in compliance with the requirements of the Higher Education Act. When a borrower defaults on a FFELP loan, the Company submits a claim to the guarantor, who provides reimbursements of principal and accrued interest, subject to the applicable risk share percentage.

Origination and Acquisition

The Reconciliation Act of 2010 eliminated originations of new FFELP loans effective July 1, 2010. However, the Company believes there will be ongoing opportunities to continue to purchase FFELP loan portfolios from current FFELP participants looking to adjust their FFELP businesses. For example, from July 1, 2010 through December 31, 2016, the Company purchased a total of $21.1 billion of FFELP student loans from various third-parties. The Company's competition for the purchase of student loan portfolios and residuals includes large banks, hedge funds, and other student loan finance companies.

Interest Rate Risk Management

Because the Company generates a significant portion of its earnings from its student loan spread, the interest rate sensitivity of the Company's balance sheet is very important to its operations. The current and future interest rate environment can and will affect the Company's interest income and net income. The effects on the Company's results of operations as a result of the changing interest rate environments are further outlined in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset Generation and Management Operating Segment - Results of Operations - Student Loan Spread Analysis" and Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk.”

Corporate and Other Activities

Real Estate and Other Investments

The Company makes investments to further diversify the Company both within and outside of its historical core education-related businesses, including investments in real estate and start-up ventures. Recent real estate investments have been focused on the development of commercial properties in the Midwest, and particularly in Lincoln, Nebraska, where the Company’s headquarters are located. These investments include projects for the development of properties in Lincoln’s east downtown Telegraph District, including a building planned as a new location for the Company’s student loan servicing operations, and the development of a

building in Lincoln’s Haymarket District that will be the new headquarters of Hudl, which provides online video analysis and coaching tools software for athletes of all levels, and where the Company will also be a tenant. As of December 31, 2016, the total amount of real estate investments by the Company was $48.4 million. In addition, the Company has an equity investment in Hudl of $41.4 million. David S. Graff, a member of the Company’s Board of Directors, is a co-founder, the Chief Executive Officer, and a director of Hudl.

Regulation and Supervision

The Company's operating segments and industry partners are heavily regulated by federal and state government regulatory agencies. The following provides a summary of the more significant existing and proposed legislation and regulations affecting the Company. A failure to comply with these laws and regulations could subject the Company to substantial fines, penalties, and remedial and other costs, restrictions on business, and the loss of business. Regulations and supervision can change rapidly, and changes could alter the manner in which the Company operates and increase the Company's operating expenses as new or additional regulatory compliance requirements are addressed.

Loan Systems and Servicing

The Company's Loan Systems and Servicing operating segment, which services Federal Direct Loan Program, FFELP, and private education and consumer loans, is subject to federal and state consumer protection, privacy, and related laws and regulations. Some of the more significant federal laws and regulations include:


•	The Higher Education Act, which establishes financial responsibility and administrative capability that govern all third-party servicers of federally insured student loans


•	The Telephone Consumer Protection Act (“TCPA”), which governs communication methods that may be used to contact customers


•	The Truth-In-Lending Act and Regulation Z, which governs disclosures of credit terms to consumer borrowers


•	The Fair Credit Reporting Act and Regulation V, which governs the use and provision of information to consumer reporting agencies


•	The Equal Credit Opportunity Act and Regulation B, which prohibits discrimination on the basis of race, creed, or other prohibited factors in extending credit


•	The Servicemembers Civil Relief Act (“SCRA”), which applies to all debts incurred prior to commencement of active military service and limits the amount of interest, including certain fees or charges that are related to the obligation or liability


•	The Electronic Funds Transfer Act (“EFTA”) and Regulation E, which protects individual consumers engaged in electronic fund transfers (“EFTs”)


•	The Gramm-Leach-Bliley Act (“GLBA”) and Regulation P, which governs a financial institution’s treatment of nonpublic personal information about consumers and requires that an institution, under certain circumstances, notify consumers about its privacy policies and practices


•	Laws prohibiting unfair, deceptive, or abusive acts or practices


•	Various laws, regulations, and standards that govern government contractors

As a student loan servicer for the federal government and for financial institutions, including the Company’s FFELP student loan portfolio, the Company is subject to the Higher Education Act and related laws, rules, regulations, and policies. The Higher Education Act regulates every aspect of the federally insured student loan program. The Company has designed its servicing operations to comply with the Higher Education Act, and it regularly monitors the Company's operations to maintain compliance.

Under the TCPA, plaintiffs may seek actual monetary loss or damages of $500 - $1,500 per violation, whichever is greater, and the courts may treble the damage award for willful or knowing violations. In addition, TCPA lawsuits have asserted putative class action claims.

In July 2010, Congress passed The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”), which has broad authority to regulate a wide range of consumer financial products and services. The Company's student loan servicing business is subject to CFPB oversight authority.

In May 2015, the CFPB launched a public inquiry into student loan servicing practices throughout the industry. In September 2015, the CFPB issued a report discussing public comments submitted in response to the inquiry, and suggesting a framework to improve borrower outcomes and reduce defaults, including the creation of consistent, industry-wide standards for the entire

servicing market. In July 2016, the Department expanded on those principles by outlining enhanced customer service standards and protections that will be incorporated into federal servicing contracts and guidelines.

The CFPB is authorized to draft new regulations implementing federal consumer financial protection laws, to enforce those laws and regulations, and to conduct examinations of the Company's operations to determine compliance. The CFPB’s authority includes the ability to assess financial penalties and fines and provide for restitution to consumers if it determines there have been violations of consumer financial protection laws. The CFPB also provides consumer financial education, tracks consumer complaints, requests data from industry participants, and promotes the availability of financial services to underserved consumers and communities. The CFPB has authority to prevent unfair, deceptive, or abusive acts or practices and to ensure that all consumers have access to fair, transparent, and competitive markets for consumer financial products and services. The CFPB’s scrutiny of financial services has impacted participants’ approach to their services, including how the Company interacts with consumers.

In addition, where a company has violated Title X of the Dodd-Frank Act or CFPB regulations implemented under Title X of the Dodd-Frank Act, the Dodd-Frank Act empowers state attorneys general and state regulators to bring civil actions to remedy violations of state law. Most states also have statutes that prohibit unfair and deceptive practices. To the extent states enact requirements that differ from federal standards or state officials and courts adopt interpretations of federal consumer laws that differ from those adopted by the CFPB under the Dodd-Frank Act, the Company's ability to offer the same products and services to consumers nationwide may be limited.

As a third-party service provider to financial institutions, the Company is subject to periodic examination by the Federal Financial Institutions Examination Council (“FFIEC”). FFIEC is a formal interagency body of the U.S. government empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions by the Federal Reserve Banks, the Federal Deposit Insurance Corporation, and the CFPB, and to make recommendations to promote uniformity in the supervision of financial institutions.

Tuition Payment Processing and Campus Commerce

The Tuition Payment Processing and Campus Commerce operating segment provides tuition management services and school information software for K-12 schools and tuition management services and campus commerce solutions for higher education institutions. As a service provider that takes payment instructions from institutions and their constituents and sends them to bank partners, the Company is directly or indirectly subject to a variety of federal and state laws and regulations. The Company's contracts with clients and bank partners require the Company to comply with these laws and regulations.

The Company's payment processing services are subject to the EFTA and Regulation E, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of debit cards and certain other electronic banking services. The Company assists bank partners with fulfilling their compliance obligations pursuant to these requirements.

The Company's payment processing services are also subject to the National Automated Clearing House Association (“NACHA”) requirements, which include operating rules and sound risk management procedures to govern the use of the Automated Clearing House ("ACH") Network. These rules are used to ensure that the ACH Network is efficient, reliable, and secure for its members. Because the ACH Network uses a batch process, the importance of proper submissions by NACHA members is magnified.

The Company is also impacted by laws and regulations that affect the bankcard industry. The Company is registered with Visa, MasterCard, American Express, and the Discover Network as a service provider and is subject to their respective rules.

The Company's higher education institution clients are subject to the Family Educational Rights and Privacy Act (“FERPA”), which protects the privacy of student education records. The Company's higher education institution clients disclose certain non-directory information concerning their students to the Company, including contact information, student identification numbers, and the amount of students’ credit balances pursuant to one or more exceptions under FERPA. Additionally, as the Company is indirectly subject to FERPA, it may not permit the transfer of any personally identifiable information to another party other than in a manner in which an educational institution may properly disclose it. While the Company believes that it has adequate policies and procedures in place to safeguard the privacy of such information, a breach of this prohibition could result in a five-year suspension of the Company's access to the related client’s records. The Company may also be subject to similar state laws and regulations that restrict higher education institutions from disclosing certain personally identifiable student information.

Some of the Company's K-12 and higher education institution clients choose to charge convenience fees to students, parents, or other payers who make online payments using a credit or debit card. Laws and regulations related to such fees vary from state to

state and certain states have laws that to varying degrees prohibit the imposition of a surcharge on a cardholder who elects to use a credit or debit card in lieu of cash, check, or other means.

The CFPB has regulatory oversight authority over consumer credit services and the prepaid card industry. The CFPB has proposed regulations regarding the prepaid card industry, which, if adopted as proposed, could impose significant additional disclosure requirements, overdraft requirements, and other requirements on the prepaid card industry. Similarly, other future actions of the CFPB could require further regulatory disclosures and changes to payment card practices, fees, routing, and other matters with respect to credit, debit, and prepaid cards.

The Company's contracts with higher education institution clients also require us to comply with regulations promulgated by the Department regarding the handling of student financial aid funds received by institutions on behalf of their students under Title IV of the Higher Education Act. On October 30, 2015, the Department amended cash management and other regulations to ensure students have convenient access to their Title IV funds, do not incur unreasonable fees, and are not led to believe they must open a financial account to receive such funds.

Communications

The telecommunications business that the Company has entered through the acquisition of Allo on December 31, 2015 is subject to extensive federal, state, and local regulation. Under the Telecommunications Act of 1996 (“Telecommunications Act”), federal and state regulators share responsibility for implementing and enforcing statutes and regulations designed to encourage competition and to preserve and advance widely available, quality telephone service at affordable prices.

At the federal level, the Federal Communications Commission ("FCC") generally exercises jurisdiction over facilities and services of local exchange carriers to the extent they are used to provide, originate, or terminate interstate or international communications. The FCC has the authority to condition, modify, cancel, terminate, or revoke operating authority for failure to comply with applicable federal laws or FCC rules, regulations, and policies.

State regulatory commissions generally exercise jurisdiction over carriers’ facilities and services to the extent they are used to provide, originate, or terminate intrastate communications. In addition, municipalities and other local government agencies regulate the public rights-of-way necessary to install and operate networks.

The Communications Act of 1934 ("Communications Act") requires, among other things, that telecommunications carriers offer services at just and reasonable rates and on non-discriminatory terms and conditions. The 1996 amendments to the Communications Act, contained in the Telecommunications Act, dramatically changed, and likely will continue to change, the landscape of the telecommunications industry. The central aim of the Telecommunications Act is to open local telecommunications markets to competition while enhancing universal service. The Telecommunications Act imposes a number of interconnection and other requirements on all local communications providers. All telecommunications carriers have a duty to interconnect directly or indirectly with the facilities and equipment of other telecommunications carriers.

The State of Nebraska Public Services Commission dictates service requirements and fees which have required Allo to obtain franchises from each incorporated municipality in which Allo operates. Allo is also required to obtain permits for street opening and construction, or for operating franchises to install and expand fiber optic facilities. These permits or other licenses or agreements typically require the payment of fees.

Allo's aerial and underground construction operations are subject to extensive laws and regulations relating to the maintenance of safe conditions in the workplace. Allo could also be subject to potential liabilities in the event it causes a release of hazardous substances or other environmental damage resulting from underground objects Allo encounters.

Internet services

The provision of internet access services is not significantly regulated by either the FCC or the state commissions. However, the FCC has in recent years taken some steps toward the imposition of some controls on the provision of internet access, and has asserted that it has jurisdictional authority in some areas related to the promotion of an open internet. The extent of the FCC’s jurisdiction with respect to the internet has not been resolved, and the outcome could lead to increased costs for Allo in connection with its provision of internet services, and could affect Allo's ability to effectively compete.

As the internet has matured, it has become the subject of increasing regulatory interest. Congress and federal regulators have adopted a wide range of measures directly or potentially affecting internet use, including, for example, consumer privacy, copyright

protections, defamation liability, taxation, obscenity, and unsolicited commercial e-mail. Allo's internet services are subject to the Communications Assistance for Law Enforcement Act ("CALEA") requirements regarding law enforcement surveillance. Content owners are now seeking additional legal mechanisms to combat copyright infringement over the internet. Pending and future legislation in this area could adversely affect Allo's operations as an ISP and relationship with internet customers. Additionally, the FCC and Congress are considering subjecting internet access services to the Universal Service funding requirements. These funding requirements could impose significant new costs on Allo's high-speed internet service. Also, the FCC and some state regulatory commissions direct certain subsidies to telephone companies deploying broadband to areas deemed to be “unserved” or “underserved.” State and local governmental organizations have also adopted internet-related regulations. These various governmental jurisdictions are also considering additional regulations in these and other areas, such as privacy, pricing, service and product quality, and taxation. The adoption of new internet regulations or the adaptation of existing laws to the internet could adversely affect Allo's business.

On June 12, 2015, the FCC Net Neutrality Order became effective. The new rules prohibit ISPs from engaging in blocking, throttling, and paid prioritization, and transparency rules compelling the disclosure of network management policies were enhanced. The FCC would also have authority under the proposed rules to hear complaints and take enforcement action if it determines that the interconnection activities of ISPs are not just and reasonable, or if ISPs fail to meet general obligations not to harm consumers or what are referred to as edge providers. The rules could limit Allo’s ability to efficiently manage internet service and respond to operational and competitive challenges.

