UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

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) 121 SOUTH 13TH STREET, SUITE 201 LINCOLN, NEBRASKA (Address of principal executive offices)		84-0748903 (I.R.S. Employer Identification No.) 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 o No þ

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 o No þ

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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. þ

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o

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

The aggregate market value of the Registrant’s voting common stock held by non-affiliates of the Registrant on June 30, 2008 (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 $11.23 per share, was $300,196,800. 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, 2009, there were 37,805,721 and 11,495,377 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 a wholly owned subsidiary).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement to be filed for its 2009 Annual Meeting of Shareholders, scheduled to be held May 20, 2009, are incorporated by reference into Part III of this Form 10-K.

 

 

NELNET, INC.
FORM 10-K
TABLE OF CONTENTS

PART I
Item 1. Business			2
Item 1A. Risk Factors			15
Item 1B. Unresolved Staff Comments			28
Item 2. Properties			28
Item 3. Legal Proceedings			29
Item 4. Submission of Matters to a Vote of Security Holders			30
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities			30
Item 6. Selected Financial Data			32
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			35
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			79
Item 8. Financial Statements and Supplementary Data			85
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			85
Item 9A. Controls and Procedures			85
Item 9B. Other Information			86
PART III
Item 10. Directors, Executive Officers, and Corporate Governance			87
Item 11. Executive Compensation			87
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			87
Item 13. Certain Relationships and Related Transactions and Director Independence			87
Item 14. Principal Accounting Fees and Services			87
PART IV
Item 15. Exhibits and Financial Statement Schedules			88
Signatures			95
Exhibit 10.32
Exhibit 10.33
Exhibit 10.69
Exhibit 10.70
Exhibit 10.71
Exhibit 10.72
Exhibit 10.73
Exhibit 12.1
Exhibit 21.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32

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 expectations and statements that assume or are dependent upon future events, are forward-looking statements. These forward-looking statements are subject to risks, uncertainties, assumptions, and other factors that may cause the actual results to be materially different from those reflected in such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in “Risk Factors” and elsewhere in this Annual Report on Form 10-K (the “Report”) and changes in the terms of student loans and the educational credit marketplace arising from the implementation of, or changes in, applicable laws and regulations, which may reduce the volume, average term, special allowance payments, and yields on student loans under the Federal Family Education Loan Program (the “FFEL Program” or “FFELP”) of the U.S. Department of Education (the “Department”) or result in loans being originated or refinanced under non-FFEL programs or may affect the terms upon which banks and others agree to sell FFELP loans to the Company. The Company could also be affected by changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students, and their families; the Company’s ability to maintain its credit facilities or obtain new facilities; the ability of lenders under the Company’s credit facilities to fulfill their lending commitments under these facilities; changes to the terms and conditions of the liquidity programs offered by the Department; changes in the general interest rate environment and in the securitization markets for education loans, which may increase the costs or limit the availability of financings necessary to initiate, purchase, or carry education loans; losses from loan defaults; changes in prepayment rates, guaranty rates, loan floor rates, and credit spreads; incorrect estimates or assumptions by management in connection with the preparation of the consolidated financial statements; and changes in general economic conditions. Additionally, financial projections may not prove to be accurate and may vary materially. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this Report. The Company is not obligated to publicly release any revisions to forward-looking statements to reflect events after the date of this Report or unforeseen events. Although the Company may from time to time voluntarily update its prior forward-looking statements, it disclaims any commitment to do so except as required by securities laws.

PART I.

ITEM 1. BUSINESS

Overview

The Company is an education planning and financing company focused on providing quality products and services to students, families, schools, and financial institutions nationwide. The Company was formed as a Nebraska corporation in 1977. Built through a focus on long term organic growth and further enhanced by strategic acquisitions, the Company earns its revenues from fee-based revenues related to its diversified education finance and service operations and from net interest income on its portfolio of student loans.

Customers

The Company’s customers consist of:

•

Students and families

•

Colleges and universities

•

Private, parochial, and other K-12 institutions

•

Lenders, holders, and agencies in education finance

Growth in the overall education marketplace generally drives increases in the demand for the Company’s products and services. Education marketplace growth is a result of rising student enrollment and the rising annual cost of education, which is illustrated in the following charts.

Product and Service Offerings

The Company offers a broad range of pre-college, in-college, and post-college products and services that help students and families plan and pay for their education and plan their careers. The Company’s products and services are designed to simplify the education planning and financing process and provide value to customers throughout the education life cycle.

Operating Segments

The Company has five operating segments as defined in Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS No. 131”), as follows:

	•		Student Loan and Guaranty Servicing
	•		Tuition Payment Processing and Campus Commerce
	•		Enrollment Services
	•		Software and Technical Services
	•		Asset Generation and Management

The Company’s 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. Management evaluates the Company’s generally accepted accounting principles (“GAAP”) based financial information as well as operating results on a non-GAAP performance measure referred to as “base net income.” Management believes “base net income” provides additional insight into the financial performance of the core operations. For further information, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In accordance with SFAS No. 131, the Company includes separate financial information about its operating segments in note 21 of the notes to the consolidated financial statements included in this Report.

Operating Results — Revenue Diversification

The Company ranks among the nation’s leaders in terms of total student loan assets originated, held, and serviced, principally consisting of loans originated under the FFEL Program (a detailed description of the FFEL Program is included in Appendix A to this Report). In recent years, the Company has expanded products and services generated from businesses that are not dependent upon government programs, thereby, reducing legislative and political risk. This revenue is primarily generated from products and services offered in the Company’s Tuition Payment Processing and Campus Commerce and Enrollment Services operating segments. The following tables summarize the Company’s revenues by operating segment for the years ended December 31, 2008, 2007, and 2006 (dollars in thousands):

		2008
																		As reported
		External								Intersegment								by segment
		Dollars				Percent				Dollars				Percent				Dollars				Percent
Student Loan and Guaranty Servicing		$	105,664				19.3	%		$	75,361				51.6	%		$	181,025				26.2	%
Tuition Payment Processing and Campus Commerce			50,124				9.2				302				0.2				50,426				7.3
Enrollment Services			112,459				20.6				2				0.0				112,461				16.3
Software and Technical Services			19,731				3.6				6,831				4.7				26,562				3.8
Total revenue from fee-based businesses			287,978				52.7				82,496				56.5				370,474				53.6
Asset Generation and Management			295,820				54.2				(2,190	)			(1.5	)			293,630				42.4
Corporate Activity and Overhead			(37,617	)			(6.9	)			65,575				45.0				27,958				4.0
Total revenue		$	546,181				100.0	%		$	145,881				100.0	%		$	692,062				100.0	%

		2007
																		As reported
		External								Intersegment								by segment
		Dollars				Percent				Dollars				Percent				Dollars				Percent
Student Loan and Guaranty Servicing		$	133,234				23.2	%		$	74,687				73.9	%		$	207,921				30.7	%
Tuition Payment Processing and Campus Commerce			46,484				8.1				688				0.7				47,172				7.0
Enrollment Services			104,245				18.1				891				0.9				105,136				15.5
Software and Technical Services			22,093				3.8				15,683				15.5				37,776				5.6
Total revenue from fee-based businesses			306,056				53.2				91,949				91.0				398,005				58.8
Asset Generation and Management			292,058				50.8				(3,737	)			(3.7	)			288,321				42.7
Corporate Activity and Overhead			(23,197	)			(4.0	)			12,777				12.7				(10,420	)			(1.5	)
Total revenue		$	574,917				100.0	%		$	100,989				100.0	%		$	675,906				100.0	%

		2006
																		As reported
		External								Intersegment								by segment
		Dollars				Percent				Dollars				Percent				Dollars				Percent
Student Loan and Guaranty Servicing		$	130,555				22.9	%		$	63,545				76.0	%		$	194,100				29.7	%
Tuition Payment Processing and Campus Commerce			39,111				6.8				503				0.6				39,614				6.0
Enrollment Services			56,049				9.8				1,000				1.2				57,049				8.7
Software and Technical Services			15,595				2.7				17,877				21.4				33,472				5.1
Total revenue from fee-based businesses			241,310				42.2				82,925				99.2				324,235				49.5
Asset Generation and Management			352,238				61.6				(2,858	)			(3.4	)			349,380				53.3
Corporate Activity and Overhead			(21,856	)			(3.8	)			3,520				4.2				(18,336	)			(2.8	)
Total revenue		$	571,692				100.0	%		$	83,587				100.0	%		$	655,279				100.0	%

Fee-Based Operating Segments

Student Loan and Guaranty Servicing

The Company’s servicing division offers lenders across the United States a complete line of education loan services, including application processing, underwriting, fund disbursement, customer service, account maintenance, federal reporting and billing collections, payment processing, default aversion, claim filing, and recovery/collection services. 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 offers three primary product offerings as part of its loan and guaranty servicing functions. These product offerings and each one’s percentage of total third-party Student Loan and Guaranty Servicing revenue provided during the year ended December 31, 2008 are as follows:

	1.		Origination and servicing of FFEL Program loans (47.1%)
	2.		Origination and servicing of non-federally insured student loans (7.6%)
	3.		Servicing and support outsourcing for guaranty agencies (45.3%)

The following table summarizes the Company’s loan servicing volumes for FFELP and private loans (dollars in millions):

		As of December 31, 2008								As of December 31, 2007
		Dollar				Percent				Dollar				Percent
Company		$	24,596	(a)			68.5	%		$	25,640				75.8	%
Third Party			11,293	(b)			31.5				8,177				24.2
Total		$	35,889				100.0	%		$	33,817				100.0	%

During 2008, the Company sold $1.8 billion (par value) of federally insured student loans to existing third-party servicing customers. As a result of these sales, there was a shift in loan servicing volumes from the Company to third parties. Excluding these sales, the Company recognized third-party servicing volume growth of 16% from existing and new customers.

The Company performs the origination and servicing activities for FFEL Program loans for itself as well as third-party clients. The Company believes service, reputation, and/or execution are factors considered by schools in developing their lender lists and customers in selecting a servicer for their loans. Management believes it is important to provide exceptional customer service at a reasonable price in order to increase the Company’s loan servicing and origination volume at schools with which the Company does business.

The Company’s FFELP servicing customers include branding and forward flow lenders, as well as other national and regional banks and credit unions, who sell loans to the Company. The Company also has various state and non-profit secondary markets as third-party clients. The majority of the Company’s external loan servicing activities are performed under “life of loan” contracts. Life of loan 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 Company serviced FFELP loans on behalf of 85 and 121 third-party servicing customers as of December 31, 2008 and 2007, respectively. The Company has experienced a reduction of participating lenders for a variety of reasons, including if third-party servicing clients commence or increase internal servicing activities, shift volume to another service provider, or exit the FFEL Program completely. Despite this trend, the Company’s remaining servicing customers have increased their servicing volume during 2008.

The Company also provides origination and servicing activities for non-federally insured loans. Although similar in terms of activities and functions (i.e., disbursement processing, application processing, payment processing, statement distribution, and reporting), private 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 serviced private loans on behalf of 16 third-party servicing customers as of December 31, 2008.

The Company also provides servicing support for guaranty agencies, which are the organizations that serve as the intermediary between the U.S. federal government and FFELP lenders, and is responsible for paying the claims made on defaulted loans. The Department has designated 35 guarantors that have been formed as either state agencies or non-profit corporations that provide FFELP guaranty services in one or more states. Approximately half of these guarantors contract externally for operational or technology services. The services provided by the Company include operational, administrative, financial, and technology services to guarantors participating in the FFEL Program and state agencies that run financial aid grant and scholarship programs.

The Company’s four guaranty servicing customers include Tennessee Student Assistance Corporation, College Assist (which is the Colorado state-designated guarantor of FFELP student loans — formerly known as College Access Network), National Student Loan Program, and the Higher Education Assistance Commission of New York.

Competition

There is a relatively large number of lenders and servicing organizations who participate in the FFEL Program. The chart below lists the top 10 servicing organizations for FFELP loans as of December 31, 2007 (the latest date information was available from the Department).

Top FFELP Loan Servicers (a)
Rank		Name		$ billions
1		Sallie Mae		$	127.4
2		PHEAA			34.4
3		Nelnet			32.2
4		Great Lakes			32.1
5		ACS			31.0
6		Wells Fargo			11.7
7		JPMorgan Chase			11.4
8		Express Loan Servicing			8.7
9		Edfinancial			7.7
10		KHEAA (Kentucky)			5.5

Source: Student Loan Servicing Alliance

The principal competitor for existing and prospective loan and guaranty servicing business is SLM Corporation, the parent company of Sallie Mae. Sallie Mae is the largest FFELP provider of origination and servicing functions as well as one of the largest service providers of non-federally guaranteed loans. In addition, the Department’s loan servicing provider(s) could become a larger competitor for the Company (as discussed below).

The Federal Direct Loan Program (the “Direct Loan Program”), through which the Federal government lends money directly to students and families, has historically used one provider for the origination and servicing of loans. Recent legislation, including the College Cost Reduction Authorization Act of 2008 (the “College Cost Reduction Act”) and the Ensuring Continued Access to Student Loans Act of 2008 (“ECASLA”), has and/or will enable the Department to accept former FFELP loans in the form of additional Direct Loan Program capacity, and to purchase FFELP loans as far back as 2003, in an effort to bring liquidity and stability back to the student loan market. As a result, the Department’s loan servicing provider may experience an increase in loan volume that the Department will be responsible for servicing. With this increase in current and potential loan volume, the Department is conducting a solicitation for additional servicing capacity. The Company submitted an application to provide services as part of this solicitation.

The Company believes the number of guaranty agencies contracting for technology services will increase as states continue expanding the scope of their financial aid grant programs and as a result of existing deficient or outdated systems. Since there is a finite universe of clients, competition for existing and new contracts is considered high. Agencies may choose to contract for part or all of their services, and the Company believes its products and services are competitive. To enhance its competitiveness, the Company continues to focus on service quality and technological enhancements.

Seasonality

The revenue earned by the Company’s loan and guaranty servicing operations is primarily related to the outstanding portfolio size and composition and the amount of disbursement and origination activity. Revenue generated by recurring monthly activity is driven based on the outstanding portfolio size and composition and has little seasonality. However, a portion of the fees received by the Company under various servicing contracts does relate to services provided in relation to the origination and disbursement of student loans. Stafford and PLUS loans are disbursed as directed by the school and are usually divided into two or three equal disbursements released at specified times during the school year. The two periods of August through October and December through March account for the majority of the Company’s total annual Stafford and PLUS loan disbursements. For private loan origination activities, disbursements peak from June through September and the Company will earn a large portion of its origination fee income during these months. There is also a seasonal fluctuation in guaranty processing levels due to the correlation of the delivery of loans to students attending schools with traditional academic calendars, with peak season occurring from approximately July to September.

Tuition Payment Processing and Campus Commerce

The Company’s Tuition Payment Processing and Campus Commerce operating segment provides products and services to help institutions and education-seeking families manage the payment of education costs during the pre-college and college stages of the education life cycle.

The K-12 market consists of nearly 30,000 private and faith-based educational institutions nationally. In the K-12 market the Company offers tuition management services as well as assistance with financial needs assessment, enrollment management, and donor management. The Company has actively managed tuition payment plans in place at approximately 4,200 K-12 educational institutions.

