8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported)

February 27, 2014

NELNET, INC.

(Exact name of registrant as specified in its charter)

Nebraska	001-31924	84-0748903
(State or other jurisdiction of incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)

121 South 13th Street Lincoln, Nebraska	68508
(Address of principal executive offices)	(Zip Code)

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

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act

(17 CFR 240.14d-2(b))

[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act

(17 CFR 240.13e-4(c))

Item 2.02 Results of Operations and Financial Condition.

On February 27, 2014, Nelnet, Inc. (the “Company”) issued a press release with respect to its financial results for the quarter ended December 31, 2013. A copy of the press release is furnished as Exhibit 99.1 to this report. In addition, a copy of the supplemental financial information for the quarter ended December 31, 2013, which was made available on the Company's website at www.nelnetinvestors.com on February 27, 2014 in connection with the press release, is furnished as Exhibit 99.2 to this report.

The above information and Exhibits 99.1 and 99.2 shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”), nor shall such information and Exhibits be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing. In addition, information on the Company's website is not incorporated by reference into this report and should not be considered part of this report.

Certain statements contained in the exhibits furnished with this report may be considered forward looking in nature and are subject to various risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company's actual results may vary materially from those anticipated, estimated, or expected. Among the key risks and uncertainties that may have a direct bearing on the Company's future operating results, performance, or financial condition expressed or implied by the forward-looking statements are the matters discussed in the Risk Factors section of the Company's Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on February 27, 2014. Although the Company may from time to time voluntarily update its prior forward-looking statements, it disclaims any commitment to do so except as required by securities laws.

Item 9.01 Financial Statements and Exhibits.

(d)Exhibits. The following exhibits are furnished as part of this report:

Exhibit No.	Description
99.1	Press Release dated February 27, 2014 - “Nelnet Reports Fourth Quarter 2013 Results”
99.2	Supplemental Financial Information for the Quarter Ended December 31, 2013

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Dated: February 27, 2014

NELNET, INC.

By:/s/ JAMES D. KRUGER

Name: James D. Kruger

Title: Chief Financial Officer

EX-99.1

Nelnet Reports Fourth Quarter 2013 Results

• GAAP net income $1.52 per share, $1.51 per share excluding adjustments

• 16 percent increase in revenue from Student Loan and Guaranty Servicing segment

• Net student loan assets of $25.9 billion

LINCOLN, Neb., February 27, 2014-Nelnet (NYSE: NNI) today reported GAAP net income of $70.5 million, or $1.52 per share, for the fourth quarter of 2013, compared with GAAP net income of $56.6 million, or $1.20 per share, for the same period a year ago.

Excluding derivative market value and foreign currency adjustments, net income was $70.1 million, or $1.51 per share, for the fourth quarter of 2013, compared with $48.1 million, or $1.02 per share, for the same period in 2012. The company reported income from derivative market value and foreign currency adjustments of $0.4 million after tax, or $0.01 per share, for the fourth quarter of 2013, compared with income of $8.5 million after tax, or $0.18 per share, for the fourth quarter of 2012. 

The increase in net income in 2013 compared with 2012 was due to increases in net interest income earned on the company’s student loan portfolio and increases in income from the company's fee-based businesses and other investments.

"2013 was a record financial year for us; we achieved the highest earnings in our history," said Jeff Noordhoek, Nelnet chief executive officer. "We continue to deliver consistent results, grow and diversify around our core businesses, and purchase student loan portfolios. In 2014, our focus will be on effectively deploying capital and making investments in core businesses and diversification."

Nelnet operates four primary business segments, earning interest income on student loans in its Asset Generation and Management operating segment, and fee-based revenue in its Student Loan and Guaranty Servicing, Tuition Payment Processing and Campus Commerce, and Enrollment Services operating segments.

Asset Generation and Management

A substantial portion of Nelnet's student loans are financed for the life of the loan at terms the company has estimated (as of December 31, 2013) will generate significant undiscounted future cash flow of approximately $2.17 billion. During the fourth quarter of 2013, the company purchased $1.9 billion of student loans. As of December 31, 2013, net student loan assets were $25.9 billion.