Television services

Federal regulations currently restrict the prices that cable systems charge for the minimum level of television programming service, referred to as “basic service,” and associated equipment. All other television service offerings are now universally exempt from rate regulation. Although basic service rate regulation operates pursuant to a federal formula, local governments, commonly referred to as local franchising authorities, are primarily responsible for administering this regulation. The majority of Allo's local franchising authorities have never been certified to regulate basic service cable rates (and order rate reductions and refunds), but they generally retain the right to do so (subject to potential regulatory limitations under state franchising laws), except in those specific communities facing “effective competition,” as defined under federal law. There have been frequent calls to impose expanded rate regulation on the cable industry. As a result of rapidly increasing cable programming costs, it is possible that Congress may adopt new constraints on the retail pricing or packaging of cable programming. Federal rate regulations currently include certain marketing restrictions that could affect Allo's pricing and packaging of service tiers and equipment. As Allo attempts to respond to a changing marketplace with competitive pricing practices, we may face regulations that impede our ability to compete.

IPTV operations require state or local franchise or other authorization in order to provide cable service to customers. Allo is subject to regulation under a Communications Act framework that addresses such issues as the use of local streets and rights of way; the carriage of public, educational, and governmental channels; the provision of channel space for leased commercial access; the amount and payment of franchise fees; consumer protection; and similar issues. In addition, federal laws and FCC regulations place limits on the common ownership of cable systems and competing multichannel television distribution systems, and on the common ownership of cable systems and local telephone systems in the same geographic area. The FCC has recently expanded its oversight and regulation of cable television-related matters. Federal law and regulations also affect numerous issues related to television programming and other content. Under federal law, certain local television broadcast stations (both commercial and non-commercial) can elect, every three years, to take advantage of rules that require a cable operator to distribute the station’s content to the cable system’s customers without charge, or to forego this “must-carry” obligation and to negotiate for carriage on an arm’s length contractual basis, which typically involves the payment of a fee by the cable operator, and sometimes involves other consideration as well. The current three year cycle began on January 1, 2015. Allo has successfully negotiated agreements with all of the local television broadcast stations that would have been eligible for “must carry” treatment in each of our current markets. The contractual relationships between cable operators and most providers of content who are not television broadcast stations generally are not subject to FCC oversight or other regulation.

The Communications Act requires most utilities owning utility poles to provide access to poles and conduits, and subjects the rates charged for this access to either federal or state regulation. In 2011, the FCC amended its existing pole attachment rules to promote broadband deployment. The 2011 order allows for new penalties in certain cases involving unauthorized attachments, but generally strengthens the ability to access investor-owned utility poles on reasonable rates, terms, and conditions.

Allo's IPTV systems are subject to a federal copyright compulsory license covering carriage of television and radio broadcast signals. The possible modification or elimination of this compulsory copyright license is the subject of continuing legislative proposals and administrative review and could adversely affect Allo's ability to obtain desired broadcast programming. Copyright clearances for non-broadcast programming services are arranged through private negotiations. IPTV operators also must obtain

music rights for locally originated programming and advertising from the major music performing rights organizations. These licensing fees have been the source of litigation in the past, and license fee disputes may arise in the future.

Telephone services

Allo offers voice communications services over a broadband network. The FCC has ruled that competitive telephone companies are entitled to interconnect with incumbent providers of traditional telecommunications services, which ensures that services can compete in the market. The FCC has also declared that certain services are not subject to traditional state public utility regulation. The full extent of the FCC preemption of state and local regulation of services is not yet clear. In November 2011, the FCC released an order significantly changing the rules governing intercarrier compensation payments for the origination and termination of telephone traffic between carriers. These rules have resulted and will continue to result in a substantial decrease in intercarrier compensation payments over a multi-year period.

Asset Generation and Management

The Dodd-Frank Act provides the Commodity Futures Trading Commission (the "CFTC") and the Securities and Exchange Commission (the "SEC") with substantial authority to regulate over-the-counter derivative transactions, and includes provisions that require derivative transactions to be executed through an exchange or central clearinghouse. On December 24, 2016, new risk retention rules went into effect that require issuers of asset-backed securities or persons who organize and initiate asset-backed securities transactions to retain a percentage of the underlying assets' credit risk. The higher retention requirements could decrease the leverage the Company obtains in a securitization and therefore potentially decrease the Company's return on equity from securitization transactions. These rules also expand disclosure and reporting requirements for each tranche of asset-backed securities, including new loan-level data requirements, and expand disclosure requirements relating to the representations, warranties, and enforcement mechanisms available to investors.

Corporate

Governmental bodies in the United States and abroad have adopted, or are considering the adoption of, laws and regulations restricting the transfer of, and safeguarding, non-public personal information. For example, in the United States, the Company and its financial institution clients are, respectively, subject to the Federal Trade Commission’s and the federal banking regulators’ privacy and information safeguarding requirements under the GLBA. The GLBA and Regulation P govern a financial institution’s treatment of nonpublic personal information about consumers and require that an institution, under certain circumstances, notify consumers about its privacy policies and practices. With certain exceptions, the GLBA prohibits a financial institution from disclosing a consumer’s nonpublic personal information to a nonaffiliated third-party unless the institution satisfies various notice requirements and the consumer does not elect to prevent, or “opt out of,” the disclosure. The GLBA also imposes specific requirements regarding the disclosure of customer account numbers and the reuse and redisclosure of information a financial institution provides to a third party. While the Company's operations are subject to certain provisions of these privacy laws, the Company has limited use of consumer information solely to providing services to other businesses and financial institutions. The Company limits sharing of non-public personal information to that necessary to complete transactions on behalf of the consumer and to that permitted by federal and state laws.

Intellectual Property

The Company owns numerous trademarks and service marks (“Marks”) to identify its various products and services. As of December 31, 2016, the Company had 56 registered Marks. The Company actively asserts its rights to these Marks when it believes infringement may exist. The Company believes its Marks have developed and continue to develop strong brand-name recognition in the industry and the consumer marketplace. Each of the Marks has, upon registration, an indefinite duration so long as the Company continues to use the Mark on or in connection with such goods or services as the Mark identifies. In order to protect the indefinite duration, the Company makes filings to continue registration of the Marks. The Company owns one patent application that has been published, but has not yet been issued, and has also actively asserted its rights thereunder in situations where the Company believes its claims may be infringed upon. The Company owns many copyright protected works, including its various computer system codes and displays, Web sites, books and other publications, and marketing materials. The Company also has trade secret rights to many of its processes and strategies and its software product designs. The Company's software products are protected by both registered and common law copyrights, as well as strict confidentiality and ownership provisions placed in license agreements, which restrict the ability to copy, distribute, or improperly disclose the software products. The Company also has adopted internal procedures designed to protect the Company's intellectual property.

The Company seeks federal and/or state protection of intellectual property when deemed appropriate, including patent, trademark/service mark, and copyright. The decision whether to seek such protection may depend on the perceived value of the intellectual property, the likelihood of securing protection, the cost of securing and maintaining that protection, and the potential for infringement. The Company's employees are trained in the fundamentals of intellectual property, intellectual property protection, and infringement issues. The Company's employees are also required to sign agreements requiring, among other things, confidentiality of trade secrets, assignment of inventions, and non-solicitation of other employees post-termination. Consultants, suppliers, and other business partners are also required to sign nondisclosure agreements to protect the Company's proprietary rights.

Employees

As of December 31, 2016, the Company had approximately 3,700 employees. None of the Company's employees are covered by collective bargaining agreements. The Company is not involved in any material disputes with any of its employees, and the Company believes that relations with its employees are good.

Available Information

Copies of the Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports are available on the Company's Web site free of charge as soon as reasonably practicable after such reports are filed with or furnished to the SEC. Investors and other interested parties can access these reports and the Company's proxy statements at http://www.nelnetinvestors.com. The Company routinely posts important information for investors on its Web site.

The Company has adopted a Code of Ethics and Conduct that applies to directors, officers, and employees, including the Company's principal executive officer and its principal financial and accounting officer, and has posted such Code of Ethics and Conduct on its Web site. Amendments to and waivers granted with respect to the Company's Code of Ethics and Conduct relating to its executive officers and directors which are required to be disclosed pursuant to applicable securities laws and stock exchange rules and regulations will also be posted on its Web site. The Company's Corporate Governance Guidelines, Audit Committee Charter, Compensation Committee Charter, Nominating and Corporate Governance Committee Charter, Risk and Finance Committee Charter, and Compliance Committee Charter are also posted on its Web site.

Information on the Company's Web site is not incorporated by reference into this report and should not be considered part of this report.

ITEM 1A. RISK FACTORS

We operate our businesses in a highly competitive and regulated environment. We are subject to risks including, but not limited to, market, liquidity, credit, regulatory, technology, operational, security, and other business risks such as reputation damage related to negative publicity and dependencies on key personnel, customers, vendors, and systems. This section highlights specific risks that could affect us. Although this section attempts to highlight key risk factors, other risks may emerge at any time and we cannot predict all risks or estimate the extent to which they may affect our financial performance. These risk factors should be read in conjunction with the other information included in this report.

Student Loan Portfolio

Our student loan portfolio is subject to certain risks related to interest rates, our ability to manage the risks related to interest rates, prepayment, and credit risk, each of which could reduce the expected cash flows and earnings on our portfolio.

Interest rate risk - basis and repricing risk

We are exposed to interest rate risk in the form of basis risk and repricing risk because the interest rate characteristics of our student loan assets do not always match the interest rate characteristics of the funding for those assets.

We fund the majority of our FFELP student loan assets with one-month or three-month LIBOR indexed floating rate securities. In addition, the interest rates on some of our debt are set via a “dutch auction.” Meanwhile, the interest earned on our FFELP student loan assets is indexed to one-month LIBOR, three-month commercial paper, and Treasury bill rates. The different interest rate characteristics of our loan assets and our liabilities funding these assets result in basis risk. We also face repricing risk due to the timing of the interest rate resets on our liabilities, which may occur as infrequently as once a quarter, in contrast to the timing

of the interest rate resets on our assets, which generally occur daily. In a declining interest rate environment, this may cause our student loan spread to compress, while in a rising interest rate environment, it may cause the spread to increase.

As of December 31, 2016, we had $22.8 billion, $1.3 billion, and $0.7 billion of FFELP loans indexed to the one-month LIBOR, three-month commercial paper, and three-month Treasury bill rate, respectively, all of which reset daily, and $13.7 billion of debt indexed to three-month LIBOR, which resets quarterly, and $9.1 billion of debt indexed to one-month LIBOR, which resets monthly. While these indices are all short term in nature with rate movements that are highly correlated over a longer period of time, there have been points in recent history related to the U.S. and European debt crisis that have caused volatility to be high and correlation to be reduced. There can be no assurance that the indices' historically high level of correlation will not be disrupted in the future due to capital market dislocations or other factors not within our control. In such circumstances, our earnings could be adversely affected, possibly to a material extent.

We have entered into basis swaps to hedge our basis and repricing risk. For these derivatives, we receive three-month LIBOR set discretely in advance and pay one-month LIBOR plus or minus a spread as defined in the agreements (the "1:3 Basis Swaps").

Interest rate risk - loss of floor income

FFELP loans originated prior to April 1, 2006 generally earn interest at the higher of the borrower rate, which is fixed over a period of time, or a floating rate based on the Special Allowance Payments ("SAP") formula set by the Department. The SAP rate is based on an applicable index plus a fixed spread that depends on loan type, origination date, and repayment status. We generally finance our student loan portfolio with variable rate debt. In low and/or certain declining interest rate environments, when the fixed borrower rate is higher than the SAP rate, these student loans earn at a fixed rate while the interest on the variable rate debt typically continues to reflect the low and/or declining interest rates. In these interest rate environments, we may earn additional spread income that we refer to as floor income.

Depending on the type of loan and when it was originated, the borrower rate is either fixed to term or is reset to an annual rate each July 1. As a result, for loans where the borrower rate is fixed to term, we may earn floor income for an extended period of time, which we refer to as fixed rate floor income, and for those loans where the borrower rate is reset annually on July 1, we may earn floor income to the next reset date, which we refer to as variable rate floor income.

For the year ended December 31, 2016, we earned $152.3 million of fixed rate floor income, net of $17.6 million of settlements paid related to derivatives used to hedge loans earning fixed rate floor income. Absent the use of derivative instruments, a rise in interest rates will reduce the amount of floor income received and this will have an impact on earnings due to interest margin compression caused by increased financing costs, until such time as the federally insured loans earn interest at a variable rate in accordance with their SAP formulas. In higher interest rate environments, where the interest rate rises above the borrower rate and fixed rate loans effectively convert to variable rate loans, the impact of the rate fluctuations is reduced.

Interest rate risk - use of derivatives

We utilize derivative instruments to manage interest rate sensitivity. Our derivative instruments are intended as economic hedges but do not qualify for hedge accounting; consequently, the change in fair value, called the “mark-to-market,” of these derivative instruments is included in our operating results. Changes or shifts in the forward yield curve can and have significantly impacted the valuation of our derivatives. Accordingly, changes or shifts in the forward yield curve will impact our financial position and results of operations.

Although we believe our derivative instruments are highly effective, developing an effective strategy for dealing with movements in interest rates is complex, and no strategy can completely insulate us from risks associated with such fluctuations. Because many of our derivatives are not balance guaranteed to a particular pool of student loans and we may not elect to fully hedge our risk on a notional and/or duration basis, we are subject to the risk of being under or over hedged, which could result in material losses. In addition, our interest rate risk management activities could expose us to substantial mark-to-market losses if interest rates move in a materially different way than was expected based on the environment when the derivatives were entered into. As a result, we cannot offer any assurance that our economic hedging activities will effectively manage our interest rate sensitivity or have the desired beneficial impact on our results of operations or financial condition.

By using derivative instruments, we are exposed to credit and market risk. We attempt to manage credit and market risks associated with interest rates by establishing and monitoring limits as to the types and degree of risk that may be undertaken and by entering into transactions with high-quality counterparties that are reviewed periodically by our risk committee. As of December 31, 2016,

all of our derivative counterparties had investment grade credit ratings. We also have a policy of requiring that all derivative contracts be governed by an International Swaps and Derivatives Association, Inc. Master Agreement.