Tuition management services include payment plan administration, ancillary billing, accounts receivable management, and record keeping. K-12 educational institutions contract with the Company to administer deferred payment plans where the institution allows the responsible party to make monthly payments over 6 to 12 months. The Company collects a fee from either the institution or the payer as an administration fee.

The Company offers two principal products to the higher education market: actively managed tuition payment plans and campus commerce outsourcing. The Company has actively managed tuition payment plans in place at approximately 600 colleges and universities. Higher educational institutions contract with the Company to administer deferred payment plans where the institution allows the responsible party to make monthly payments on either a semester or annual basis. The Company collects a fee from either the institution or the payer as an administration fee.

The campus commerce solution, QuikPay^®, is sold as a subscription service to colleges and universities. QuikPay processes payments through the appropriate channels in the banking or credit card networks to make deposits into the client’s bank account. It can be further deployed to other departments around campus as requested (e.g., application fees, alumni giving, parking, events, etc.). There are approximately 200 college and university campuses using the QuikPay system. The Company earns revenue for e-billing, hosting/maintenance, credit card convenience fees, and e-payment transaction fees.

Competition

This segment of the Company’s business focuses on two separate markets: private and faith-based K-12 schools and higher education colleges and universities.

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: banking companies, tuition management providers, financial needs assessment providers, accounting firms, and a myriad of software companies.

In the higher education market, the Company targets business officers at colleges and universities. In this market, the primary competition is limited to three tuition payment providers, as well as solutions developed in-house by colleges and universities.

The Company’s principal competitive advantages are (i) the service it provides to institutions, (ii) the information management tools provided with the Company’s service, and (iii) the Company’s ability to interface with the institution’s clients. The Company believes its clients select products primarily on technological superiority and feature functionality, but price and service also impact the selection process.

Seasonality

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. Revenue associated with providing QuikPay subscription services is recognized over the service period with the highest revenue months being July through September and December and January. The Company’s operating expenses do not follow the seasonality of the revenues. This is primarily due to fixed year-round personnel costs and seasonal marketing costs.

Enrollment Services

The Company’s Enrollment Services operating segment offers enrollment products and services that are focused on helping (i) students plan and prepare for life after high school (content management) and (ii) colleges recruit and retain students (lead generation). The Company’s enrollment products and services include the following:

Content Management
•		Test preparation study guides and online courses
•		Admissions consulting
•		Licensing of scholarship data
•		Essay and resume editing services
•		Call center services

Lead Generation
•		Vendor lead management services
•		Pay per click marketing management
•		Email marketing
•		Admissions lead generation
•		List marketing services

As with all of the Company’s products and services, the Company’s focus is on the education seeking family — both college bound and in college — and the Company delivers products and services in this segment through four primary customer channels: higher education, corporate and government, K-12, and direct-to-consumer/customer service. Many of the Company’s products in this segment are distributed online; however, products such as test preparation study guides are distributed as printed materials. In addition, essay and resume editing services are delivered primarily by contract editors. In addition to its other clients, the Company provides on-line test preparation services and products to the United States Department of Defense under contracts with one year terms.

Competition

In this segment, the primary areas in which the Company competes are: lead generation and management, test preparation study guides and online courses, and call center services.

There are several large competitors in the areas of lead generation and test preparation, but the Company does not believe any one competitor has a dominant position in all of the product and service areas offered by the Company. The Company has seen increased competition in the area of call center operations, including outsourced admissions, as other companies have recognized the potential in this market.

The Company competes through various methods, including price, brand awareness, depth of product and service selection, and customer service. The Company has attempted to be a “one stop shop” for the education seeking family looking for career assessment, test preparation, and college information. The Company also offers its institutional clients a breadth of services unrivaled in the education industry.

Seasonality

As with the Company’s other business segments, portions of the Company’s Enrollment Services segment are subject to seasonal fluctuations based upon the traditional academic school year, with peaks in January and August. Additionally, the Company recognizes revenue from the sale of lists when these products are distributed to the customer. Revenue from the sale of lists is dependent on demand for the lists and varies from period to period.

Software and Technical Services

The Company’s Software and Technical Services Operating Segment develops student loan servicing software, which is used internally by the Company and licensed to third-party student loan holders and servicers. This segment also provides information technology products and services, with core areas of business in educational loan software solutions, business intelligence, technical consulting services, and Enterprise Content Management (“ECM”) solutions.

The Company licenses, maintains, and supports the following systems and software:

•

HELMS/HELM-Net, STAR, and SLSS, systems which are used in the full servicing of FFELP, private, consolidation, and Canadian loans

•

Mariner, which is used for consolidation loan origination

•

InfoCentre, which is a data warehouse and analysis tool for educational loans

•

Uconnect, a tool to facilitate information sharing between different applications

The Company’s clients within the education loan marketplace include large and small financial institutions, secondary markets, loan originators, and loan servicers. The Company’s software and documentation is distributed electronically via its web site and, if necessary, on CD-ROM. Primary support for clients is done remotely from the Company’s offices, but the Company does provide on-site support and training when required. In addition, the Company runs and supports the software necessary for the ELM NDN process. This process connects lenders and schools in the funds disbursal process.

The Company also supplies and supports ECM solutions. The Company’s Technical Consulting Services group provides consulting services, primarily Microsoft related, both within and outside of the educational loan marketplace. The Company’s Microsoft Enterprise Consulting practice also provides products and solutions for the Microsoft platform. Examples of these products are Uconnect^® (an application integration product), Dynamic Payables^® (an Accounts Payable automation product), and Dynamic Filer^® (a low-cost file, scan, and search solution).

The Company is a reseller of IBM hardware and software, Hummingbird (Open Text), Kofax, and Ultimus document imaging technology, and the Company’s products require third party software from Microsoft. All of these third party products and resources are generally available and in some cases the Company relies on its clients obtaining these products directly from the vendors rather than through the Company. The Company is a Microsoft Gold Certified partner and a Microsoft Business Solutions partner.

A significant portion of the software and technology services business is dependent on the existence of and participants in the FFEL Program. If the federal government were to terminate the FFEL Program or the number of entities participating in the program were to decrease, the Company’s software and technical services segment would be impacted. The recent legislation and capital market disruptions have had an impact on the profitability of FFEL Program participants. As a result, the number of entities participating in the FFEL Program has and may continue to be adversely impacted. This impact could have an effect on the Company’s software and technical services segment. In order to mitigate any negative impact as a result of changes in the FFEL Program, the Company is working to diversify revenues in this segment.

Competition

The Company is one of the leaders in the education loan software processing industry. Many lenders in the FFEL Program utilize the Company’s software either directly or indirectly. Management believes the Company’s competitors in this segment are much smaller than the Company and do not have the depth of knowledge or products offered by the Company.

The Company’s primary method of competition in this segment is based upon its depth of knowledge, experience, and product offerings in the education loan industry. The Company believes it has a competitive edge in offering proven solutions, since the Company’s competition consists primarily of consulting firms that offer services and not products.

The Company also faces competition from loan servicers; however, loan servicing companies are outsourcing solutions which do not allow a client to differentiate themselves in the market.

Seasonality

Software demonstrations and decisions to purchase software generally take place during year-end budget season, but management believes implementation timeframes vary enough to provide a consistent revenue stream throughout the year. In addition, software support is a year long ongoing process and not generally affected by seasonality.

Asset Generation and Management Operating Segment

The Asset Generation and Management Operating Segment includes the origination, acquisition, management, and ownership of the Company’s student loan assets, which has historically been the Company’s largest product and service offering. The Company historically generated 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 costs associated with originating, acquiring, and financing its portfolio. Due to recent legislation and capital market disruptions that began in 2007, the yield on student loans has been adversely impacted.

Impact of Recent Legislation and Capital Market Disruptions

On September 27, 2007, the President signed into law the College Cost Reduction Act. Among other things, this legislation reduced special allowance payments received by lenders, increased origination fees paid by lenders, and eliminated all provisions related to Exceptional Performer status, and the monetary benefits associated with it. Management estimated the impact of this legislation reduced the annual yield on FFELP loans originated after October 1, 2007 by 70 to 80 basis points. As a result of this legislation, the Company modified borrower benefits and reduced loan acquisition and internal costs.

In addition, the Company has significant financing needs that it meets through the capital markets. Since August 2007, the capital markets have experienced unprecedented disruptions, which have had an adverse impact on the Company’s earnings and financial condition. Since the Company cannot determine nor control the length of time or extent to which the capital markets will remain disrupted, it reduced its direct and indirect costs related to its asset generation activities, and is more selective in pursuing origination activity in the direct to consumer channel. Accordingly, beginning in January 2008, the Company suspended Consolidation and private student loan originations and exercised contractual rights to discontinue, suspend, or defer the acquisition of student loans in connection with substantially all of its branding and forward flow relationships.

Funding Student Loan Originations

Historically, the Company funded new loan originations using loan warehouse facilities and asset-backed securitizations. Student loan warehousing has historically allowed the Company to buy and manage student loans prior to transferring them into more permanent financing arrangements. In July 2008, the Company did not renew its liquidity provisions on its FFELP warehouse facility. Accordingly, the facility became a term facility and no new loan originations could be funded with this facility. In August 2008, the Company began funding FFELP Stafford and PLUS student loan originations for the 2008-2009 academic year pursuant to the Department’s Loan Participation Program (as discussed below).

In August 2008, the Department implemented the Loan Purchase Commitment Program (the “Purchase Program”) and the Loan Participation Program (the “Participation Program”) pursuant to the ECASLA. Under the Department’s Purchase Program, the Department will purchase loans at a price equal to the sum of (i) par value, (ii) accrued interest, (iii) the one percent origination fee paid to the Department, and (iv) a fixed amount of $75 per loan. Under the Participation Program, the Department provides interim short term liquidity to FFELP lenders by purchasing participation interests in pools of FFELP loans. FFELP lenders are charged a rate of commercial paper (“CP”) plus 50 basis points on the principal amount of participation interests outstanding. Loans funded under the Participation Program must be either refinanced by the lender or sold to the Department pursuant to the Purchase Program prior to its expiration on September 30, 2009. To be eligible for purchase or participation under the Department’s programs, loans were originally limited to FFELP Stafford or PLUS loans made for the academic year 2008-2009, first disbursed between May 1, 2008 and July 1, 2009, with eligible borrower benefits.

On October 7, 2008, legislation was enacted to extend the Department’s authority to address FFELP student loans made for the 2009-2010 academic year and allowing for the extension of the Participation Program and Purchase Program from September 30, 2009 to September 30, 2010. The Department indicated that loans for the 2008-2009 academic year which are funded under the Department’s Participation Program will need to be refinanced or sold to the Department prior to September 30, 2009. On November 8, 2008, the Department announced the replication of the terms of the Participation and Purchase Program, in accordance with the October 7^th legislation, which will include FFELP student loans made for the 2009-2010 academic year.

As of December 31, 2008, the Company had $622.2 million of FFELP loans funded using the Participation Program. The Company plans to continue to use the Participation Program to fund loans originated for the 2008-2009 and 2009-2010 academic years. These programs are allowing the Company to continue originating new federal student loans to all students regardless of the school they attend. As of February 27, 2009, the Company had $1.4 billion of FFELP loans funded using the Participation Program.

Asset Management

As of December 31, 2008, the Company had a student loan portfolio of $25.1 billion as shown below:

Student Loan Portfolio Composition

Term Funded (Asset-Backed Securitizations)

The majority of the notes issued under asset-backed securitizations primarily reprice at a fixed spread to three month LIBOR and are structured to substantially match the maturity of the funded assets. These notes fund FFELP student loans that are predominantly set based on a spread to three month commercial paper. Historically, three month LIBOR and three month commercial paper indexes have been highly correlated. Based on cash flows developed to reflect management’s current estimate of, among other factors, prepayments, defaults, deferment, forbearance, and interest rates, the Company currently expects future undiscounted cash flows from these transactions will be approximately $1.4 billion. These cash flows consist of net spread and servicing and administrative revenue in excess of estimated cost. However, due to the unintended consequences of government intervention in the commercial paper markets and limited issuances of qualifying financial commercial paper, the relationship between the three-month financial commercial paper and LIBOR has been distorted and volatile. Such distortion has had and may continue to have a significant impact on the earnings and cash flows of this portfolio.

FFELP Warehouse Facility

The Company’s FFELP warehouse facility terminates in May 2010. As of December 31, 2008, the Company has $1.6 billion of student loans in the facility and $1.4 billion borrowed under the facility. The Company plans to remove and/or refinance the remaining collateral in this facility by using the Department’s Conduit Program (as discussed below), using other financing arrangements, including secured transactions in the capital markets, using unrestricted operating cash, and/or selling loans to third parties.

In January 2009, the Department published summary terms under which it will finance eligible FFELP Stafford and PLUS loans in a conduit vehicle established to provide funding for student lenders (the “Conduit Program”). Loans eligible for the Conduit Program must be first disbursed on or after October 1, 2003, but not later than June 30, 2009, and fully disbursed before September 30, 2009, and meet certain other requirements. Funding for the Conduit Program will be provided by the capital markets at a cost based on market rates. The Conduit Program will have a term of five years. As of December 31, 2008, the Company had $873 million of loans included in its FFELP warehouse facility that would be eligible for this program.

Although the Company expects asset-backed securitizations to remain a primary source of funding loans over the long term, the Company expects transaction volume to be more limited and less favorable than in the past due to the credit market disruptions that began in August 2007. On December 19, 2008, the Federal Reserve Board of New York published proposed terms for the U.S. Government’s Term Asset-Backed Securities Loan Facility (“TALF”), a program designed to facilitate renewed issuance of consumer and small business asset-backed securities (“ABS”) at interest rate spreads that are lower than current disrupted levels. As proposed, the TALF will provide investors with funding of up to three years for eligible ABS rated by two or more rating agencies in the highest investment-grade rating category. Eligible ABS include ‘AAA’ rated student loan ABS backed by FFELP student loans and non-government guaranteed student loans first disbursed since May 1, 2007. As of December 31, 2008, the Company had approximately $1.0 billion of student loans included in its FFELP warehouse facility that would be eligible to serve as collateral for ABS funded under TALF, which includes $772 million of loans that are also eligible for the Conduit Program. While the Company expects TALF to improve its access to and reduce the cost of ABS funding, it is unable to predict, at this time, the impact TALF will ultimately have on funding activities.

Private Loan Warehouse Facility

As of December 31, 2008, the Company had $154.2 million of student loans in its private loan warehouse facility and $95.0 million borrowed under the facility. On February 25, 2009, the Company paid all debt outstanding on this facility with operating cash and terminated the facility.

Interest Rate Risk Management

The current and future interest rate environment can and will affect the Company’s interest earnings, net interest income, and net income. The effects of changing interest rate environments are further outlined in Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk — Interest Rate Risk.”

The Company is exposed to interest rate risk in the form of basis risk and repricing risk because the interest rate characteristics of the Company’s assets do not match the interest rate characteristics of the funding. As of December 31, 2008, the Company had $23.6 billion of FFELP loans indexed to three-month financial commercial paper rate and $20.5 billion of debt indexed to LIBOR. Due to the unintended consequences of government intervention in the commercial paper markets and limited issuances of qualifying financial commercial paper, the relationship between the three-month financial commercial paper and LIBOR has been distorted and volatile. Such distortion has had and may continue to have a significant impact on the earnings of the Company. In addition, the Company faces repricing risk due to the timing of the interest rate resets on its liabilities, which may occur as frequently as every quarter, and the timing of the interest rate resets on its assets, which generally occur daily.

