Edgar Filing: NELNET INC

nelnet_10k-123110.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ___ to ___ .

COMMISSION FILE NUMBER 001-31924

NELNET, INC.

(Exact name of registrant as specified in its charter)

NEBRASKA (State or other jurisdiction of incorporation or organization)	84-0748903 (I.R.S. Employer Identification No.)
121 SOUTH 13TH STREET, SUITE 201 LINCOLN, NEBRASKA (Address of principal executive offices)	68508 (Zip Code)

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

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

TITLE OF EACH CLASS

Class A Common Stock, Par Value $0.01 per Share

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

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

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

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

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

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

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

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 [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [ ]

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

The aggregate market value of the registrant’s voting common stock held by non-affiliates of the registrant on June 30, 2010 (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 $19.28 per share, was $535,442,039. 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, 2011, there were 36,842,762 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 2011 Annual Meeting of Shareholders, scheduled to be held May 26, 2011, 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	14
Item 1B.	Unresolved Staff Comments	24
Item 2.	Properties	24
Item 3.	Legal Proceedings	25
Item 4.	(Removed and Reserved)	26

PART II

Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters, and
	Issuer Purchases of Equity Securities	26
Item 6.	Selected Financial Data	28
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	76
Item 8.	Financial Statements and Supplementary Data	82
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	82
Item 9A.	Controls and Procedures	82
Item 9B.	Other Information	84

PART III

Item 10.	Directors, Executive Officers, and Corporate Governance	84
Item 11.	Executive Compensation	84
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	84
Item 13.	Certain Relationships and Related Transactions and Director Independence	85
Item 14.	Principal Accounting Fees and Services	85

PART IV

Item 15.	Exhibits and Financial Statement Schedules	85

Signatures		91

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

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

•

risks related to the Company’s student loan portfolio, such as interest rate basis and repricing risk resulting from the fact that the interest rate characteristics of the Company’s student loan assets do not match the interest rate characteristics of the funding for those assets, the risk of loss of floor income on certain student loans originated under the Federal Family Education Loan Program (the “FFEL Program” or “FFELP”) of the U.S. Department of Education (the “Department”), risks related to the use of derivatives to manage exposure to interest rate fluctuations, and potential losses from loan defaults, changes in prepayment rates, guaranty rates, loan floor rates, and credit spreads;

•

risks related to the Company’s liquidity and funding requirements, including the Company’s ability to maintain credit facilities or obtain new facilities, the ability of lenders under the Company’s credit facilities to fulfill their lending commitments under these facilities, the Company’s ability to satisfy debt obligations secured by student loan assets and related collateral, and 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 purchase, refinance, or continue to carry education loans;

•

risks from changes in the student loan and educational credit marketplace resulting from the implementation of, or changes in, applicable laws and regulations, including the discontinuance of private sector student loan originations under the FFEL Program effective July 1, 2010, and the Company’s ability to maintain its loan servicing contract with the Department of Education to service federally-owned student loans and to comply with servicing agreements with third party customers for the service of loans under the Federal Direct Loan and FFEL Programs;

•

risks from changes in the demand or preferences for educational financing and related services by educational institutions, students, and their families;

•

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

•

risks associated with litigation, complex government regulations, changes in general economic and credit market conditions, and related party transactions; and

•

uncertainties inherent in the estimates and assumptions about future events that management is required to make in the preparation of the Company’s consolidated financial statements.

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

PART I.

ITEM 1. BUSINESS

Overview

Nelnet, Inc. (the “Company”) is an innovative education services company focused primarily on providing fee-based processing services and quality education-related products and services in four core areas: loan financing, loan servicing, payment processing, and enrollment services (education planning). These products and services help students and families plan, prepare, and pay for their education and make the administrative and financial processes more efficient for schools and financial organizations. In addition, the Company earns net interest income on a portfolio of federally insured student loans. Substantially all revenue from external customers is earned, and all long-lived assets are located, in the United States.

The Company was formed as a Nebraska corporation in 1977 to service federal student loans for two local banks. The Company built on this initial foundation as a servicer to become a leading originator, holder, and servicer of federal student loans, principally consisting of loans originated under the FFEL Program (a detailed description of the FFEL Program is included in Appendix A to this report). To reduce its reliance on the net interest margin on student loans, the Company has significantly diversified and increased its fee-based education-related services.

The Company had certain business objectives in place during 2010 that included:

Continuing to grow and diversify fee-based revenue

Managing operating costs

Maximizing the value of its existing student loan portfolio

Using financial strength and liquidity to capitalize on market opportunities

Achieving these business objectives, as well as significant legislation changes in the student loan industry as discussed below, has impacted and will continue to impact the financial condition and operating results of the Company. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview,” for additional information on the financial impact related to these items.

Customers

The Company serves several different groups of customers including:

Students and families

Colleges and universities, specifically financial aid, business, and admissions offices

Private, faith-based, and other K-12 institutions

Lenders, servicers, and state agencies in education finance

Government entities

An increase in the size of the education market generally increases the demand for the Company’s products and services. As shown in the chart below, total student enrollment is projected to continue to grow for many years. An increasing number of students are pursuing a higher education, often with the help of financial aid by the federal government, for whom the Company services loans. In addition, as the education market continues to grow, often with budget and funding concerns, schools have an increasing need to become more efficient, offer consistent and quality services, and recruit and retain students.

(1)

Source: Digest of Education Statistics 2009, National Center for Education Statistics, U.S. Department of Education, March 2010, NCES 2010-020

Operating Segments

The Company operates as four distinct operating segments with several different brands. The Company’s operating segments offer a broad range of services designed to simplify education planning and financing for students and families and the administrative and financial processes for schools and financial institutions. The Company’s operating segments include:

Student Loan and Guaranty Servicing

Referred to as Nelnet Diversified Solutions (“NDS”)

Focused on student loan servicing, student loan servicing-related technology solutions, and outsourcing services for guaranty agencies

Includes the brands Nelnet Loan Servicing, Firstmark Services, Nelnet Guarantor Solutions, and 5280 Solutions

Tuition Payment Processing and Campus Commerce

Commonly known as Nelnet Business Solutions (“NBS”)

Focused on payment processing

Includes the brand FACTS Management

Enrollment Services

Commonly called Nelnet Enrollment Solutions (“NES”)

Focused on education planning and enrollment-related services, including interactive marketing

Includes the brands CUnet, Peterson’s, EssayEdge, and Student Marketing Group

Asset Generation and Management

Includes the acquisition and management of the Company’s student loan assets

Recent Developments – Legislation

The Company has historically ranked 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.

On March 30, 2010, President Obama signed into law the Health Care and Education Reconciliation Act of 2010 (the “Reconciliation Act of 2010”). Effective July 1, 2010, this law prohibits new loan originations under the FFEL Program and requires that all new federal loan originations be made through the Federal Direct Loan Program. The new law does not alter or affect the terms and conditions of existing FFELP loans.

As a result of the Reconciliation Act of 2010, the Company no longer originates new FFELP loans. In addition, net interest income on the Company’s existing FFELP loan portfolio, as well as fee-based revenue from guarantee and third party FFELP servicing and education loan software licensing and consulting fees related to the FFEL Program, will decline over time as the Company’s and the Company’s customers’ FFELP loan portfolios are paid down.

Due to the legislative changes in the student loan industry, the Company believes there will be opportunities to purchase FFELP loan portfolios and/or expand its current level of guarantee and third party FFELP servicing volume on behalf of current FFELP participants looking to adjust their FFELP businesses. In addition, as discussed below, in June 2009, the Department awarded a servicing contract to the Company to service federally-owned student loans originated under the Federal Direct Loan Program. In addition, the Company is offering a hosted servicing software solution to third parties that can be used by third parties to service various types of student loans including Federal Direct Program and FFEL Program loans. Currently, the Company has agreements with third parties, including a contract with an incumbent Direct Loan Program service provider, to add more than 12 million borrowers to its hosted servicing software solution by the end of 2011.

Segment Operating Results

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.” The Company includes separate financial information about its operating segments, including revenues, net income or loss, and total assets for each of the Company’s segments, for the last three fiscal years in note 15 of the notes to the consolidated financial statements included in this report.

In recent years, the Company has expanded products and service offerings from businesses that are not dependent upon the FFEL Program, thereby reducing legislative and political risk related to the education lending industry. These products and services generate fee-based revenue. The following chart summarizes the percent of external revenue earned by the Company’s operating segments when excluding Corporate Activity and Overhead and fixed rate floor income included in the Asset Generation and Management operating segment. Excluding Corporate Activity and Overhead and fixed rate floor income provides better comparability of revenue recognized from the Company’s operating segments’ external customers during the years presented. The majority of external revenue included in Corporate Activity and Overhead is interest expense on unsecured corporate debt offset by income earned on certain investment activities. Fixed rate floor income is subject to changes in interest rates, which is a factor beyond the Company’s control. The amount of fixed rate floor income was significant during each of 2010 and 2009 due to historically low interest rates. (See Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk – Interest Rate Risk,” for further detail related to the Company’s fixed rate floor income.)

The following chart also shows the contribution of revenue earned from operating segments that generate fee-based revenue and includes a reconciliation to total external revenue by operating segment as presented on the following page.

External revenue (dollars in thousands):
	Year ended December 31,
	2010					2009					2008
Fee-based segments	$	359,172		57.8	%	$	305,546		64.0	%	$	287,749		52.7	%
Asset Generation and Management
(excluding fixed rate floor income)		262,189		42.2			172,075		36.0			257,915		47.3

Subtotal		621,361		100.0	%		477,621		100.0	%		545,664		100.0	%

Fixed rate floor income		132,243					145,098					37,457
Corporate Activity and Overhead		(7,182	)				(18,417	)				(32,180	)

Total	$	746,422				$	604,302				$	550,941

The following tables summarize the Company’s revenues by operating segment (dollars in thousands):

	Year ended December 31, 2010
	External						Intersegment						As reported by segment
	Dollars			Percent			Dollars			Percent			Dollars		Percent

Student Loan and Guaranty Servicing	$	159,419			21.4	%	$	85,342			100.0	%	$	244,761		29.4	%
Tuition Payment Processing and Campus Commerce		59,856			8.0			—			—			59,856		7.2
Enrollment Services		139,897			18.7			—			—			139,897		16.8

Total revenue from fee-based segments		359,172			48.1			85,342			100.0			444,514		53.4

Asset Generation and Management		394,432			52.8			(4,370	)		(5.1	)		390,062		46.8

Corporate Activity and Overhead		(7,182	)		(0.9	)		4,370			5.1			2,812		(0.2	)

Total revenue	$	746,422			100.0	%	$	85,342			100.0	%	$	831,764		100.0	%

	Year ended December 31, 2009
	External						Intersegment						As reported by segment
	Dollars			Percent			Dollars			Percent			Dollars			Percent

Student Loan and Guaranty Servicing	$	132,193			21.9	%	$	85,048			100.0	%	$	217,241			31.6	%
Tuition Payment Processing and Campus Commerce		53,956			8.9			—			—			53,956			7.8
Enrollment Services		119,397			19.8			—			—			119,397			17.3

Total revenue from fee-based segments		305,546			50.6			85,048			100.0			390,594			56.7

Asset Generation and Management		317,173			52.4			(2,003	)		(2.4	)		315,170			45.7

Corporate Activity and Overhead		(18,417	)		(3.0	)		2,003			2.4			(16,414	)		(2.4	)

Total revenue	$	604,302			100.0	%	$	85,048			100.0	%	$	689,350			100.0	%

	Year ended December 31, 2008
	External						Intersegment						As reported by segment

	Dollars			Percent			Dollars			Percent			Dollars			Percent

Student Loan and Guaranty Servicing	$	125,446			22.8	%	$	77,957			100.0	%	$	203,403			32.4	%
Tuition Payment Processing and Campus Commerce		49,844			9.0			—			—			49,844			7.9
Enrollment Services		112,459			20.4			—			—			112,459			17.9

Total revenue from fee-based segments		287,749			52.2			77,957			100.0			365,706			58.2

Asset Generation and Management		295,372			53.6			(2,190	)		(2.8	)		293,182			46.6

Corporate Activity and Overhead		(32,180	)		(5.8	)		2,190			2.8			(29,990	)		(4.8	)

Total revenue	$	550,941			100.0	%	$	77,957			100.0	%	$	628,898			100.0	%

Fee-Based Operating Segments

Student Loan and Guaranty Servicing

The five primary service offerings of this operating segment and each one’s percentage of total Student Loan and Guaranty Servicing revenue during 2010, are as follows:

Originating and servicing FFEL Program loans (50%)

Servicing federally-owned student loans for the Department of Education (12%)

Originating and servicing non-federally insured student loans (4%)

Servicing and outsourcing services for guaranty agencies (26%)

Student loan servicing software and other information technology products and services (8%)

The following chart summarizes the Company’s loan and guarantee servicing volumes (dollars in millions):

Company Owned	$	24,136		$	23,139		$	24,378		$	26,351		$	26,183		$	23,727

% of total		67.3	%		61.6	%		56.7	%		55.3	%		47.0	%		38.6	%

Number of borrowers:

Government
servicing:		—			441,913			1,055,896			1,530,308			2,510,630			2,804,502

FFELP
servicing:		2,266,866			2,311,558			2,327,016			2,329,150			2,227,288			1,912,748


Total:		2,266,866			2,753,471			3,382,912			3,859,458			4,737,918			4,717,250

As discussed under “Recent Developments – Legislation,” revenue from guarantee and third party FFELP servicing and education loan software licensing and consulting fees related to the FFEL Program will decline over time as the Company’s and the Company’s customers’ FFELP loan portfolios are paid down. However, these decreases will be partially made up by the increase in revenue earned by the Company for servicing loans for the Department. In addition, the Company is offering a hosted servicing software solution to third parties that can be used by third parties to service various types of student loans including Federal Direct Program and FFEL Program loans. Currently, the Company has agreements with third parties, including a contract with an incumbent Direct Loan Program service provider, to add more than 12 million borrowers to its hosted servicing software solution by the end of 2011.