The Dodd-Frank Act provides the CFTC with substantial authority to regulate over-the-counter derivative transactions. The CFTC issued final regulations that require derivative transactions to be executed through an exchange or central clearinghouse. As such, effective June 10, 2013, all over-the-counter derivative contracts executed by us are cleared post-execution at a regulated clearinghouse. Clearing is a process by which a third-party, the clearinghouse, steps in between the original counterparties and guarantees the performance of both, by requiring that each post substantial amounts of liquid collateral on an initial and mark-to-market basis to cover the clearinghouse's potential future exposure in the event of default. The new clearing requirements did not alter or affect the terms and conditions of our derivative instruments executed prior to June 10, 2013. The new clearing requirements require us to post substantial amounts of liquid collateral when executing new derivative instruments, which could negatively impact our liquidity and capital resources and may prevent or limit us from utilizing derivative instruments to manage interest rate sensitivity and risks. However, the new clearing requirements reduce counterparty risk associated with derivatives executed by us after June 10, 2013.

When the fair value of a derivative contract is positive (an asset on our balance sheet), this generally indicates that the counterparty or clearinghouse owes us if the derivative was settled. If the counterparty or clearinghouse fails to perform, credit risk with such counterparty or clearinghouse is equal to the extent of the fair value gain in the derivative less any collateral held by us. If we were unable to collect from a counterparty or clearinghouse, we would have a loss equal to the amount the derivative is recorded on the consolidated balance sheet.

When the fair value of a derivative instrument is negative (a liability on our balance sheet), we would owe the counterparty if the derivative was settled and, therefore, have no immediate credit risk. If the negative fair value of derivatives with a counterparty exceeds a specified threshold, we may have to make a collateral deposit with the counterparty. The threshold at which we may be required to post collateral is dependent upon our unsecured credit rating. We believe any downgrades from our current unsecured credit ratings (Standard & Poor's: BBB- (stable outlook) and Moody's: Ba1 (stable outlook)), would not result in additional collateral requirements of a material nature. In addition, no counterparty has the right to terminate our contracts in the event of downgrades from the current ratings. However, some derivative contracts have mutual optional termination provisions that can be exercised during 2022. As of December 31, 2016, the fair value of derivatives with early termination provisions was a negative $2.7 million (a liability on the Company's balance sheet).

Interest rate movements have an impact on the amount of collateral we are required to deposit with our derivative instrument counterparties or the clearinghouse. Based on the interest rate swaps outstanding as of December 31, 2016 (for both the floor income and hybrid debt hedges), if the forward interest rate curve was one basis point lower for the remaining duration of these derivatives, we would have been required to post $1.6 million in additional collateral. In addition, if the forward basis curve between 1-month and 3-month LIBOR experienced a one basis point reduction in spread for the remaining duration of our 1:3 Basis Swaps (in which we pay 1-month LIBOR and receive 3-month LIBOR), we would have been required to post $1.6 million in additional collateral.

With our current derivative portfolio, we do not currently anticipate a near term movement in interest rates having a material impact on our liquidity or capital resources, nor expect future movements in interest rates to have a material impact on our ability to meet potential collateral deposit requirements with our counterparties or clearinghouse. Due to the existing low interest rate environment, our exposure to downward movements in interest rates on our interest rate swaps is limited. In addition, we believe the historical high correlation between 1-month and 3-month LIBOR limits our exposure to interest rate movements on the 1:3 Basis Swaps.

However, if interest rates move materially and negatively impact the fair value of our derivative portfolio or if we enter into additional derivatives in which the fair value of such derivatives becomes negative, we could be required to deposit a significant amount of collateral with our derivative instrument counterparties and/or the clearinghouse. The collateral deposits, if significant, could negatively impact our liquidity and capital resources.

Our outstanding cross-currency interest rate swap is a derivative entered into as a result of an asset-backed security financing. This derivative was entered into at the securitization trust level with the counterparty and does not contain credit contingent features related to our or the trust's credit ratings. As such, there are no collateral requirements and the impact of changes to foreign currency rates has no impact on the amount of collateral we would be required to deposit with the counterparty on this derivative.

Prepayment risk

Higher rates of prepayments of student loans, including consolidations by the Department through the Federal Direct Loan Program or private refinancing programs, would reduce our interest income.

Pursuant to the Higher Education Act, borrowers may prepay loans made under the FFEL Program at any time without penalty. Prepayments may result from consolidations of student loans by the Department through the Federal Direct Loan Program or by a lending institution through a private education loan, which historically tend to occur more frequently in low interest rate environments; from borrower defaults, which will result in the receipt of a guaranty payment; and from voluntary full or partial prepayments; among other things.

Legislative risk exists as Congress evaluates proposals to reauthorize the Higher Education Act. If the federal government and the Department initiate additional loan forgiveness, other repayment options or plans, or consolidation loan programs, such initiatives could further increase prepayments and reduce interest income, and could also reduce servicing fees.

The rate of prepayments of student loans may be influenced by a variety of economic, social, political, and other factors affecting borrowers, including interest rates, federal budgetary pressures, and the availability of alternative financing. Our profits could be adversely affected by higher prepayments, which reduce the balance of loans outstanding and, therefore, the amount of interest income we receive.

Credit risk

Future losses due to defaults on loans held by us present credit risk which could adversely affect our earnings.

The vast majority (98.9 percent) of our student loan portfolio is federally guaranteed. The allowance for loan losses from the federally insured loan portfolio is based on periodic evaluations of our loan portfolios, considering loans in repayment versus those in nonpaying status, delinquency status, trends in defaults in the portfolio based on Company and industry data, past experience, trends in student loan claims rejected for payment by guarantors, changes to federal student loan programs, current economic conditions, and other relevant factors. The federal government currently guarantees 97 percent of the principal and interest on federally insured student loans disbursed on and after July 1, 2006 (and 98 percent for those loans disbursed on and after October 1, 1993 and prior to July 1, 2006), which limits our loss exposure on the outstanding balance of our federally insured portfolio. Student loans disbursed prior to October 1, 1993 are fully insured for both principal and interest.

Our private education loans are unsecured, with neither a government nor a private insurance guarantee. Accordingly, we bear the full risk of loss on these loans if the borrower and co-borrower, if applicable, default. In determining the adequacy of the allowance for loan losses on the private education loans, we consider several factors, including: loans in repayment versus those in a nonpaying status, delinquency status, type of program, trends in defaults in the portfolio based on Company and industry data, past experience, current economic conditions, and other relevant factors. We place a private education loan on nonaccrual status when the collection of principal and interest is 90 days past due, and charge off the loan when the collection of principal and interest is 120 days past due.

The evaluation of the allowance for loan losses is inherently subjective, as it requires material estimates that may be subject to significant changes. As of December 31, 2016, our allowance for loan losses was $51.8 million. During the year ended December 31, 2016, we recognized a provision for loan losses of $13.5 million. The provision for loan losses reflects the activity for the applicable period and provides an allowance at a level that management believes is appropriate to cover probable losses inherent in the loan portfolio. However, future defaults can be higher than anticipated due to a variety of factors, such as downturns in the economy, regulatory or operational changes, and other unforeseen future trends. If actual performance is significantly worse than currently estimated, it would materially affect our estimate of the allowance for loan losses and the related provision for loan losses in our statements of income.

Liquidity and Funding

We fund student loans in warehouse facilities. The current maturities of these facilities do not match the maturity of the related funded assets. Therefore, we will need to modify and/or find alternative funding related to the student loan collateral in these facilities prior to their expiration. If we cannot find any funding alternatives, we would lose our collateral, including the student loan assets and cash advances, related to these facilities.

The majority of our portfolio of student loans is funded through asset-backed securitizations that are structured to substantially match the maturity of the funded assets, and there are minimal liquidity issues related to these facilities. We also have student loans funded in shorter term warehouse facilities. The current maturities of these facilities do not match the maturity of the related funded assets. Therefore, we will need to modify and/or find alternative funding related to the student loan collateral in these facilities prior to their expiration.

As of December 31, 2016, we maintained three FFELP warehouse facilities as described in note 4 of the notes to consolidated financial statements included in this report. The FFELP warehouse facilities have revolving financing structures supported by 364-day liquidity provisions, which expire in 2017 and 2018. In the event we are unable to renew the liquidity provisions for a facility, the facility would become a term facility at a stepped-up cost, with no additional student loans being eligible for financing, and we would be required to refinance the existing loans in the facility by the final maturity dates in 2018 and 2019. The FFELP warehouse facilities also contain financial covenants relating to levels of our consolidated net worth, ratio of adjusted EBITDA to corporate debt interest, and unencumbered cash. Any noncompliance with these covenants could result in a requirement for the immediate repayment of any outstanding borrowings under the facilities. As of December 31, 2016, $1.7 billion was outstanding under the FFELP warehouse facilities and $83.8 million was advanced as equity support.

If we are unable to obtain cost-effective funding alternatives for the loans in the warehouse facilities prior to the facilities' maturities, our cost of funds could increase, adversely affecting our results of operations. If we cannot find any funding alternatives, we would lose our collateral, including the student loan assets and cash advances, related to these facilities.

We are exposed to mark-to-formula collateral support risk on one of our FFELP warehouse facilities.

One of our FFELP warehouse facilities provides formula based advance rates based on market conditions, which requires equity support to be posted to the facility. As of December 31, 2016, $656.3 million was outstanding under this warehouse facility and $20.3 million was advanced as equity support. In the event that a significant change in the valuation of loans results in additional required equity funding support for this warehouse facility greater than what we can provide, the warehouse facility could be subject to an event of default resulting in termination of the facility and an acceleration of the repayment provisions. If we cannot find any funding alternatives, we would lose our collateral, including the student loan assets and cash advances, related to this facility. A default on the FFELP warehouse facility would result in an event of default on our $350.0 million unsecured line of credit that would result in the outstanding balance on the line of credit becoming immediately due and payable. The other two FFELP warehouse facilities have static advance rates that require initial equity for loan funding, but do not require increased equity based on market movements.

We are subject to economic and market fluctuations related to our investments.

We currently invest a substantial portion of our excess cash in student loan asset-backed securities and other investments that are subject to market fluctuations. The fair value of these investments was $106.6 million as of December 31, 2016, including $103.8 million in student loan asset-backed securities. The student loan asset-backed securities earn a floating interest rate and carry expected returns of approximately LIBOR + 200-400 basis points to maturity. While the vast majority of these securities are backed by FFELP government guaranteed student loan collateral, most are in subordinate tranches and have a greater risk of loss with respect to the applicable student loan collateral pool. While we expect these securities to have few credit issues if held to maturity, they do have limited liquidity, and we could incur a significant loss if the investments were sold prior to maturity at an amount less than the original purchase price.

Changes in ratings on asset-backed securitization transactions, including those we sponsor, can have a material adverse impact on our ability to access the asset-backed securities market.

After securitizations are initially issued, if their performance does not align with rating agencies' expectations at the time of issuance, or if the rating agencies modify their assumptions and methodologies used for rating student loan securitizations, it is possible that initial high quality ratings on our subsidiaries’ securitizations, or those of other asset-backed securities issuers, could be materially lowered. Such actions could adversely affect our ability to access the asset-backed securities market, or make new securitization transactions more expensive by requiring us to pay a higher spread over LIBOR when pricing new bonds.

Operations

Risks associated with our operations, as further discussed below, include those related to our information technology systems and potential security and privacy breaches, our ability to manage performance related to regulatory requirements, and the importance of maintaining scale by retaining existing customers and attracting new business opportunities.

Various events could disrupt our networks, information systems, or properties and could impair our operating activities and negatively impact our reputation.

As a loan servicer, software provider, payment provider, and telecommunications company for the federal government, financial institutions, education industry, and local communities that serve millions of customers through the internet and other distribution channels across the U.S., we depend on our ability to process, secure, record, and monitor a large number of customer transactions and confidential information on a continuous basis. Additionally, we depend on the efficient and uninterrupted operation of our computer network systems, software, datacenter, and telecommunications systems, as well as the systems of third parties.

Information security risks have significantly increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to support and process customer transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties. Our business segments rely on our digital technologies, computer and email systems, software, and networks to conduct their operations. In addition, to access our products and services, our customers may use personal smartphones, tablet PCs, and other mobile devices that are beyond our control systems.

Although we believe we have robust information security procedures, controls, and business continuity plans, we may be subject to information technology system failures and network disruptions. Malicious and abusive activities, such as the dissemination of computer viruses, worms, and other destructive or disruptive software, computer hackings, social engineering, process breakdowns, denial of service attacks, and other malicious activities have become more common. If directed at us or technologies upon which we depend, these activities could have adverse consequences on our network and our customers, including degradation of service, excessive call volume to call centers, and damage to our or our customers' equipment and data. Further, these activities could result in security breaches, such as misappropriation, misuse, leakage, falsification or accidental release or loss of information maintained in our information technology systems and networks, and in our vendors’ systems and networks, including customer, personnel, and vendor data. System failures and network disruptions may also be caused by natural disasters, accidents, power disruptions, or telecommunications failures. If a significant incident were to occur, it could damage our reputation and credibility, lead to customer dissatisfaction and, ultimately, loss of customers or revenue, in addition to increased costs to service our customers and protect our network. These events also could result in large expenditures to repair or replace the damaged properties, networks, or information systems or to protect them from similar events in the future. System redundancy may be ineffective or inadequate, and our business continuity plans may not be sufficient for all eventualities. Any significant loss of customers or revenue, or significant increase in costs of serving those customers, could adversely affect our growth, financial condition, and results of operations.

Although to date we have not experienced a material loss relating to cyber attacks, information security breaches, or system outage, there can be no assurance that we will not suffer such losses in the future or that there is not a current threat that remains undetected at this time. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, and the size and scale of our services.

In addition, the personal consumer data that we receive and maintain in our operations is subject to privacy laws and regulations, and we expect regulatory oversight will continue to increase and consumer privacy protection regulations, standards, supervision, examinations, and enforcement practices will continue to evolve in both detail and scope. This evolution may significantly add to our privacy compliance and operating costs.

As a result of these matters, the continued development and enhancement of our training, controls, processes, and practices designed to protect, monitor, and restore our systems, computers, software, data, and networks from attack, damage, or unauthorized access remain a priority for the Company and each of our business segments. Even though we maintain technology and telecommunication, professional services, media, network security, privacy, injury, and liability insurance coverage to offset costs that may be incurred as a result of a cyber attack, information security breach, or extended system outage, this insurance coverage may not cover all costs of such incidents.

We outsource critical operations, which exposes us to risks related to our third-party vendors.