The interest rate earned by the Company and the interest rate paid by the underlying borrowers on the Company’s portfolio of FFELP loans is set forth in the Higher Education Act and the Department’s regulations thereunder and, generally, is based upon the date the loan was originated.

Loans originated prior to April 1, 2006 generally earn interest at the higher of a floating rate based on the Special Allowance Payment or SAP formula set by the Department and the borrower rate, which is fixed over a period of time. The SAP formula is based on an applicable index plus a fixed spread that is dependent upon when the loan was originated, the loan’s repayment status, and funding sources for the loan. The Company generally finances its student loan portfolio with variable rate debt. In low and/or declining interest rate environments, when the fixed borrower rate is higher than the rate produced by the SAP formula, the Company’s student loans earn at a fixed rate while the interest on the variable rate debt typically continues to decline. In these interest rate environments, the Company may earn additional spread income that it refers 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, the Company may earn floor income for an extended period of time, which the Company refers to as fixed rate floor income, and for those loans where the borrower rate is reset annually on July 1, the Company may earn floor income to the next reset date, which the Company refers to as variable rate floor income. In accordance with new legislation enacted in 2006, lenders are required to rebate fixed rate floor income and variable rate floor income to the Department for all new FFELP loans first originated on or after April 1, 2006.

Absent the use of derivative instruments, a rise in interest rates may reduce the amount of floor income received and this may have an impact on earnings due to interest margin compression caused by increasing financing costs, until such time as the federally insured loans earn interest at a variable rate in accordance with their special allowance payment formulas. In higher interest rate environments, where the interest rate rises above the borrower rate and fixed rate loans effectively become variable rate loans, the impact of the rate fluctuations is reduced.

Credit Risk

The Company’s portfolio of student loan assets is subject to minimal credit risk, generally based upon the type of loan, date of origination, and quality of the underlying loan servicing. Substantially all of the Company’s loan portfolio (99% at December 31, 2008) is guaranteed by the Department at levels ranging from 97% to 100%. Depending upon when the loan was first disbursed, and subject to certain servicing requirements, the federal government currently guarantees 97% or 98% of the principal of and the interest on federally insured student loans, which limits the Company’s loss exposure to 3% or 2% of the outstanding balance of the Company’s federally insured portfolio (for older loans disbursed prior to 1993, the guaranty rate is 100%). The Company’s portfolio of non-federally insured loans is subject to credit risk similar to other consumer loan assets.

Competition

The Company faces competition from many lenders in the student loan industry. Through its size, the Company has successfully leveraged economies of scale to gain market share, and also competes by offering a full array of loan products and services. The Company differentiates itself from other lenders through its customer service, comprehensive product offering, vertical integration, technology, and strong relationships with colleges and universities.

The Company views SLM Corporation, the parent company of Sallie Mae, as its largest competitor in terms of loan origination and student loans held. Large, national and regional banks are also strong competitors, although many are involved only in the origination of student loans. Additionally, in different geographic locations across the country, the Company faces strong competition from regional, tax-exempt student loan secondary markets.

The Direct Loan Program has reduced the origination volume available for FFEL Program participants. As a result of the recent legislation and capital market disruptions, many lenders have withdrawn from the student loan market. Substantially all other lenders have altered their student loan offerings including the elimination of certain borrower benefits and premiums paid on secondary market loan purchases. Many FFELP lenders have made other significant changes which dramatically reduced the loan volume they originated. These conditions, primarily centered on loan access and loan processing, have led a number of schools to convert from the FFELP to the Direct Loan Program or participate in the Direct Loan Program in addition to the FFELP.

Seasonality

The Company earns net interest income on its portfolio of student loans. Net interest income is primarily driven by the size and composition of the portfolio in addition to the cost of borrowing and the prevailing interest rate environment. Although originations of student loans are generally subject to seasonal trends which correspond to the traditional academic school year, the size and run-off of the Company’s portfolio and the periodic acquisition of student loans through its various channels limits the seasonality of net interest income. While seasonality of interest income may be limited, the Company incurs significantly more asset generation costs prior to and at the beginning of the academic school year.

Intellectual Property

The Company owns numerous trademarks and service marks (“Marks”) to identify its various products and services. As of December 31, 2008, the Company had approximately 11 pending and 97 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 four patent applications that have been published, but have 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 collateral. 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, 2008, the Company had approximately 2,200 employees. Approximately 1,100 of these employees held professional and management positions while approximately 1,100 were in support and operational positions. 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 United States Securities and Exchange Commission (the “SEC”). Investors and other interested parties can access these reports and the Company’s proxy statements at http://www.nelnet.com. The Company routinely posts important information for investors on its Web site. The SEC maintains an Internet site (http://www.sec.gov) that contains periodic and other reports such as annual, quarterly, and current reports on Forms 10-K, 10-Q, and 8-K, respectively, as well as proxy and information statements regarding the Company and other companies that file electronically with the SEC.

The Company has adopted a Code of 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 Conduct on its Web site. Amendments to and waivers granted with respect to the Company’s Code of 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, and Nominating and Corporate Governance Committee Charter are also posted on its Web site and, along with its Code of Conduct, are available in print without charge to any shareholder who requests them. Please direct all requests as follows:

Nelnet, Inc.
121 South 13^th Street, Suite 201
Lincoln, Nebraska 68508
Attention: Secretary

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

Asset Generation and Management and Student Loan and Guaranty Servicing Operating Segments

The following risk factors relate to the Company’s operating segments most impacted by the provisions of the FFEL Program which include:

•

Asset Generation and Management

•

Student Loan and Guaranty Servicing

Additional risk factors affecting these segments are set forth under the “Liquidity and Capital Resources” caption below.

Changes in legislation and regulations could have a negative impact upon the Company’s business and may affect its profitability.

Funds for payment of interest subsidy payments, special allowance payments, and other payments under the FFEL Program are subject to annual budgetary appropriations by Congress. Federal budget legislation has in the past contained provisions that restricted payments made under the FFEL Program to achieve reductions in federal spending. Future federal budget legislation may adversely affect expenditures by the Department and the financial condition of the Company.

On August 14, 2008, the Higher Education Opportunity Act (“HEOA”) was enacted into law and effectively reauthorized the FFEL Program through 2014, with authorization to make FFELP loans through 2018 to borrowers with existing loans. Provisions in the HEOA include, but are not limited to, the following:

	•		School code of conduct requirements applicable to FFELP and private education loan lending
	•		Disclosure and reporting requirements for lenders and schools participating in preferred lender arrangements
	•		Permissible and prohibited inducement activities on the part of FFELP lenders, private education lenders, and FFELP guaranty agencies
	•		Additional loan origination and repayment disclosures that FFELP and private education lenders must provide to borrowers
	•		Additional FFELP loan servicing requirements

The HEOA may affect the Company’s profitability by increasing costs as a result of required changes to the Company’s operations.

The College Cost Reduction Act established a competitive auction program, effective July 1, 2009, for the origination rights to PLUS loans made to parents. The Secretary of Education must hold auctions in which FFEL Program lenders bid on the special allowance rate they are willing to accept in exchange for the right to originate PLUS loans to parent borrowers in a particular state. The bid submitted by a lender cannot exceed the special allowance rate for such loans currently defined in the Higher Education Act. The Secretary may award the origination rights on a state-by-state basis to the lenders which submit the two lowest bids. The Company may not be one of the two lenders awarded the origination rights in one or more states, which could result in a reduced amount of PLUS loan volume.

Furthermore, Congressional amendments to the Higher Education Act, or other relevant federal laws, and rules and regulations promulgated by the Secretary of Education, may adversely impact holders of FFELP loans. For example, changes might be made to the rate of interest or special allowance payments paid on FFELP loans, to the level of insurance provided by guaranty agencies, to the fees assessed to FFEL Program lenders, or to the servicing requirements for FFELP loans. New policies affecting the competition between the Federal Direct Loan and FFEL Programs may be instituted, or the FFEL Program could be eliminated in its entirety. Such changes could have a material adverse effect on the Company and its operations. The Company cannot predict potential legislation impacting the FFEL Program and recognizes that a level of political and legislative risk always exists within the industry.

In addition to changes to the Higher Education Act and FFEL Program, various state laws and regulations targeted at student lending companies have been enacted. These laws place restrictions on lending and business practices between schools and lenders of FFELP and private education loans and required changes to the Company’s business practices and operations. As with possible actions in the future by Congress and the Secretary of Education at the federal level, state legislatures may enact laws and state regulating agencies may institute rules or take actions which adversely impact holders of FFELP or private education loans.

The impact of legislative changes coupled with financial market disruption has caused the Company and other FFELP lenders to re-evaluate the markets in which they originate loans and the value of the FFEL Program loan assets they hold. Some lenders may limit originations to schools based on the school’s cohort default rate and some lenders may sell loans to the Department through the Department’s Participation and Purchase Program. Additionally, schools currently participating in the FFEL Program may re-evaluate the Direct Loan Program. These changes could reduce future third party servicing volume and the Company’s loan servicing and guaranty revenue.

The Company may be subject to penalties and sanctions if it fails to comply with governmental regulations or guaranty agency rules.

Historically, the Company’s principal business has been comprised of originating, acquiring, holding, and servicing student loans made and guaranteed pursuant to the FFEL Program, which was created by the Higher Education Act. The Higher Education Act governs many aspects of the Company’s operations. The Company is also subject to rules of the agencies that act as guarantors of the student loans, known as guaranty agencies. In addition, the Company is subject to certain federal and state banking laws, regulations, and examinations, as well as federal and state consumer protection laws and regulations, including, without limitation, laws and regulations governing borrower privacy protection, information security, restrictions on access to student information, and, specifically with respect to the Company’s non-federally insured loan portfolio, certain state usury laws and related regulations and the Federal Truth in Lending Act. All or most of these laws and regulations impose substantial requirements upon lenders and servicers involved in consumer finance. Failure to comply with these laws and regulations could result in liability for the Company as a result of the imposition of civil penalties and potential class action law suits.

The Company’s failure to comply with the regulatory regimes described above may arise from:

•

Breaches of the Company’s internal control systems, such as a failure to adjust manual or automated servicing functions following a change in regulatory requirements

•

Privacy issues

•

Technological defects, such as a malfunction in or destruction of the Company’s computer systems

•

Fraud by the Company’s employees or other persons in activities such as borrower payment processing

Such failure to comply, irrespective of the reason, could subject the Company to loss of the federal guaranty on federally insured loans, costs of curing servicing deficiencies or remedial servicing, suspension or termination of the Company’s right to participate in the FFEL Program or to participate as a servicer, negative publicity, and potential legal claims or actions brought by the Company’s servicing customers and borrowers.

The Company has the ability to cure servicing deficiencies and the Company’s historical losses in this area have been minimal. However, the Company’s loan servicing and guaranty servicing activities are highly dependent on its information systems, and while the Company has well-developed and tested business recovery systems, the Company faces the risk of business disruption should there be extended failures of its systems.

The Company has entered into separate agreements with the Nebraska and New York State Attorneys General in relation to its lending activities. The Company pledges full disclosure and transparency in its marketing, origination, and servicing of education loans. Failure to meet the terms and conditions of an agreement could subject the Company to legal action by the respective Attorney General.

The Higher Education Act generally prohibits a lender from providing certain inducements to educational institutions or individuals in order to secure applicants for FFELP loans. The Company has structured its relationships and product offerings in a manner intended to comply with the Higher Education Act, supporting regulations, and the available communications and guidance from the Department.

If the Department were to change its position on any of these matters, the Company may have to change the way it markets products and services and a new marketing strategy may not be as effective. If the Company fails to respond to the Department’s change in position, the Department could potentially impose sanctions upon the Company that could negatively impact the Company’s business.

Competition created from other lenders and servicers may adversely impact the volume of future originations and the Company’s loan and guaranty servicing businesses.

The Company’s student loan originations generally are limited to students attending eligible educational institutions in the United States. Origination volume is greater at some schools than others, and the Company’s and its servicing clients’ ability to remain active lenders at a particular school is subject to competition from other FFEL Program lenders. In addition to other lenders, the Company also faces competition from other FFEL Program loan and guaranty service providers who may be willing to modify pricing or services to gain greater market share.

As the Company seeks to further expand its business, the Company will face numerous competitors who may be well established in the markets the Company seeks to penetrate, or who may have better brand recognition and greater financial resources. Consequently, such competitors may have more flexibility to address the risks inherent in the student loan business. Additionally, some of the Company’s competitors are tax-exempt organizations that do not pay federal or state income tax which provides them a pricing advantage. These factors could lead to lower origination volume and reduced loan and guaranty servicing revenue.

Competition created by the Federal Direct Loan Program may adversely impact the volume of future originations and the Company’s loan and guaranty servicing business.

The Student Loan Reform Act of 1993 authorized a program of “direct loans” to be originated by schools with funds provided by the Secretary of Education. Under the Direct Loan Program, the Secretary of Education enters into agreements with schools, or origination agents in lieu of schools, to disburse loans with funds provided by the Secretary of Education. Participation in the program by schools is voluntary.

The loan terms are generally the same under the Direct Loan Program as under the FFEL Program, though more flexible repayment, consolidation, and forgiveness provisions are available under the Direct Loan Program. Additionally, the interest rate on Direct PLUS Loans made on or after July 1, 2006, is more favorable for parent and graduate borrowers. At the discretion of the Secretary of Education, students attending schools that participate in the Direct Loan Program (and their parents) may still be eligible for participation in the FFEL Program, though no borrower can obtain loans under both programs for the same period of enrollment.

As a result of the recent legislation and capital market disruptions, many lenders have withdrawn from the student loan market. Substantially all other lenders have altered their student loan offerings including the elimination of certain borrower benefits and premiums paid on secondary market loan purchases. Many FFELP lenders have made other significant changes which dramatically reduced the loan volume they originated. These conditions, primarily centered on loan access and loan processing, have led a number of schools to convert from the FFELP to the Direct Loan Program or participate in the Direct Loan Program in addition to the FFELP.

It is difficult to predict the impact of the Direct Loan Program, as there is no way to accurately predict the number of schools that will participate in future years or, if the Secretary authorizes students attending participating schools to continue to be eligible for FFELP loans, how many students will seek loans under the Direct Loan Program instead of the FFEL Program. In addition, it is impossible to predict whether future legislation will eliminate, limit, or expand the Direct Loan Program or the FFEL Program.

The reduction in the Company’s student loan purchases from branding and forward flow partners could have an adverse impact on its business.

The Company has historically acquired student loans through forward flow commitments and branding partner arrangements with other student loan lenders. The enactment of the College Cost Reduction Act in September 2007 resulted in a reduction in the yields on student loans and, accordingly, a reduction in the amount of the premium the Company could pay lenders under its forward flow commitments and branding partner arrangements. In addition, the current capital market disruptions have rendered origination or acquisition of student loans through these channels uneconomical. Accordingly, the Company has limited acquisition of student loans through its branding and forward flow relationships and will only buy loans that are economically priced and eligible for the Department’s Participation and Purchase Program. As a result, the Company has and will continue to experience a decrease in its forward flow and branding partner loan volume. The Company can give no assurance that it will be successful in renegotiating or renewing, on economically reasonable terms, its branding and forward flow agreements once those agreements expire. Loss of a strong branding or forward flow partner, or relationships with schools from which a significant volume of student loans is directly or indirectly acquired, could result in an adverse effect on the Company’s business.