Historically low interest rates are continuing to provide an opportunity for the company to generate substantial near-term value and cash flow from its student loan portfolio. For the fourth quarter of 2013, Nelnet reported net interest income of $108.7 million, compared with $90.6 million for the same period a year ago. Net interest income included $38.8 million and $35.5 million of fixed rate floor income in the fourth quarters of 2013 and 2012, respectively.   Core student loan spread increased to 1.56 percent for the fourth quarter of 2013, compared with 1.44 percent for the same period in 2012. This increase was due to the improved relationship between the interest rate indices governing what the company earns on its loans (one-month LIBOR) and what the company pays to fund such loans (three-month LIBOR).

Fee-Based Operating Segments

The company reported total revenue from its fee-based operating segments in the fourth quarters of 2013 and 2012 of $103.9 million and $98.2 million, respectively. Net income from fee-based operating segments was $12.0 million for the fourth quarter of 2013, up from $9.0 million for the same period in 2012. Certain intangible assets within the company's fee-based operating segments became fully amortized in 2012, which improved net income by $2.9 million during the fourth quarter of 2013, compared with the same period in 2012.

Revenue from the company's Student Loan and Guaranty Servicing segment increased 16 percent, or $8.6 million, to $63.2 million for the fourth quarter of 2013, up from $54.6 million for the fourth quarter of 2012. The increase in revenue was the result of growth in servicing volume under the company's contract with the U.S. Department of Education (Department) and collection revenue from guaranty agencies.

As of December 31, 2013, the company was servicing $110.5 billion of loans for 5.3 million borrowers on behalf of the Department, compared with $68.8 billion of loans for 3.9 million borrowers as of December 31, 2012. Revenue from this contract increased to $28.9 million for the fourth quarter of 2013, up from $19.4 million for the same period a year ago.

For the fourth quarter of 2013, revenue from the company's Tuition Payment Processing and Campus Commerce segment was $19.0 million, an increase of $1.3 million, or 7 percent, from the same period in 2012. The company reported fourth quarter of 2013 revenue from its Enrollment Services segment of $21.7 million, compared with $25.9 million for the same period in 2012.

Other Income

Other income increased $9.0 million to $16.0 million for the fourth quarter of 2013, compared with $7.0 million for the same period in 2012. The increase was due to increases in investment advisory fee revenue, which totaled $5.9 million for the fourth quarter of 2013, compared with $0.6 million for the same period in 2012, and in net realized and unrealized gains on investments, which totaled $3.9 million for the fourth quarter of 2013, compared with $0.9 million for the same period in 2012.

Operating Expenses

The company reported consolidated operating expenses of $111.6 million for the fourth quarter of 2013, compared with $109.2 million for the same period in 2012.

Year End Results

GAAP net income for the year ended December 31, 2013 was $302.7 million, or $6.50 per share, compared with GAAP net income of $178.0 million, or $3.76 per share, for 2012. Excluding derivative market value and foreign currency adjustments, net income in 2013 was $272.5 million, or $5.85 per share, compared with $207.4 million, or $4.38 per share, for 2012. The derivative market value and foreign currency adjustments were income of $30.1 million after tax, or $0.65 per share, during 2013, compared with an expense of $29.4 million after tax, or $0.62 per share, for 2012.

Non-GAAP Performance Measures

The company provides additional non-GAAP financial information related to specific items management believes to be important in the evaluation of its operating results, including specifically, the impact of unrealized gains and losses resulting from changes in fair values of derivative instruments which do not qualify for “hedge treatment” under GAAP and foreign currency transaction gains or losses resulting from the re-measurement of the company's Euro-denominated bonds to U.S. dollars. The company believes these point in time estimates of asset and liability values related to financial instruments that are subject to interest and currency rate fluctuations, and items whose timing and/or amount cannot be reasonably estimated in advance, affect the period to period comparability of the results of the company's fundamental business operations on a recurring basis. Accordingly, the company provides operating results excluding these items for comparability purposes.