We have entered into contracts with third-party service providers that provide critical services, technology, and software to our business segments. Some of our third-party vendors are primary service providers for which there are few substitutes. If any of these vendors should experience financial difficulties, system interruptions, regulatory violations, security threats, or they cannot otherwise meet our specifications, our ability to provide some services may be materially adversely affected, in which case our business, results of operations, and financial condition may be adversely affected.

We must satisfy certain requirements necessary to maintain the federal guarantees of our federally insured loans and the federally insured loans that we service for third parties, and we may incur penalties or lose our guarantees if we fail to meet these requirements.

As of December 31, 2016, we serviced $24.4 billion of FFELP loans that maintained a federal guarantee, of which $17.0 billion and $7.4 billion were owned by the Company and third-party entities, respectively.

We must meet various requirements in order to maintain the federal guarantee on federally insured loans. The federal guarantee on federally insured loans is conditional based on compliance with origination, servicing, and collection policies set by the Department and guaranty agencies. If the Company misinterprets Department guidance, or incorrectly applies the Higher Education Act, the Department could determine that the Company is not in compliance. Federally insured loans that are not originated, disbursed, or serviced in accordance with the Department's and guaranty agency regulations may risk partial or complete loss of the guarantee. If we experience a high rate of servicing deficiencies (including any deficiencies resulting from the conversion of loans from one servicing platform to another, errors in the loan origination process, establishment of the borrower's repayment status, and due diligence or claim filing processes), it could result in the loan guarantee being revoked or denied. In most cases we have the opportunity to cure these deficiencies by following a prescribed cure process which usually involves obtaining the borrower's reaffirmation of the debt. However, not all deficiencies can be cured.

We are allowed three years from the date of the loan rejection to cure most loan rejections. If a cure cannot be achieved during this three year period, insurance is permanently revoked, although we maintain our right to collect the loan proceeds from the borrower. In cases where we purchase loans that were previously serviced by another servicing institution and we identify a serving deficiency by the prior servicer, we may, based on the terms of the purchase agreement, have the ability to require the previous lender to repurchase the rejected loans.

A guaranty agency may also assess an interest penalty upon claim payment if the deficiency does not result in a loan rejection. These interest penalties are not subject to cure provisions and are typically related to isolated instances of due diligence deficiencies. Additionally, we may become ineligible for special allowance payment benefits from the time of the first deficiency leading to the loan rejection through the date that the loan is cured.

Failure to comply with federal and guarantor regulations may result in fines, penalties, the loss of the insurance and related federal guarantees on affected FFELP loans, the loss of special allowance payment benefits, expenses required to cure servicing deficiencies, suspension or termination of the right to participate as a FFELP servicer, negative publicity, and potential legal claims, including potential claims by our servicing customers if they lose the federal guarantee on loans that we service for them. If the Company is subjected to significant fines, or loss of insurance or guarantees on a material number of FFELP loans, or if the Company loses its ability to service FFELP loans, it could have a material, negative impact on the Company's business, financial condition, or results of operations.

Our largest fee-based customer, the Department of Education, represented approximately 20 percent of our revenue in 2016. Failure to extend the Department contract or obtain a new Department contract, unfavorable contract modifications or interpretations, or our inability to consistently surpass competitor performance metrics, could significantly lower loan servicing revenue and hinder future servicing opportunities.

We are one of four TIVAS awarded a student loan servicing contract by the Department to provide additional servicing capacity for loans owned by the Department, with new loan volume historically allocated among the four TIVAS based on certain performance metrics established by the Department and compared among that group. As of December 31, 2016, we were servicing $162.5 billion of student loans for 6.0 million borrowers under this contract. For the year ended December 31, 2016, we recognized $151.7 million in revenue from the Department, which represented approximately 20 percent of our revenue.

The Department also has contracts with 31 NFP entities to service student loans, although currently five NFP servicers service the volume allocated to these 31 entities. On March 2, 2016, the Department announced that new student loans will be allocated for servicing among the TIVAS and NFP servicers on the basis of performance metrics as compared among all loan servicers in that group. This change resulted in a decrease in our and the other TIVAS overall government allocation of new student loans for servicing. The amount of future allocations of new loan volume could be negatively impacted if we are unable to consistently surpass comparable competitor performance metrics. In addition, in the event the existing Department servicing contract becomes subject to unfavorable modifications or interpretations by the Department, loan servicing revenue could decrease significantly.

Our contract with the Department expires on June 16, 2019. In April 2016, the Department's Office of Federal Student Aid released information regarding a new contract procurement process for the Department to acquire a single servicing platform with multiple customer service providers to manage all student loans owned by the Department. The contract solicitation process is divided into two phases.

On May 5, 2016, we entered into an operating agreement with Great Lakes, also one of the four TIVAS, to form the joint venture GreatNet. The joint venture will operate as a separate legal entity and was created to deliver the single federal aid servicing solution to the Department. We and Great Lakes each own 50 percent of the ownership interest of GreatNet.

On June 30, 2016, the Department announced which entities were selected to respond to Phase II of the procurement selection process. GreatNet was one of three entities selected, and PHEAA and Navient, the other two TIVAS, were also selected to respond to Phase II. On January 6, 2017, GreatNet submitted its Phase II response to the Department and is currently awaiting announcement from the new administration on the next steps in the procurement process. We have been informed that one of the two other bidders filed a bid protest in relation to this contract solicitation process on January 5, 2017.

In the event the Department servicing contract is not extended beyond the current expiration date or GreatNet is not chosen as the subsequent servicer, loan servicing revenue would decrease significantly. During a year of new political administration transitions, there are significant risks and uncertainties regarding the current Department contract and potential future Department contract, including potential delays, cancellation, or material changes to the structure of the contract procurement process.

Additionally, we are partially dependent on the existing Department contract to broaden servicing operations with the Department, other federal and state agencies, and commercial clients. The size and importance of this contract provides us the scale and infrastructure needed to profitably expand into new business opportunities. Failure to extend the Department contract beyond the current expiration date, or obtain a new Department contract, could significantly hinder future opportunities.

Our ability to continue to grow and maintain our contracts with commercial businesses and government agencies is partly dependent on our ability to maintain compliance with various laws, regulations, and industry standards applicable to those contracts.

We are subject to various laws, regulations, and industry standards related to our commercial and government contracts. In most cases, these contracts are subject to termination rights, audits, and investigations. The laws and regulations that impact our operating segments are outlined in Part I, Item 1, "Regulation and Supervision." Additionally, our contracts with the federal government require that we maintain internal controls in accordance with the National Institute of Standards and Technologies (“NIST”) and our operating segments that utilize payment cards are subject to the Payment Card Industry Data Security Standards (“PCI-DSS”). If we are found to be in noncompliance with the contract provisions or applicable laws, regulations, or standards, or the contracted party exercises its termination or other rights for that or other reasons, our reputation could be negatively affected, and our ability to compete for new contracts or maintain existing contracts could diminish. If this were to occur, our results of operations from existing contracts and future opportunities for new contracts could be negatively affected.

Although we expect that our acquisition of Allo and resulting entry into the communications business will result in benefits to us, we may not be able to realize those benefits.

The success of our acquisition of Allo and resulting entry by us into the communications business depends in large part on the ability of Allo to successfully develop and expand fiber networks in existing service areas and additional communities within acceptable cost parameters, gain market share in communities in existing service areas, and obtain acceptable market share levels in additional communities that we do not yet serve. Allo may not be able to achieve those objectives and we may not realize the expected benefits from the acquisition of Allo. In addition, the expected benefits are subject to risks related to the uncertain nature of our ability to successfully integrate operations; the ability to successfully maintain technological competitive advantages with respect to the offered telecommunications, internet, television, telephone, and other related services and minimize potential system disruptions to the availability, speed, and quality of such services; potential changes in the marketplace, including potential decreases in market pricing for telecommunications and related services; potential changes in the demand for fiber optic internet, television, and telephone services; and increases in transport and content costs as discussed below.

Transport and content costs related to Allo’s video products and services are substantial and continue to increase.

The cost of video transport and content costs is expected to continue to be one of Allo’s largest operating costs associated with providing television service. Television programming content includes cable-oriented programming, as well as the programming of local over-the-air television stations that Allo retransmits. In addition, on-demand programming is being made available in response to customer demand. In recent years, the cable industry has experienced rapid increases in the cost of programming, especially the costs for sports programming and for local broadcast station retransmission consent. Programming costs are generally assessed on a per-subscriber basis, and therefore are related directly to the number of subscribers to which the programming is provided. Allo’s relatively small base of subscribers limits our ability to negotiate lower per-subscriber programming costs, whereas larger providers can often obtain discounts based on the number of their subscribers. This cost difference can cause Allo to experience reduced operating margins relative to our competitors with a larger subscriber base. In addition, escalators in existing content agreements cause cost increases that are out of line with general inflation. While Allo expects these increases to continue, it may not be able to pass programming cost increases on to customers, particularly as an increasing amount of programming content becomes available via the internet at little or no cost. Also, some competitors (or their affiliates) own programming in their own right and Allo may be unable to secure license rights to that programming. As Allo’s programming contracts with content providers expire, there can be no assurance that they will be renewed on acceptable terms or that they will be renewed at all, in which case Allo may be unable to provide such television programming causing business results to be adversely affected.

If Allo cannot obtain and maintain necessary rights-of-way for its communications network, Allo's operations may be interrupted and it would likely face increased costs.

Allo is dependent on easements, franchises, and licenses from various private parties such as established telephone companies and other utilities, railroads, long-distance companies and from state highway authorities, local governments and transit authorities for access to aerial pole space, underground conduits, and other rights-of-way in order to construct and operate its networks. Some agreements relating to rights-of-way may be short-term or revocable at will, and Allo cannot be certain that it will continue to have access to existing rights-of-way after the governing agreements are terminated or expire. If any of Allo's right-of-way agreements were terminated or could not be renewed, it may be forced to remove network facilities from the affected areas, relocate, or abandon networks, which would interrupt operations and force Allo to find alternative rights-of-way, and make unexpected capital expenditures.

If Allo cannot successfully manage construction risks and uncertainties, the expansion of its communications networks may not be achieved within acceptable cost parameters or result in desired levels of market share.

The success of our acquisition of Allo depends on the ability of Allo to successfully execute its current efforts and plans to construct expanded fiber communications networks to make its services available to additional homes and businesses. The construction of communications networks is subject to various risks and uncertainties, including risks and uncertainties related to the determination of the precise locations of easements and other rights-of-way necessary to construct and operate the networks, and the management of such construction in a manner that reasonably minimizes the disruption to other private property owners, including minimizing any unintended damage to property or equipment owned or utilized by private parties. If Allo is not successful in managing these and similar construction risks, it could experience higher than expected costs and reputational damage that adversely impacts market share and future revenues, and the currently expected benefits from its expansion efforts and plans may not be realized.

Allo may incur liabilities or suffer negative financial impact relating to occupational, health, and safety matters or failure to comply with safety or environmental laws.

Aerial and underground construction of new networks and service requires employees and contractors to work in the proximity of gas, electric, water, sewer, and other competitors’ utility services, and Allo's operations are subject to extensive laws and regulations relating to the maintenance of safe conditions in the workplace. While Allo has invested, and will continue to invest, substantial resources in its robust occupational, health, and safety programs, Allo's business involves a high degree of operational risk, and there can be no assurance that it will avoid significant exposure. These hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment, and other consequential damages and could lead to suspension of operations, large damage claims and, in extreme cases, criminal liability. Allo could also be subject to potential liabilities in the event it causes a release of hazardous substances or other environmental damage resulting from underground objects they encounter. Environmental laws and regulations can impose significant fines and criminal sanctions for violations. Costs associated with the discharge of hazardous substances may include clean-up costs and related damages or liabilities. These costs could be significant and could adversely affect Allo's results of operations and cash flows.

Industry changes and competitive pressures may harm revenues and profit margins, including future revenues and profit margins of our new communications business through Allo.

We face aggressive price competition for our products and services and, as a result, we may have to lower our product and service prices to stay competitive, while at the same time, expand market share and maintain profit margins. Even if we are able to maintain or increase market share for a product or service, revenue or profit margins could decline because the product or service is in a maturing market or market conditions have changed due to economic, political, or regulatory pressures.

The internet, television, and telecommunications businesses are highly competitive. For a discussion of the competitive factors faced by Allo, see Part I, Item I, "Communications - Competition." Allo may not be able to successfully anticipate and respond to many of these various competitive factors affecting the industry, including regulatory changes that may affect competitors and Allo differently, new technologies, services and applications that may be introduced, and changes in consumer preferences, demographic trends, and discount or bundled pricing strategies by competitors which are larger and have more resources than Allo. If Allo does not compete effectively, it could lose customers, revenue, and market share; customers may reduce their usage of Allo's services or switch to a less profitable service; and Allo may need to lower prices or increase marketing efforts to remain competitive.

Our failure to successfully manage other business and certain asset acquisitions and other investments could have a material adverse effect on our business, financial condition, and/or results of operations.

We may acquire other new businesses, products, and services, or enhance existing businesses, products, and services, or make other investments to further diversify our businesses both within and outside of our historical education-related businesses, through acquisitions of other companies, product lines, technologies, and personnel, or through investments in real estate or other companies. Any acquisition or investment is subject to a number of risks. Such risks may include diversion of management time and resources, disruption of our ongoing businesses, difficulties in integrating acquisitions, extensive regulatory requirements, dilution to existing shareholders if our common stock is issued in consideration for an acquisition or investment, incurring or assuming indebtedness or other liabilities in connection with an acquisition, unexpected declines in real estate values or the failure to realize expected benefits from real estate development projects, lack of familiarity with new markets, and difficulties in supporting new product lines. Our failure to successfully manage acquisitions or investments, or successfully integrate acquisitions, could have a material adverse effect on our business, financial condition, and/or results of operations. Correspondingly, our expectations as to the accretive nature of the acquisitions or investments could be inaccurate.

We must adapt to rapid technological change. If we are unable to take advantage of technological developments, or if we adopt and implement them more slowly than our competitors, we may experience a decline in the demand for our products and services.