A decrease in third-party servicing volume could have a negative effect on the Company’s earnings.

To the extent that third-party servicing clients reduce the volume of student loans that the Company processes on their behalf or decide not to hold FFELP loan assets, the Company’s income would be reduced, and, to the extent the related costs could not be reduced correspondingly, net income could be adversely affected. Such volume reductions may occur for a variety of reasons, including if third-party servicing clients commence or increase internal servicing activities, shift volume to another service provider, sell their loan portfolios, or exit the FFEL Program completely, for instance, as a result of reduced interest rate margins.

Future losses due to defaults on loans held by the Company present credit risk which could adversely affect the Company’s earnings.

Over 99% of the Company’s student loan portfolio is comprised of federally insured loans. These loans currently benefit from a federal guaranty of their principal balance and accrued interest. The allowance for loan losses from the federally insured loan portfolio is based on periodic evaluations of the Company’s loan portfolios considering 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% of the principal of and the interest on federally insured student loans disbursed on and after July 1, 2006 (and 98% for those loans disbursed prior to July 1, 2006), which limits the Company’s loss exposure on the outstanding balance of the Company’s federally insured portfolio. Also, in accordance with the Student Loan Reform Act of 1993, student loans disbursed prior to October 1, 1993 are fully insured for both principal and interest.

The Company’s non-federally insured loans are unsecured and are not guaranteed or reinsured under any federal student loan program or any private insurance program. Accordingly, the Company bears 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 non-federally insured loans, the Company considers several factors including: loans in repayment versus those in a nonpaying status, months in repayment, delinquency status, loan program type, loan underwriting, economic trends and historical portfolio default trends. The Company places a non-federally insured loan on nonaccrual status and charges 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. The provision for loan losses reflects the activity for the applicable period and provides an allowance at a level that the Company’s management believes is adequate 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, debt management operational effectiveness, and other unforeseen future trends. If actual performance is worse than estimated, it could materially affect the Company’s estimate of the allowance for loan losses and the related provision for loan losses in the Company’s statement of operations.

The Company must satisfy certain requirements necessary to maintain the federal guarantees of its federally insured loans, and the Company may incur penalties or lose its guarantees if it fails to meet these requirements.

The Company must meet various requirements in order to maintain the federal guaranty on its federally insured loans. These requirements include establishing servicing requirements and procedural guidelines and specify school and loan eligibility criteria. The federal guaranty on the Company’s federally insured loans is conditional based on the Company’s compliance with origination, servicing, and collection policies set by the Department and guaranty agencies. Federally insured loans that are not originated, disbursed, or serviced in accordance with the Department’s and guarantee agency regulations may risk partial or complete loss of the guaranty thereof. If the Company experiences 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 the Company has the opportunity to cure these deficiencies by following a prescribed cure process which usually involves obtaining the borrower’s reaffirmation of the debt. The lender becomes ineligible for special allowance interest benefits from the time of the first error leading to the loan rejection through the date that the loan is cured.

The Company is 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 and the Company maintains its right to collect the loan proceeds from the borrower.

A guaranty agency may also assess an interest penalty upon claim payment if the error(s) 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.

Failure to comply with Federal and guarantor regulations may result in loss of insurance or assessment of interest penalties at the time of claim reimbursement by the Company. A future increase in either the loans claim rejections and/or interest penalties could become material to the Company’s fiscal operations.

Higher rates of prepayments of student loans could reduce the Company’s profits.

Pursuant to the Higher Education Act, borrowers may prepay loans made under the FFEL Program at any time without penalty. Prepayments may result from consolidating student loans, which historically tends 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. High prepayment rates will have the most impact on the Company’s asset-backed securitization transactions, since those securities are priced according to the expected average lives of the underlying loans. The rate of prepayments of student loans may be influenced by a variety of economic, social, and other factors affecting borrowers, including interest rates and the availability of alternative financing. The Company’s profits could be adversely affected by higher prepayments, which may reduce the amount of net interest income the Company receives.

Consolidation loan activity by competitors or through the Direct Loan Program presents a risk to the Company’s loan portfolio and profitability.

The Company’s portfolio of federally insured loans is subject to refinancing through the use of consolidation loans, which are expressly permitted by the Higher Education Act and the Direct Loan Program. In January 2008, the Company suspended consolidation student loan originations as a result of legislative actions and capital market disruptions which impacted the profitability of consolidation loans. As a result, the Company may lose student loans in its portfolio that are consolidated by competing FFELP lenders or by the Direct Loan Program. Increased consolidations of student loans by the Company’s competitors or by the Direct Loan Program may result in a negative return on loans, when considering the origination costs or acquisition premiums paid with respect to these loans. Moreover, it may result in a reduction in net interest income. Additionally, consolidation of loans away by competing lenders or by the Direct Loan Program can result in a decrease of the Company’s servicing portfolio, thereby decreasing fee-based servicing income.

The Company faces liquidity risks associated with financing student loan originations and acquisitions.

A primary funding need of the Company is to finance its existing student loan portfolio and to fund new student loan originations and acquisitions. The Company relies upon secured financing vehicles as its most significant source of funding for student loans. Current conditions in the capital markets have resulted in reduced liquidity and increased credit risk premiums for market participants. These conditions may continue to increase the cost and reduce the availability of debt in the capital markets. As a result, a prolonged period of market illiquidity may affect the Company’s ability to finance its current student loan portfolio and could have an adverse impact on the Company’s future earnings and financial condition. See the additional risk factors under the “Liquidity and Capital Resources” caption below and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

Elimination of the FFEL Program by the Federal Government would have a significant negative effect on the Company’s earnings and operations.

Elimination of the FFEL Program would significantly impact the Company’s operations and profitability by, among other things, reducing the Company’s interest revenues as a result of the inability to add new FFELP loans to the Company’s portfolio and reducing guarantee and third-party servicing fees as a result of reduced FFELP loan servicing and origination volume. Additionally, the elimination of the FFEL Program would reduce education loan software sales and related consulting fees received from lenders using the Company’s software products and services.

On February 26, 2009, the President introduced several proposals related to the fiscal year 2010 Federal budget, including a proposal for the elimination of the FFEL Program and a recommendation that all new student loan originations be funded through the Direct Loan Program, with loan servicing to be provided by private sector companies through performance-based contracts with the Department. The proposal did not contain specific details as to implementation or timing, and the proposal is subject to review by Congress and possible changes. The Company cannot currently predict whether this or any other proposals to eliminate the FFEL Program will ultimately be enacted.

Utilization by lenders of the Department’s Participation and Purchase Program could reduce servicing, default aversion, and collection revenue.

On July 1, 2008, pursuant to the ECASLA, the Department announced terms under which it will offer to purchase certain FFELP student loans and participation interests in certain FFELP student loans from FFELP lenders. Under the Department’s Purchase Program, the Department will purchase loans at a price equal to the sum of (i) par value, (ii) accrued interest, (iii) the one percent origination fee paid to the Department, and (iv) a fixed amount of $75 per loan. Lenders will have until September 30, 2009 to sell loans to the Department under the 2008-2009 academic year Purchase Program.

On October 7, 2008, legislation was enacted to extend the Department’s authority to address FFELP student loans made for the 2009-2010 academic year and allowing for the replication of the Participation Program and Purchase Program for the 2009-2010 academic year. Lenders will have until September 30, 2010 to sell 2009-2010 academic year loans to the Department.

FFELP student loans purchased by the Department through the Purchase Program may be serviced by the Department, consequently reducing the size of the FFEL Program third-party servicing market. Use of the Purchase Program by the Company and its third-party servicing clients will likely reduce future third-party servicing and will reduce guaranty revenue.

Operating Segments — Fee-Based Businesses

The following risk factors relate to the Company’s operating segments not directly related to the FFEL Program. These operating segments include:

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Tuition Payment Processing and Campus Commerce

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Enrollment Services

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Software and Technical Services

Changes in legislation and regulations could have a negative impact upon the Company’s business and may affect its profitability.

Changes to privacy and direct mail legislation could negatively impact the Company, in particular the Company’s list management and lead generation activities. Changes in such legislation could restrict the Company’s ability to collect information for its list management and lead generation activities and its ability to use the information it collects. The Company has a privacy policy that covers how certain subsidiaries collect, protect, and use personal information. Depending on the department, product, and/or other factors, certain entities may have more restrictive information handling practices.

The Company’s Software and Technical Services operating segment provides information technology products and services, with core areas of business in student loan software solutions for schools, lenders, and guarantors. Many of the Company’s customers receiving these services have been negatively impacted through reduced margins as a result of the passage of the College Cost Reduction Act in September 2007 and the recent disruption in the financial markets. This impact could decrease the demand for the Company’s products and services and affect the Company’s revenue and profit margins.

The Company’s results are affected by competitive conditions, economic changes, and customer preferences.

Demand for the Company’s products and services, which impact revenue and profit margins, is affected by (i) the development and timing of the introduction of competitive products and services; (ii) the Company’s response to pricing pressures to stay competitive; (iii) changes in customer discretionary spending based on economic conditions; and (iv) changes in customers’ preferences for the Company’s products and services, including the success of products and services offered by competitors.

In addition, K-12 and post-secondary enrollment numbers impact the demand for the Company’s products and services. Education enrollment numbers are impacted by general population trends and the general state of the economy. Revenue in the Company’s fee- based businesses is recurring only to the extent that customer relationships are sustained. For some products and services, volume and growth is concentrated to a limited number of customers. Reduction in volume or loss of key customer relationships could have a negative impact on the Company’s future operating results.

Liquidity and Capital Resources

The Company faces liquidity and funding risk to meet its financial obligations.

Liquidity and funding risk refers to the risk that the Company will be unable to finance its operations due to a loss of access to the capital markets or other financing alternatives, or difficulty in raising financing needed for its assets. Liquidity and funding risk also encompasses the ability of the Company to meet its financial obligations without experiencing significant business disruption or reputational damage that may threaten its viability as a going concern.

The recent unprecedented disruptions in the credit and financial markets and the general economic crisis have had and may continue to have an adverse effect on the cost and availability of financing for the Company’s student loan portfolios and, as a result, have had and may continue to have an adverse effect on the Company’s liquidity, results of operations, and financial condition. Such adverse conditions may continue or worsen in the future.

The Company’s primary funding needs are those required to finance its student loan portfolio and satisfy its cash requirements for new student loan originations and acquisitions. In general, the amount, type, and cost of the Company’s funding, including securitizations and unsecured financing from the capital markets and borrowings from financial institutions, have a direct impact on the Company’s operating expenses and financial results and can limit the Company’s ability to grow its student loan assets. The Company relies upon secured financing vehicles as its most significant source of funding for student loans. The Company’s primary secured financing vehicles are loan warehouse facilities and asset-backed securitizations.

Historically, the Company funded new loan originations using loan warehouse facilities and asset-backed securitizations. Student loan warehousing has historically allowed the Company to buy and manage student loans prior to transferring them into more permanent financing arrangements. In July 2008, the Company did not renew its liquidity provisions on its FFELP warehouse facility. Accordingly, the facility became a term facility and no new loan originations could be funded with this facility. In August 2008, the Company began funding FFELP Stafford and PLUS student loan originations for the 2008-2009 academic year pursuant to the Department’s Loan Participation Program (as discussed below).

In August 2008, the Department implemented the Purchase Program and the Participation Program pursuant to the ECASLA. Under the Department’s Purchase Program, the Department will purchase loans at a price equal to the sum of (i) par value, (ii) accrued interest, (iii) the one percent origination fee paid to the Department, and (iv) a fixed amount of $75 per loan. Under the Participation Program, the Department provides interim short term liquidity to FFELP lenders by purchasing participation interests in pools of FFELP loans. FFELP lenders are charged a rate of commercial paper plus 50 basis points on the principal amount of participation interests outstanding. Loans funded under the Participation Program for the 2008-2009 academic year must be either refinanced by the lender or sold to the Department pursuant to the Purchase Program prior to its expiration on September 30, 2009. To be eligible for purchase or participation under the Department’s programs, loans were originally limited to FFELP Stafford or PLUS loans made for the academic year 2008-2009, first disbursed between May 1, 2008 and July 1, 2009, with eligible borrower benefits.

On October 7, 2008, legislation was enacted to extend the Department’s authority to address FFELP student loans made for the 2009-2010 academic year and allowing for the extension of the Participation Program and Purchase Program from September 30, 2009 to September 30, 2010. The Department indicated that loans for the 2008-2009 academic year which are funded under the Department’s Participation Program will need to be refinanced or sold to the Department prior to September 30, 2009. On November 8, 2008, the Department announced the replication of the terms of the Participation and Purchase Program, in accordance with the October 7^th legislation, which will include FFELP student loans made for the 2009-2010 academic year. Loans for the 2009-2010 academic year will need to be refinanced or sold to the Department prior to September 30, 2010.

With respect to the origination of new FFELP student loans for the 2008-2009 and 2009-2010 academic years, the Company currently expects to utilize the Department’s Participation Program.

The Company has historically relied on asset-backed securitizations as a significant source of funding for student loans on a long term basis. The severe disruptions in the credit and financial markets have made asset-backed securitization financing generally unavailable. The Company is currently unable to predict when market conditions will allow for future asset-backed securitization financing. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

If the Company is unable to obtain cost-effective and stable funding alternatives, its funding capabilities and liquidity would be negatively impacted and its cost of funds could increase, adversely affecting the Company’s results of operations. In addition, the Company’s ability to originate and acquire student loans would be limited or could be eliminated.

The Company is exposed to mark-to-formula collateral support risk on its FFELP warehouse facility.

The Company’s warehouse facility for FFELP loans provides formula based advance rates based on current market conditions, which require equity support to be posted to the facility. While the Company does not believe that the loan valuation formula is reflective of the actual fair value of its loans, it is subject to compliance with these provisions of the warehouse facility agreement. As of December 31, 2008, $1.4 billion was outstanding under this facility. Under the current terms of the facility, the remaining student loan collateral will need to be refinanced or removed by May 9, 2010, the final maturity of the facility. As of December 31, 2008, the Company had $280.6 million posted as equity funding support for the facility.

The Company has utilized its $750.0 million unsecured line of credit to fund equity advances on its warehouse facility. As of December 31, 2008, the Company had $691.5 million outstanding under the line of credit and $51.2 million available for future use. The amount available under the line of credit is less than maximum capacity as a credit provider is no longer funding draw requests (see below).

Continued disruptions in the credit and financial markets may cause additional volatility in the loan valuation formula under the warehouse facility. Should a significant change in the valuation of loans result in additional required equity funding support for the warehouse facility greater than what the Company can provide, the warehouse facility could be subject to an event of default resulting in a termination of the facility and an acceleration of the repayment provisions. A default on the FFELP warehouse facility would result in an event of default on the Company’s unsecured line of credit that would result in the outstanding balance on the line of credit becoming immediately due and payable.