The following provides an overview of each service offering included in this operating segment.

Originating and servicing FFEL Program loans

The Student Loan and Guaranty Servicing operating segment provides for the servicing of the Company’s student loan portfolio and the portfolios of third parties. The loan servicing activities include loan origination activities, loan conversion activities, application processing, borrower updates, payment processing, due diligence procedures, and claim processing. These activities are performed internally for the Company’s portfolio in addition to generating external fee revenue when performed for third party clients.

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

The Company serviced FFELP loans on behalf of approximately 56 third party servicing customers as of December 31, 2010. The Company’s FFELP servicing customers include national and regional banks, credit unions, and various state and non-profit secondary markets. The majority of the Company’s external FFELP loan servicing activities are performed under “life of loan” contracts. Life of loan 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. In recent years, the Company has experienced a reduction of third party servicing customers and servicing volume as customers shift volume to another service provider or exit the FFEL Program completely.

Servicing federally-owned student loans for the Department of Education

In June 2009, the Company was one of four private sector companies awarded a student loan servicing contract by the Department of Education to provide additional servicing capacity for loans owned by the Department. These loans include Federal Direct Loan Program loans originated directly by the Department and FFEL Program loans purchased by the Department. The contract spans five years, with one five-year renewal at the option of the Department. In September 2009, the Department began assigning FFELP purchased loans to the four servicers. Beginning with the second year of servicing in June 2010, the Department began allocating new loan volume originated under the Federal Direct Loan Program among the four servicers based on five equally weighted performance metrics.

Three metrics measure the satisfaction among separate customer groups, including borrowers, financial aid personnel at postsecondary schools participating in the federal student loan program, and Federal Student Aid and other federal agency personnel or contractors who work with the servicers.

Two performance metrics measure the success of default prevention efforts as reflected by the percentage of borrowers and percentage of dollars in each servicer’s portfolio that go into default.

Based on the first year of survey results, the Company will be allocated 16% of the new loan volume originated by the Department for the period from August 15, 2010 through August 14, 2011 (the second year of the servicing contract). The Department projects it will originate new loans for 6 million borrowers in total during the second year of this contract, which will then be allocated to the four servicers. As of December 31, 2010, the Company was servicing $30.3 billion of loans for 2.8 million borrowers under this contract. During 2010, the Company earned $29.9 million in revenue under this contract.

Management believes it is important to provide exceptional customer service at a reasonable price in order to increase the Company’s servicing volume; therefore, the Company has focused and will continue to focus heavily on customer service-related projects, efficiencies, and technology development to improve its allocation in future years of the contract.

Originating and servicing non-federally insured student loans

This operating segment 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), non-federally insured 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 non-federally insured loans on behalf of approximately 15 third party servicing customers as of December 31, 2010.

Servicing and outsourcing services for guaranty agencies

This operating segment 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 are responsible for paying the claims made on defaulted loans. The Department has designated 26 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 providing software and data center services, borrower and loan updates, default aversion tracking services, claim processing services, and post-default collection services.

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), National Student Loan Program, and the Higher Education Assistance Commission of New York.

Student loan servicing software and other information technology products and services

This operating segment also develops student loan servicing software, which is used internally by the Company and also licensed to third party student loan holders and servicers. In addition, this operating segment provides information technology products and services, with core areas of business in educational loan software solutions, technical consulting services, and enterprise content management solutions. In addition, the Company is offering a hosted servicing software solution to third parties that can be used by third parties to service various types of student loans including Federal Direct Program and FFEL Program loans. Currently, the Company has agreements with third parties, including a contract with an incumbent Direct Loan Program service provider, to add more than 12 million borrowers to its hosted servicing software solution by the end of 2011.

The Company’s clients within the education loan marketplace include large and small financial institutions, secondary markets, loan originators, and loan servicers. A significant portion of the software and technology services business were dependent on the existence of and participants in the FFEL Program. The elimination of the FFEL Program reduced education loan software licensing opportunities and related consulting fees received from lenders using the Company’s software products and services. However, because the efficient, scalable, and compliant software services all student loans, the Company has leveraged the opportunity to provide software hosting services to third parties, including the non-profit organizations that may begin servicing Federal Direct Loan Program loans for the Department as allowed per the provisions of the Reconciliation Act of 2010.

Competition

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

Loan servicing

The principal competitor for existing and prospective FFELP and non-federally insured student loan servicing business is SLM Corporation, the parent company of Sallie Mae. Sallie Mae is the largest for-profit provider of servicing functions, as well as one of the largest service providers of non-federally insured student loans.

With the elimination of the FFEL Program, four servicers, including the Company, were named by the Department as servicers of federally owned loans. The three competitors for gaining future servicing volume from the Department include Great Lakes Educational Loan Services Inc. (“Great Lakes”), Pennsylvania Higher Education Assistance Agency (“PHEAA”), and Sallie Mae.

In addition, non-profit organizations may also service loans for up to 100,000 borrower accounts on behalf of the Department in the future. The ability of the non-profit organizations to retain or increase their borrower accounts will depend upon their ability to maintain compliance and meet performance requirements under their agreement with the Department. The non-profit organizations will have their performance measured by the Department using the same performance metrics as described previously for the four private sector companies awarded a servicing contract in June 2009. If a non-profit organization servicing score is equal to or higher than that of the lowest score for each of the four new Federal Direct Loan Program servicers for each of the five performance metrics, the non-profit organization will be allowed to compete with the current Federal Direct Loan Program servicers for a percentage of new borrowers for the next allocation year.

Guaranty servicing

The Company believes the number of guaranty agencies contracting for technology services will increase 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 in this market, the Company continues to focus on service quality and technological enhancements. With the elimination of the FFEL Program, these services will continue for agencies’ existing portfolios, but no new portfolios will be created.

Software and technology

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 on its depth of knowledge, experience, and product offerings in the education loan industry.

Tuition Payment Processing and Campus Commerce

The Company’s Tuition Payment Processing and Campus Commerce operating segment provides products and services to help students and families manage the payment of education costs at all levels (K-12 and higher education). It also provides innovative education-focused technologies, services, and support solutions to help schools with the everyday challenges of collecting and processing commerce data.

K-12

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 is the market leader, having actively managed tuition payment plans in place at approximately 4,500 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’s financial needs assessment service helps K-12 schools evaluate and determine the amount of grants and financial aid to disburse to the families it serves. Through the Company’s enrollment management services, private and faith-based schools update forms, coordinate mailings, compile enrollment packets, perform data entry, and complete additional administrative tasks. The Company’s donor services allow schools to assess and deliver strategic fundraising solutions using the latest technology.

Higher education

The Company offers two principal products to the higher education market: actively managed tuition payment plans and campus commerce technologies and payment processing.

The Company has actively managed tuition payment plans in place at approximately 700 colleges and universities. Higher education institutions contract with the Company to administer deferred payment plans where the institution allows the student and family 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 Company’s suite of campus commerce solutions provides services that allow for families’ electronic billing and payment of campus charges. Campus commerce includes cashiering for face-to-face transactions, campus-wide commerce management, and refunds, among others. The Company earns revenue for these e-billing, hosting/maintenance, credit card convenience fees, and e-payment transaction fees, which are powered by the Company’s QuikPAY system, a secure payment processing engine.

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.). Approximately 320 college and university campuses use the QuikPAY system.

Competition

The Company is the largest provider of tuition management services to the private and faith-based K-12 market in the United States. Competitors include 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 offices at colleges and universities. In this market, the primary competition is limited to three campus commerce and tuition payment providers, as well as solutions developed in-house by colleges and universities.

The Company’s principal competitive advantages are (i) the 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.

Enrollment Services

The Enrollment Services operating segment offers products and services that are focused on helping colleges recruit and retain students (interactive and list marketing services) and helping students plan and prepare for life after high school (publishing services and resource centers). Interactive marketing products and services include agency of record services, qualified inquiry generation, pay per click, and other marketing management, along with school operations consulting and call center solutions. The majority of interactive marketing revenue is derived from fees which are earned through the delivery of qualified inquiries or clicks provided to colleges and universities. List marketing services include providing lists to help higher education institutions and businesses reach the middle school, high school, college bound high school, college, and young adult market place. Publishing services include test preparation study guides, school directories and databases, and career exploration guides. Resource centers include online courses, scholarship search and selection data, career planning, and on-line information about colleges and universities.

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 electronically transmitted or distributed online; however, products such as test preparation study guides, school directories, and career exploration guides are also distributed as printed materials.

Competition

In this segment, the primary areas in which the Company competes are: interactive marketing, test preparation study guides and online courses, and admissions consulting (call center services).

There are several large competitors in the areas of inquiry 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 inquiry validation, 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.

Legislation

Certain provisions in recently promulgated regulations under the Higher Education Act could have an impact on the Company’s Enrollment Services operating segment, as a result of its services provided to for-profit schools. The Higher Education Act provides that to be eligible to participate in Federal student financial aid programs, an educational institution, including for-profit schools, must enter into a program participation agreement with the Secretary of the Department of Education. The agreement includes a number of conditions with which an institution must comply to be granted initial and continuing eligibility to participate. Among those conditions is a prohibition on institutions providing any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments to any individual or entity engaged in recruiting or admission activities. Previous regulations promulgated under the Higher Education Act specified a number of types of compensation, or “safe harbors,” that did not constitute incentive compensation in violation of this agreement. One of those safe harbors permitted an institution to award incentive compensation for Internet-based recruitment and admission activities. The Department of Education’s newly issued regulations repeal all existing safe harbors regarding incentive compensation in recruiting, though exempting click-based payments to third parties for the provision of internet generated student contact information. Additionally, the regulations include misrepresentation standards for advertisements, offers, and communications presented to prospective students, with associated penalties for noncompliance with these standards. The regulations are effective July 1, 2011.

Approximately 95% of interactive marketing revenue included in this segment is generated from for-profit schools. These regulations may subject the Company to greater risk of liability and may increase the Company’s costs of compliance with these regulations or limit the Company’s ability to serve for-profit schools. In addition, these regulations could negatively impact enrollment at for-profit schools, which could adversely affect interactive marketing revenue.

Additionally, the Department has proposed certain regulations referred to as the Gainful Employment regulations, which would exclude career education programs from receiving federal student financial aid if they do not meet certain debt-to-income and student loan repayment measures. The Gainful Employment regulations are not final, and as proposed will not directly regulate the activities performed by the Company. However, if the Gainful Employment regulations become final, the regulations could negatively impact enrollment at for-profit schools, which could adversely affect interactive marketing revenue.

Asset Generation and Management Operating Segment

The Asset Generation and Management Operating Segment includes the 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 generates a substantial portion of its earnings from the spread, referred to as the Company’s student loan spread, between the yield it receives on its student loan portfolio and the costs associated with originating, acquiring, and financing its portfolio. In addition to the student loan portfolio, all costs and activity associated with the generation of assets, administration of those assets, and maintenance of the debt transactions are included in this segment.

Student loans consist of federally insured student loans and non-federally insured student loans. Federally insured student loans are made under the FFEL Program. The Company’s portfolio of federally insured student loans is subject to minimal credit risk as these loans are guaranteed by the Department at levels ranging from 97% to 100%. Substantially all of the Company’s loan portfolio (99% as of December 31, 2010) is federally insured. The Company’s portfolio of non-federally insured loans is subject to credit risk similar to other consumer loan assets.

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

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

Legislation

As discussed previously, as a result of the Reconciliation Act of 2010, the Company no longer originates new FFELP loans. Net interest income in the Company’s existing FFELP loan portfolio will decline over time as the portfolio is paid down.

Future cash flow from portfolio

The majority of the Company’s portfolio of student loans is funded in asset-backed securitizations that are structured to substantially match the maturity of the funded assets, thereby minimizing liquidity risk. In addition, due to (i) the difference between the yield the Company receives on the loans and cost of financing within these transactions, and (ii) the excess servicing and administration fees the Company earns from these transactions, the Company has created a portfolio that will generate earnings and significant cash flow over the life of these transactions.

Based on cash flow models developed to reflect management’s current estimate of, among other factors, prepayments, defaults, deferment, forbearance, and interest rates, as of December 31, 2010, the Company expects future undiscounted cash flows from its portfolio to be approximately $1.61 billion. The forecasted cash flow does not include cash flows that the Company expects to receive related to loans funded through the Department of Education’s Conduit Program or other warehouse facilities. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources,” for further details related to the estimated future cash flow from the Company’s portfolio.