Our long-term operating results depend substantially upon our ability to continually enhance, develop, introduce, and market new products and services. We must continually and cost-effectively maintain and improve our information technology systems and infrastructure in order to successfully deliver competitive products and services to our customers. The widespread adoption of new technologies and market demands could require substantial expenditures to enhance system infrastructure and existing products and services. If we fail to enhance and scale our systems and operational infrastructure or products and services, our operating segments may lose their competitive advantage and this could adversely affect financial and operating results.

Regulatory and Legal

Federal and state laws and regulations can restrict our business and result in increased compliance expenses, and noncompliance with these laws and regulations could result in penalties, litigation, reputation damage, and a loss of customers.

Our operating segments and customers are heavily regulated by federal and state government regulatory agencies. See Part I, Item 1, "Regulation and Supervision." The laws and regulations enforced by these agencies are proposed or enacted to protect consumers and the financial industry as a whole, not necessarily the Company, our operating segments, or our shareholders. We have procedures and controls in place to monitor compliance with numerous federal and state laws and regulations. However, because these laws and regulations are complex, differ between jurisdictions, and are often subject to interpretation, or as a result of unintended errors, we may, from time to time, inadvertently violate these laws and regulations. Compliance with these laws and regulations is expensive and requires the time and attention of management. These costs divert capital and focus away from efforts intended to grow our business. If we do not successfully comply with laws, regulations, or policies, we could incur fines or penalties, lose existing or new customer contracts or other business, and suffer damage to our reputation. Changes in these laws and regulations can significantly alter our business environment, limit business operations, and increase costs of doing business, and we cannot predict the impact such changes would have on our profitability.

The CFPB has the authority to supervise and examine large nonbank student loan servicers, including us. If in the course of such an examination the CFPB were to determine that we were not in compliance with applicable laws, regulations, and CFPB positions, it is possible that this could result in material adverse consequences, including, without limitation, settlements, fines, penalties, adverse regulatory actions, changes in our business practices, or other actions. In 2015, the CFPB conducted a public inquiry into student loan servicing practices and issued a report recommending the creation of consistent, industry-wide standards for the entire servicing market. In July 2016, the Department expanded on this by outlining enhanced customer service standards and protections that will be incorporated into federal servicing contracts and guidelines. The CFPB has also announced that it may issue student loan servicing rules in the future. This area is expected to be a continuing focus of the CFPB.

There is significant uncertainty regarding how the CFPB's recommendations, strategies, and priorities will impact our businesses and our results of operations going forward. Actions by the CFPB could result in requirements to alter our services, causing them to be less attractive or effective and impair our ability to offer them profitably. In the event that the CFPB changes regulations adopted in the past by other regulators, or modifies past regulatory guidance, our compliance costs and litigation exposure could increase. Our litigation exposure could also increase if the CFPB exercises its authority to limit or ban pre-dispute arbitration clauses or class action waiver clauses in contracts for consumer financial services.

As a result of the Reconciliation Act of 2010, interest income on our existing FFELP loan portfolio, as well as revenue from third-party FFELP servicing and FFELP loan servicing software licensing and consulting fees, will decline over time as our and our third-party lender clients' FFELP loan portfolios are paid down and FFELP clients exit the market.

The Reconciliation Act of 2010 prohibits new loan originations under the FFEL Program and requires that all new federal loan originations be made through the Federal Direct Loan Program. The law did not alter or affect the terms and conditions of existing FFELP loans.

During the years ended December 31, 2016, 2015, and 2014, we recognized approximately $360 million, $425 million, and $430 million, respectively, of net interest income on our FFELP loan portfolio, approximately $26 million, $71 million, and $80 million, respectively, in guaranty and third-party FFELP servicing revenue, and approximately $6 million, $5 million, and $5 million, respectively, in FFELP loan servicing software licensing and consulting fees related to the FFEL Program. These amounts will decline over time as our and our third-party lender clients' FFELP loan portfolios are paid down.

The Company's FFELP guaranty servicing revenue was earned from two guaranty clients. A contract with one client expired on October 31, 2015 and was not renewed. The remaining guaranty client exited the FFELP guaranty business at the end of their contract term on June 30, 2016. FFELP guaranty servicing revenue recognized by us from these two clients during the years ended December 31, 2016, 2015, and 2014 was $9.6 million, $56.9 million, and $66.7 million, respectively. After June 30, 2016, we have no remaining guaranty revenue.

If we are unable to grow or develop new revenue streams, our consolidated revenue and operating margin will decrease as a result of the decline in FFELP loan volume outstanding.

Exposure related to certain tax issues could decrease our net income.

Federal and state income tax laws and regulations are often complex and require interpretation. The nexus standards and the sourcing of receipts from intangible personal property and services have been the subject of state audits and litigation with state taxing authorities and tax policy debates by various state legislatures. As the U.S. Congress and U.S. Supreme Court have not provided clear guidance in this regard, conflicting state laws and court decisions create significant uncertainty and expense for taxpayers conducting interstate commerce. Changes in income tax regulations could negatively impact our results of operations. If states enact legislation, alter apportionment methodologies, or aggressively apply the income tax nexus standards, we may become subject to additional state taxes.

From time to time, we engage in transactions in which the tax consequences may be subject to uncertainty. Examples of such transactions include asset and business acquisitions and dispositions, financing transactions, apportionment, nexus standards, and income recognition. Significant judgment is required in assessing and estimating the tax consequences of these transactions. We prepare and file tax returns based on the interpretation of tax laws and regulations. In the normal course of business, our tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities. In accordance with authoritative accounting guidance, we establish reserves for tax contingencies related to deductions and credits that we may be unable to sustain. Differences between the reserves for tax contingencies and the amounts ultimately owed are recorded in the period they become known. Adjustments to our reserves could have a material effect on our financial statements.

In addition to corporate tax matters, as both a lender and servicer of student loans, we are required to report student loan interest received and cancellation of indebtedness to individuals and the Internal Revenue Service on an annual basis. These informational forms assist individuals in complying with their federal and state income tax obligations. The statutory and regulatory guidance regarding the calculations, recipients, and timing are complex and we know that interpretations of these rules vary across the industry. The complexity and volume associated with these informational forms creates a risk of error which could result in penalties or damage to our reputation.

Principal Shareholder and Related Party Transactions

Our Executive Chairman beneficially owns 77.6 percent of the voting rights of our shareholders and effectively has control over all matters at our Company.

Michael S. Dunlap, our Executive Chairman and a principal shareholder, beneficially owns 77.6 percent of the voting rights of our shareholders. Accordingly, each member of the Board of Directors and each member of management has been elected or effectively appointed by Mr. Dunlap and can be removed by Mr. Dunlap. As a result, Mr. Dunlap, as Executive Chairman and controlling shareholder, has control over all matters at our Company and has the ability to take actions that benefit him, but may not benefit other minority shareholders, and may otherwise exercise his control in a manner with which other minority shareholders may not agree or which they may not consider to be in their best interests.

Our contractual arrangements and transactions with Union Bank, which is under common control with us, present conflicts of interest and pose risks to our shareholders that the terms may not be as favorable to us as we could receive from unrelated third parties.

Union Bank is controlled by Farmers & Merchants Investment Inc. ("F&M"), which owns 81.4 percent of Union Bank's common stock and 15.4 percent of Union Bank's non-voting non-convertible preferred stock. Mr. Dunlap, a significant shareholder, as well as Executive Chairman, and a member of our Board of Directors, along with his spouse and children, owns or controls a total of 33.0 percent of the stock of F&M, including a total of 48.6 percent of the outstanding voting common stock of F&M, and Mr. Dunlap's sister, Angela L. Muhleisen, along with her spouse and children, owns or controls a total of 31.7 percent of F&M stock, including a total of 47.5 percent of the outstanding voting common stock of F&M. Mr. Dunlap serves as a Director and Chairman of F&M. Ms. Muhleisen serves as a Director and Chief Executive Officer of F&M and as a Director, Chairperson, President, and Chief Executive Officer of Union Bank. Union Bank is deemed to have beneficial ownership of a significant number of shares of Nelnet because it serves in a capacity of trustee or account manager for various trusts and accounts holding shares of Nelnet, and may share voting and/or investment power with respect to such shares. As of December 31, 2016, Union Bank was deemed to beneficially own 11.4 percent of the voting rights of our common stock. As of December 31, 2016, Mr. Dunlap and Ms. Muhleisen beneficially owned 77.6 percent and 12.5 percent, respectively, of the voting rights of our outstanding common stock.

We have entered into certain contractual arrangements with Union Bank, including loan purchases and sales, loan servicing, loan participations, banking services, 529 Plan administration services, lease arrangements, and various other investment and advisory

services. The net aggregate impact on our consolidated statements of income for the years ended December 31, 2016, 2015, and 2014 related to the transactions with Union Bank was income (before income taxes) of $7.0 million, $6.6 million, and $17.1 million, respectively. See note 19 of the notes to consolidated financial statements included in this report for additional information related to the transactions between us and Union Bank.

Transactions between Union Bank and us are generally based on available market information for comparable assets, products, and services and are extensively negotiated. In addition, all related party transactions between Union Bank and us are approved by both the Union Bank Board of Directors and our Board of Directors. Furthermore, Union Bank is subject to regulatory oversight and review by the FDIC, the Federal Reserve, and the State of Nebraska Department of Banking and Finance. The FDIC and the State of Nebraska Department of Banking and Finance regularly review Union Bank's transactions with affiliates. The regulatory standard applied to the bank falls under Regulation W, which places restrictions on certain “covered” transactions with affiliates.

We intend to maintain our relationship with Union Bank, which our management believes provides certain benefits to us. Those benefits include Union Bank's knowledge of and experience in the FFELP industry, its willingness to provide services, and at times liquidity and capital resources, on an expedient basis, and the proximity of Union Bank to our corporate headquarters located in Lincoln, Nebraska.

The majority of the transactions and arrangements with Union Bank are not offered to unrelated third parties or subject to competitive bids. Accordingly, these transactions and arrangements not only present conflicts of interest, but also pose the risk to our shareholders that the terms of such transactions and arrangements may not be as favorable to us as we could receive from unrelated third parties. Moreover, we may have and/or may enter into contracts and business transactions with related parties that benefit Mr. Dunlap and his sister, as well as other related parties, that may not benefit us and/or our minority shareholders.

ITEM 1B. UNRESOLVED STAFF COMMENTS

The Company has no unresolved comments from the staff of the Securities and Exchange Commission regarding its periodic or current reports under the Securities Exchange Act of 1934.

ITEM 2. PROPERTIES

The following table lists the principal facilities for office space owned or leased by the Company as of December 31, 2016. The Company owns the building in Lincoln, Nebraska where its principal office is located.



Location	Primary function or segment	Approximate square feet		Lease expiration date

Lincoln, NE	Corporate Headquarters, Loan Systems and Servicing, Tuition Payment Processing and Campus Commerce	187,000	(a)	—

Highlands Ranch, CO	Loan Systems and Servicing	67,000		October 2020

Omaha, NE	Loan Systems and Servicing, Tuition Payment Processing and Campus Commerce	56,000		December 2017, December 2020, and December 2025

Lincoln, NE	Loan Systems and Servicing, Asset Generation and Management	51,000		November 2023 and March 2024

Aurora, CO	Loan Systems and Servicing	37,000		September 2019

Lincoln, NE	Communications	29,000		—

Lincoln, NE	Loan Systems and Servicing, Asset Generation and Management, Tuition Payment Processing and Campus Commerce	22,000	(b)	Month-to-month, February 2017, and October 2017 (b)

Burleson, TX	Tuition Payment Processing and Campus Commerce	17,000		October 2021

Imperial, NE	Communications	6,000		—


(a)	Excludes a total of approximately 27,000 square feet of owned office space that the Company leases to third parties.


(b)	Includes a total of approximately 16,000 square feet that became subject to month-to-month lease terms upon the expiration of the original lease in December 2016. Also includes approximately 4,200 square feet under a lease that expired in February 2017, at which time the Company vacated the property.

Allo's physical assets consist of network plant and fiber, including signal receiving, encoding and decoding devices, headend reception facilities, distribution systems, and customer-located property. The network plant and fiber assets are generally attached to utility poles under pole rental agreements with local public utilities and telephone companies, or are buried in underground ducts or trenches, generally in utility easements. Allo owns or leases real property for signal reception sites, and owns its own vehicles. Allo's headend reception facilities and most offices are located on leased property.

The Company leases other office facilities located throughout the United States. These properties are leased on terms and for durations that are reflective of commercial standards in the communities where these properties are located. The Company believes that its respective properties are generally adequate to meet its long term business goals. The Company's principal office is located at 121 South 13^th Street, Suite 100, Lincoln, Nebraska 68508.

ITEM 3. LEGAL PROCEEDINGS

The Company is subject to various claims, lawsuits, and proceedings that arise in the normal course of business. These matters frequently involve claims by student loan borrowers disputing the manner in which their student loans have been serviced or the accuracy of reports to credit bureaus, claims by student loan borrowers or other consumers alleging that state or Federal consumer protection laws have been violated in the process of collecting loans or conducting other business activities, and disputes with other business entities. In addition, from time to time the Company receives information and document requests from state or federal regulators concerning its business practices. The Company cooperates with these inquiries and responds to the requests. While the Company cannot predict the ultimate outcome of any regulatory examination, inquiry, or investigation, the Company believes its activities have materially complied with applicable law, including the Higher Education Act, the rules and regulations adopted by the Department thereunder, and the Department's guidance regarding those rules and regulations. On the basis of present information, anticipated insurance coverage, and advice received from counsel, it is the opinion of the Company's management that the disposition or ultimate determination of these claims, lawsuits, and proceedings will not have a material adverse effect on the Company's business, financial position, or results of operations.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company's Class A common stock is listed and traded on the New York Stock Exchange under the symbol “NNI,” while its Class B common stock is not publicly traded. As of January 31, 2017, there were 30,627,012 and 11,476,932 shares of Class A common stock and Class B common stock outstanding, respectively. The number of holders of record of the Company's Class A common stock and Class B common stock as of January 31, 2017 was 904 and 45, respectively. The record holders of the Class B common stock are Michael S. Dunlap and Stephen F. Butterfield, an entity controlled by them, various members of their families, and various estate planning trusts established by them. Because many shares of the Company's Class A common stock are held by brokers and other institutions on behalf of shareholders, the Company is unable to estimate the total number of beneficial owners represented by these record holders. The following table sets forth the high and low intraday sales prices for the Company's Class A common stock for each full quarterly period in 2016 and 2015.