The Company plans to remove and/or refinance the remaining collateral in this facility by using the Department’s Conduit Program, using other financing arrangements, including secured transactions in the capital markets, using unrestricted operating cash, and/or selling loans to third parties. The Company cannot predict if it will be successful at removing and/or refinancing the remaining collateral in the FFELP warehouse facility and such terms may have a material adverse effect on the Company’s results of operations and financial condition.

The Company faces counterparty risk.

The Company has exposure to the financial condition of its various lending, investment, and derivative counterparties. If any of the Company’s counterparties is unable to perform its obligations, the Company would, depending on the type of counterparty arrangement, experience a loss of liquidity or an economic loss. Related to derivative exposure, the Company may not be able to cost effectively replace the derivative position depending on the type of derivative and the current economic environment. If the Company was not able to replace the derivative position, the Company would be exposed to a greater level of interest rate and/or foreign currency exchange rate risk which could lead to additional losses.

The lending commitment under the Company’s $750.0 million unsecured line of credit is provided by a total of thirteen banks, with no individual bank representing more than 11% of the total lending commitment. The bank lending group includes Lehman Brothers Bank (“Lehman”), a subsidiary of Lehman Brothers Holdings Inc., which represents approximately 7% of the lending commitment under the line of credit. On September 15, 2008, Lehman Brothers Holdings Inc. filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. Since the bankruptcy filing, the Company has experienced funding delays from Lehman for its portion of the lending commitment and does not expect Lehman to fund future borrowing requests. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

As a source of liquidity for funding new FFELP student loan originations, the Company maintains a participation agreement with the related party Union Bank and Trust Company (“Union Bank”), as trustee for various grantor trusts, under which Union Bank has agreed to purchase from the Company participation interests in student loans. The Company currently can participate loans to Union Bank to the extent of availability under the grantor trusts, up to $750 million. In the event that Union Bank experiences adverse changes to its financial condition, such participation agreement liquidity may not be available to the Company in the future.

As of December 31, 2008, the Company had a total of $610 million invested in guaranteed investment contracts (“GICs”). Approximately $100 million of these GICs are with foreign banks, which receive support from regional or national governments. The remaining $510 million of these GICs are with a total of three banks, all of which are currently at least A rated, and with one such bank representing 88% of this amount. These agreements may be terminated by the Company if the GIC providers’ unsecured credit rating falls below a certain threshold. A default by the counterparties under the GICs could lead to a loss of the Company’s investment and have a material adverse effect on the Company’s results of operations and financial condition.

When the mark-to-market value of a derivative instrument is negative, the Company owes the counterparty and, therefore, has no immediate counterparty risk. Additionally, if the negative mark-to-market value of derivatives with a counterparty exceeds a specified threshold, the Company may have to make a collateral deposit with the counterparty. The threshold at which the Company posts collateral may depend on the Company’s unsecured credit rating. If interest and foreign currency exchange rates move materially, the Company could be required to deposit a significant amount of collateral with its derivative instrument counterparties. The collateral deposits, if significant, could negatively impact the Company’s capital resources.

When the fair value of a derivative contract is positive, this generally indicates that the counterparty owes the Company. If the counterparty fails to perform, credit risk with such counterparty is equal to the extent of the fair value gain in the derivative less any collateral held by the Company.

The Company attempts to manage market and credit risks associated with interest and foreign currency exchange 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 the Company’s risk committee. The Company also has a policy of requiring that all derivative contracts be governed by an International Swaps and Derivatives Association, Inc. Master Agreement.

The Company is exposed to interest rate risk in the form of basis risk and repricing risk because the interest rate characteristics of the Company’s assets do not match the interest rate characteristics of the funding for the assets.

The Company issues asset-backed securities, the vast majority being variable rate, to fund its student loan assets. The variable rate debt is generally indexed to 3-month LIBOR, set by auction, or through a remarketing process. The income generated by the Company’s student loan assets is generally driven by short term indices (treasury bills and commercial paper) that are different from those which affect the Company’s liabilities (generally LIBOR), which creates basis risk. Moreover, the Company also faces repricing risk due to the timing of the interest rate resets on its liabilities, which may occur as infrequently as every quarter, and the timing of the interest rate resets on its assets, which generally occurs daily. In a declining interest rate environment, this may cause the Company’s student loan spread to compress, while in a rising rate environment, it may cause the spread to increase.

In using different index types and different index reset frequencies to fund assets, the Company is exposed to interest rate risk in the form of basis risk and repricing risk, which, as noted above, is the risk that the different indices may reset at different frequencies, or will not move in the same direction or with the same magnitude. While these indices are short term with rate movements that are highly correlated over a longer period of time, they have recently become less correlated. There can be no assurance the indices will regain their high level of correlation in the future due to capital market dislocations or other factors not within the Company’s control. In such circumstances, the Company’s earnings could be adversely affected, possibly to a material extent.

The Company has used derivative instruments to hedge the repricing risk due to the timing of the interest rate resets on its assets and liabilities. However, the Company does not generally hedge the basis risk due to the different interest rate indices associated with its assets and liabilities since the derivatives needed to hedge this risk are generally illiquid or non-existent and the relationship between the indices for most of the Company’s assets and liabilities has been highly correlated over a long period of time. Recently, the spread has widened and may widen further, which has and may continue to have a significant impact on the net spread of the Company’s student loan portfolio.

As of December 31, 2008, the Company had approximately $23.6 billion of FFELP loans indexed to three-month financial commercial paper rate and $20.5 billion of debt indexed to LIBOR. Due to the unintended consequences of government intervention in the commercial paper markets and limited issuances of qualifying financial commercial paper, the relationship between the three-month financial CP and LIBOR rates has been distorted and volatile. To address this issue, the Department announced that for purposes of calculating the FFELP loan index from October 27, 2008 to December 31, 2008, the Federal Reserve’s Commercial Paper Funding Facility rate was used for those days in which no three-month financial commercial paper rate was available. This action partially mitigated the recent volatility between CP and LIBOR, however, there are no assurances that the Department will utilize a similar methodology for the first quarter of 2009 or in the future.

Characteristics unique to asset-backed securitizations may negatively affect the Company’s continued liquidity.

The interest rates on certain of the Company’s asset-backed securities are set and periodically reset via a “dutch auction” (“Auction Rate Securities”) or through a remarketing utilizing remarketing agents (“Variable Rate Demand Notes”).

For Auction Rate Securities, investors and potential investors submit orders through a broker-dealer as to the principal amount of notes they wish to buy, hold, or sell at various interest rates. The broker-dealers submit their clients’ orders to the auction agent, who then determines the clearing interest rate for the upcoming period. Interest rates on these Auction Rate Securities are reset periodically, generally every 7 to 35 days, by the auction agent or agents. Beginning in the first quarter of 2008, as part of the ongoing credit market crisis, auction rate securities from various issuers have failed to receive sufficient order interest from potential investors to clear successfully, resulting in failed auction status. Since February 2008, the Company’s Auction Rate Securities have failed in this manner. Under historical conditions, the broker-dealers would purchase these securities if investor demand is weak. However, since February 2008, the broker-dealers have been allowing auctions to fail. Currently, all of the Company’s Auction Rate Securities are in a failed auction status and the Company believes they will remain in a failed auction status for an extended period of time and possibly permanently.

As a result of a failed auction, the Auction Rate Securities will generally pay interest to the holder at a maximum rate as defined by the indenture. While these rates will vary by class of security, they will generally be based on a spread to LIBOR or Treasury Securities. These maximum rates are subject to increase if the credit ratings on the bonds are downgraded.

The Company cannot predict whether future auctions related to its Auction Rate Securities will be successful. The Company is currently seeking alternatives for reducing its exposure to the auction rate market, but may not be able to achieve alternate financing for some or all of its Auction Rate Securities. If there is no demand for the Company’s Auction Rate Securities, the Company could be subject to interest costs substantially above the anticipated and historical rates paid on these types of securities.

For Variable Rate Demand Notes, the remarketing agents set the price, which is then offered to investors. If there are insufficient potential bid orders to purchase all of the notes offered for sale, the Company could be subject to interest costs substantially above the anticipated and historical rates paid on these types of securities.

The Company is exposed to interest rate risk because of the interest rate characteristics of certain of its assets and the interest rate characteristics of the related funding of such assets.

Loans originated prior to April 1, 2006 generally earn interest at the higher of a floating rate based on the Special Allowance Payment or SAP formula set by the Department and the borrower rate, which is fixed over a period of time. The Company generally finances its student loan portfolio with variable rate debt. In low and/or declining interest rate environments, when the fixed borrower rate is higher than the rate produced by the SAP formula, the Company’s student loans earn at a fixed rate while the interest on the variable rate debt typically continues to decline. In these interest rate environments, the Company may earn additional spread income that it refers 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, the Company may earn floor income for an extended period of time, which the Company refers to as fixed rate floor income, and for those loans where the borrower rate is reset annually on July 1, the Company may earn floor income to the next reset date, which the Company refers to as variable rate floor income. In accordance with new legislation enacted in 2006, lenders are required to rebate fixed rate floor income and variable rate floor income to the Department for all new FFELP loans first originated on or after April 1, 2006.

Absent the use of derivative instruments, a rise in interest rates may reduce the amount of floor income received and this may have an impact on earnings due to interest margin compression caused by increasing financing costs, until such time as the federally insured loans earn interest at a variable rate in accordance with their special allowance payment 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.

The Company is subject to foreign currency exchange risk and such risk could lead to increased costs.

As a result of the Company’s offerings in Euro-denominated notes, the Company is exposed to market risk related to fluctuations in foreign currency exchange rates between the U.S. dollar and the Euro, and LIBOR and EURIBOR. The principal and accrued interest on these notes is re-measured at each reporting period and recorded on the Company’s balance sheet in U.S. dollars based on the foreign currency exchange rate on that date. When foreign currency exchange rates between the U.S. dollar and the Euro change significantly, earnings may fluctuate significantly. The Company entered into cross-currency interest rate swaps that hedge these risks but, as discussed below, such swaps may not always be effective.

The Company’s derivative instruments may not be successful in managing interest and foreign currency exchange rate risks, which may negatively impact the Company’s operations.

When the Company utilizes derivative instruments, it utilizes them to manage interest and foreign currency exchange rate sensitivity. The Company’s derivative instruments are intended as economic hedges but do not qualify for hedge accounting under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of FASB Statement No. 133 (“SFAS No. 133”); consequently, the change in fair value, called the “mark-to-market”, of these derivative instruments is included in the Company’s operating results. Changes or shifts in the forward yield curve and foreign currency exchange rates can and have significantly impacted the valuation of the Company’s derivatives. Accordingly, changes or shifts in the forward yield curve and foreign currency exchange rates will impact the financial position, results of operations, and cash flows of the Company. Further, the Company may incur costs or be subject to bid/ask spreads if the Company terminates a derivative instrument. The derivative instruments used by the Company are typically in the form of interest rate swaps, basis swaps, and cross-currency interest rate swaps.

Developing an effective strategy for dealing with movements in interest rates and foreign currency exchange rates is complex, and no strategy can completely insulate the Company from risks associated with such fluctuations. Although the Company believes its derivative instruments are highly effective, because many of its derivatives are not balance guaranteed to a particular pool of student loans, the Company is subject to prepayment risk that could result in the Company being under or over hedged, which could result in material losses to the Company. In addition, the Company’s interest rate and foreign currency exchange risk management activities could expose the Company to substantial mark-to-market losses if interest rates or foreign currency exchange rates move materially differently from the environment when the derivatives were entered into. As a result, the Company cannot offer any assurance that its economic hedging activities will effectively manage its interest and foreign currency exchange rate sensitivity, or have the desired beneficial impact on its results of operations or financial condition.

The ratings of the Company or of any securities issued by the Company may change, which may increase the Company’s costs of capital and may reduce the liquidity of the Company’s securities.

Ratings are based primarily on the creditworthiness of the Company, the underlying assets of asset-backed securitizations, the amount of credit enhancement in any given transaction, and the legal structure of any given transaction. Ratings are not a recommendation to purchase, hold, or sell any of the Company’s securities inasmuch as the ratings do not address the market price or suitability for investors. There is no assurance that ratings will remain in effect for any given period of time or that current ratings will not be lowered or withdrawn by any rating agency. Ratings for the Company or any of its securities may be increased, lowered, or withdrawn by any rating agency if, in the rating agency’s judgment, circumstances so warrant. If the Company’s credit ratings are lowered or withdrawn, the Company may experience an increase in the interest rate paid on the Company’s unsecured line of credit or the interest rates or other costs associated with other capital raising activities by the Company, which may negatively affect the Company’s operations. Moreover, if the unsecured ratings of the Company are lowered or withdrawn, it may affect the terms of the Company’s outstanding derivative contracts and could result in requirements for the Company to post additional collateral under those contracts. Additionally, a lowered or withdrawn credit rating may negatively affect the liquidity of the Company’s securities.

General Risk Factors

A continued economic recession could reduce demand for Company products and services and lead to lower revenue and lower earnings.

The Company earns revenue from the interest and fees charged on the loans and other products and services it sells. When the economy slows, the demand for those products and services can fall, reducing interest and fee revenue and earnings. An economic downturn can also hurt the ability of borrowers to repay their loans, causing higher loan losses. Several factors could cause the economy to slow down or even recede, including higher energy costs, higher interest rates, reduced consumer or corporate spending, declining home values, natural disasters, terrorist activities, military conflicts, and the normal cyclical nature of the economy.

Changes in accounting policies or accounting standards, changes in how accounting standards are interpreted or applied, and incorrect estimates and assumptions by management in connection with the preparation of the Company’s consolidated financial statements could materially affect the reported amounts of asset and liabilities, the reported amounts of income and expenses, and related disclosures.

The Company’s accounting policies are fundamental to determining and understanding financial condition and results of operations. Some of these policies require use of estimates and assumptions that could affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods. Several of the Company’s accounting policies are critical because they require management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies”. From time to time the Financial Accounting Standards Board (“FASB”) and the SEC change the financial accounting and reporting standards that govern the preparation of external financial statements. In addition, accounting standard setters and those who interpret the accounting standards (such as the FASB and/or the SEC) may change or even reverse their previous interpretations or positions on how these standards should be applied. Changes in financial accounting and reporting standards and changes in current interpretations may be beyond the Company’s control, can be hard to predict, and could materially impact how the Company reports its financial condition and results of operations. The Company could be required to apply a new or revised standard retroactively or apply an existing standard differently, also retroactively, in each case resulting in the Company potentially restating prior period financial statements that could potentially be material.

The Company’s future results may be affected by various legal and regulatory proceedings.

The outcome of legal proceedings may differ from the Company’s expectations because the outcomes of litigation, including regulatory matters, are often difficult to reliably predict. Various factors or developments can lead the Company to change current estimates of liabilities and related insurance receivables where applicable, or make such estimates for matters previously not susceptible of reasonable estimates, such as a significant judicial ruling or judgment, a significant settlement, significant regulatory developments or changes in applicable law. A future adverse ruling, settlement, or unfavorable development could result in future charges that could have a material adverse effect on the Company’s results of operations or cash flows in any particular period.

The market price of the Company’s Class A common stock may fluctuate significantly, which may result in losses for investors.