Forward-looking and Cautionary Statements  

This press release contains forward-looking statements within the meaning of federal securities laws.  These statements are based on management's current expectations as of the date of this release and are subject to known and unknown risks and uncertainties that may cause actual results or performance to differ materially from those expressed or implied by the forward-looking statements. Such risks include, among others, risks related to the company's student loan portfolio such as interest rate basis and repricing risk and the use of derivatives to manage exposure to interest rate fluctuations; the company's funding requirements to satisfy asset financing needs; risks related to the availability of government funds and actual extension of the company's loan servicing contract with the Department for an additional five years and the company's ability to maintain and increase volumes under that contract to service federally owned student loans; changes in the educational credit and services marketplace resulting from changes in applicable laws, regulations, and government programs and budgets; risks related to the expected reduction in government payments to guaranty agencies to rehabilitate defaulted FFELP loans and services in support of those activities; uncertainties inherent in forecasting future cash flows from student loan assets and related asset-backed securitizations; and changes in general economic and credit market conditions. For more information, see the "Risk Factors" sections and other cautionary discussions of risks and uncertainties included in documents filed or furnished by the company with the Securities and Exchange Commission, including the cautionary information about forward-looking statements contained in the company's supplemental financial information for the fourth quarter ended December, 31, 2013.  All information in this release is as of the date of this release. Although the company may from time to time voluntarily update or revise its 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.

Consolidated Statements of Income

(Dollars in thousands, except share data)

	Three months ended							Year ended
	December 31, 2013			September 30, 2013		December 31, 2012		December 31, 2013		December 31, 2012
	(unaudited)			(unaudited)		(unaudited)
Interest income:
Loan interest	$	165,865		158,675		154,663		638,142		609,237
Investment interest	2,006			1,562		1,326		6,668		4,616
Total interest income	167,871			160,237		155,989		644,810		613,853
Interest expense:
Interest on bonds and notes payable	59,135			55,315		65,391		230,935		268,566
Net interest income	108,736			104,922		90,598		413,875		345,287
Less provision for loan losses	3,500			5,000		3,500		18,500		21,500
Net interest income after provision for loan losses	105,236			99,922		87,098		395,375		323,787
Other income (expense):
Loan and guaranty servicing revenue	63,167			64,582		54,584		243,428		209,748
Tuition payment processing and campus commerce revenue	18,988			19,927		17,735		80,682		74,410
Enrollment services revenue	21,735			22,563		25,890		98,078		117,925
Other income	15,981			8,613		7,023		46,298		39,476
Gain on sale of loans and debt repurchases	799			2,138		3,009		11,699		4,139
Derivative settlements, net	(6,407		)	(6,688	)	(7,112	)	(29,636	)	(14,022	)
Derivative market value and foreign currency adjustments, net	752			(9,960	)	13,769		48,593		(47,394	)
Total other income	115,015			101,175		114,898		499,142		384,282
Operating expenses:
Salaries and benefits	52,120			48,712		48,633		196,169		192,826
Cost to provide enrollment services	13,864			14,668		16,172		64,961		78,375
Depreciation and amortization	5,274			4,340		8,861		18,311		33,625
Other	40,349			39,887		35,578		149,542		128,738
Total operating expenses	111,607			107,607		109,244		428,983		433,564
Income before income taxes	108,644			93,490		92,752		465,534		274,505
Income tax expense	37,556			30,444		36,099		161,193		96,077
Net income	71,088			63,046		56,653		304,341		178,428
Net income attributable to noncontrolling interest	568			216		19		1,669		431
Net income attributable to Nelnet, Inc.	$	70,520		62,830		56,634		302,672		177,997
Earnings per common share:
Net income attributable to Nelnet, Inc. shareholders - basic and diluted	$	1.52		1.35		1.20		6.50		3.76
Weighted average common shares outstanding - basic and diluted	46,502,028			46,496,612		47,277,427		46,570,314		47,369,331

Condensed Consolidated Balance Sheets

(Dollars in thousands)