Floor Income

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 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. The Company uses derivative instruments as part of its overall risk management strategy, including interest rate swaps to hedge a portion of its floor income.

The Company’s core student loan spread (variable student loan spread including fixed rate floor contribution) and variable student loan spread (net interest margin excluding fixed rate floor income) is summarized below.

(a)

The interest earned on the majority of the Company’s FFELP student loan assets is indexed to the three-month commercial paper index. The Company funds the majority of its assets with three-month LIBOR indexed floating rate securities. The relationship between these two indices has a significant impact on student loan spread. This table (the right axis) shows the difference between the average three-month LIBOR and commercial paper indices.

As reflected in the previous table, the Company’s core and variable student loan spread increased in 2010 compared with 2009. The Company’s variable student loan spread increased in 2010 as a result of the tightening of the commercial paper rate, which is the primary rate the Company earns on its student loan portfolio, and the LIBOR rate, which is the primary rate the Company pays to fund its student loan assets.

The primary difference between variable student loan spread and core student loan spread is fixed rate floor income. A summary of fixed rate floor income and its contribution to core spread follows.

	Year ended December 31,
	2010			2009

Fixed rate floor income, gross	$	151,861			147,107

Derivative settlements (a)		(19,618	)		(2,009	)

Fixed rate floor income, net	$	132,243			145,098

Fixed rate floor income
contribution to spread, net		0.52	%		0.58	%

(a)	Includes settlement payments on derivatives used to hedge student loans earning fixed rate floor income.

The high levels of fixed rate floor income earned during 2010 and 2009 are due to historically low interest rates. If interest rates remain low, the Company anticipates continuing to earn significant fixed rate floor income in future periods. See Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk – Interest Rate Risk,” which provides additional detail on the Company’s portfolio earning fixed rate floor income and the derivatives used by the Company to hedge these loans.

Interest Rate Risk Management

Because the Company generates a significant portion of its earnings from its student loans 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 Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk.”

Competition

There were two loan delivery programs that provided federal government guaranteed student loans: the FFELP and the Federal Direct Loan Program. FFELP loans were provided by private sector institutions and are ultimately guaranteed by the Department, except for the risk sharing loss, as discussed previously. Federal Direct Loan Program loans are provided to borrowers directly by the Department on terms similar to student loans historically provided under the FFELP.

As discussed previously, as a result of the Reconciliation Act of 2010, effective July 1, 2010, this law prohibits new loan originations under the FFEL Program and requires that all new federal loan originations be made through the Federal Direct Loan Program. The new law does not alter or affect the terms and conditions of existing FFELP loans.

Intellectual Property

The Company owns numerous trademarks and service marks (“Marks”) to identify its various products and services. As of December 31, 2010, the Company had seven pending and 86 registered Marks. The Company actively asserts its rights to these Marks when it believes infringement may exist. The Company believes its Marks have developed and continue to develop strong brand-name recognition in the industry and the consumer marketplace. Each of the Marks has, upon registration, an indefinite duration so long as the Company continues to use the Mark on or in connection with such goods or services as the Mark identifies. In order to protect the indefinite duration, the Company makes filings to continue registration of the Marks. The Company owns one patent application that has been published, but has not yet been issued and has also actively asserted its rights thereunder in situations where the Company believes its claims may be infringed upon. The Company owns many copyright-protected works, including its various computer system codes and displays, Web sites, books and other publications, and marketing 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, 2010, the Company had approximately 2,200 employees. None of the Company’s employees are covered by collective bargaining agreements. The Company is not involved in any material disputes with any of its employees, and the Company believes that relations with its employees are good.

Available Information

Copies of the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports are available on the Company’s Web site free of charge as soon as reasonably practicable after such reports are filed with or furnished to the 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, Nominating and Corporate Governance Committee Charter, and the Finance Committee Charter are also posted on its Web site.

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

ITEM 1A. RISK FACTORS

We operate our business in a highly competitive and regulated environment. We are subject to business risks including, but not limited to, operating in markets that are highly competitive, negative publicity and reputation damage, and the impact of a sustained economic downturn. This risk factors section highlights specific risks that could affect us. Although this section attempts to highlight key risk factors, other risks may emerge at any time and we cannot predict all risks or estimate the extent to which they may affect our financial performance. These risk factors should be read in conjunction with the other information included in this report.

Student Loan Portfolio

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

Interest rate risk – basis and repricing risk

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

We fund the majority of our student loan assets with 3-month LIBOR indexed floating rate securities. In addition, the interest rates on some of our debt are set via a “dutch auction” or through a periodic remarketing. Meanwhile, the margins on our student loan assets are indexed to treasury bill and commercial paper rates. The different interest rate characteristics of our loan assets and liabilities funding these assets results in basis risk. We also face repricing risk due to the timing of the interest rate resets on our liabilities, which may occur as infrequently as every quarter, in contrast to the timing of the interest rate resets on our assets, which generally occur daily. In a declining interest rate environment, this may cause our student loan spread to compress, while in a rising interest rate environment, it may cause the spread to increase.

As of December 31, 2010, we had $22.8 billion of FFELP loans indexed to the fiscal quarter average rate of daily financial commercial paper rates and $1.0 billion indexed to the fiscal quarter average rate of 13-week Treasury Bill auctions, and $19.8 billion of debt to fund such loans indexed to three-month LIBOR in which the rate resets discretely in advance. While these indices are all short term in nature with rate movements that are highly correlated over a longer period of time, there have been points in recent history where volatility has been high and correlation has been reduced. There can be no assurance that the indices’ historically high level of correlation will not be disrupted in the future due to capital market dislocations or other factors not within our control. In such circumstances, our earnings could be adversely affected, possibly to a material extent. See Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk.”

Interest rate risk – loss of floor income

We are exposed to interest rate risk because of the interest rate characteristics of certain of our student loan assets and the interest rate characteristics of the related funding of those assets.

FFELP 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. We generally finance our 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, our student loans earn at a fixed rate while the interest on the variable rate debt typically continues to decline. In these interest rate environments, we may earn additional spread income that we refer to as floor income.

Depending on the type of loan and when it was originated, the borrower rate is either fixed to term or is reset to an annual rate each July 1. As a result, for loans where the borrower rate is fixed to term, we may earn floor income for an extended period of time, which we refer to as fixed rate floor income, and for those loans where the borrower rate is reset annually on July 1, we may earn floor income to the next reset date, which we refer to as variable rate floor income. In accordance with 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 originated on or after April 1, 2006.

For the year ended December 31, 2010, we earned $132.2 million of fixed rate floor income, net of $19.6 million of settlements paid related to derivatives used to hedge loans earning fixed rate floor income. Absent the use of derivative instruments and apart from potential repricing benefits associated with the mismatch between the interest reset of the loan assets and debt securities, a rise in interest rates will reduce the amount of floor income received and this will have an impact on earnings due to interest margin compression caused by increased financing costs, until such time as the federally insured loans earn interest at a variable rate in accordance with their SAP formulas. In higher interest rate environments, where the interest rate rises above the borrower rate and fixed rate loans effectively convert to variable rate loans, the impact of the rate fluctuations is reduced. See Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk.”

Interest rate risk – use of derivatives

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

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

By using derivative instruments, we are exposed to counterparty credit risk and market risk.

When the fair value of a derivative instrument is negative (a liability on our balance sheet), we would owe the counterparty if the derivative was settled and, therefore, have no immediate credit risk with the counterparty. Additionally, if the negative fair value of derivatives with a counterparty exceeds a specified threshold, we may be required to maintain a collateral deposit with the counterparty. The threshold at which we post collateral is dependent upon our unsecured credit rating. If our credit ratings are downgraded from current levels or if interest and foreign currency exchange rates move materially, we could be required to deposit a significant amount of collateral with our derivative instrument counterparties. The collateral deposits, if significant, could negatively impact our liquidity and capital resources. As of December 31, 2010, the fair value of our derivatives which had a negative fair value (a liability on our balance sheet) was $16.1 million and we had $11.1 million posted as collateral to derivative counterparties.

When the fair value of a derivative contract is positive (an asset on our balance sheet), this generally indicates that the counterparty owes us if the derivative was settled. 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 us. If we were unable to collect from a counterparty, we would have a loss equal to the amount the derivative is recorded on the consolidated balance sheet. As of December 31, 2010, the fair value of our derivatives which had a positive fair value in our favor (an asset on our balance sheet) was $118.3 million, of which $94.9 million related to the fair value of our cross-currency interest rate swaps. As of December 31, 2010, our trustee held $182.8 million of collateral from the counterparty on the cross-currency interest rate swaps.

We attempt to manage market and credit risks associated with our derivative instruments by establishing and monitoring limits as to the types and degree of risk that may be undertaken, and by entering into transactions with high-quality counterparties that are reviewed periodically by our risk committee. As of December 31, 2010, all of our derivative counterparties had investment grade credit ratings. We also have a policy that requires all derivative contracts be governed by an International Swaps and Derivatives Association, Inc. Master Agreement.

Prepayment risk

Higher rates of prepayments of student loans, including consolidation by the Department through the Federal Direct Loan Program, would reduce our net interest income.

Pursuant to the Higher Education Act, borrowers may prepay loans made under the FFEL Program at any time without penalty. Prepayments may result from consolidation of student loans by the Department as part of the Federal Direct Loan Program, 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.

On February 14, 2011, the President introduced several proposals related to the fiscal year 2012 Federal budget, including a proposal to allow certain FFELP loan borrowers who also have Federal Direct Loan Program loans, for a one-time nine month period from January 1, 2012 through September 30, 2012, to convert their existing FFELP loans into Federal Direct Loan Program loans to be held by the Department, and as an incentive to convert, to provide such borrowers a credit of up to two percent on their loan balance. The proposal suggests it would simplify loan servicing and that the government would recognize a savings via elimination of lender subsidies on the FFELP loans. The proposal did not contain specific details as to implementation or timing, and the proposal is subject to review by Congress and possible changes. We cannot currently predict whether this or any other proposals will ultimately be enacted.

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

Credit risk

Future losses due to defaults on loans held by us, or loans sold to unaffiliated third parties which we are obligated to repurchase in the event of certain delinquencies, present credit risk which could adversely affect our earnings.

Over 99% of our student loan portfolio is federally guaranteed. The allowance for loan losses from the federally insured loan portfolio is based on periodic evaluations of our loan portfolios considering loans in repayment versus those in nonpaying status, delinquency status, trends in defaults in the portfolio based on Company and industry data, past experience, trends in student loan claims rejected for payment by guarantors, changes to federal student loan programs, current economic conditions, and other relevant factors. The federal government currently guarantees 97% of the principal and 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 our loss exposure on the outstanding balance of our federally insured portfolio. Student loans disbursed prior to October 1, 1993 are fully insured for both principal and interest.

Our non-federally insured loans are unsecured, with neither a government nor a private insurance guarantee. Accordingly, we bear the full risk of loss on these loans if the borrower and co-borrower, if applicable, default. In determining the adequacy of the allowance for loan losses on the non-federally insured loans, we consider several factors, including: loans in repayment versus those in a nonpaying status, delinquency status, type of program, trends in defaults in the portfolio based on Company and industry data, past experience, current economic conditions, and other relevant factors. We place a non-federally insured loan on nonaccrual status when the collection of principal and interest is 30 days past due and charge off the loan when the collection of principal and interest is 120 days past due.

The evaluation of the allowance for loan losses is inherently subjective, as it requires material estimates that may be subject to significant changes. As of December 31, 2010, our allowance for loan losses was $43.6 million. During the year ended December 31, 2010, we recognized a provision for loan losses of $22.7 million. The provision for loan losses reflects the activity for the applicable period and provides an allowance at a level that 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, and other unforeseen future trends. If actual performance is worse than estimated, it would materially affect our estimate of the allowance for loan losses and the related provision for loan losses in our statement of operations.

We have participated interests in non-federally insured loans to unaffiliated third parties. Loans participated under these agreements have been accounted for as loan sales. Accordingly, the participation interests sold are not included on our consolidated balance sheet. Under the terms of the servicing agreements, our servicing operations are obligated to repurchase loans subject to the participation interests when such loans become 60 or 90 days delinquent. As of December 31, 2010, we had a reserve related to this obligation of $12.6 million included in other liabilities on the consolidated balance sheet. The evaluation of the reserve related to these participated loans is inherently subjective, as it requires estimates that may be subject to changes. If actual performance is worse than estimated, it would negatively affect our results of operations.

Liquidity and Funding

We face liquidity and funding risk to meet our financial obligations.

We have two primary liquidity and funding needs:

Satisfy unsecured debt obligations, specifically our unsecured line of credit

Satisfy debt obligations secured by student loan assets and related collateral

Satisfy unsecured debt obligations, specifically our unsecured line of credit

We have a $750.0 million unsecured line of credit that terminates in May 2012. As of December 31, 2010, $450.0 million was outstanding under this facility. Upon termination in 2012, there can be no assurance that we will be able to maintain this line of credit, find alternative funding, or increase the amount outstanding under the line, if necessary. The line of credit agreement contains certain financial covenants that, if not met, lead to an event of default under the agreement. The covenants include maintaining a minimum consolidated net worth, minimum adjusted EBITDA to corporate debt interest (over the last four rolling quarters), limitation on subsidiary indebtedness, and limitation on the percentage of non-guaranteed loans in our portfolio.