	2016								2015
	1st Quarter		2nd Quarter		3rd Quarter		4th Quarter		1st Quarter		2nd Quarter		3rd Quarter		4th Quarter
High	$	37.28	$	38.19	$	44.92	$	44.08	$	48.80	$	48.69	$	44.92	$	36.97
Low	26.15		35.05		37.06		38.24		43.00		40.81		34.26		30.55

Dividends on the Company's Class A and Class B common stock were paid as follows during the years ended December 31, 2016 and 2015.



	2016								2015
Record date	3/1/16		6/1/16		9/1/16		12/1/16		2/27/15		6/1/15		9/1/15		12/1/15
Payment date	3/15/16		6/15/16		9/15/16		12/15/16		3/13/15		6/15/15		9/15/15		12/15/15
Dividend amount per share	$	0.12	$	0.12	$	0.12	$	0.14	$	0.10	$	0.10	$	0.10	$	0.12

The Company currently plans to continue making regular quarterly dividend payments, subject to future earnings, capital requirements, financial condition, and other factors. In addition, the payment of dividends is subject to the terms of the Company's outstanding junior subordinated hybrid securities, which generally provide that if the Company defers interest payments on those securities it cannot pay dividends on its capital stock.

Performance Graph

The following graph compares the change in the cumulative total shareholder return on the Company's Class A common stock to that of the cumulative return of the S&P 500 Index and the S&P Financials Index. The graph assumes that the value of an investment in the Company's Class A common stock and each index was $100 on December 31, 2011 and that all dividends, if applicable, were reinvested. The performance shown in the graph represents past performance and should not be considered an indication of future performance.



Company/Index	12/31/2011		12/31/2012		12/31/2013		12/31/2014		12/31/2015		12/31/2016
Nelnet, Inc.	$	100.00	$	128.55	$	183.76	$	203.98	$	149.41	$	228.77
S&P 500	100.00		116.00		153.58		174.60		177.01		198.18
S&P Financials	100.00		128.82		174.71		201.27		198.20		243.38

The preceding information under the caption “Performance Graph” shall be deemed to be “furnished” but not “filed” with the Securities and Exchange Commission.

Stock Repurchases

The following table summarizes the repurchases of Class A common stock during the fourth quarter of 2016 by the Company or any “affiliated purchaser” of the Company, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934. Certain share repurchases included in the table below were made pursuant to a trading plan adopted by the Company in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934.



Period	Total number of shares purchased (a)	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs (b)	Maximum number of shares that may yet be purchased under the plans or programs (b)
October 1 - October 31, 2016	154,618	$	39.65	154,140	4,639,743
November 1 - November 30, 2016	68,955	39.18		68,649	4,571,094
December 1 - December 31, 2016	2,203	52.22		—	4,571,094
Total	225,776	$	39.63	222,789

(a)

The total number of shares includes: (i) shares repurchased pursuant to the stock repurchase program discussed in footnote (b) below; and (ii) shares owned and tendered by employees to satisfy tax withholding obligations upon the vesting of restricted shares. Shares of Class A common stock tendered by employees to satisfy tax withholding obligations included 478 shares, 306 shares, and 2,203 shares in October, November, and December, respectively. Unless otherwise indicated, shares owned and tendered by employees to satisfy tax withholding obligations were purchased at the closing price of the Company’s shares on the date of vesting.


(b)	On August 4, 2016, the Company announced that its Board of Directors authorized a new stock repurchase program in May 2016 to repurchase up to a total of five million shares of the Company's Class A common stock during the three-year period ending May 25, 2019.

Equity Compensation Plans

For information regarding the securities authorized for issuance under the Company's equity compensation plans, see Part III, Item 12 of this report.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial and other operating information of the Company. The selected financial data in the table is derived from the consolidated financial statements of the Company. The following selected financial data should be read in conjunction with the consolidated financial statements, the related notes, and “Management's Discussion and Analysis of Financial Condition and Results of Operations” included in this report.



	Year ended December 31,
	2016			2015		2014		2013		2012
	(Dollars in thousands, except share data)
Operating Data:
Net interest income	$	372,563		431,899		436,563		413,875		345,287
Loan systems and servicing revenue	214,846			239,858		240,414		243,428		209,748
Tuition payment processing, school information, and campus commerce revenue	132,730			120,365		98,156		80,682		74,410
Communications revenue	17,659			—		—		—		—
Enrollment services revenue	4,326			51,073		62,949		79,275		98,510
Other income	53,929			47,262		73,936		65,101		58,891
Gain on sale of loans and debt repurchases, net	7,981			5,153		3,651		11,699		4,139
Net income attributable to Nelnet, Inc.	256,751			267,979		307,610		302,672		177,997
Earnings per common share attributable to Nelnet, Inc. shareholders - basic and diluted:	6.02			5.89		6.62		6.50		3.76
Dividends per common share	0.50			0.42		0.40		0.40		1.40

Other Data:
Fixed rate floor income, net of derivative settlements	$	152,336		184,746		179,870		148,431		145,345
Core student loan spread	1.28		%	1.43	%	1.48	%	1.54	%	1.44	%
Acquisition of student loans (par value)	$	356,110		4,036,333		6,099,249		4,058,997		3,885,138
Student loans serviced (at end of period)	194,821,646			176,436,497		161,642,254		138,208,897		97,492,053

	As of December 31,
	2016			2015		2014		2013		2012
Balance Sheet Data:	(Dollars in thousands, except share data)
Cash and cash equivalents	$	69,654		63,529		130,481		63,267		66,031
Student loans receivable, net	24,903,724			28,324,552		28,005,195		25,907,589		24,830,621
Goodwill and intangible assets, net	195,125			197,062		168,782		123,250		126,511
Total assets	27,180,108			30,419,144		30,027,739		27,704,028		26,543,573
Bonds and notes payable	24,668,490			28,105,921		27,956,946		25,888,468		25,034,513
Nelnet, Inc. shareholders' equity	2,061,655			1,884,432		1,725,448		1,443,662		1,165,208
Tangible Nelnet, Inc. shareholders' equity (a)	1,866,530			1,687,370		1,556,666		1,320,412		1,038,697
Outstanding common shares	42,105,044			43,953,460		46,243,316		46,376,715		46,612,290
Book value per common share	48.96			42.87		37.31		31.13		25.00
Tangible book value per common share (a)	44.33			38.39		33.66		28.47		22.28

Ratios:
Shareholders' equity to total assets	7.59		%	6.19	%	5.75	%	5.21	%	4.39	%

(a)

Tangible Nelnet, Inc. shareholders' equity, a non-GAAP measure, equals "Nelnet, Inc. shareholders' equity" less "Goodwill and intangible assets, net." Management believes tangible shareholders' equity and the corresponding tangible book value per common share are useful supplemental non-GAAP measures to evaluate the strength of the Company's capital position and facilitate comparisons with other companies in the financial services industry. However, there is no comprehensive

authoritative guidance for the presentation of these measures, and similarly titled measures may be calculated differently by other companies.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Management’s Discussion and Analysis of Financial Condition and Results of Operations is for the years ended December 31, 2016, 2015, and 2014. All dollars are in thousands, except share data, unless otherwise noted.)

The following discussion and analysis provides information that the Company’s management believes is relevant to an assessment and understanding of the consolidated results of operations and financial condition of the Company. The discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and related notes included in this report. This discussion and analysis contains forward-looking statements and should be read in conjunction with the disclosures and information contained in "Forward-Looking and Cautionary Statements" and Item 1A "Risk Factors" included in this report.

OVERVIEW

The Company is a diverse company with a focus on delivering education-related products and services and student loan asset management. The largest operating businesses engage in student loan servicing, tuition payment processing and school information systems, and communications. A significant portion of the Company's revenue is net interest income earned on a portfolio of federally insured student loans. The Company also makes investments to further diversify the Company both within and outside of its historical core education-related businesses, including, but not limited to, investments in real estate and start-up ventures.

GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments

A reconciliation of the Company's GAAP net income to net income, excluding derivative market value and foreign currency adjustments, is provided below.



	Year ended December 31,
	2016			2015		2014
GAAP net income attributable to Nelnet, Inc.	$	256,751		267,979		307,610
Derivative market value and foreign currency adjustments	(71,744		)	(28,651	)	(37,703	)
Tax effect (a)	$	27,263		10,887		14,327
Net income, excluding derivative market value and foreign currency adjustments (b)	$	212,270		250,215		284,234

Earnings per share:
GAAP net income attributable to Nelnet, Inc.	$	6.02		5.89		6.62
Derivative market value and foreign currency adjustments	(1.68		)	(0.63	)	(0.81	)
Tax effect (a)	0.63			0.24		0.31
Net income, excluding derivative market value and foreign currency adjustments (b)	$	4.97		5.50		6.12


(a)	The tax effects are calculated by multiplying the derivative market value and foreign currency adjustments by the applicable statutory income tax rate.

(b)

The Company provides additional non-GAAP financial information related to specific items management believes to be important in the evaluation of its operating results and performance. "Derivative market value and foreign currency adjustments" include (i) the unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP; and (ii) the foreign currency transaction gains or losses caused by the re-measurement of the Company's Euro-denominated bonds to U.S. dollars. The Company believes these point-in-time estimates of asset and liability values related to these financial instruments that are subject to interest and currency rate fluctuations are subject to volatility mostly due to timing and market factors beyond the control of management, and affect the period-to-period comparability of the results of operations. Accordingly, the Company’s management utilizes operating results excluding these items for comparability purposes when making decisions regarding the Company’s performance and in presentations with credit rating agencies, lenders, and investors. Consequently, the Company reports this non-GAAP information because the Company believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance.

The decrease in net income, excluding derivative market value and foreign currency adjustments, for 2016 as compared to 2015, was expected due to the runoff of the Company's student loan portfolio and lower student loan spread, which decreased net interest income.

Operating Results

The Company earns net interest income on its FFELP student loan portfolio in its Asset Generation and Management ("AGM") operating segment. This segment is expected to generate a stable net interest margin and significant amounts of cash as the FFELP portfolio amortizes. As of December 31, 2016, the Company had a $24.9 billion student loan portfolio that will amortize over the next approximately 25 years. The Company actively seeks to acquire FFELP loan portfolios to leverage its servicing scale and expertise to generate incremental earnings and cash flow.

In addition, the Company earns fee-based revenue through the following reportable operating segments:


•	Loan Systems and Servicing ("LSS") - referred to as Nelnet Diversified Solutions ("NDS")


•	Tuition Payment Processing and Campus Commerce ("TPP&CC") - referred to as Nelnet Business Solutions ("NBS")


•	Communications - referred to as Allo Communications ("Allo")

Other business activities and operating segments that are not reportable are combined and included in Corporate and Other Activities ("Corporate"). Corporate and Other Activities also includes income earned on certain investments and interest expense incurred on unsecured debt transactions.

Prior to January 1, 2016, the Company allocated certain corporate overhead expenses that are incurred within the Corporate and Other Activities segment to the other operating segments. These expenses included certain corporate activities related to executive management, internal audit, enterprise risk management, and other costs incurred by the Company due to corporate-wide initiatives. Effective January 1, 2016, internal reporting to executive management (the "chief operating decision maker") changed to eliminate the allocation of these expenses to the other segments. Management believes the change in its allocation methodology results in a better reflection of the operating results of each of the reportable segments as if they each operated as a standalone business entity, which also reflects how management evaluates the performance of the segments. Prior period segment operating results have been restated to conform to the current period presentation.

The information below provides the operating results for each reportable operating segment and Corporate and Other Activities for the years ended December 31, 2016, 2015, and 2014 (dollars in millions).


(a)	Revenue includes intersegment revenue earned by LSS as a result of servicing loans for AGM.

(b)

Total revenue includes "net interest income after provision for loan losses" and "total other income" from the Company's segment statements of income, excluding the impact from changes in fair values of derivatives and foreign currency transaction adjustments. Net income excludes changes in fair values of derivatives and foreign currency transaction adjustments, net of tax. For information regarding the exclusion of the impact from changes in fair values of derivatives and foreign currency transaction adjustments, see "GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above.


(c)	Computed as income before income taxes divided by total revenue.

The Company’s current outlook for 2017-2019 operating results is that the Company believes that net income for those years will be at decreased levels compared to 2016, due to the continued amortization of the Company’s FFELP loan portfolio and anticipated

increases in interest rates. The Company currently believes that in the short-term it will most likely not be able to invest the excess cash generated from the FFELP loan portfolio into assets that immediately generate the rates of return historically realized from that portfolio. In addition, the Company currently anticipates Allo's operating results will be dilutive to the Company's consolidated earnings over the next several years as it continues to build its network in Lincoln, Nebraska, due to large upfront capital expenditures and associated depreciation and upfront customer acquisition costs.

A summary of the results and financial highlights for each reportable operating segment and a summary of the Company's liquidity and capital resources follows. See "Results of Operations" for each reportable operating segment and "Liquidity and Capital Resources" under this Item 7 for additional detail.

Loan Systems and Servicing


•	As of December 31, 2016, the Company was servicing $194.8 billion in FFELP, private, and government owned student loans, as compared with $176.4 billion and $161.6 billion of loans as of December 31, 2015 and 2014, respectively. The year over year increase was due to an increase in government and private loan servicing volume.

•

Revenue decreased in 2016 compared to 2015 and 2015 compared to 2014 due primarily to the loss of two guaranty servicing and collection clients. The Company's guaranty servicing and collection revenue was earned from two guaranty clients, and a significant amount of such revenue came from one of those clients. The contract with this client expired on October 31, 2015. The other guaranty servicing and collection client exited the FFELP guaranty business at the end of their contract term on June 30, 2016. After this customer's exit from the FFELP guaranty business effective June 30, 2016, the Company has no remaining guaranty revenue. FFELP guaranty servicing and FFELP guaranty collection revenue recognized by the Company from these clients for the years ended December 31, 2016, 2015, and 2014, was $9.6 million, $56.9 million, and $66.7 million, respectively. The decrease in revenue was partially offset by an increase in government and private servicing revenue.