From January 1, 2008 to February 27, 2009, the closing daily sales price of the Company’s Class A common stock as reported by the New York Stock Exchange ranged from a low of $4.91 per share to a high of $16.06 per share. The Company expects the Class A common stock to continue to be subject to fluctuations as a result of a variety of factors, including factors beyond the Company’s control. These factors include:

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Changes in interest rates and credit market conditions affecting the cost and availability of financing for the Company’s student loan assets

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Changes in the education financing regulatory framework

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Changes in demand for education financing or other products and services that the Company offers

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Variations in the Company’s quarterly operating results

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Changes in financial estimates by securities analysts

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Changes in market valuations of comparable companies

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Future sales of the Company’s Class A common stock

In addition, in May 2008 the Company announced that it was temporarily suspending its quarterly dividend payments of $0.07 per share on its Class A and Class B common stock. The Company will continue to evaluate its dividend policy, but the payment of future dividends remains in the discretion of the Company’s board of directors and will continue to depend on the Company’s earnings, capital requirements, financial condition, and other factors. In addition, the payment of dividends is subject to the terms of certain other outstanding securities issued by the Company. The Company does not currently anticipate resuming the payment of dividends on its common stock in the foreseeable future.

The Company may not meet the expectations of shareholders and/or of securities analysts at some time in the future, and the market price of the Company’s Class A common stock could decline as a result.

Negative publicity that may be associated with the student lending industry, including negative publicity about the Company, may harm the Company’s reputation and adversely affect operating results.

During 2007 and 2008, the student lending industry was the subject of various investigations and reports. The publicity associated with these investigations and reports may have a negative impact on the Company’s reputation. To the extent that potential or existing customers decide not to utilize the Company’s products or services as a result of such publicity, the Company’s operating results may be adversely affected.

If management does not effectively execute the Company’s restructuring objectives to reduce infrastructure costs and reposition the Company in the education market place, it could adversely affect the Company’s customers, operations, revenue, and ability to compete.

As the result of FFEL Program regulation changes, financial market disruption, and an ongoing economic recession, the Company has implemented restructuring objectives to reduce infrastructure costs and reposition itself in the education market place. Beginning in the third quarter of 2007 and continuing into 2009, the Company has executed initiatives that created efficiencies within its asset generation business and decreased operating expenses through a reduction in workforce, realignment of operating facilities, and restructuring of operating systems and system support.

If management is unable to successfully implement the Company’s reorganization objectives or if these objectives do not have the desired effects or result in the projected efficiencies, the Company may incur additional or unexpected expenses, reputation damage, or loss of customers which would adversely affect the Company’s operations and revenues.

Failures in the Company’s information technology system could materially disrupt its business.

The Company’s servicing and operating processes are highly dependent upon its information technology system infrastructure, and the Company faces the risk of business disruption if failures in its information systems occur, which could have a material impact upon its business and operations. The Company depends heavily on its own computer-based data processing systems in servicing both its own student loans and those of third-party servicing customers and providing tuition payment and campus commerce transactions and lead generation products and services. The Company regularly backs up its data and maintains detailed disaster recovery plans. A major physical disaster or other calamity that causes significant damage to information systems could adversely affect the Company’s business. Additionally, loss of information systems for a sustained period of time could have a negative impact on the Company’s performance and ultimately on cash flow in the event the Company were unable to process transactions and/or provide services to customers.

A compromise of customer data could negatively impact the Company’s business.

The Company, on its own behalf and on behalf of other entities, stores a significant amount of personal data about the customers to whom the Company provides services. If access to customer data were compromised through breach of its systems, fraud, or otherwise, the Company could suffer reputation damage, loss of customers, and unexpected financial costs.

Exposure related to certain tax issues could decrease the Company’s net income.

A corporation is considered to be a “personal holding company” under the U.S. Internal Revenue Code of 1986, as amended (the “Code”), if (1) at least 60% of its adjusted ordinary gross income is “personal holding company income” (generally, passive income) and (2) at any time during the last half of the taxable year more than half, by value, of its stock is owned by five or fewer individuals, as determined under attribution rules of the Code. If both of these tests are met, a personal holding company is subject to an additional tax on its undistributed personal holding company income, currently at a 15% rate. Five or fewer individuals hold more than half the value of the Company’s stock. In June 2003, the Company submitted a request for a private letter ruling from the Internal Revenue Service seeking a determination that its federally guaranteed student loans qualify as assets of a “lending or finance business,” as defined in the Code. Such a determination would have assured the Company that holding such loans does not make it a personal holding company. Based on its historical practice of not issuing private letter rulings concerning matters that it considers to be primarily factual, however, the Internal Revenue Service has indicated that it will not issue the requested ruling, taking no position on the merits of the legal issue. So long as more than half of the Company’s value continues to be held by five or fewer individuals, if it were to be determined that some portion of its federally guaranteed student loans does not qualify as assets of a “lending or finance business,” as defined in the Code, the Company could become subject to personal holding company tax on its undistributed personal holding company income. The Company continues to believe that neither Nelnet, Inc. nor any of its subsidiaries is a personal holding company. However, even if Nelnet, Inc. or one of its subsidiaries was determined to be a personal holding company, the Company believes that by utilizing intercompany distributions, it could eliminate or substantially eliminate its exposure to personal holding company taxes, although it cannot assure that this will be the case.

The Company is subject to federal and state income tax laws and regulations. Income tax regulations are often complex and require interpretation. Changes in income tax regulations could negatively impact the Company’s results of operations. If states enact legislation, alter apportionment methodologies, or aggressively apply the income tax nexus standards, the Company may become subject to additional state taxes. The applicability and taxation on the earnings from intangible personal property has 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 tremendous uncertainty and expense for taxpayers conducting interstate commerce.

From time to time, the Company engages 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. The Company prepares and files tax returns based on the interpretation of tax laws and regulations. In the normal course of business, the Company’s 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 SFAS No. 109, Accounting for Income Taxes, and Financial Accounting Standards Interpretation No. 48, Accounting for Uncertainty in Income Taxes, the Company establishes reserves for tax contingencies related to deductions and credits that it 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 the Company’s reserves could have a material effect on the Company’s financial statements.

Transactions with affiliates and potential conflicts of interest of certain of the Company’s officers and directors, including the Company’s Chief Executive Officer, pose risks to the Company’s shareholders that the Company may not enter into transactions on the same terms that the Company could receive from unrelated third-parties.

The Company has entered into certain contractual arrangements with entities controlled by Michael S. Dunlap, the Company’s Chairman, Chief Executive Officer, and a principal shareholder, and members of his family and, to a lesser extent, with entities in which other directors and members of management hold equity interests or board or management positions. Such arrangements constitute a significant portion of the Company’s business and include cash management activities and sales of student loans and student loan origination rights by such affiliates to the Company. These arrangements may present potential conflicts of interest. Many of these arrangements are with Union Bank, in which Mr. Dunlap owns an indirect interest and of which he serves as a member of the Board of Directors. The Company intends to maintain its relationship with Union Bank, which management believes provides substantial benefits to the Company, although there can be no assurance that any transactions between the Company and entities controlled by Mr. Dunlap, his family, and/or other officers and directors of the Company are, or in the future will be, on terms that are no less favorable than what could be obtained from an unrelated third party.

The Company’s Chairman and Chief Executive Officer owns a substantial percentage of the Company’s Class A and Class B common stock and is able to control all matters subject to a shareholder vote.

Michael S. Dunlap, the Company’s Chairman, Chief Executive Officer, and a principal shareholder, beneficially owns a substantial percentage of the Company’s outstanding shares of Class A common stock and Class B common stock. Each share of Class A common stock has one vote and each share of Class B common stock has 10 votes on all matters to be voted upon by the Company’s shareholders. As a result, Mr. Dunlap is able to control all matters requiring approval by the Company’s shareholders, including the election of all members of the Board of Directors, and may do so in a manner with which other shareholders may not agree or which they may not consider to be in the best interest of other shareholders. In addition, Stephen F. Butterfield, the Company’s Vice Chairman, owns a substantial number of shares of Class B common stock.

Managing assets for third parties has inherent risks that, if not properly managed, could negatively affect the Company’s business.

As part of the Company’s Loan and Guaranty Servicing and other Fee Based business segments, the Company manages loan portfolios and transfers funds for third party customers. A compromise of security surrounding loan portfolio and cash management processes or mismanagement of customer assets could lead to litigation, fraud, reputation damage, and unanticipated operating costs that could affect the Company’s overall business.

The Company may face operational risks from its reliance on vendors to complete specific business operations.

The Company relies on outside vendors to provide key components of business operations such as internet connections and network access. Disruptions in communication services provided by a vendor or any failure of a vendor to handle current or higher volumes of use could hurt the Company’s ability to deliver products and services to customers and otherwise to conduct business. Financial or operational difficulties of an outside vendor could also hurt operations if those difficulties interfere with the vendor’s services.

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. The Company owns the building in Lincoln, Nebraska where its principal office is located. The building is subject to a lien securing the outstanding mortgage debt on the property.

								Lease
				Approximate				expiration
Location		Primary Function or Segment		square feet				date
Lincoln, NE		Corporate Headquarters, Asset Generation and Management, Student Loan and Guaranty Servicing			154,000				—
Aurora, CO		Asset Generation and Management, Student Loan and Guaranty Servicing, Software and Technical Services			124,000			February 2015
Jacksonville, FL		Student Loan and Guaranty Servicing, Software and Technical Services			109,000			January 2014
Lawrenceville, NJ		Enrollment Services			62,000			April 2011

The square footage amounts above exclude a total of approximately 43,000 square feet of owned office space in Lincoln, Nebraska that the Company leases to third parties. The Company also leases approximately 62,000 square feet of office space in Indianapolis, Indiana where Asset Generation and Management and Student Loan and Guaranty Servicing operations were previously conducted, of which 56,000 square feet is now subleased to third parties. 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 201, Lincoln, Nebraska 68508.

ITEM 3. LEGAL PROCEEDINGS

General

The Company is subject to various claims, lawsuits, and proceedings that arise in the normal course of business. These matters principally consist of claims by student loan borrowers disputing the manner in which their student loans have been processed 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 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.

Municipal Derivative Bid Practices Investigation

As previously disclosed, on February 8, 2008, Shockley Financial Corp. (“SFC”), an indirect, wholly-owned subsidiary of the Company that provides investment advisory services for the investment of proceeds from the issuance of municipal and corporate bonds, received a grand jury subpoena issued by the U.S. District Court for the Southern District of New York upon application of the Antitrust Division of the U.S. Department of Justice (“DOJ”). The subpoena seeks certain information and documents from SFC in connection with DOJ’s criminal investigation of the bond industry with respect to possible anti-competitive practices related to awards of guaranteed investment contracts and other products for the investment of proceeds from bond issuances. SFC currently has one employee. The Company and SFC are cooperating with the investigation.

On March 5, 2008, SFC received a subpoena from the SEC related to a similar investigation, on June 6, 2008 and June 12, 2008, SFC received subpoenas from the New York Attorney General and the Florida Attorney General, respectively, relating to their similar investigations. Each of the subpoenas seeks information similar to that of the DOJ. The Company and SFC are cooperating with these investigations.

SFC was also named as a defendant in a number of substantially identical purported class action lawsuits, which as of June 16, 2008 have been consolidated before the U.S. District Court for the Southern District of New York, under the caption In re Municipal Derivatives Antitrust Litigation. The consolidated suit (the “Suit”) alleges several financial institutions and financial service provider defendants engaged in a conspiracy not to compete and to fix prices and rig bids for municipal derivatives (including GICs) sold to issuers of municipal bonds. The Suit also asserts claims for violations of Section 1 of the Sherman Act, fraudulent concealment, unfair competition and violation of the California Cartwright Act. On January 30, 2009, SFC entered into a Tolling and Cooperation Agreement (“Tolling Agreement”) with a number of the plaintiffs involved in the Suit. In connection with the Tolling Agreement, on February 5, 2009 SFC was voluntarily dismissed from the Suit, without prejudice, on motion of the plaintiffs who are parties to the Tolling Agreement. To the extent SFC is not dismissed by other plaintiffs, SFC intends to vigorously contest the Suit.

SFC, the Company, or other subsidiaries of the Company may receive subpoenas from other regulatory agencies. Due to the preliminary nature of these matters as to SFC, the Company is unable to predict the ultimate outcome of the investigations or the Suit.

Department of Education Review

The Department of Education periodically reviews participants in the FFEL Program for compliance with program provisions. On June 28, 2007, the Department notified the Company that it would be conducting a review of the Company’s administration of the FFEL Program under the Higher Education Act. The Company understands that the Department selected several schools and lenders for review. Specifically, the Department indicated it was reviewing the Company’s practices in connection with the prohibited inducement provisions of the Higher Education Act and the provisions of the Higher Education Act and the associated regulations which allow borrowers to have a choice of lenders. The Company responded to the Department’s requests for information and documentation and has cooperated with their review.

While the Company cannot predict the ultimate outcome of the review, the Company believes its activities have materially complied with the Higher Education Act, the rules and regulations adopted by the Department of Education thereunder, and the Department’s guidance regarding those rules and regulations.

Department of Justice

In connection with the Company’s settlement with the Department of Education in January 2007 to resolve the Office of Inspector General of the Department of Education (the “OIG”) audit report with respect to the Company’s student loan portfolio receiving special allowance payments at a minimum 9.5% interest rate, the Company was informed in February 2007 by the Department of Education that a civil attorney with the Department of Justice had opened a file regarding the issues set forth in the OIG report, which the Company understands is common procedure following an OIG audit report. The Company has engaged in discussions with and provided information to the DOJ in connection with the review.

By letter dated November 18, 2008, the DOJ requested that the Company provide the DOJ certain documents and information related to the Company’s compliance with the prohibited inducement provisions of the Higher Education Act and associated regulations. The Company responded to the DOJ’s requests and is cooperating with their review.

While the Company is unable to predict the ultimate outcome of these reviews, the Company believes its practices complied with applicable law, including the provisions of the Higher Education Act, the rules and regulations adopted by the Department of Education thereunder, and the Department’s guidance regarding those rules and regulations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2008.

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. The number of holders of record of the Company’s Class A Common Stock and Class B Common Stock as of January 31, 2009 was 773 and nine, respectively. 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 sales prices for the Company’s Class A Common Stock for each full quarterly period in 2008 and 2007.

		2008																2007
		1st Quarter				2nd Quarter				3rd Quarter				4th Quarter				1st Quarter				2nd Quarter				3rd Quarter				4th Quarter
High		$	13.66			$	14.11			$	16.06			$	14.80			$	27.92			$	28.00			$	24.35			$	19.61
Low			9.00				10.35				9.37				9.21				23.38				22.99				17.11				11.99

In the first quarter of 2007, the Company began paying dividends of $0.07 per share on the Company’s Class A and Class B Common Stock which were paid quarterly through the first quarter of 2008. On May 21, 2008, the Company announced that it was temporarily suspending its quarterly dividend program. The Company will continue to evaluate its dividend policy, which is subject to future earnings, capital requirements, financial condition, and other factors.

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 Dow Jones U.S. Total Market Index and the Dow Jones U.S. Financial Services 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, 2003 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.

COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG NELNET, INC., THE DOW JONES US TOTAL MARKET INDEX,
AND THE DOW JONES US FINANCIAL SERVICES INDEX

Company/Index		12/31/2003				12/31/2004				12/31/2005				12/31/2006				12/31/2007				12/31/2008
Nelnet, Inc.		$	100.00			$	120.22			$	181.61			$	122.14			$	57.58			$	65.33
Dow Jones U.S. Total Market Index			100.00				112.01				119.10				137.64				145.91				91.69
Dow Jones U.S. Financial Services Index			100.00				114.26				123.84				158.21				132.73				55.16

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 2008 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.

										Total number of				Maximum number
										shares purchased				of shares that may
		Total number				Average				as part of publicly				yet be purchased
		of shares				price paid				announced plans				under the plans
Period		purchased (1)				per share				or programs (2) (3)				or programs (4)
October 1 – October 31, 2008			1,606			$	13.10				1,606				7,107,906
November 1 – November 30, 2008			260,468				36.93				1,708				7,384,499
December 1 – December 31, 2008			56,508				12.84				1,645				7,156,712
Total			318,582			$	32.54				4,959

(B / C)

(A + D)

Maximum number of

Approximate dollar

Closing price on

Approximate

Approximate

shares that

value of shares that

the last trading day

number of shares that

number of shares that

may yet be

may yet be

of the Company’s

may yet be

may yet be

purchased under the

purchased under

Class A Common

purchased under

purchased under

2006 Plan

the 2006 ESLP

Stock

the 2006 ESLP

the 2006 Plan and

As of

(A)

(B)

(C)

(D)

2006 ESLP

October 31, 2008

4,616,450

$

36,450,000

$

14.63

2,491,456

7,107,906

November 30, 2008

4,614,742

36,450,000

13.16

2,769,757

7,384,499

December 31, 2008

4,613,097

36,450,000

14.33

2,543,615

7,156,712

Equity Compensation Plans

For information regarding 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. As a result of certain transactions as summarized below, the period-to-period comparability of the Company’s financial position and results of operations may be difficult.

•

During 2004 through 2006, the Company acquired the stock or certain assets of 17 different entities.

•

The Company began recognizing interest income in 2004 on a loan portfolio in which it earned a minimum interest rate of 9.5 percent. Interest income earned on this portfolio decreased as a result of rising interest rates and the pay down of the portfolio. As a result of the Company’s settlement entered into with the Department, beginning July 1, 2006 the Company no longer recognizes 9.5 percent floor income on this loan portfolio. In addition, the Company recognized an impairment charge of $21.7 million in 2006 related to loan premiums paid on loans acquired in 2005 that were previously considered eligible for 9.5% special allowance payments prior to the settlement with the Department.

•

In May 2007, the Company sold EDULINX, a Canadian student loan service provider and subsidiary of the Company. As a result of this transaction, the results of operations for EDULINX are reported as discontinued operations for all periods presented.

•

Upon passage of the College Cost Reduction Act in September 2007, management evaluated the carrying amount of goodwill and certain intangible assets. Based on the legislative changes and the student loan business model modifications the Company implemented as a result of the legislative changes, the Company recorded an impairment charge of $39.4 million and a restructuring charge of $20.3 million. The restructuring activities have resulted in expense savings in subsequent periods. The September 2007 legislation contains provisions with implications for participants in the FFEL Program by significantly decreasing the annual yield on loans originated after October 1, 2007.

•

In September 2007, the Company also recorded an expense of $15.7 million to increase the Company’s allowance for loan losses related to the increase in risk share as a result of the elimination of the Exceptional Performer program.

•

In January 2008, the Company announced a plan to further reduce operating expenses related to its student loan origination and related businesses as a result of ongoing disruptions in the credit markets. As a result of this plan, the Company recorded restructuring charges of $26.1 million in 2008. The restructuring activities have resulted in expense savings in subsequent periods.

•

Due to legislation and capital market disruptions, beginning in January 2008, the Company suspended Consolidation loan originations and exercised contractual rights to discontinue, suspend, or defer the acquisition of student loans in connection with substantially all of its branding and forward flow relationships. This decreased the amount of loans originated and acquired from historical periods.

•

In 2008, as a result of the disruptions in the debt and secondary markets, the Company sold $1.8 billion (par value) of student loans in order to reduce the amount of student loans remaining under the Company’s multi-year committed financing facility for FFELP loans, which reduced the Company’s exposure related to certain equity support provisions included in this facility. These loan sales resulted in the recognition of a loss of $51.4 million.

•

During the fourth quarter of 2008, the Company incurred expenses of $13.5 million from fees paid related to liquidity contingency planning.

Management evaluates the Company’s GAAP-based financial information as well as operating results on a non-GAAP performance measure referred to as “base net income.” Management believes “base net income” provides additional insight into the financial performance of the core operations.

		Year ended December 31,
		2008				2007				2006				2005				2004
		(dollars in thousands, except share data)
Income Statement Data:
Net interest income		$	187,892				244,614				308,459				328,999				398,160
Less provision (recovery) for loan losses			25,000				28,178				15,308				7,030				(529	)
Net interest income after provision (recovery) for loan losses			162,892				216,436				293,151				321,969				398,689
Other income			307,392				327,238				247,033				145,500				119,653
Gain (loss) on sale of loans			(51,414	)			3,597				16,133				301				240
Derivative market value, foreign currency, and put option adjustments			10,827				26,806				(31,075	)			96,227				(11,918	)
Derivative settlements, net			55,657				18,677				23,432				(17,008	)			(34,140	)
Salaries and benefits			(183,393	)			(236,631	)			(214,676	)			(142,132	)			(130,840	)
Amortization of intangible assets			(26,230	)			(30,426	)			(25,062	)			(8,151	)			(8,707	)
Impairment expense			(18,834	)			(49,504	)			(21,488	)			—				—
Other operating expenses			(212,157	)			(219,048	)			(185,053	)			(117,448	)			(98,580	)
Income before income taxes and minority interest			44,740				57,145				102,395				279,258				234,397
Income tax expense			17,896				21,716				36,237				100,581				85,227
Income from continuing operations			26,844				35,429				65,916				178,074				149,170
Income (loss) from discontinued operations, net of tax			1,818				(2,575	)			2,239				3,048				9
Net income			28,662				32,854				68,155				181,122				149,179
Earnings (loss) per share, basic and diluted:
Continuing operations		$	0.54				0.71				1.23				3.31				2.78
Discontinued operations			0.04				(0.05	)			0.04				0.06				—
Net income			0.58				0.66				1.27				3.37				2.78
Weighted average shares outstanding (basic)			49,099,967				49,618,107				53,593,056				53,761,727				53,648,605
Weighted average shares outstanding (diluted)			49,114,208				49,628,802				53,593,056				53,761,727				53,648,605
Dividends per common share		$	0.07				0.28				—				—				—
Other Data:
Origination and acquisition volume (a)		$	2,809,083				5,152,110				6,696,118				8,471,121				4,070,529
Average student loans			26,044,507				25,143,059				21,696,466				15,716,388				11,809,663
Student loans serviced (at end of period) (b)			35,888,693				33,817,458				30,593,592				26,988,839				21,076,045
Ratios:
Core student loan spread			0.93	%			1.13	%			1.42	%			1.51	%			1.66	%
Net loan charge-offs as a percentage of the ending balance of student loans in repayment			0.125	%			0.046	%			0.018	%			0.007	%			0.102	%
Shareholders’ equity to total assets (at end of period)			2.31	%			2.09	%			2.51	%			2.85	%			3.01	%

		As of December 31,
		2008				2007				2006				2005				2004
		(dollars in thousands)
Balance Sheet Data:
Cash and cash equivalents		$	189,847				111,746				102,343				96,678				41,181
Student loans receivables, net			25,413,008				26,736,122				23,789,552				20,260,807				13,461,814
Goodwill and intangible assets			252,232				277,525				353,008				243,630				16,792
Total assets			27,854,897				29,162,783				26,796,873				22,798,693				15,169,511
Bonds and notes payable			26,787,959				28,115,829				25,562,119				21,673,620				14,300,606
Shareholders’ equity			643,226				608,879				671,850				649,492				456,175

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, 2008, 2007, and 2006. All dollars are in thousands, except per share amounts, unless otherwise noted.)

OVERVIEW

The Company is an education planning and financing company focused on providing quality products and services to students, families, and schools nationwide. The Company is a vertically-integrated organization that offers a broad range of products and services to its customers throughout the education life cycle.

Built through a focus on long term organic growth and further enhanced by strategic acquisitions, the Company earns its revenues from fee-based revenues related to its diversified education finance and service operations and from net interest income on its portfolio of student loans.

The following provides certain events and operating activities that have impacted the financial condition and operating results of the Company. These items include:

•

Reduced exposure to liquidity risk on the Company’s FFELP warehouse facility

•

Continued diversification of revenue through fee-based businesses

•

Continued decreases in operating expenses

Reduction in Liquidity Risk Exposure — FFELP Warehouse Facility

The Company’s multi-year committed financing facility for FFELP loans has historically allowed the Company to buy and manage the majority of its student loans prior to transferring them into more permanent financing arrangements. The terms and conditions of this facility provides for formula based advance rates based on current market conditions, which require equity support to be posted to the facility. In order to reduce exposure related to these equity support provisions, the Company reduced the amount of loans included in the facility in 2008 by (i) completing asset-backed securities transactions of $4.5 billion which were issued at rates higher than those historically achieved by the Company, and (ii) selling $1.8 billion (par value) in student loan assets resulting in the recognition of a loss of $51.4 million. In addition, the Company incurred expenses of $13.5 million in 2008 from fees paid related to liquidity contingency planning.

As of December 31, 2008, the outstanding balance under this facility was $1.4 billion. The Company plans to remove and/or refinance the remaining collateral in this facility by using the Department’s Conduit Program (as discussed below), using other financing arrangements, using unrestricted operating cash, and/or selling loans to third parties.

Revenue Diversification

In recent years, the Company has expanded products and services generated from businesses that are not dependent upon government programs reducing legislative and political risk. This revenue is primarily generated from products and services offered in the Company’s Tuition Payment Processing and Campus Commerce and Enrollment Services operating segments. The only product and service offering in these segments that was affected by student loan legislative developments is list marketing services. The table below includes the Company’s revenue from fee-based businesses and shows the revenue earned by the Company’s operating segments that are less dependent upon government programs, excluding list marketing services.

		Year ended December 31,
		2008				2007				$ Change				% Change
Tuition Payment Processing and Campus Commerce		$	50,124				46,484				3,640
Enrollment Services — Content Management and Lead Generation			103,014				81,649				21,365
Total revenue from fee-based businesses less dependent upon government programs			153,138				128,133			$	25,005				19.5	%
Enrollment Services — List Marketing Services			9,445				22,596
Student Loan and Guaranty Servicing			105,664				133,234
Software and Technical Services			19,731				22,093
Total revenue from fee-based businesses		$	287,978				306,056

Operating Expenses

As a result of the restructuring plans implemented in September 2007 and January 2008, as well as the Company’s continued focus on capitalizing on the operating leverage of the Company’s business structure and strategies, operating expenses decreased $95.0 million for the year ended December 31, 2008 compared to the same period a year ago. Excluding restructuring expense, impairment expense, and liquidity contingency planning fees, operating expenses decreased $74.7 million, or 15.7%, for the year ended December 31, 2008 compared to the same period in 2007.

RESULTS OF OPERATIONS

The Company’s operating results are primarily driven by the performance of its existing portfolio, the cost necessary to generate new assets, the revenues generated by its fee based businesses, and the cost to provide those services. The performance of the Company’s portfolio is driven by net interest income and losses related to credit quality of the assets along with the cost to administer and service the assets and related debt.

Net Interest Income

The Company generates a significant portion of its earnings from the spread, referred to as its student loan spread, between the yield the Company receives on its student loan portfolio and the cost of funding these loans. This spread income is reported on the Company’s consolidated statements of income as net interest income. The amortization of loan premiums, including capitalized costs of origination, the 1.05% per year consolidation loan rebate fee paid to the Department, and yield adjustments from borrower benefit programs, are netted against loan interest income on the Company’s statements of income. The amortization of debt issuance costs is included in interest expense on the Company’s statements of income.

The Company’s portfolio of FFELP loans originated prior to April 1, 2006 earns interest at the higher of a variable rate based on the special allowance payment (SAP) formula set by the Department and the borrower rate. The SAP formula is based on an applicable index plus a fixed spread that is dependent upon when the loan was originated, the loan’s repayment status, and funding sources for the loan. As a result of one of the provisions of the Higher Education Reconciliation Act of 2005 (“HERA”), the Company’s portfolio of FFELP loans originated on or after April 1, 2006 earns interest at a variable rate based on the SAP formula. For the portfolio of loans originated on or after April 1, 2006, when the borrower rate exceeds the variable rate based on the SAP formula, the Company must return the excess to the Department.

On September 27, 2007, the President signed into law the College Cost Reduction Act. This legislation has and will continue to have a significant impact on the Company’s net interest income and should be considered when reviewing the Company’s results of operations. Among other things, this legislation:

•

Reduced special allowance payments to for-profit lenders and not-for-profit lenders by 0.55 percentage points and 0.40 percentage points, respectively, for both Stafford and Consolidation loans disbursed on or after October 1, 2007

•

Reduced special allowance payments to for-profit lenders and not-for-profit lenders by 0.85 percentage points and 0.70 percentage points, respectively, for PLUS loans disbursed on or after October 1, 2007

•

Increased origination fees paid by lenders on all FFELP loan types, from 0.5 percent to 1.0 percent, for all loans first disbursed on or after October 1, 2007

•

Eliminated all provisions relating to Exceptional Performer status, and the monetary benefit associated with it, effective October 1, 2007

•

Reduces default insurance to 95 percent of the unpaid principal of such loans, for loans first disbursed on or after October 1, 2012

The impact of this legislation has reduced the annual yield on FFELP loans originated after October 1, 2007. The Company believes it can mitigate some of the reduction in annual yield by creating efficiencies and lowering costs, modifying borrower benefits, and reducing loan acquisition costs.

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 earnings, net interest income, and net income. The effects of changing interest rate environments are further outlined in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk — Interest Rate Risk.”

Investment interest income, which is a component of net interest income, includes income from unrestricted interest-earning deposits and funds in the Company’s special purpose entities which are utilized for its asset-backed securitizations.

Net interest income also includes interest expense on unsecured debt offerings. The proceeds from these unsecured debt offerings were and have been used by the Company to fund general business operations, certain asset and business acquisitions, and the repurchase of stock under the Company’s stock repurchase plan.

Provision for Loan Losses

Management estimates and establishes an allowance for loan losses through a provision charged to expense. Losses are charged against the allowance when management believes the collectability of the loan principal is unlikely. Recovery of amounts previously charged off is credited to the allowance for loan losses. Management maintains the allowance for federally insured and non-federally insured loans at a level believed to be adequate to provide for estimated probable credit losses inherent in the loan portfolio. This evaluation is inherently subjective because it requires estimates that may be susceptible to significant changes. The Company analyzes the allowance separately for its federally insured loans and its non-federally insured loans.

Management bases the allowance for the federally insured loan portfolio on periodic evaluations of the Company’s loan portfolios, considering 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. One of the changes to the Higher Education Act as a result of HERA’s enactment in February 2006, was to lower the guaranty rates on FFELP loans, including a decrease in insurance and reinsurance on portfolios receiving the benefit of the Exceptional Performance designation by 1%, from 100% to 99% of principal and accrued interest (effective July 1, 2006), and a decrease in insurance and reinsurance on portfolios not subject to the Exceptional Performance designation by 1%, from 98% to 97% of principal and accrued interest (effective for all loans first disbursed on and after July 1, 2006).