Satisfy debt obligations secured by student loan assets and related collateral

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

We maintain a FFELP warehouse facility that has a maximum financing amount of $500.0 million, with a revolving financing structure supported by 364-day liquidity provisions, which expire on July 29, 2011. The final maturity date of the facility is July 29, 2013. In the event that we are unable to renew the liquidity provisions by July 29, 2011, the facility would become a term facility at a stepped-up cost, with no additional student loans being eligible for financing, and we would be required to refinance the existing loans in the facility by July 29, 2013. The FFELP facility provides for formula based advance rates depending on FFELP loan type, up to a maximum of 85 percent to 98 percent of the principal and interest of loans financed. The advance rates for collateral may increase or decrease based on market conditions, but they are subject to a minimum advance of 75 to 80 percent based on loan type. The facility contains financial covenants relating to levels of our consolidated net worth, ratio of adjusted EBITDA to corporate debt interest, and unencumbered cash. Any violation of these covenants could result in a requirement for the immediate repayment of any outstanding borrowings under the facility. As of December 31, 2010, $108.4 million was outstanding under this facility and $391.6 million was available for future use. As of December 31, 2010, we had $5.3 million advanced as equity support in the facility.

In May 2009, the Department implemented a program under which it finances 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 had to 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 is provided by the capital markets at a cost based on market rates, in which we were advanced 97 percent of the student loan face amount. Excess amounts needed to fund the remaining 3 percent of the student loan balances were contributed by us. The Conduit Program expires on May 8, 2014. The Student Loan Short-Term Notes (“Student Loan Notes”) issued by the Conduit Program are supported by a combination of (i) notes backed by FFELP loans, (ii) a liquidity agreement with the Federal Financing Bank, and (iii) a put agreement provided by the Department. If the conduit does not have sufficient funds to pay all Student Loan Notes, then those Student Loan Notes will be repaid with funds from the Federal Financing Bank. The Federal Financing Bank will hold the notes for a short period of time and, if at the end of that time, the Student Loan Notes still cannot be paid off, the underlying FFELP loans that serve as collateral to the Conduit Program will be sold to the Department through a put agreement at a price of 97 percent of the face amount of the loans. As of December 31, 2010, $2.7 billion was outstanding under this facility and we had $94.1 million of operating cash advanced in the facility.

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

Operations

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

A failure of our information technology systems or infrastructure, or those of our third party vendors, could damage client relationships and our reputation or result in a security or privacy breach.

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

Additionally, we face the risk of business disruption if failures in our information systems occur as a result of changes in infrastructure, relocation of infrastructure, or failure to perform required services, which could have a material impact upon our business and operations. Although we regularly back up our data and maintain detailed disaster recovery plans, a major physical disaster or other calamity that causes significant damage to or the loss of our information systems for a sustained period of time could adversely affect our business and cash flows if we are unable to process transactions and/or provide services to customers.

We rely on outside vendors to provide some of the key components of business operations. Several of these key vendors are provided access to our customer data to complete the operations required by their contracts, such as banking services, datacenters, electronic and paper correspondence, credit reporting, skip tracing, and secure storage of proprietary and customer information. Our vendors must comply with our defined servicing levels, security policies, and applicable industry regulations. However, disruptions in vendor services, changes in servicing contracts, security, or non-compliance with industry regulations could hinder our ability to meet customer obligations, service levels, or lead to financial or reputation damage. Financial or operational difficulties of an outside vendor could also hurt operations if those difficulties interfere with the vendor’s services or cause reputation damage to our business segments.

The secure confidentiality of customer information contained in our systems is critical to our business. A compromise of security surrounding our student 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 our overall business. Although we believe that the applications we use are proven and designed for data security and integrity to process electronic transactions, there can be no assurance that these applications will be sufficient to counter all current and emerging technology threats designed to interrupt service or breach systems in order to gain access to confidential client information or intellectual property or assurance that these applications will be sufficient to address the security and privacy concerns of existing and potential customers.

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

We must meet various requirements in order to maintain the federal guaranty on our federally insured loans. The federal guaranty on our federally insured loans is conditional based on our 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 guaranty agency regulations may risk partial or complete loss of the guaranty. If we experience a high rate of servicing deficiencies (including any deficiencies resulting from the conversion of loans from one servicing platform to another, errors in the loan origination process, establishment of the borrower’s repayment status, and due diligence or claim filing processes), it could result in the loan guarantee being revoked or denied. In most cases we have the opportunity to cure these deficiencies by following a prescribed cure process which usually involves obtaining the borrower’s reaffirmation of the debt. 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.

We are allowed three years from the date of the loan rejection to cure most loan rejections. If a cure cannot be achieved during this three year period, insurance is permanently revoked, although we maintain our right to collect the loan proceeds from the borrower.

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 us. A future increase in either the loans claim rejections and/or interest penalties could become material to our fiscal operations.

As of December 31, 2010, the Company serviced $29.4 billion of FFELP loans that maintained a federal guarantee, of which $23.7 billion and $5.7 billion were owned by the Company and third party entities, respectively.

As we expand our service offerings to include software hosting services to third party servicing customers, we may incur penalties if certain performance standards are not met.

We have entered into subcontracts to provide software hosting services to third party servicing customers that service loans under the Federal Direct Loan and FFEL Programs. These contracts include certain performance standards that we must meet. If these performance requirements are not met, we will incur penalties and loss of future revenue.

If our loan servicing contract with the Department of Education expiring in 2014 is not renewed, our loan servicing revenues will be significantly reduced and we will need to restructure our loan servicing operations.

In June 2009, the Department named us as one of four private sector companies awarded a servicing contract to service all federally-owned student loans. Our servicing contract with the Department spans five years and the Department can renew the contract for one, five-year period. During the year ended December 31, 2010, we recognized $29.9 million of revenue on this contract. We expect total loans serviced and revenue from this contract to grow each year of the contract. Upon the expiration of this contract, any renewal to provide loan servicing to the Department could be subject to a bidding process in which we may not be successful. Not obtaining a renewal of a loan servicing contract upon its expiration would result in a significant reduction in revenue and we would have to make significant changes to our operations which may result in the recording of special charges, such as workforce reduction costs, charges relating to consolidating excess facilities, and impairments of assets.

Regulatory and Legal

Federal and state regulations can restrict our business and noncompliance with these regulations could result in penalties, litigation, and reputation damage.

Our operating segments and commercial customers are heavily regulated by federal and state governments and regulatory agencies. This regulation and legislation is proposed or enacted to protect consumers and the financial industry as a whole, not necessarily the Company, our operating segments, or our stockholders. Consequently, this regulation and legislation can significantly alter the regulatory environment, limit business operations, increase costs of doing business, and could lead to fines or penalties if we were found to be out of compliance.

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, establishes the new federal Bureau of Consumer Financial Protection (the “BCFP”), an independent agency within the Federal Reserve to regulate consumer financial products, including education loans, and services offered primarily for personal, family, or household purposes, and will require the BCFP and other federal agencies, including the SEC and the Commodity Futures Trading Commission (the “CFTC”), to undertake various assessments and rulemakings. The majority of the provisions in the Dodd-Frank Act are aimed at financial institutions. However, there are components of the legislation that will have an impact on us, including new requirements for derivatives and securitizations as discussed below, corporate governance and executive compensation provisions for public companies, and provisions which may impact us as we work with financial institutions and credit rating agencies.

The Dodd-Frank Act provides the CFTC and the SEC with substantial new authority to regulate over-the-counter derivatives transactions, and includes provisions that require derivatives transactions to be executed through an exchange or centrally cleared, unless an exemption applies based on regulations to be developed by the CFTC and the SEC. The CFTC and the SEC have initiated rulemaking processes with respect to derivatives. Although we cannot predict the ultimate outcome of these rulemakings, new regulations in this area may result in increased costs and cash collateral margin requirements for the types of derivatives we use to hedge or otherwise manage our financial risks related to volatility in interest rates and foreign currency exchange rates.

There are also provisions in the Dodd-Frank Act that will affect future student loan portfolio securitization financing transactions through the issuance of asset-backed securities. The SEC and federal banking agencies are directed to adopt regulations requiring issuers of asset backed securities or persons who organize and initiate asset-backed securities transactions to retain a portion of the underlying assets’ credit risk, new disclosure and reporting requirements for each tranche of asset-backed securities, including new loan-level data requirements, and new disclosure requirements relating to the representations, warranties, and enforcement mechanisms available to investors in asset-backed securities. The SEC has issued proposed new rules governing asset-backed securities. Although we cannot predict the ultimate outcome of this rulemaking, the Dodd-Frank Act provisions and new regulations in this area are expected to affect the terms of future student loan securitization transactions that we facilitate and result in greater risk retention and less flexibility for structuring such transactions.

At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the resulting regulations will impact our business and operations. As rules and regulations are promulgated by the federal agencies responsible for implementing and enforcing the provisions in the Dodd-Frank Act, we will need to apply adequate resources to ensure that we are in compliance with all applicable provisions. Compliance with these new laws and regulations may result in additional costs and may otherwise adversely impact our results of operations, financial condition, or liquidity.

Additionally, certain provisions in recently promulgated regulations under the Higher Education Act could have an impact on our Enrollment Services operating segment, as a result of its services provided to for-profit schools. The United States Higher Education Act provides that to be eligible to participate in Federal student financial aid programs, an educational institution, including for-profit schools, must enter into a program participation agreement with the Secretary of the Department of Education. The agreement includes a number of conditions with which an institution must comply to be granted initial and continuing eligibility to participate. Among those conditions is a prohibition on institutions providing any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments to any individual or entity engaged in recruiting or admission activities. Previous regulations promulgated under the Higher Education Act specified a number of types of compensation, or “safe harbors,” that did not constitute incentive compensation in violation of this agreement. One of those safe harbors permitted an institution to award incentive compensation for Internet-based recruitment and admission activities. The Department of Education’s newly issued regulations repeal all existing safe harbors regarding incentive compensation in recruiting, though exempting click-based payments to third parties for the provision of internet generated student contact information. Additionally, the regulations include misrepresentation standards for advertisements, offers, and communications presented to prospective students, with associated penalties for noncompliance with these standards. The regulations are effective July 1, 2011.

Approximately 95% of our interactive marketing revenue included in our Enrollment Services operating segment is generated from for-profit schools. These regulations may subject us to greater risk of liability and may increase our costs of compliance with these regulations or limit our ability to serve for-profit schools. In addition, these regulations could negatively impact enrollment at for-profit schools, which could adversely affect our interactive marketing revenue.

Effective July 1, 2010, the Reconciliation Act of 2010 prohibits new loan originations under the FFEL Program and requires that all new federal loan originations be made through the Federal Direct Loan Program. As a result of this legislation, net interest income on our existing FFELP loan portfolio, as well as fee-based revenue from guarantee and third party FFELP servicing and education loan software licensing and consulting fees will decline over time as our and our customers’ FFELP loan portfolios are paid down.

On March 30, 2010, President Obama signed into law the Reconciliation Act of 2010. Effective July 1, 2010, this law prohibits new loan originations under the FFEL Program and requires that all new federal loan originations be made through the Federal Direct Loan Program. The new law does not alter or affect the terms and conditions of existing FFELP loans.

As a result of the Reconciliation Act of 2010, we no longer originate new FFELP loans. As such, subsequent to 2010, we will no longer recognize a gain from originating and subsequently selling FFELP loans to the Department under the Department’s Loan Purchase Commitment Program (the “Purchase Program”). During 2010 and 2009, we recognized pre-tax gains of $33.8 million and $36.6 million, respectively, from selling $2.1 billion of FFELP loans to the Department during each of these years under the Purchase Program.

In addition, as a result of the Reconciliation Act of 2010, net interest income on our existing FFELP loan portfolio, as well as fee-based revenue from guarantee and third party FFELP servicing and education loan software licensing and consulting fees related to the FFEL Program, will decline over time as our and our customers’ FFELP loan portfolios are paid down. During the years ended December 31, 2010 and 2009, we recognized approximately $377 million and approximately $247 million, respectively, of net interest income on our FFELP loan portfolio, approximately $101 million and approximately $100 million, respectively, in guarantee and third party FFELP servicing revenue, and approximately $8 million and approximately $7 million, respectively, in education loan software licensing and consulting fees related to the FFEL Program.

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

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

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

The costs and effects of litigation, investigations, or similar matters, or adverse facts and developments related thereto, could materially affect our financial position, results of operations, and cash flows.

We may be involved from time to time in a variety of lawsuits, investigations, or similar matters arising out of our business operations. Our insurance may not cover all claims that may be asserted against us, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation. If the ultimate judgments or settlements in any litigation or investigation significantly exceed our insurance coverage, they could have a material adverse effect on our financial position, results of operations, and cash flows for any particular period.

Principal Shareholder and Related Party Transactions.

Our Chairman and Chief Executive Officer beneficially owns 66.3% of the voting rights of our shareholders and has day to day control over all matters at our Company.