•

Revenue from the government servicing contract increased to $151.7 million in 2016 compared to $133.2 million and $124.4 million in 2015 and 2014, respectively. The increase in 2016 compared to 2015 was due to a shift in the portfolio of loans serviced to a greater portion of loans in higher paying repayment statuses, an increase in billable applications for TPD borrowers due to a new change request matching eligible borrowers to the social security administration database, and the transfer of borrowers from a not-for-profit servicer who exited the loan servicing business in August 2016. The increase in 2015 compared to 2014 was due to an increase in the number of borrowers serviced under the government servicing contract.


•	In April 2016, the Department's Office of Federal Student Aid released information regarding a new contract procurement process for the Department to acquire a single servicing system platform with multiple customer service providers to manage all student loans owned by the Department. The contract solicitation process is divided into two phases.

On May 6, 2016, the Company and Great Lakes submitted a joint response to Phase I as part of a newly created joint venture to respond to the contract solicitation process and to provide services under the new contract in the event that the Department selects it to be awarded with the contract. The joint venture will operate as a new legal entity called GreatNet. The Company and Great Lakes each own 50 percent of the ownership interests of GreatNet. In addition to the Company, Great Lakes is also one of four TIVAS that currently has a student loan servicing contract with the Department to provide servicing for loans owned by the Department. GreatNet was one of three entities selected to respond to Phase II of the procurement selection process. On January 6, 2017, GreatNet submitted its Phase II response to the Department and is currently awaiting announcement from the new administration on the next steps in the procurement process.

Tuition Payment Processing and Campus Commerce


•	Revenue increased in 2016 and 2015, compared to 2015 and 2014, respectively, due to increases in the number of managed tuition payment plans, campus commerce customer transaction volume, and new school customers. In addition, the Company purchased RenWeb on June 3, 2014, which contributed revenue of $8.8 million, $19.9 million, and $23.2 million in 2014, 2015, and 2016, respectively.

Communications

•

On December 31, 2015, the Company purchased the majority of the ownership interests of Allo for total cash consideration of $46.25 million. On January 1, 2016, the Company sold a 1.0 percent ownership interest in Allo to a non-related third-party for $0.5 million. The remaining 7.5 percent of the ownership interests of Allo is owned by members of Allo management, who have the opportunity to earn an additional 11.5 percent (up to 19 percent) of the total ownership interests based on the financial performance of Allo. The Allo assets acquired and liabilities assumed were recorded by the Company at their respective estimated fair values at the date of acquisition, and such assets and liabilities were included in the Company's balance sheet as of December 31, 2015. However, Allo had no impact on the consolidated statement of income for 2015. On January 1, 2016, the Company began to reflect the operations of Allo in the consolidated statements of income.


•	For the year ended December 31, 2016, the operating segment recorded a net loss of $5.9 million. The Company anticipates this operating segment will be dilutive to consolidated earnings over the next several years as it continues to build its network in Lincoln, Nebraska, due to large upfront capital expenditures and associated depreciation and upfront customer acquisition costs.


•	The Company anticipates total network capital expenditures of approximately $80 million in 2017; however, such amount could change based on customer demand for Allo's services. For the year ended December 31, 2016, Allo's capital expenditures were $38.8 million.

Asset Generation and Management

•

During the year ended December 31, 2016 compared to the same period in 2015, the average balance of the Company's student loan portfolio decreased $1.8 billion, to $26.9 billion, due primarily to the amortization of the portfolio, and limited portfolio acquisitions from third parties. The Company acquired $356.1 million of FFELP and private education student loans during 2016, compared to $4.0 billion in 2015 and $6.1 billion in 2014.

•

Core student loan spread decreased to 1.28% for 2016, compared to 1.43% for 2015. This decrease was a result of decreases in variable student loan spread and fixed rate floor income. Variable student loan spread decreased due to a widening in the basis between the asset and debt indices in which the Company earns interest on its loans and funds such loans. Fixed rate floor income decreased due to an increase in interest rates.


•	Due to historically low interest rates, the Company continues to earn significant fixed rate floor income. During 2016, 2015, and 2014, the Company earned $152.3 million, $184.7 million, and $179.9 million, respectively, of fixed rate floor income (net of $17.6 million, $23.0 million, and $24.4 million of derivative settlements, respectively, used to hedge such loans).

•

In the third quarter of 2016, the Company revised its policy to correct for an error in its method of applying the interest method used to amortize premiums and accrete discounts on its student loan portfolio. Previously, the Company amortized premiums and accreted discounts by including in its prepayment assumption forecasted payments in excess of contractually required payments as well as forecasted defaults. The Company has determined that only payments in excess of contractually required payments should be included in the prepayment assumption. Under the Company's revised policy, as of September 30, 2016, the constant prepayment rate used by the Company to amortize/accrete student loan premiums/discounts was decreased. During the third quarter of 2016, the Company recorded an adjustment to reflect the net impact on prior periods for the correction of this error that resulted in an $8.2 million reduction to the Company's net loan discount balance and a corresponding pre-tax increase to interest income ($5.1 million after tax). The Company concluded this error had an immaterial impact on 2016 results as well as the results for prior periods.


•	During the fourth quarter of 2016, the Company redeemed certain debt securities prior to their legal maturity and recognized $7.4 million, or $4.6 million after tax, in interest expense to write off the remaining debt discount associated with these bonds.

Corporate and Other Activities

•

Whitetail Rock Capital Management, LLC, the Company's SEC-registered investment advisory subsidiary, recognized investment advisory revenue of $6.1 million, $4.3 million, and $17.7 million for 2016, 2015, and 2014, respectively. These amounts include performance fees earned from the sale of managed securities or managed securities being called prior to the full contractual maturity. Due to improvements in the capital markets, the opportunities to earn performance fees on the sale of student loan asset-backed securities were more limited in 2016 and 2015 as compared to 2014.

•

On February 1, 2016, the Company sold 100 percent of the membership interests in Sparkroom LLC, which includes the majority of the Company's inquiry management products and services within Nelnet Enrollment Services. The Company retained the digital marketing and content solution products and services under the brand name Peterson's within the Nelnet Enrollment Services business, which include test preparation study guides, school directories and databases, career exploration guides, on-line courses, scholarship search and selection data, career planning information and guides, and on-line information about colleges and universities. The Company reclassified the revenue and cost of goods sold attributable to the Peterson's products and services from "enrollment services revenue" and "cost to provide enrollment services" to "other income" and "other expenses," respectively, on the consolidated statements of income. After this reclassification, "enrollment services revenue" and "cost to provide enrollment services" include the operating results of the products and services sold as part of the Sparkroom disposition for all periods presented. These reclassifications had no effect on consolidated net income.

Liquidity and Capital Resources


•	As of December 31, 2016, the Company had cash and cash equivalents of $69.7 million. In addition, the Company had a portfolio of available-for-sale and trading investments, consisting primarily of student loan asset-backed securities, with a fair value of $106.6 million as of December 31, 2016.


•	For the year ended December 31, 2016, the Company generated $325.3 million in net cash provided by operating activities.


•	Forecasted undiscounted future cash flows from the Company's student loan portfolio financed in asset-backed securitization transactions are estimated to be approximately $2.07 billion as of December 31, 2016.


•	As of December 31, 2016, no amounts were outstanding on the Company's unsecured line of credit and $350.0 million was available for future use. The unsecured line of credit has a maturity date of December 12, 2021.


•	During 2016, the Company repurchased a total of 2,038,368 shares of Class A common stock for $69.1 million ($33.90 per share).


•	During 2016, the Company paid cash dividends of $21.2 million ($0.50 per share).

•

The Company intends to use its liquidity position to capitalize on market opportunities, including FFELP and private education loan acquisitions; strategic acquisitions and investments; expansion of Allo's telecommunications network; and capital management initiatives, including stock repurchases, debt repurchases, and dividend distributions. The timing and size of these opportunities will vary and will have a direct impact on the Company's cash and investment balances.

CONSOLIDATED RESULTS OF OPERATIONS

An analysis of the Company's operating results for the years ended December 31, 2016, 2015, and 2014 is provided below.

The Company’s operating results are primarily driven by the performance of its existing portfolio and the revenues generated by its fee-based businesses and the costs to provide such services. The performance of the Company’s portfolio is driven by net interest income (which includes financing costs) and losses related to credit quality of the assets, along with the cost to administer and service the assets and related debt.

The Company operates as distinct reportable operating segments as described above. For a reconciliation of the reportable segment operating results to the consolidated results of operations, see note 14 of the notes to consolidated financial statements included in this report. Since the Company monitors and assesses its operations and results based on these segments, the discussion following the consolidated results of operations is presented on a reportable segment basis.



	Year ended December 31,
	2016			2015		2014		Additional information
Loan interest	$	751,280		726,258		703,007		Increase in 2016 compared to 2015 due to an increase in the gross yield earned on the student loan portfolio and an adjustment recorded during 2016 to reflect the net impact on prior periods for a correction of an error regarding the Company's method of applying the interest method to amortize premiums and accrete discounts on its student loan portfolio, partially offset by a decrease in the average balance of student loans and a decrease in gross fixed rate floor income. Increase in 2015 compared to 2014 due to an increase in the average balance of student loans and the gross yield earned on student loans.
Investment interest	9,466			7,851		6,793		Includes income from unrestricted interest-earning deposits and investments and funds in asset-backed securitizations.
Total interest income	760,746			734,109		709,800
Interest expense	388,183			302,210		273,237		Increase in 2016 compared to 2015 due to an increase in the Company's cost of funds. In addition, during 2016, the Company redeemed certain debt securities prior to their legal maturity and recognized interest expense to write off the remaining debt discount associated with these bonds. These increases were partially offset by a decrease in average debt outstanding. Increase in 2015 compared to 2014 due to an increase in the Company's cost of funds and an increase in average debt outstanding.
Net interest income	372,563			431,899		436,563		See table below for additional analysis.
Less provision for loan losses	13,500			10,150		9,500		Represents the periodic expense of maintaining an allowance appropriate to absorb losses inherent in the portfolio of student loans. See AGM operating segment - results of operations.
Net interest income after provision for loan losses	359,063			421,749		427,063
Other income:
LSS revenue	214,846			239,858		240,414		See LSS operating segment - results of operations.
TPP&CC revenue	132,730			120,365		98,156		See TPP&CC operating segment - results of operations.
Communications revenue	17,659			—				See Communications operating segment - results of operations.
Enrollment services revenue	4,326			51,073		62,949		See table below for additional analysis.
Other income	53,929			47,262		73,936		See table below for the components of "other income."
Gain on sale of loans and debt repurchases, net	7,981			5,153		3,651		Gains are primarily from the repurchase of the Company's own asset-backed and unsecured debt securities. In 2014, gains from debt repurchases were partially offset by losses on the sale of loans.
Derivative settlements, net	(21,949		)	(24,250	)	(21,843	)	The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Derivative settlements for each applicable period should be evaluated with the Company's net interest income. See table below for additional analysis.
Derivative market value and foreign currency adjustments, net	71,744			28,651		37,703		Includes (i) the unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP; and (ii) the foreign currency transaction gains or losses caused by the re-measurement of the Company's Euro-denominated bonds to U.S. dollars.
Total other income	481,266			468,112		494,966
Operating expenses:
Salaries and benefits	255,924			247,914		228,079		Increase in 2016 compared to 2015 due to additional personnel to support the increase in TPP&CC revenue and the acquisition of Allo on December 31, 2015, partially offset by a decrease in personnel in the LSS operating segment as a result of the loss of guaranty servicing clients and improved operational efficiencies, and a decrease in personnel due to the sale of Sparkroom during the first quarter of 2016. Increase in 2015 compared to 2014 due to additional personnel to support increased LSS servicing volume and TPP&CC revenue, as well as increased headcount as a result of a TPP&CC acquisition during 2014.
Depreciation and amortization	33,933			26,343		21,134		Increases due to investments in information technology infrastructure, additional investments in TPP&CC systems and products, and due to the acquisition of Allo on December 31, 2015 and a TPP&CC acquisition on June 3, 2014. Allo's capital expenditures during 2016 were $38.8 million. Intangible amortization expense for 2016, 2015, and 2014 was $11.6 million, $9.8 million, and $6.5 million, respectively.
Loan servicing fees	25,750			30,213		27,009		Third-party servicing fees decreased in 2016 due to a declining loan portfolio. Additionally, the Company pays higher third-party servicing fees on delinquent loans, and the Company's third-party serviced loan portfolio had fewer delinquent loans in 2016 compared to 2015 and thus, third-party fees decreased. The increase in 2015 compared to 2014 was due to purchases of a significant amount of loans serviced at third parties.
Cost to provide communication services	6,866			—		—		Represents cost of services primarily composed of television programming costs in the Communications operating segment.
Cost to provide enrollment services	3,623			41,733		49,985		See table below for additional analysis.
Other	115,419			123,014		126,303		Decrease due to a decrease in collection costs associated with the decrease in FFELP guaranty collection revenue, partially offset by increases as a result of the acquisition of Allo on December 31, 2015, and a TPP&CC acquisition on June 3, 2014, and an increase to support the increase in tuition payment plans and campus commerce activity and continued investments in and enhancements of payment plan and campus commerce systems and products.
Total operating expenses	441,515			469,217		452,510
Income before income taxes	398,814			420,644		469,519
Income tax expense	141,313			152,380		160,238		Effective tax rate: 2016 - 35.50%, 2015 - 36.25%, 2014 - 34.25%. During 2014, income tax expense was reduced by $5.9 million due to a tax capital loss resulting from certain asset sales. The Company currently expects its effective tax rate to range between 35.50% and 37.50% in future periods.
Net income	257,501			268,264		309,281
Net income attributable to noncontrolling interest	750			285		1,671
Net income attributable to Nelnet, Inc.	$	256,751		267,979		307,610




Additional information:
Net income attributable to Nelnet, Inc.	$	256,751		267,979		307,610		See "Overview - GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above for additional information about non-GAAP net income, excluding derivative market value and foreign currency adjustments.
Derivative market value and foreign currency adjustments	(71,744		)	(28,651	)	(37,703	)
Tax effect	27,263			10,887		14,327
Net income attributable to Nelnet, Inc., excluding derivative market value and foreign currency adjustments	$	212,270		250,215		284,234

The following table summarizes the components of "net interest income" and "derivative settlements, net."