In September 2005, the Company was re-designated as an Exceptional Performer by the Department in recognition of its exceptional level of performance in servicing FFELP loans. As a result of this designation, the Company received 99% reimbursement (100% reimbursement prior to July 1, 2006) on all eligible FFELP default claims submitted for reimbursement during the applicable period. Only FFELP loans that were serviced by the Company, as well as loans owned by the Company and serviced by other service providers designated as Exceptional Performers by the Department, were eligible for the 99% reimbursement.

On September 27, 2007, the President signed into law the College Cost Reduction Act. Among other things, this legislation eliminated all provisions relating to Exceptional Performer status, and the monetary benefit associated with it, effective October 1, 2007. Accordingly, the majority of claims submitted on or after October 1, 2007 are subject to reimbursement at 97% or 98% of principal and accrued interest depending on the disbursement date of the loan. During 2007, the Company recorded an expense of $15.7 million to increase the Company’s allowance for loan losses related to the increase in risk share as a result of the elimination of the Exceptional Performer program.

In determining the adequacy of the allowance for loan losses on the non-federally insured loans, the Company considers several factors including: loans in repayment versus those in a nonpaying status, months in repayment, delinquency status, type of program, and trends in defaults in the portfolio based on Company and industry data. The Company places a non-federally insured loan on nonaccrual status and charges off the loan when the collection of principal and interest is 120 days past due.

Other Income

The Company also earns fees and generates income from other sources, including principally loan and guaranty servicing income; fee-based income on borrower late fees, payment management activities, and certain marketing and enrollment services; and fees from providing software services.

Loan and Guaranty Servicing Income — Loan servicing fees are determined according to individual agreements with customers and are calculated based on the dollar value of loans, number of loans, or number of borrowers serviced for each customer. Guaranty servicing fees, generally, are calculated based on the number of loans serviced, volume of loans serviced, or amounts collected. Revenue is recognized when earned pursuant to applicable agreements, and when ultimate collection is assured.

Other Fee-Based Income — Other fee-based income includes borrower late fee income, payment management fees, the sale of lists and print products, and subscription-based products and services. Borrower late fee income earned by the Company’s education lending subsidiaries is recognized when payments are collected from the borrower. Fees for payment management services are recognized over the period in which services are provided to customers. Revenue from the sale of lists and printed products is generally earned and recognized, net of estimated returns, upon shipment or delivery. Revenues from the sales of subscription-based products and services are recognized ratably over the term of the subscription. Subscription revenue received or receivable in advance of the delivery of services is included in deferred revenue.

Software Services — Software services income is determined from individual agreements with customers and includes license and maintenance fees associated with student loan software products. Computer and software consulting services are recognized over the period in which services are provided to customers.

Operating Expenses

Operating expenses includes indirect costs incurred to generate and acquire student loans, costs incurred to manage and administer the Company’s student loan portfolio and its financing transactions, costs incurred to service the Company’s student loan portfolio and the portfolios of third parties, costs incurred to provide tuition payment processing, campus commerce, enrollment, list management, software, and technical services to third parties, the depreciation and amortization of capital assets and intangible assets, investments in products, services, and technology to meet customer needs and support continued revenue growth, and other general and administrative expenses. Operating expenses also includes employee termination benefits, lease termination costs, the write-down of certain assets related to the Company’s September 2007 and January 2008 restructuring initiatives, and certain severance and retention costs associated with additional strategic decisions made during 2008.

Year ended December 31, 2008 compared to year ended December 31, 2007

Net Interest Income

		Year ended
		December 31,				December 31,
		2008				2007				$ Change
Interest income:
Loan interest		$	1,176,383				1,667,057				(490,674	)
Investment interest			37,998				80,219				(42,221	)
Total interest income			1,214,381				1,747,276				(532,895	)
Interest expense:
Interest on bonds and notes payable			1,026,489				1,502,662				(476,173	)
Net interest income			187,892				244,614				(56,722	)
Provision for loan losses			25,000				28,178				(3,178	)
Net interest income after provision for loan losses		$	162,892				216,436				(53,544	)

•

Net interest income decreased for the year ended December 31, 2008 compared to 2007 as a result of the compression in the core student loan spread as discussed in this Item 7 under “Asset Generation and Management Operating Segment — Results of Operations.” Core student loan spread was 0.93% and 1.13% for the years ended December 31, 2008 and 2007, respectively. The decrease was also due to an overall decrease in cash held in 2008 compared to 2007 and lower interest rates in 2008. The decreases to net interest income were offset by the amount of variable rate floor income the Company earned during these periods. During the years ended December 31, 2008, the Company earned $42.3 million of variable rate floor income, as compared to $3.0 million of variable rate floor income earned during the year ended December 31, 2007.

•

Excluding an expense of $15.7 million to increase the Company’s allowance for loan losses related to the increase in risk share as a result of the elimination of the Exceptional Performer program in the third quarter of 2007, the provision for loan losses increased for the year ended December 31, 2008 compared to 2007. The provision for loan losses for federally insured loans increased as a result of the increase in risk share as a result of the loss of Exceptional Performer. The provision for loan losses for non-federally insured loans increased primarily due to increases in delinquencies as a result of the continued weakening of the U.S. economy.

Other Income

		Year ended
		December 31,				December 31,
		2008				2007				$ Change
Loan and guaranty servicing income		$	104,176				128,069				(23,893	)
Other fee-based income			178,699				160,888				17,811
Software services income			19,757				22,669				(2,912	)
Other income			4,760				15,612				(10,852	)
Gain (loss) on sale of loans			(51,414	)			3,597				(55,011	)
Derivative market value, foreign currency, and put option adjustments			10,827				26,806				(15,979	)
Derivative settlements, net			55,657				18,677				36,980
Total other income		$	322,462				376,318				(53,856	)

•

“Loan and guaranty servicing income” decreased due to decreases in FFELP loan servicing income, non-federally insured loan servicing income, and guaranty servicing income as further discussed in this Item 7 under “Student Loan and Guaranty Servicing Operating Segment — Results of Operations.”

•

“Other fee-based income” increased due to an increase in the number of managed tuition payment plans and an increase in campus commerce transactions processed in the Tuition Payment Processing and Campus Commerce Operating Segment, as well as an increase in lead generation sales volume in the Enrollment Services Operating Segment and an increase in borrower late fee income in the Asset Generation and Management Operating Segment.

•

“Software services income” decreased as the result of a reduction in the number of projects for existing customers and the loss of customers due to the legislative developments in the student loan industry throughout 2008.

•

“Other income” decreased for the year ended December 31, 2008 compared to 2007 due to a gain of $3.9 million from the sale of an entity accounted for under the equity method in 2007. In addition, the Company recognized $2.6 million in 2007 related to an agreement with a third party under which the Company provided administrative services to the third party for a fee. This agreement was terminated in the third quarter of 2007. The remaining change is a result of a decrease in income earned on certain investment activities.

•

The Company recognized a loss of $51.4 million during the year ended December 31, 2008 as a result of the sale of $1.8 billion of student loans as further discussed in this Item 7 under “Asset Generation and Management Operating Segment — Results of Operations.”

•

The change in “derivative market value, foreign currency, and put option adjustments” was caused by the change in the fair value of the Company’s derivative portfolio and foreign currency rate fluctuations which are further discussed in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk.” The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Management has structured all of the Company’s derivative transactions with the intent that each is economically effective; however, the Company’s derivative instruments do not qualify for hedge accounting under SFAS No. 133.

•

Further detail of the components of derivative settlements is included in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk.” Derivative settlements for each applicable period should be evaluated with the Company’s net interest income.

Operating Expenses

		Year ended December 31,
		2008				2007				$ Change
Salaries and benefits		$	177,724				230,316				(52,592	)
Other expenses			223,464				245,558				(22,094	)
Operating expenses, excluding restructure expense, impairment expense, and liquidity contingency planning fees			401,188				475,874			$	(74,686	)
Restructure expense			7,067				10,231
Impairment expense			18,834				49,504
Liquidity contingency planning fees			13,525				—
Total operating expenses		$	440,614				535,609

Excluding restructuring and impairment charges and the liquidity contingency planning fees recognized by the Company in 2008, operating expenses decreased $74.7 million for the year ended December 31, 2008 compared to 2007. The decrease is the result of cost savings from the September 2007 and January 2008 restructuring plans implemented by the Company. These plans resulted in the net reduction of approximately 700 positions in the Company’s overall workforce, leading to decreases in salaries and benefits and other expenses. The decrease is also a result of the Company capitalizing on the operating leverage of its business structure and strategies.

Operating expenses for the year ended December 31, 2008 includes $3.9 million of certain severance and retention costs associated with additional strategic decisions made during 2008. These costs are not included in restructure expense in the above table.

Income Taxes

The Company’s effective tax rate was 40% for the year ended December 31, 2008 compared to 38% for the same period in 2007. The effective tax rate increased due to the permanent tax impact of stock compensation and outstanding put options related to prior acquisitions and a reduction of federal and state tax credits as a percentage of pre-tax book income. This increase was partially offset by a benefit from resolution of uncertain tax matters and a reduction in state taxes.

Year ended December 31, 2007 compared to year ended December 31, 2006

Net Interest Income

		Year ended
		December 31,				December 31,
		2007				2006				$ Change
Interest income:
Loan interest		$	1,667,057				1,455,715				211,342
Investment Interest			80,219				93,918				(13,699	)
Total interest income			1,747,276				1,549,633				197,643
Interest expense:
Interest on bonds and notes payable			1,502,662				1,241,174				261,488
Net interest income			244,614				308,459				(63,845	)
Provision for loan losses			28,178				15,308				12,870
Net interest income after provision for loan losses		$	216,436				293,151				(76,715	)

•

Net interest income for the year ended December 31, 2006 included $32.3 million of 9.5% special allowance payments. In accordance with the Company’s Settlement Agreement with the Department in January 2007, the Company did not receive any 9.5% special allowance payments in 2007. Excluding the 9.5% special allowance payments, net interest income before the allowance for loan losses decreased $31.6 million. Interest expense increased $10.8 million for the year ended December 31, 2007 compared to the same period in 2006 as a result of additional issuances of unsecured debt used to fund operating activities of the Company. The remaining change in net interest income before the provision for loan losses is attributable to the growth in the Company’s student loan portfolio offset by a decrease in core student loan spread. Core student loan spread was 1.13% and 1.42% for the years ended December 31, 2007 and 2006, respectively, as further discussed in this Item 7 under “Asset Generation and Management Operating Segment — Results of Operations.”

•

The provision for loan losses increased for the year ended December 31, 2007 compared to 2006 as a result of the Company recognizing $15.7 million in expense for provision for loan losses as a result of the elimination of the Exceptional Performer program. During the year ended December 31, 2006, the Company recognized $6.9 million in expense for provision for loan losses as a result of HERA’s enactment in February 2006.

Other Income

		Year ended
		December 31,				December 31,
		2007				2006				$ Change
Loan and guaranty servicing income		$	128,069				121,593				6,476
Other fee-based income			160,888				102,318				58,570
Software services income			22,669				15,890				6,779
Other income			15,612				7,232				8,380
Gain on sale of loans			3,597				16,133				(12,536	)
Derivative market value, foreign currency, and put option adjustments			26,806				(31,075	)			57,881
Derivative settlements, net			18,677				23,432				(4,755	)
Total other income		$	376,318				255,523				120,795

•

“Loan and guaranty servicing income” increased due to an increase in guaranty servicing income which was offset by a decrease in FFELP loan servicing income as further discussed in this Item 7 under “Student Loan and Guaranty Servicing Operating Segment — Results of Operations.”

•

“Other fee-based income” increased due to business acquisitions, an increase in the number of managed tuition payment plans, an increase in campus commerce and related clients, and an increase in lead generation sales due to additional customers.

•

“Software services income” increased as a result of new customers, additional projects for existing customers, and increased fees in the Software and Technical Services Operating Segment.

•

“Other income” increased as a result of a gain on the sale of an entity accounted for under the equity method of $3.9 million in September 2007. The remaining change is a result of income earned on certain investment activities.

•

As part of the Company’s asset management strategy, the Company periodically sells student loan portfolios to third parties. During 2007 and 2006, the Company sold $115.3 million (par value) and $748.5 million (par value) of student loans, respectively, resulting in the recognition of a gain of $3.6 million and $16.1 million, respectively.

•

The change in “derivative market value, foreign currency, and put option adjustments” was caused by the change in the fair value of the Company’s derivative portfolio and foreign currency rate fluctuations which are further discussed in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk.” The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Management has structured all of the Company’s derivative transactions with the intent that each is economically effective; however, the Company’s derivative instruments do not qualify for hedge accounting under SFAS No. 133.

•

Further detail of the components of derivative settlements is included in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk.” Derivative settlements for each applicable period should be evaluated with the Company’s net interest income.

Operating expenses

		Year ended December 31,
		2007				2006				$ Change
Salaries and benefits		$	230,316				228,238				2,078
Other expenses			245,558				242,591				2,967
Operating expenses, excluding the impact of acquisitions, restructure expense, and impairment expense			475,874				470,829			$	5,045
Impact of acquisitions			—				(46,038	)
Restructure expense			10,231				—
Impairment expense			49,504				21,488
Total operating expenses		$	535,609				446,279

Excluding the impact of acquisitions and restructuring and impairment charges, operating expenses increased $5.0 million, or 1%, in 2007 compared to 2006.

Income Taxes

The Company’s effective tax rate was 38.0% for the year ended December 31, 2007 compared to 35.4% for the same period in 2006. The effective tax rate increased due to certain enacted state tax law changes, resolution of uncertain tax matters, and an increase in expense recognized by the Company during 2007 compared to 2006 related to its outstanding put options which are not deductible for tax purposes. The increases were partially offset by increased federal and state tax credits earned during the year.

Financial Condition as of December 31, 2008 compared to December 31, 2007

		As of December 31,								Change
		2008				2007				Dollars				Percent
Assets:
Student loans receivable, net		$	25,413,008				26,736,122				(1,323,114	)			(4.9)	%
Cash, cash equivalents, and investments			1,348,104				1,120,838				227,266				20.3
Goodwill			175,178				164,695				10,483				6.4
Intangible assets, net			77,054				112,830				(35,776	)			(31.7	)
Fair value of derivative instruments			175,174				222,471				(47,297	)			(21.3	)
Other assets			666,379				805,827				(139,448	)			(17.3	)
Total assets		$	27,854,897				29,162,783				(1,307,886	)			(4.5	)%
Liabilities:
Bonds and notes payable		$	26,787,959				28,115,829				(1,327,870	)			(4.7	)%
Fair value of derivative instruments			1,815				5,885				(4,070	)			(69.2	)
Other liabilities			421,897				432,190				(10,293	)			(2.4	)
Total liabilities			27,211,671				28,553,904				(1,342,233	)			(4.7	)
Shareholders’ equity			643,226				608,879				34,347				5.6
Total liabilities and shareholders’ equity		$	27,854,897				29,162,783				(1,307,886	)			(4.5	)%