Michael S. Dunlap, our Chairman, Chief Executive Officer, and a principal shareholder, beneficially owns 66.3% of the voting rights of our shareholders. In addition, Mr. Dunlap, Stephen F. Butterfield, our Vice Chairman, and Angela L. Muhleisen, Mr. Dunlap’s sister, beneficially own stock that in the aggregate has 81.0% of the voting rights of our shareholders. Accordingly, each member of the Board of Directors and each member of management has been elected or effectively appointed by Mr. Dunlap and can be removed by Mr. Dunlap. As a result, Mr. Dunlap, as Chairman, Chief Executive Officer, and controlling shareholder, has day to day control over all matters at our Company and has the ability to take actions that benefit him and Ms. Muhleisen but may not benefit other minority shareholders, and may otherwise exercise his control in a manner with which other minority shareholders may not agree or which they may not consider to be in their best interests.

We have entered into contractual arrangements with Union Bank & Trust Company (“Union Bank”). Union Bank is controlled by Farmers & Merchants Investment Inc. (“F&M”) which owns 81.4% of Union Bank’s common stock and 15.4% of Union Bank’s non-voting preferred stock. Michael S. Dunlap, a significant shareholder of us as well as our Chief Executive Officer, Chairman, and a member of our Board of Directors, owns or controls 40.2% of the stock of F&M, while Mr. Dunlap’s sister, Angela L. Muhleisen, owns or controls 38.6% of F&M stock. The transactions with Union Bank present conflicts of interest and pose risks to our shareholders that the terms may not be as favorable to us as we could receive from unrelated third parties.

Union Bank is controlled by F&M which owns 81.4% of Union Bank’s common stock and 15.4% of Union Bank’s non-voting preferred stock. Michael S. Dunlap, a significant shareholder of us as well as our Chief Executive Officer, Chairman, and a member of our Board of Directors, owns or controls 40.2% of the stock of F&M, while Mr. Dunlap’s sister, Angela L. Muhleisen, owns or controls 38.6% of F&M stock. Mr. Dunlap serves as a Director and Co-President of F&M. Ms. Muhleisen serves as Director and Co-President of F&M and as a Director, Chairperson, President, and Chief Executive Officer of Union Bank. Union Bank is deemed to have beneficial ownership of various shares of Nelnet because it serves in a capacity of trustee and has sole voting and/or investment power. As of December 31, 2010, Union Bank was deemed to beneficially own 11.8% of the voting rights of our common stock. As of December 31, 2010, Mr. Dunlap and Ms. Muhleisen beneficially owned 66.3% and 13.9%, respectively, of the voting rights of our outstanding common stock.

We have entered into certain contractual arrangements with Union Bank. These transactions include:

Loan sales - During 2008 and 2009, we sold $535.4 million (par value) and $76.4 million (par value), respectively, of FFELP student loans (the “FFELP Loans”) to Union Bank. We recognized a loss of $3.9 million and $0.8 million, respectively, on these loan sales which represented unamortized loan costs on these portfolios. These loans were sold pursuant to an affiliate transaction exemption granted by the Federal Reserve Board which allowed Union Bank to purchase FFELP loans from us. In connection with the exemption and the loan purchase by Union Bank, an Assurance Commitment Agreement (the “Commitment Agreement”) was also entered into, by and among, us, Union Bank, and Mr. Dunlap. Per the terms of the Commitment Agreement, we provided certain assurances to Union Bank designed to mitigate potential losses related to the FFELP Loans, including holding amounts in escrow equal to the unguaranteed portion and reimbursing Union Bank for losses, if any, related to the portfolio. As part of this agreement, we were also obligated to buy back loans once they were 30 days delinquent. In 2010 and 2009, we bought back from Union Bank $11.7 million (par value) and $36.9 million (par value), respectively, in loans and incurred expenses of $128,000 and $374,000, respectively, related to this obligation.

In March 2010, we purchased $524.2 million (par value) of federally insured student loans from Union Bank, which represented all outstanding FFELP loans remaining under the provisions of the Commitment Agreement. As a result of this loan purchase, we no longer have a commitment to hold amounts in escrow, reimburse Union Bank for losses, and buy back delinquent loans related to this portfolio.

Loan purchases – During 2010, we purchased $989.2 million (par value) of FFELP student loans from Union Bank, which includes $535.9 million of loans purchased under the Commitment Agreement as discussed previously. No premiums were paid for these loan purchases.

Loan servicing – As of December 31, 2010, we serviced $530.0 million of loans for Union Bank. Servicing revenue earned by us from this portfolio was $1.8 million for the year ended December 31, 2010.

Funding – We maintain an agreement with Union Bank, as trustee for various grantor trusts, under which Union Bank has agreed to purchase from us participation interests in student loans (the “FFELP Participation Agreement”). We use this facility as a source to fund FFELP student loans. We have the option to purchase the participation interests from the grantor trusts at the end of a 364-day period upon termination of the participation certificate. As of December 31, 2010, $350.4 million of loans were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement. The agreement automatically renews annually and is terminable by either party upon five business days notice. This agreement provides beneficiaries of Union Bank’s grantor trusts with access to investments in interests in student loans, while providing liquidity to us on a short term basis. We can participate loans to Union Bank to the extent of availability under the grantor trusts, up to $750 million or an amount in excess of $750 million if mutually agreed to by both parties. Loans participated under this agreement have been accounted for by us as loan sales. Accordingly, the participation interests sold are not included on our consolidated balance sheet.

We have from time to time repurchased certain of our own asset-backed securities (bonds and notes payable). For accounting purposes, these notes have been effectively retired and are not included on our consolidated balance sheet. However, these securities are legally outstanding at the trust level and we could sell these notes to third parties or redeem the notes at par as cash is generated by the trust estate. During 2010, we participated $218.7 million of these securities to Union Bank, as trustee for various grantor trusts, and obtained cash proceeds equal to the par value of the notes. We entered into a Guaranteed Purchase Agreement with Union Bank whereby we must purchase these notes back from Union Bank at par upon the request of Union Bank. As of December 31, 2010, $107.1 million of these securities were outstanding and subject to the participation agreement and are included in “bonds and notes payable” on our consolidated balance sheet.

Operating cash – The majority of our cash operating bank accounts are maintained at Union Bank. We also invest cash in the Short term Federal Investment Trust (“STFIT”) of the Student Loan Trust Division of Union Bank, which we use as operating cash accounts. As of December 31, 2010, we had $326.9 million deposited at Union Bank in operating accounts or invested in the STFIT. Interest income earned from cash deposited in these operating cash accounts for the year ended December 31, 2010 was $1.1 million.

529 Plan administration – We provide certain 529 Plan administration services to certain college savings plans (the "College Savings Plans") through a contract with Union Bank, as the program manager. Union Bank is entitled to a fee as program manager pursuant to its program management agreement with the College Savings Plans. In 2010, we received fees of $5.7 million from Union Bank related to our administration services provided to the College Savings Plans.

Lease arrangement – Union Bank leases space in our corporate headquarters building. During 2010, Union Bank paid us approximately $71,000 for rent.

Other fees paid to Union Bank – During 2010, we paid Union Bank approximately $655,000 for administrative and record keeping services, commissions, and cash management fees.

Other fees received from Union Bank – During 2010, we received approximately $165,000 from Union Bank related to an employee sharing arrangement and for providing health and productivity services.

Investment Services – In December 2010, Union Bank established various trusts whereby Union Bank serves as trustee for the purpose of purchasing, holding, and selling investments in student loan asset backed securities. We and Union Bank have both invested money into the trusts. As of December 31, 2010 and February 28, 2011, we had $4.9 million and $22.9 million, respectively, and Union Bank had $28.6 million and $128.8 million, respectively, invested in the trusts. We and Union Bank employ certain individuals as dual employees and such employees provide consulting and advisory services to Union Bank as trustee for these trusts, and Union Bank has agreed to pay us for the share of such employees’ salary and payroll based on the value of such services rendered as well as the loss of value of such dual employees’ services to us.

Defined contribution plan – Union Bank administers our 401(k) defined contribution plan. Fees paid to Union Bank to administer the plan, approximately $239,000 in 2010, are paid by the plan’s participants.

Letter of credit – Union Bank has issued a $125,000 letter of credit for our benefit. Union Bank charged no fee for providing this service.

The net aggregate impact on our consolidated statements of income for the years ended December 31, 2010, 2009, and 2008 related to the transactions with Union Bank as described above was income of approximately $8.2 million, $6.9 million, and $4.9 million, respectively. See note 20 of the notes to the consolidated financial statements included in this Form 10-K for additional information related to the transactions between us and Union Bank.

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

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

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

ITEM 1B. UNRESOLVED STAFF COMMENTS

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

ITEM 2. PROPERTIES

The following table lists the principal facilities for office space owned or leased by the Company. 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.

Location	Primary Function or Segment	Approximate square feet	Lease expiration date

Lincoln, NE	Corporate Headquarters, Asset Generation and Management, Student Loan and Guaranty Servicing, Tuition Payment Processing and Campus Commerce	120,000	–

Lincoln, NE	Student Loan and Guaranty Servicing	54,000	December 2015

Aurora, CO	Student Loan and Guaranty Servicing	96,000	February 2015

Highlands Ranch, CO	Student Loan and Guaranty Servicing	51,000	March 2014

Paramus, NJ	Enrollment Services	23,000	May 2013

Lawrenceville, NJ	Enrollment Services	13,000	December 2012

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 80,000 square feet and 76,000 square feet of office space in Jacksonville, Florida and Indianapolis, Indiana, respectively, where Asset Generation and Management and Student Loan and Guaranty Servicing operations were previously conducted. As of December 31, 2010, 26,000 square feet in the Indianapolis location was subleased to third parties and such subleases expire in March 2013 and December 2013. 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 13th Street, 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 of Education thereunder, and the Department’s guidance regarding those rules and regulations. Other than as specifically discussed below, 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.

Regulatory Reviews

As previously reported in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2010, on October 28, 2010 the Company entered into a settlement agreement with the Department whereby the Company agreed to pay the Department $27,500 in settlement of an issue raised in the Department’s Final Program Review Determination Letter issued on September 3, 2010 as a result of a review that was initiated on June 28, 2007. That letter alleged a violation of the prohibited inducements provisions of the Higher Education Act and associated regulations with respect to the Company’s relationship with one higher education institution in 2006-07, and indicated that the Department intended to assess a fine of $27,500, the statutory penalty for such violations. The Company is confident its practices complied with applicable law and the Department’s guidance on applicable law, but in order to resolve the issue entered into the settlement agreement with the Department, pursuant to which the Company denied any liability or violation of law and agreed not to appeal the Department’s decision.

United States ex rel Oberg v. Nelnet, Inc. et al

As previously reported in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2010, on October 25, 2010 a settlement agreement was finalized to dismiss the qui tam action initiated by Jon H. Oberg on behalf of the United States of America in the U.S. District Court for the Eastern District of Virginia on September 21, 2007 against the Company and nine other student loan lenders. The amended complaint in the action had alleged that the defendants submitted false claims for payment to the Department in order to obtain special allowance payments on certain student loans at a rate of 9.5%, which the complaint alleged were in excess of amounts permitted by law, alleged that approximately $407 million in unlawful 9.5% special allowance payment claims were submitted by the Company, and sought a judgment against the defendants in the amount of three times the amount of damages sustained by the government in connection with the alleged overbilling by the defendants for special allowance payments, as well as civil penalties.

The settlement agreement, for which an agreement in principle was reached on August 13, 2010, provided for a $55.0 million settlement payment by the Company, and the Company paid this amount on November 3, 2010. The Company recorded a $55.0 million pre-tax charge during the third quarter of 2010 related to the settlement. The Company expects that the Internal Revenue Service (the “IRS”) will review the settlement agreement as part of its normal procedures for settlements with government agencies, to determine if the payments are deductible as ordinary and necessary business expenses. While the Company believes that the payments are fully deductible under the applicable tax law, the IRS may not agree with that position.

The Company believed it had strong defenses to the Oberg complaint, but entered into the settlement agreement in order to eliminate the uncertainty, distraction, and expense of a trial.

United States ex rel Vigil v. Nelnet, Inc. et al

On November 4, 2009, the Company was served with a Summons and Third Amended Complaint naming the Company as one of three defendants in an unrelated qui tam action brought by Rudy Vigil (the “Vigil Complaint”). This matter was filed under seal in the U.S. District Court for the District of Nebraska on July 11, 2007 and was unsealed on October 15, 2009 following the government’s notice that it declined to intervene in the matter. The Vigil Complaint, filed by a former employee of the Company, appeared to allege that the Company engaged in false advertising and offered prohibited inducements to student loan borrowers in order to increase the Company’s loan holdings, and subsequently submitted false claims to the Department of Education in order to obtain special allowance payments and default claim payments on such loans. The Company filed a Motion to Dismiss the Vigil Complaint, and on April 1, 2010, the Court granted the Motion, dismissing the Vigil Complaint with prejudice.

On April 7, 2010, Mr. Vigil filed a Notice of Appeal of the Court’s Order of Dismissal. On June 9, 2010 Mr. Vigil filed his appeal brief with the United States Court of Appeals for the Eighth Circuit (“Appeals Court”). The Company filed its responsive brief on July 8, 2010 and Mr. Vigil filed his reply brief on August 2, 2010. On December 14, 2010, the parties presented arguments in support of their briefs to the Appeals Court. The Court’s decision on the appeal is pending.