	Year ended December 31,
	2016			2015		2014		Additional information
Variable student loan interest margin, net of settlements on derivatives	$	195,823		222,479		234,814		Represents the yield the Company receives on its student loan portfolio less the cost of funding these loans. Variable student loan spread is also impacted by the amortization/accretion of loan premiums and discounts, the 1.05% per year consolidation loan rebate fee paid to the Department, and yield adjustments from borrower benefit programs. See AGM operating segment - results of operations.
Fixed rate floor income, net of settlements on derivatives	152,336			184,746		179,870		The Company has a portfolio of student loans that are earning interest at a fixed borrower rate which exceeds the statutorily defined variable lender rates, generating fixed rate floor income. See Item 7A, "Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk" for additional information.
Investment interest	9,466			7,851		6,793
Non-portfolio related derivative settlements	(915		)	(1,014	)	(1,026	)
Corporate debt interest expense	(6,096		)	(6,413	)	(5,731	)	Includes interest expense on the Junior Subordinated Hybrid Securities and unsecured and secured lines of credit.
Net interest income (net of settlements on derivatives)	$	350,614		407,649		414,720

The following tables summarize the components of "Enrollment services revenue" and "cost to provide enrollment services."



	Inquiry management (marketing) (a)		Inquiry management (software) (a)	Total (a)
	Year ended December 31, 2016
Enrollment services revenue	$	4,005	321	4,326
Cost to provide enrollment services	3,623		—	3,623
Gross profit	$	382	321	703
Gross profit %	9.5%

	Year ended December 31, 2015
Enrollment services revenue	$	47,277	3,796	51,073
Cost to provide enrollment services	41,733		—	41,733
Gross profit	$	5,544	3,796	9,340
Gross profit %	11.7%

	Year ended December 31, 2014
Enrollment services revenue	$	58,341	4,608	62,949
Cost to provide enrollment services	49,985		—	49,985
Gross profit	$	8,356	4,608	12,964
Gross profit %	14.3%


(a)	On February 1, 2016, the Company sold 100 percent of the membership interests in Sparkroom LLC, which includes the majority of the Company's inquiry management products and services within Nelnet Enrollment Services. After the sale of Sparkroom LLC, the Company no longer earns inquiry management revenue.

The following table summarizes the components of "other income."



	Year ended December 31,
	2016		2015		2014
Peterson's revenue (a)	$	14,254	19,632		19,934
Borrower late fee income	12,838		14,693		14,760
Investment advisory fees (b)	6,129		4,302		17,653
Realized and unrealized gains/(losses) on investments classified as available-for-sale and trading, net	2,773		143		7,289
Remeasurement of business acquisition contingent consideration	—		(925	)	1,268
Reduction of repurchase obligation (c)	—		—		4,235
Other (d)	17,935		9,417		8,797
Other income	$	53,929	47,262		73,936


(a)	The decrease in revenue in 2016 compared to 2015 and 2014 was due to the loss of rights to a certain publication.

(b)

The Company provides investment advisory services under various arrangements and earns annual fees of 25 basis points on the outstanding balance of investments and up to 50 percent of the gains from the sale of securities or securities being called prior to the full contractual maturity for which it provides advisory services. Due to improvements in the capital markets, the opportunities to earn performance fees on the sale of student loan asset-backed securities were more limited in 2016 and 2015 as compared to 2014. As of December 31, 2016, the outstanding balance of investments subject to these arrangements was $907.0 million.


(c)	During 2014, the Company recognized income related to the modification of certain servicing agreements in which the Company's loan repurchase obligation was reduced.


(d)	The operating results for the year ended December 31, 2016 include a gain of approximately $3.0 million related to the Company's sale of Sparkroom, LLC in February 2016. In addition, during 2016 the Company recognized net gains of $5.1 million related to the sale of various real estate, venture capital, and other investments.

LOAN SYSTEMS AND SERVICING OPERATING SEGMENT – RESULTS OF OPERATIONS

Student Loan Servicing Volumes (dollars in millions)



Company owned	$21,237	$21,397	$19,742	$19,369	$18,934	$18,593	$18,886	$18,433	$18,079	$17,429	$16,962
% of total	21.8%	15.5%	12.2%	11.5%	11.1%	10.6%	10.7%	10.1%	9.8%	9.0%	8.7%
Number of servicing borrowers:
Government servicing	3,892,929	5,305,498	5,915,449	5,882,446	5,817,078	5,886,266	5,842,163	5,786,545	5,726,828	6,009,433	5,972,619
FFELP servicing	1,626,146	1,462,122	1,397,295	1,358,551	1,353,785	1,339,307	1,335,538	1,298,407	1,296,198	1,357,412	1,312,192
Private servicing	173,948	195,580	202,529	205,926	209,854	230,403	245,737	250,666	267,073	292,989	355,096
Total:	5,693,023	6,963,200	7,515,273	7,446,923	7,380,717	7,455,976	7,423,438	7,335,618	7,290,099	7,659,834	7,639,907

Number of remote hosted borrowers	6,912,204	1,915,203	1,611,654	1,592,813	1,559,573	1,710,577	1,755,341	1,796,783	1,842,961	2,103,989	2,230,019

Summary and Comparison of Operating Results



	Year ended December 31,
	2016			2015		2014		Additional information
Net interest income	$	111		49		30
Loan systems and servicing revenue	214,846			239,858		240,414		See table below for additional analysis.
Intersegment servicing revenue	45,381			50,354		55,139		Represents revenue earned by the LSS operating segment as a result of servicing loans for the AGM operating segment. Year over year decrease was due to portfolio run-off.
Total other income	260,227			290,212		295,553
Salaries and benefits	132,072			134,635		125,844		Decrease in 2016 compared to 2015 due primarily to a decrease in personnel as a result of the loss of guaranty servicing and collection clients discussed below and improved operational efficiencies, partially offset by additional personnel to support the increase in volume of loans serviced for the government entering repayment status and the increase in private loan servicing volume. Increase in 2015 compared to 2014 due to additional personnel to support the increase in volume of loans serviced under the government servicing contract and the increase in private loan servicing volume.
Depreciation and amortization	1,980			1,931		1,734
Other expenses	40,715			57,799		59,521		Collection costs associated with FFELP guaranty collection revenue were $3.5 million, $19.2 million, and $24.3 million in 2016, 2015, and 2014, respectively. Excluding collection costs, other expenses were $37.2 million, $38.6 million, and $35.2 million in 2016, 2015, and 2014, respectively. See additional information below regarding the decrease in FFELP guaranty collection revenue.
Intersegment expenses, net	24,204			29,706		31,956		Intersegment expenses represent costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services.
Total operating expenses	198,971			224,071		219,055
Income before income taxes	61,367			66,190		76,528
Income tax expense	(23,319		)	(25,153	)	(29,081	)
Net income	38,048			41,037		47,447
Net loss attributable to noncontrolling interest	—			20		—
Net income attributable to Nelnet, Inc.	$	38,048		41,057		47,447
Before tax operating margin	23.6		%	22.8	%	25.9	%

Loan systems and servicing revenue



	Year ended December 31,
	2016		2015	2014	Additional information
Government servicing	$	151,728	133,189	124,378	Increase in 2016 compared to 2015 due to a shift in the portfolio of loans serviced to a greater portion of loans in higher paying repayment statuses, an increase in billable applications for TPD borrowers due to a new change request matching eligible borrowers to the social security administration database, and the transfer of borrowers from a not-for-profit servicer who exited the loan servicing business in August 2016. Increase in 2015 compared to 2014 was due to an increase in the number of borrowers serviced under the government servicing contract.
FFELP servicing	15,948		14,248	13,334	Year over year increases due to an increase in third-party servicing volume as a result of conversions to the Company's servicing platform. Over time, FFELP servicing revenue will decrease as third-party customers' FFELP portfolios run off.
Private servicing	15,600		12,040	10,497	Increase due to growth in private loan servicing volume from existing and new clients.
FFELP guaranty servicing	2,349		9,318	11,284	The Company’s guaranty servicing revenue was earned from two guaranty servicing clients. A contract with one client expired on October 31, 2015, and was not renewed. Guaranty servicing revenue from this customer was $4.9 million and $6.4 million in 2015 and 2014, respectively. The remaining guaranty servicing client exited the FFELP guaranty business at the end of their contract term on June 30, 2016. Guaranty servicing revenue from this customer was $2.3 million, $4.4 million, and $4.9 million in 2016, 2015, and 2014, respectively. Effective June 30, 2016, the Company has no remaining guaranty servicing revenue.
FFELP guaranty collection	7,211		47,597	55,369	The Company’s guaranty collection revenue was earned from two guaranty collection clients. A contract with one client expired on October 31, 2015, and was not renewed. Guaranty collection revenue from this customer was $32.5 million and $42.4 million in 2015 and 2014, respectively. The remaining guaranty servicing client exited the FFELP guaranty business at the end of their contract term on June 30, 2016. Guaranty collection revenue from this customer was $7.2 million, $15.1 million, and $13.0 million in 2016, 2015, and 2014, respectively. The Company incurred collection costs that were directly related to guaranty collection revenue. Effective June 30, 2016, the Company has no remaining guaranty collection revenue.
Software services	18,132		19,492	22,349	The majority of software services revenue relates to providing hosted student loan servicing. Year over year decreases were due to a decrease in the average number of remote hosted borrowers. In addition, in August 2016, a not-for-profit servicer exited the business and their servicing volume was transferred to the Company and is included in the Company's government servicing volume.
Other	3,878		3,974	3,203	The majority of this revenue relates to providing contact center outsourcing activities.
Loan systems and servicing revenue	$	214,846	239,858	240,414

TUITION PAYMENT PROCESSING AND CAMPUS COMMERCE OPERATING SEGMENT – RESULTS OF OPERATIONS

This segment of the Company’s business is subject to seasonal fluctuations which correspond, or are related to, the traditional school year. Tuition management revenue is recognized over the course of the academic term, but the peak operational activities take place in summer and early fall. Higher amounts of revenue are typically recognized during the first quarter due to fees related to grant and aid applications as well as online applications and enrollment services. The Company’s operating expenses do not follow the seasonality of the revenues. This is primarily due to generally fixed year-round personnel costs and seasonal marketing costs. Based on the timing of revenue recognition and when expenses are incurred, revenue and pre-tax operating margin are higher in the first quarter as compared to the remainder of the year.

The Company purchased RenWeb on June 3, 2014. The results of RenWeb's operations are reported in the Company's consolidated financial statements from the date of acquisition. RenWeb's revenue from the date of acquisition through December 31, 2014 and for the years ended December 31, 2015 and 2016 was $8.8 million, $19.9 million, and $23.2 million, respectively.

Summary and Comparison of Operating Results



	Year ended December 31,
	2016			2015		2014		Additional information
Net interest income	$	9		3		6
Tuition payment processing, school information, and campus commerce revenue	132,730			120,365		98,156		In addition to the acquisition of RenWeb referred to above, the remaining increase was due to an increase in the number of managed tuition payment plans, campus commerce customer transaction volume, and new school customers.
Other income (expense)	—			(925	)	1,268		Amount represents the remeasurement of contingent consideration to fair value related to the acquisition of RenWeb.
Total other income	132,730			119,440		99,424
Salaries and benefits	62,329			55,523		48,453		In addition to the acquisition of RenWeb referred to above, the remaining increase was due to additional personnel to support the increase in payment plans and school information system customers and continued system maintenance and enhancements.
Depreciation and amortization	10,595			8,992		8,169		Amortization of intangible assets for 2016, 2015, and 2014 was $9.2 million, $8.9 million, and $6.5 million, respectively. As a result of the acquisition of RenWeb, the Company recorded $37.2 million of intangible assets.
Other expenses	18,486			15,161		13,006		In addition to the acquisition of RenWeb referred to above, the remaining increase was due to additional expenses to support the increase in payment plans and school information system customers and continued system maintenance and enhancements.
Intersegment expenses, net	6,615			8,617		4,769		Intersegment expenses represent costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services.
Total operating expenses	98,025			88,293		74,397
Income before income taxes	34,714			31,150		25,033
Income tax expense	(13,191		)	(11,838	)	(9,513	)
Net income	$	21,523		19,312		15,520
Before tax operating margin	26.2		%	26.1	%	25.2	%

COMMUNICATIONS OPERATING SEGMENT - RESULTS OF OPERATIONS

The acquisition of privately held Allo was completed on December 31, 2015. The fair value of Allo's assets acquired and liabilities assumed are included in the Company's consolidated balance sheet as of December 31, 2015. However, no operating results of Allo are included in the consolidated income statement of the Company for the year ended December 31, 2015. See note 7 of the notes to consolidated financial statements included in this report for additional information related to the acquisition of Allo.

Summary of Operating Results - Year ended December 31, 2016

During 2016, Allo began providing services in Lincoln, Nebraska, as part of a multi-year project to pass substantially all commercial and residential properties in the community. Due to the substantial increase of activity within this segment throughout 2016 as a result of the Lincoln network build-out, the Company has provided the 2016 quarterly results for the Communications segment below.



	Three months ended									Year ended
	March 31, 2016			June 30, 2016		September 30, 2016		December 31, 2016		December 31, 2016		Additional information
Net interest expense	$	(147	)	(205	)	(318	)	(600	)	(1,270	)	Allo has a line of credit with Nelnet, Inc. (parent company). The interest expense incurred by Allo and related interest income earned by Nelnet, Inc. is eliminated for the Company's consolidated financial statements. The outstanding balance on this line of credit as of December 31, 2015 and 2016 was $13.9 million and $58.0 million, respectively.
Communications revenue	4,346			4,478		4,343		4,492		17,659		Communications revenue is derived primarily from the sale of pure fiber optic services to residential and business customers in Nebraska, including internet, television, and telephone services.
Salaries and benefits	1,089			1,377		2,325		2,857		7,649		At December 31, 2015 and December 31, 2016, Allo had 97 and 318 employees, respectively, including part-time employees. Allo also uses temporary employees in the normal course of business. Certain costs qualify for capitalization as Allo builds its network.
Depreciation and amortization	1,129			1,378		1,630