The Company believes it has strong defenses to the Vigil Complaint and will continue to vigorously contest the matter. Due to the uncertainty, costs, and risks inherent in the litigation process, the Company cannot predict the ultimate outcome or resolution.

Bais Yaakov of Spring Valley v. Peterson’s Nelnet, LLC

On January 5, 2011, Peterson’s Nelnet, LLC (“Peterson’s), a subsidiary of the Company, was served with a Summons and First Amended Complaint which had been filed on January 4, 2011 in the U.S. District Court for the District of New Jersey. The First Amended Complaint alleged that Peterson’s had sent to the Plaintiff in 2008 and 2009 six facsimiles advertising products or services offered by Peterson’s, that such facsimiles were not sent as the result of express invitation or permission granted by the plaintiff, and that Peterson’s had failed to include certain opt out language in those facsimile transmissions. The First Amended Complaint alleged that such acts violated the federal Telephone Consumer Protection Act (the “TCPA”), purportedly entitling the plaintiff to $500 per violation, trebled for willful violations for each of the six faxes. The Plaintiff further included allegations that Peterson’s had sent putative class members more than 10,000 faxes that violated the TCPA, amounting to more than $5.0 million in statutory penalty damages and more than $15.0 million if trebled for willful violations. The Plaintiff included allegations in the First Amended Complaint seeking to establish a class action for two different classes of plaintiffs: Class A, to whom Peterson’s sent unsolicited facsimile advertisements containing opt out notices similar to those contained in the faxes received by the Plaintiff; and Class B, to whom Peterson’s sent facsimile advertisements containing opt out notices similar to those contained in the faxes received by the Plaintiff. No class has yet been established or recognized by the court.

Peterson’s filed a Motion to Dismiss the Plaintiff’s First Amended Complaint on February 16, 2011. The Plaintiff has not yet responded to that Motion to Dismiss and no oral argument has been held on that motion.

The Company believes that Peterson’s has strong defenses to the complaint in this action and Peterson’s intends to contest the suit vigorously. Due to the uncertainty, costs, and risks inherent in the litigation process, the Company cannot predict the ultimate outcome or resolution.

ITEM 4. (REMOVED AND RESERVED)

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, 2011 was 746 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 2010 and 2009.

	2010								2009
	1st Quarter		2nd Quarter		3rd Quarter		4th Quarter		1st Quarter		2nd Quarter		3rd Quarter		4th Quarter
High	$	19.45	$	21.46	$	23.98	$	24.06	$	14.87	$	13.61	$	15.41	$	17.78
Low		14.54		17.72		17.76		21.35		4.25		5.51		12.44		12.15

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. On November 5, 2009, the Company’s Board of Directors voted to reinstate the quarterly dividend program effective for the fourth quarter of 2009. Accordingly, a dividend of $0.07 per share on the Company’s Class A and Class B common stock was paid during the fourth quarter of 2009 and during the first, second, and third quarters of 2010. In November 2010, the Nelnet Board of Directors declared a fourth quarter cash dividend on its outstanding shares of Class A common stock and Class B common stock of $0.49 per share. The dividend consisted of a quarterly dividend of $0.07 per share, and an additional $0.42 per share representing $0.07 per share for each of the six quarters in 2008 and 2009 during which the Company had suspended dividend payments to preserve capital during a volatile period in the market. The dividend was paid on December 15, 2010 to shareholders of record as of December 1, 2010.

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

Performance Graph

The following graph compares the change in the cumulative total shareholder return on the Company’s Class A common stock to that of the cumulative return of the 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, 2005 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	12/31/2005		12/31/2006		12/31/2007		12/31/2008		12/31/2009		12/31/2010

Nelnet, Inc.	$	100.00	$	67.26	$	31.71	$	35.97	$	43.43	$	61.73
Dow Jones U.S. Total Market Index		100.00		115.57		122.51		76.98		99.15		115.66
Dow Jones U.S. Financial Services Index		100.00		127.76		107.18		44.54		67.47		69.89

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 2010 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, 2010		2,601	$	23.38		1,658		4,608,815
November 1 - November 30, 2010		1,335		23.39		1,008		4,692,904
December 1 - December 31, 2010		1,756		22.98		692		2,984,952
Total		5,692	$	23.26		3,358

(1)

The total number of shares includes: (i) shares purchased pursuant to the 2006 Plan discussed in footnote (2) below; (ii) shares owned and tendered by employees to satisfy tax withholding obligations upon the vesting of restricted shares; and (iii) shares purchased pursuant to the 2006 ESLP discussed in footnote (3) below, of which there were none for the months of October, November, or December 2010. Shares of Class A common stock purchased pursuant to the 2006 Plan included 1,658 shares, 1,008 shares, and 692 shares in October, November, and December 2010, respectively, that had been issued to the Company’s 401(k) plan and allocated to employee participant accounts pursuant to the plan’s provisions for Company matching contributions in shares of Company stock, and were purchased by the Company from the plan pursuant to employee participant instructions to dispose of such shares. Shares of Class A common stock tendered by employees to satisfy tax withholding obligations included 943 shares, 327 shares, and 1,064 shares in October, November, and December 2010, respectively. Unless otherwise indicated, shares owned and tendered by employees to satisfy tax withholding obligations were purchased at the closing price of the Company’s shares on the date of vesting.

(2)

The Company’s Board of Directors authorized a stock repurchase program to repurchase up to a total of ten million shares of the Company’s Class A common stock (the “2006 Plan”). The 2006 Plan has an expiration date of May 24, 2012.

(3)

On May 25, 2006, the Company publicly announced that the shareholders of the Company approved an Employee Stock Purchase Loan Plan (the “2006 ESLP”) to allow the Company to make loans to employees for the purchase of shares of the Company’s Class A common stock either in the open market or directly from the Company. A total of $40 million in loans were authorized under the 2006 ESLP, and a total of one million shares of Class A common stock were reserved for issuance under the 2006 ESLP. Shares could be purchased directly from the Company or in the open market through a broker at prevailing market prices at the time of purchase, subject to any conditions or restrictions on the timing, volume, or prices of purchases as determined by the Compensation Committee of the Board of Directors and set forth in the Stock Purchase Loan Agreement with the participant. The 2006 ESLP provided that it would terminate as to future awards or loans on May 25, 2016. However on November 10, 2010, the Company’s Board of Directors terminated the 2006 ESLP effective as of December 31, 2010 such that no future awards or loans will be made under the 2006 ESLP. Such termination does not affect loans outstanding on the date of termination.

(4)

The maximum number of shares that may yet be purchased under the plans as of the end of October, November, and December 2010 is calculated below. There are no assurances that any additional shares will be repurchased under the 2006 Plan. As discussed in note (3) above, on November 10, 2010, the Company’s Board of Directors terminated the 2006 ESLP effective as of December 31, 2010 such that no future awards or loans will be made under the 2006 ESLP. Accordingly, as of December 31, 2010 no additional shares will be purchased under the 2006 ESLP.

As of	Maximum number of shares that may yet be purchased under the 2006 Plan (A)		Approximate dollar value of shares that may yet be purchased under the 2006 ESLP (B)		Closing price on the last trading day of the Company's Class A Common Stock (C)		(B / C) Approximate number of shares that may yet be purchased under the 2006 ESLP (D)		(A + D) Approximate number of shares that may yet be purchased under the 2006 Plan and 2006 ESLP
October 31, 2010		2,986,652	$	36,450,000	$	22.47		1,622,163		4,608,815
November 30, 2010		2,985,644		36,450,000		21.35		1,707,260		4,692,904
December 31, 2010		2,984,952		—		23.69		—		2,984,952

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. 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 Decmber 31,
	2010			2009			2008			2007			2006
	(dollars in thousands, except share data)
Operating Data:
Revenue:
Net interest income before provision for loan losses	$	371,071			235,345			187,892			244,614			308,459
Loan and guaranty servicing revenue		139,636			108,747			99,942			122,380			121,593
Tuition payment processing and campus commerce revenue		59,824			53,894			48,155			42,766			34,784
Enrollment services revenue		139,897			119,397			112,405			103,905			55,361
Software services revenue		18,948			21,164			24,115			27,764			15,890
Other income		31,310			26,469			22,775			30,423			19,405
Derivative settlements, net		(14,264	)		39,286			55,657			18,677			23,432
Total revenue		746,422			604,302			550,941			590,529			578,924

Gain (loss) on sale of loans and debt repurchases, net		78,631			76,831			(51,414	)		3,597			16,133

Operating expenses:
Salaries and benefits		166,011			151,285			177,724			230,450			214,676
Litigation settlement		55,000			—			—			—			—
Impairment expense		26,599			32,728			18,834			49,504			21,488
Cost to provide enrollment services		91,647			74,926			64,965			45,408			19,798
Other operating expenses		164,229			146,694			179,091			210,247			190,317
Total operating expenses		503,486			405,633			440,614			535,609			446,279

Income tax expense		113,420			76,573			17,896			21,716			36,237
Income from continuing operations		189,034			139,125			26,844			35,429			65,916
Income (expense) from discontinued operations		—			—			1,818			(2,575	)		2,239
Net income		189,034			139,125			28,662			32,854			68,155
Earnings (loss) per common share:
Basic:
Continuing operations	$	3.82			2.79			0.54			0.71			1.23
Discontinued operations		—			—			0.04			(0.05	)		0.04
Net earnings		3.82			2.79			0.58			0.66			1.27
Diluted:
Continuing operations	$	3.81			2.78			0.54			0.71			1.23
Discontinued operations		—			—			0.04			(0.05	)		0.04
Net earnings		3.81			2.78			0.58			0.66			1.27

Dividends per common share	$	0.70			0.07			0.07			0.28			—

Other Data:
Revenue from fee-based segments as a percentage of total revenue (excluding
fixed rate floor income and Corporate Activity and Overhead)		57.8	%		64.0	%		52.7	%		47.7	%		42.5	%
Fixed rate floor income	$	132,243			145,098			37,457			10,347			30,234
Core student loan spread		1.48	%		1.18	%		0.99	%		1.13	%		1.42	%
Origination and acquisition volume (a)	$	4,202,164			2,779,873			2,809,082			5,152,110			6,696,118
Student loans serviced (at end of period) (b)		61,477,651			37,549,563			35,888,693			33,817,458			30,593,592

	As of December 31,
		2010		2009		2008		2007		2006
	(dollars in thousands, except share data)
Balance Sheet Data:
Cash and cash equivalents	$	283,801		338,181		189,847		111,746		102,343
Student loans receivables, net		24,033,001		23,926,957		25,413,008		26,736,122		23,789,552
Goodwill and intangible assets		155,830		197,255		252,232		277,525		353,008
Total assets		25,893,892		25,876,427		27,854,897		29,162,783		26,796,873
Bonds and notes payable		24,672,472		24,805,289		26,787,959		28,115,829		25,562,119
Shareholders' equity		906,633		784,563		643,226		608,879		671,850
Tangible shareholders' equity		750,803		587,308		390,994		331,354		318,842
Book value per common share		18.75		15.73		13.05		12.31		12.79
Tangible book value per common share		15.53		11.77		7.93		6.70		6.07

Ratios:
Shareholders' equity to total assets		3.50	%	3.03	%	2.31	%	2.09	%	2.51	%

(a)

Initial loans originated or acquired through various channels, including originations through the direct channel; acquisitions through the branding partner channel, the forward flow channel, and the secondary market (spot purchases); and loans acquired in portfolio and business acquisitions.

(b)

The student loans serviced does not include loans serviced by EDULINX for all periods presented. The Company sold EDULINX in May 2007. As a result of this transaction, EDULINX is reported as discontinued operations.

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, 2010, 2009, and 2008. All dollars are in thousands, except share amounts, unless otherwise noted.)

The following discussion and analysis provides information that the Company’s management believes is relevant to an assessment and understanding of the consolidated results of operations and financial condition of the Company. The discussion should be read in conjunction with the Company’s consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2010.

Reclassifications

Certain amounts previously reported have been reclassified to conform to the current period presentation. The reclassifications were made to change the income statement presentation to provide the users of the financial statements additional information related to the operating results of the Company. These reclassifications include:

Reclassifying the Company’s gains on debt repurchases to “gain on sale of loans and debt repurchases, net” which were previously included in “other income.”

Reclassifying costs incurred by the Company related to restructuring activities to “restructure expense,” which were previously included in “salaries and benefits” and “occupancy and communications.”

The reclassifications had no effect on consolidated net income or consolidated assets or liabilities.

OVERVIEW

The Company is an innovative education services company focused primarily on providing fee-based processing services and quality education-related products and services in four core areas: loan financing, loan servicing, payment processing, and enrollment services (education planning).These products and services help students and families plan, prepare, and pay for their education and make the administrative and financial processes more efficient for schools and financial organizations. In addition, the Company earns net interest income on a portfolio of federally insured student loans.

The Company has certain business objectives in place that include:

Continue to grow and diversify fee-based revenue

Manage operating costs

Maximize the value of existing portfolio

Use liquidity to capitalize on market opportunities

Recent Developments

Litigation Settlement

During 2010, the Company entered into an agreement to settle all claims associated with the previously disclosed “qui tam” action brought by Jon H. Oberg on behalf of the United States of America. As a result of the settlement, the Company recorded a $55.0 million pre-tax charge during the third quarter of 2010. On November 3, 2010, the Company paid the $55.0 million settlement. The Company expects that the Internal Revenue Service (the “IRS”) will review the settlement agreement as part of its normal procedures for settlements with government agencies, to determine if the payments are deductible as ordinary and necessary business expenses. While the Company believes that the payments are fully deductible under applicable tax law, the IRS may not agree with that position.

The Company believed it had strong defenses to the Oberg Complaint, but entered into the settlement agreement in order to eliminate the uncertainty, distraction, and expense of a trial. See Part I, Item 3, “Legal Proceedings,” for additional information related to this settlement.

Legislation – FFELP

As a result of the Reconciliation Act of 2010, the Company no longer originates new FFELP loans. As such, subsequent to 2010, the Company will no longer recognize a gain from originating and subsequently selling FFELP loans to the Department under the Department’s Purchase Program. During 2010 and 2009, the Company recognized pre-tax gains of $33.8 million and $36.6 million, respectively, from selling $2.1 billion of FFELP loans to the Department during each of these years under the Purchase Program.

In addition, as a result of the Reconciliation Act of 2010, net interest income on the Company’s existing FFELP loan portfolio, as well as fee-based revenue from guarantee and third party FFELP servicing and education loan software licensing and consulting fees related to the FFEL Program, will decline over time as the Company’s and the Company’s customers’ FFELP loan portfolios are paid down. During 2010 and 2009, the Company recognized approximately $377 million and approximately $247 million, respectively, of net interest income on its FFELP loan portfolio; approximately $101 million and approximately $100 million, respectively, in guarantee and third party FFELP servicing revenue; and approximately $8 million and approximately $7 million, respectively, in education loan software licensing and consulting fees related to the FFEL Program.

Continue to Grow and Diversify Fee-Based Revenue

The Company has expanded products and services generated from businesses that are not dependent upon the FFEL Program, thereby reducing legislative and political risk related to the education lending industry. Revenues from these businesses are primarily generated from products and services offered in the Company’s Tuition Payment Processing and Campus Commerce and Enrollment Services operating segments. In addition, in September 2009, the Company began servicing federally-owned student loans for the Department. The amount of federally-owned student loans originated through the Federal Direct Loan Program is expected to increase substantially, which will lead to an increase in servicing volume and related revenue for the Company. As shown below, revenue earned from the Company’s fee-based operating segments has grown $53.6 million (17.6%) in 2010 compared to 2009.

	Year ended December 31,
	2010		2009		$ Change		% Change
Student Loan and Guaranty Servicing (a)	$	159,419		132,193		27,226		20.6	%
Tuition Payment Processing and Campus Commerce		59,856		53,956		5,900		10.9
Enrollment Services		139,897		119,397		20,500		17.2

Total revenue from fee-based businesses	$	359,172		305,546		53,626		17.6	%

(a) The Student Loan and Guaranty Servicing operating segment included $33.4 million and $7.8 million of revenue earned from rehabilitation collections on defaulted loans in 2010 and 2009, respectively.

Student Loan and Guaranty Servicing – Expected Revenue Growth

In June 2009, the Company was one of four private sector companies awarded a student loan servicing contract by the Department to provide additional servicing capacity for loans owned by the Department. These loans include Federal Direct Loan Program loans originated directly by the Department and FFEL Program loans purchased by the Department. The contract spans five years, with one five-year renewal at the option of the Department. In September 2009, the Department began assigning FFEL purchased loans to the four servicers. Beginning with the second year of servicing in June 2010, the Department began allocating new loan volume originated under the Federal Direct Loan Program among the four servicers based on five equally weighted performance metrics.

Two performance metrics measure the success of default prevention efforts as reflected by the percentage of borrowers and percentage of dollars in each servicer’s portfolio that go into default.

The Student Loan and Guaranty Servicing operating segment also develops student loan servicing software, which is used internally by the Company and also licensed to third party student loan holders and servicers. In addition, the Company is offering a hosted servicing software solution to third parties that can be used by third parties to service various types of student loans including Federal Direct Program and FFEL Program loans. Currently, the Company has agreements with third parties, including a contract with an incumbent Direct Loan Program service provider, to add more than 12 million borrowers to its hosted servicing software solution by the end of 2011.

Manage Operating Costs

As shown below, excluding the litigation settlement, the cost to provide enrollment services, restructure and impairment charges, and collection costs related to loan rehabilitation revenue, operating expenses increased $19.0 million (6.6%) in 2010 compared with 2009. This increase is due to incurring additional costs to support the increase in revenue at the Company’s fee-based operating segments. A significant portion of the increase is due to an increase in operating costs in the Student Loan and Guaranty Servicing operating segment as a direct result of supporting the government servicing volume increase.

	Year ended December 31,
	2010		2009		$ Change		% Change

Salaries and benefits	$	166,011		151,285		14,726		9.7	%
Other expenses (a)		138,868		134,597		4,271		3.2
Operating expenses, excluding the litigation settlement, the cost
to provide enrollment services, restructure and impairment charges,
and collection costs related to loan rehabilitation revenue		304,879		285,882	$	18,997		6.6	%
Litigation settlement		55,000		—
Cost to provide enrollment services		91,647		74,926
Restructure expense		6,020		7,982
Impairment expense		26,599		32,728
Collection costs related to loan rehabilitation revenue (b)		19,341		4,115
Total operating expenses	$	503,486		405,633

(a)

Excludes the litigation settlement, the cost to provide enrollment services, restructure and impairment charges, and collection costs related to loan rehabilitation revenue.

(b)

The Company incurred collection costs directly related to revenue earned from rehabilitation loans. These costs are included in “professional and other services” in the consolidated statements of income and are shown separately in the above table for comparability purposes for the periods shown.

Impairment charges

Included in operating expenses in 2010 is an impairment charge related to the impairment of goodwill. As a result of the 2010 annual goodwill impairment test, the Company recorded impairment charges at two reporting units included in the Enrollment Services operating segment. These charges consisted of $23.9 million related to its interactive marketing business and $2.7 million related to its list marketing business. Recent legislation and related public scrutiny has negatively affected current and projected enrollments at for-profit schools. These factors may impact future revenue, operating margins, and cash flows related to the Company’s interactive marketing business. The Company’s list marketing business continues to be negatively affected by the economic recession and deterioration of the direct-to-consumer market.

Maximize the Value of Existing Portfolio

Fixed rate floor income

Loans originated prior to April 1, 2006 generally earn interest at the higher of a floating rate based on the Special Allowance Payment or the 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 earns additional spread income that it refers to as floor income. For loans where the borrower rate is fixed to term, the Company earns floor income for an extended period of time, which the Company refers to as fixed rate floor income.

(a)

The primary difference between variable student loan spread and core student loan spread is fixed rate floor income. A summary of fixed rate floor income and its contribution to core spread follows.

	Year ended December 31,
	2010			2009

Fixed rate floor income, gross	$	151,861			147,107

Derivative settlements (a)		(19,618	)		(2,009	)

Fixed rate floor income, net	$	132,243			145,098

Fixed rate floor income
contribution to spread, net		0.52	%		0.58	%

(a) Includes settlement payments on derivatives used to hedge student loans earning fixed rate floor income.

The high levels of fixed rate floor income earned during 2010 and 2009 are due to historically low interest rates. If interest rates remain low, the Company anticipates continuing to earn significant fixed rate floor income in future periods. See Item 7A, “Quantitative and Qualitative Disclosures about Market Risk – Interest Rate Risk,” which provides additional detail on the Company’s portfolio earning fixed rate floor income and the derivatives used by the Company to hedge these loans.

Future Cash Flow from Portfolio

As of December 31, 2010, based on cash flow models 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 its portfolio to be approximately $1.61 billion as detailed below.

The forecasted cash flow presented below includes all loans currently funded in asset-backed securitizations. As of December 31, 2010, the Company had $21.0 billion of loans included in asset-backed securitizations, which represented 88 percent of its total FFELP student loan portfolio classified as held for investment. The forecasted cash flow does not include cash flows that the Company expects to receive related to loans funded through the Department’s Conduit Program and other warehouse facilities or loans originated and/or acquired subsequent to December 31, 2010.

(a)

The Company uses various assumptions, including prepayments and future interest rates, when preparing its cash flow forecast. These assumptions are further discussed below.

Prepayments: The primary variable in establishing a life of loan estimate is the level and timing of prepayments. Prepayment rates equal the percentage of loans that prepay annually as a percentage of the beginning of period balance, net of scheduled principal payments. A number of factors can affect estimated prepayment rates, including the level of consolidation activity and default rates. Should any of these factors change, management may revise its assumptions, which in turn would impact the projected future cash flow. The Company’s cash flow forecast above assumes prepayment rates that are generally consistent with those utilized in recent asset-backed securities transactions. If management used a prepayment rate assumption two times greater than what was used to forecast the cash flow, the cash flow forecast would be reduced by approximately $330 million to $390 million.

Interest rates: The Company funds the majority of its student loans with three-month LIBOR (“LIBOR”) indexed floating rate securities. Meanwhile, the interest earned on the Company’s student loan assets are indexed primarily to a commercial paper rate (“CP”). The different interest rate characteristics of the Company’s loan assets and liabilities funding these assets result in basis risk. The Company’s cash flow forecast assumes LIBOR will exceed CP by 12 basis points for the life of the portfolio, which approximates the historical relationship between these indices. If the forecast is computed assuming a spread of 24 basis points between CP and LIBOR for the life of the portfolio, the cash flow forecast would be reduced by approximately $100 million to $140 million.

The Company uses the current forward interest rate yield curve to forecast cash flows. A change in the forward interest rate curve would impact the future cash flows generated from the portfolio. An increase in future interest rates will reduce the amount of fixed rate floor income the Company is currently receiving. The Company attempts to mitigate the impact of a rise in short-term rates by hedging interest rate risks. As of December 31, 2010, the net fair value of the Company’s interest rate derivatives used to hedge loans earning fixed rate floor income was a negative $4.8 million. See Item 7A, “Quantitative and Qualitative Disclosures about Market Risk — Interest Rate Risk.”

FFELP 2009-2010 Academic Year Originations

During 2010, the Company recognized a pre-tax gain of $33.8 million when it sold $2.1 billion of 2009-2010 academic year loans to the Department under the Department’s Purchase Program.

Use Liquidity to Capitalize on Market Opportunities

The Company has used and will continue to use its improved liquidity position to capitalize on market opportunities, including debt repurchases, student loan purchases, and stock repurchases, as discussed further below.

Debt Repurchases

During 2010, the Company used operating cash to repurchase outstanding debt as summarized below. Due to improvements in the capital markets, the opportunities for the Company to repurchase debt at less than par are becoming more limited.

	Year ended December 31, 2010
	Notional amount		Purchase price		Gain

Asset-backed securities	$	690,750		650,789		39,961

Junior Subordinated Hybrid Securities		34,995		30,073		4,922

Total	$	725,745		680,862		44,883

Student Loan Purchases

During 2010, the Company purchased $2.7 billion (par value) of student loans. The Company believes there will be additional opportunities to purchase FFELP loan portfolios and/or expand its current level of guarantee and third party FFELP servicing volume from current FFELP participants looking to modify their involvement and/or exit the market.

Stock Repurchases

During 2010, the Company repurchased and retired 1.9 million shares of its Class A common stock for $39.8 million (average price per share of $21.33).

Subsequent Use of Liquidity – Unsecured Debt

Subsequent to December 31, 2010, the Company used operating cash to repurchase $62.6 million (par value) of Junior Subordinated Hybrid Securities for $55.7 million. The Company recognized a pre-tax gain of $6.9 million as a result of this debt repurchase, which will be included in the Company’s operating results for the quarter ending March 31, 2011.

In addition, subsequent to December 31, 2010, the Company paid $325.0 million on its unsecured line of credit. After making these payments, as of February 28, 2011, the outstanding balance on the Company’s unsecured line of credit was $125.0 million.

RESULTS OF OPERATIONS

The Company’s operating results are primarily driven by the performance of its existing portfolio and the revenues generated by its fee-based businesses and the costs to provide such services. The performance of the Company’s portfolio is driven by net interest income 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 and discounts, 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 consolidated statements of income. The amortization of debt issuance costs is included in interest expense on the Company’s consolidated 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 or SAP formula set by the Department of Education 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. 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.

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 investments 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 used by the Company to fund general business operations and certain asset and business acquisitions.

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 collection 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 appropriate 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.

The allowance for the federally insured loan portfolio is based on periodic evaluations of the Company’s loan portfolios considering loans in repayment versus those in a nonpaying status, delinquency status, trends in defaults in the portfolio based on Company and industry data, past experience, trends in student loan claims rejected for payment by guarantors, changes to federal student loan programs, current economic conditions, and other relevant factors. The federal government 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. Student loans disbursed prior to October 1, 1993 are fully insured.

In determining the appropriateness 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, delinquency status, type of program, trends in defaults in the portfolio based on Company and industry data, past experience, current economic conditions, and other relevant factors. The Company places a non-federally insured loan on nonaccrual status when the collection of principal and interest is 30 days past due 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 revenue from other sources as summarized below.

Student Loan and Guaranty Servicing Revenue – 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.

Tuition Payment Processing and Campus Commerce Revenue – Tuition payment processing and campus commerce revenue primarily includes actively managed tuition payment solutions and online payment processing. Fees for these services are recognized over the period in which services are provided to customers.

Enrollment Services Revenue – Enrollment services revenue primarily consists of the following items:

Interactive marketing – Interactive marketing revenue is derived primarily from fees which are earned through the delivery of qualified inquiries or clicks. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. Delivery is deemed to have occurred at the time a qualified inquiry or click is delivered to the customer provided that no significant obligations remain. From time to time, the Company may agree to credit certain inquiries or clicks if they fail to meet the contractual or other guidelines of a particular client. The Company has established a sales reserve based on historical experience. To date, such credits have been immaterial and within management’s expectations.

For a portion of its interactive marketing revenue, the Company has agreements with providers of online media or traffic (“Publishers”) used in the generation of inquiries or clicks. The Company receives a fee from its customers and pays a fee to Publishers either on a cost per inquiry, cost per click, or cost per number of impressions basis. The Company is the primary obligor in the transaction. As a result, the fees paid by the Company’s customers are recognized as revenue and the fees paid to its Publishers are included in “cost to provide enrollment services” in the Company’s consolidated statements of income.

List marketing - Revenue from the sale of lists is generally earned and recognized, net of estimated returns, upon delivery.

Publishing services - Revenue from the sale of print products is generally earned and recognized, net of estimated returns, upon shipment or delivery.

Resource centers – Resource centers services include online courses, scholarship search and selection data, career planning, and online information about colleges and universities. The majority of these services are sold based on subscriptions and/or are performance based. Revenues from sales of subscription and performance based services are recognized ratably over the term of the contract as earned. Subscription and performance based revenues received or receivable in advance of the delivery of services is included in deferred revenue.

Software Services Revenue – Software services revenue 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; collection costs related to rehabilitation revenue; the cost to provide enrollment services; costs incurred to provide tuition payment processing, campus commerce, resource center and list marketing services, and 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. The cost to provide enrollment services, as discussed previously, consists of costs incurred to provide interactive marketing and publishing and editing services in the Company’s Enrollment Services operating segment. Operating expenses also includes impairment charges related to the impairment of goodwill and certain intangible assets and employee termination benefits, lease termination costs, and the write-down of certain assets related to the Company’s restructuring initiatives. Operating expenses in 2010 also includes a litigation settlement charge.

Summary and Comparison of Operating Results

Net Interest Income (net of settlements on derivatives)

	Years ended December 31,										Years ended December 31,
						Change								Change
	2010			2009		$			%			2009	2008	$			%
Interest income:
Loan interest	$	598,675			609,920		(11,245	)	(1.8	)%	$	609,920	1,176,383		(566,463	)	(48.2	)%
Investment interest		5,256			10,287		(5,031	)	(48.9	)		10,287	37,998		(27,711	)	(72.9	)
Total interest income		603,931			620,207		(16,276	)	(2.6	)		620,207	1,214,381		(594,174	)	(48.9	)
Interest expense:
Interest on bonds and notes payable		232,860			384,862		(152,002	)	(39.5	)		384,862	1,026,489		(641,627	)	(62.5	)
Net interest income		371,071			235,345		135,726		57.7			235,345	187,892		47,453		25.3
Provision for loan losses		22,700			29,000		(6,300	)	(21.7	)		29,000	25,000		4,000		16.0
Net interest income after provision for loan losses		348,371			206,345		142,026		68.8			206,345	162,892		43,453		26.7

Derivative settlements, net (a)		(14,264	)		39,286		(53,550	)	(136.3	)		39,286	55,657		(16,371	)	(29.4	)

Net interest income after provision for loan losses (net of settlements on derivatives)	$	334,107			245,631		88,476		36.0	%	$	245,631	218,549		27,082		12.4	%

(a)

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 the majority 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. Derivative settlements for each applicable period should be evaluated with the Company’s net interest income.

Net interest income after provision for loan losses, net of settlements on derivatives, changed during the years ended December 31, 2010, 2009, and 2008 as follows:

	Year ended December 31,											Year ended December 31,
							Change										Change
	2010			2009			$			%			2009		2008		$			%


Student loan interest margin, net of settlements on derivatives (a)	$	241,199			140,679			100,520		71.5	%	$	140,679		167,892			(27,213	)	(16.2	)%

Fixed rate floor income, net of settlements on derivatives (b)		132,243			145,098			(12,855	)	(8.9	)		145,098		37,457			107,641		287.4

Variable-rate floor income, net of settlements on derivatives (c)		—			7,502			(7,502	)	(100.0	)		7,502		42,325			(34,823	)	(82.3	)
Investment interest (d)		5,256			10,287			(5,031	)	(48.9	)		10,287		37,998			(27,711	)	(72.9	)
Corporate debt interest expense (e)		(21,891	)		(28,935	)		7,044		(24.3	)		(28,935	)	(42,123	)		13,188		(31.3	)
Provision for loan losses (f)		(22,700	)		(29,000	)		6,300		(21.7	)		(29,000	)	(25,000	)		(4,000	)	16.0

Net interest income after provision for loan losses (net of settlements on derivatives)	$	334,107			245,631			88,476		36.0	%	$	245,631		218,549			27,082		12.4	%

(a)

Changes in student loan interest margin, net of settlements on derivatives, are due to changes in the variable student loan spread. Variable student loan spread was to 0.96% in 2010, 0.63% in 2009, and 0.91% in 2008. See “Asset Generation and Management Operating Segment – Results of Operations – Student Loan Spread Analysis” included in this Item 7 for further discussion.

(b)

The Company has a portfolio of student loans that are earning interest at a fixed borrower rate which exceeds the statutorily defined variable lender rate generating fixed rate floor income. Due to lower interest rates in 2010 and 2009 as compared to 2008, the Company received additional fixed rate floor income on a portion of its student loan portfolio. See Item 7A “Quantitative and Qualitative Disclosures about Market Risk – Interest Rate Risk” for additional information.

(c)

Loans that reset annually on July 1 can generate excess spread income compared with the rate based on the special allowance payment formula in declining interest rate environments. The Company refers to this additional income as variable-rate floor income. A portion of the Company’s portfolio was earning variable-rate floor income during 2008 and 2009 as a result of declining interest rates during these periods. No variable-rate floor income was earned during 2010.

(d)

Investment interest decreased in 2010 compared to 2009 and in 2009 compared to 2008 due to lower interest rates and a decrease in average cash held.

(e)

Corporate debt interest expense includes interest expense incurred by the Company on its 5.125% Senior Notes due 2010 (the “Senior Notes”), Junior Subordinated Hybrid Securities, and its $750 million unsecured line of credit.

Corporate debt interest expense decreased in 2010 compared to 2009 due to a reduction in debt outstanding due to the purchase of certain Senior Notes and Junior Subordinated Hybrid Securities and the maturity of the Senior Notes on June 1, 2010. During the first, second, and third quarters of 2009, the Company purchased $34.9 million, $35.5 million, and $137.9 million, respectively, of its Senior Notes. The remaining balance outstanding on the Senior Notes, $66.7 million, was paid on June 1, 2010. In the third quarter of 2010, the Company purchased $35.0 million of its Junior Subordinated Hybrid Securities.

Corporate debt interest expense decreased in 2009 compared to 2008 due to the purchase of $208.3 million of Senior Notes in 2009 as described above. In addition, interest expense decreased as a result of a decrease in interest rates. The weighted average interest rate and notes outstanding on the Company’s unsecured line of credit was 0.73% and $691.5 million, respectively, as of December 31, 2009 compared to 1.25% and $691.5 million, respectively, as of December 31, 2008.

(f)

The provision for loan losses represents the periodic expense of maintaining an allowance sufficient to absorb losses inherent in the Company’s portfolio of loans. The provision for loan losses recognized by the Company was larger during 2009 compared with 2010, primarily due to the provision related to the Company’s non-federally insured student loan portfolio. During 2009, the Company increased its allowance for non-federally insured loans due to management's projected performance of the portfolio in light of economic conditions. As of December 31, 2010, the dollar amount of the Company’s non-federally insured student loan portfolio, including those loans in repayment and loans delinquent, decreased from the same period a year ago. These decreases, as well as continued aging of the portfolio, resulted in less provision expense recognized by the Company during 2010 as compared to 2009 related to the Company’s non-federally insured portfolio.

Other Income

	Year ended December 31,											Year ended December 31,
							Change										Change
	2010			2009			$			%			2009		2008		$			%

Loan and guaranty servicing revenue (a)	$	139,636			108,747			30,889		28.4	%	$	108,747		99,942			8,805		8.8	%
Tuition payment processing and campus commerce revenue (b)		59,824			53,894			5,930		11.0			53,894		48,155			5,739		11.9
Enrollment services revenue (c)		139,897			119,397			20,500		17.2			119,397		112,405			6,992		6.2
Software services revenue (d)		18,948			21,164			(2,216	)	(10.5	)		21,164		24,115			(2,951	)	(12.2	)
Other income (e)		31,310			26,469			4,841		18.3			26,469		22,775			3,694		16.2
Gain (loss) on sale of loans and debt repurchases, net (f)		78,631			76,831			1,800		2.3			76,831		(51,414	)		128,245		(249.4	)
Derivative market value, foreign currency, and put option adjustments (g)		3,587			(30,802	)		34,389		(111.6	)		(30,802	)	10,827			(41,629	)	(384.5	)
Derivative settlements, net (h)		(14,264	)		39,286			(53,550	)	(136.3	)		39,286		55,657			(16,371	)	(29.4	)
Total other income	$	457,569			414,986			42,583		10.3	%	$	414,986		322,462			92,524		28.7	%

(a)

“Loan and guaranty servicing revenue” increased in 2010 compared with 2009 due to an increase in loan servicing revenue as a result of servicing loans for the Department, as well as an increase in guaranty servicing revenue as a result of recognizing $33.4 million in revenue related to rehabilitation collections on defaulted loans in 2010 compared with $7.8 million in 2009. This additional revenue was offset by a decrease in external FFELP servicing revenue due to the loss of servicing volume from third party customers as a result of these customers selling their portfolios to the Company or the Department under the Purchase Program.

“Loan and guaranty servicing revenue” increased in 2009 compared with 2008 primarily due to an increase in FFELP loan servicing revenue. This increase was due to an increase in servicing volume and the receipt of $6.8 million in conversion fees associated with the loss of life of loan servicing and transfer related activities for third party clients that sold loans to the Department. See Item 7 under “Student Loan and Guaranty Servicing Operating Segment – Results of Operations” for additional information.

(b)

“Tuition payment processing and campus commerce revenue” increased in each 2010 compared to 2009 and 2009 compared to 2008 due to an increase in the number of managed tuition payment plans and an increase in campus commerce transactions processed in each of these periods as discussed in this Item 7 under “Tuition Payment Processing and Campus Commerce Operating Segment – Results of Operations.”

(c)

“Enrollment services revenue” increased in each 2010 compared to 2009 and 2009 compared to 2008 due to an increase in interactive marketing revenue offset by a reduction in revenue related to other enrollment products and services as further discussed in this Item 7 under “Enrollment Services Operating Segment – Results of Operations.”

(d)

“Software services revenue” decreased in each 2010 compared to 2009 and 2009 compared to 2008 due to 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.

(e)

The following table summarizes the components of “other income”.

	Year ended December 31,
	2010		2009		2008

Borrower late fee income	$	12,390		11,305		11,515
529 Plan administration (1)		5,744		3,409		4,579
Gain on sale of equity method investment		—		3,500		—
Other		13,176		8,255		6,681

Other income	$	31,310		26,469		22,775

(1)

The Company provided certain 529 Plan administration services to the College Savings Plan of Nebraska through a contract with Union Bank, as the program manager. Effective in December 2010, Union Bank was no longer the program manager for the College Savings Plan of Nebraska, which will significantly reduce 529 Plan administration fees earned by the Company in future periods.

(f) “Gain (loss) on sale of loans and debt repurchases, net” includes the following:

	Year ended December 31, 2010						Year ended December 31, 2009						Year ended December 31, 2008
	Notional amount		Purchase price		Gain		Notional amount		Purchase price		Gain		Notional amount		Purchase price		Gain
Gains on debt repurchases:
Asset-backed securities	$	690,750		650,789		39,961	$	348,155		319,627		28,528	$	—		—		—
Junior Subordinated Hybrid Securities		34,995		30,073		4,922		1,750		350		1,400		—		—		—
5.125% Senior Notes due 2010		—		—		—		208,284		196,529		11,755		—		—		—

	$	725,745		680,862		44,883	$	558,189		516,506		41,683	$	—		—		—
Gain (loss) on sale of loans, net						33,748						35,148						(51,414	)

Gain (loss) on sale of loans and debt repurchases, net					$	78,631					$	76,831					$	(51,414	)

(g)

The change in “derivative market value, foreign currency, and put option adjustments” is primarily the result of the change in the fair value of the Company’s derivative portfolio and transaction gains/losses resulting from the re-measurement of the Company’s Euro-denominated bonds to U.S. dollars. These changes are summarized below.

	Year ended December 31,
	2010	2009	2008

Change in fair value of derivatives - (expense) income