	As of		As of	As of
	December 31, 2013		September 31, 2013	December 31, 2012
			(unaudited)
Assets:
Student loans receivable, net	$	25,907,589	24,701,112	24,830,621
Non-federally insured student loans receivable - held for sale	—		28,480	—
Cash, cash equivalents, and investments	255,307		284,054	149,343
Restricted cash and investments	902,699		768,621	911,978
Goodwill and intangible assets, net	123,250		124,050	126,511
Other assets	582,004		630,611	589,442
Total assets	$	27,770,849	26,536,928	26,607,895
Liabilities:
Bonds and notes payable	$	25,955,289	24,858,455	25,098,835
Other liabilities	371,570		300,560	343,847
Total liabilities	26,326,859		25,159,015	25,442,682
Equity:
Total Nelnet, Inc. shareholders' equity	1,443,662		1,377,863	1,165,208
Noncontrolling interest	328		50	5
Total equity	1,443,990		1,377,913	1,165,213
Total liabilities and equity	$	27,770,849	26,536,928	26,607,895

Contacts:

Media, Ben Kiser, +1-402-458-3024, or Investors, Phil Morgan, +1-402-458-3038, both of Nelnet, Inc.

EX-99.2

For Release:February 27, 2014

Media Contact: Ben Kiser, 402.458.3024

Investor Contact: Phil Morgan, 402.458.3038

Nelnet, Inc. supplemental financial information for the fourth quarter 2013

(All dollars are in thousands, except per share amounts, unless otherwise noted)

The following information should be read in connection with Nelnet, Inc.'s (the “Company's”) press release for fourth quarter 2013 earnings, dated February 27, 2014, and the Company's Annual Report on Form 10-K for the year ended December 31, 2013.

This earnings supplement contains forward-looking statements, 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. 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. These statements are subject to known and unknown risks, uncertainties, and other factors that may cause actual results and performance to be materially different from any future results or performance expressed or implied by such statements. These factors include, among others, the risks and uncertainties set forth in the "Risk Factors" section of the Company's Annual Report on Form 10-K for the year ended December 31, 2013 (the "2013 Annual Report"), in particular such risks and uncertainties as:

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

• financing and liquidity risks, including risks of changes in the general interest rate environment and in the securitization and other financing markets for student loans, which may increase the costs or limit the availability of financings necessary to purchase, refinance, or continue to hold student loans;

• risks from changes in the educational credit and services markets resulting from changes in applicable laws, regulations, and government programs and budgets, such as the expected decline over time in FFELP loan interest income and fee-based revenues due to the discontinuation of new FFELP loan originations in 2010 and potential government initiatives to consolidate existing FFELP loans to the Federal Direct Loan Program, risks related to the expected reduction in government payments to guaranty agencies to rehabilitate defaulted FFELP loans and services in support of those activities, risks related to the availability of government funds and actual extension of the Company's loan servicing contract with the U.S. Department of Education (the "Department"), which accounted for 23 percent of the Company's fee-based revenue in 2013, for an additional five years, and the Company's ability to maintain or increase volumes under that contract, and the Company's ability to comply with agreements with third-party customers for the servicing of FFELP and Federal Direct Loan Program loans;

• risks related to a breach of or failure in the Company's operational or information systems or infrastructure, or those of third-party vendors;

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

• risks and uncertainties associated with litigation matters and with maintaining compliance with the extensive regulatory requirements applicable to the Company's business, 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 earnings supplement 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 its prior forward-looking statements, it disclaims any commitment to do so except as required by securities laws.

1

Consolidated Statements of Income

	Three months ended							Year ended
	December 31, 2013			September 30, 2013		December 31, 2012		December 31, 2013		December 31, 2012
Interest income:	(unaudited)			(unaudited)		(unaudited)
Loan interest	$	165,865		158,675		154,663		638,142		609,237
Investment interest	2,006			1,562		1,326		6,668		4,616
Total interest income	167,871			160,237		155,989		644,810		613,853
Interest expense:
Interest on bonds and notes payable	59,135			55,315		65,391		230,935		268,566
Net interest income	108,736			104,922		90,598		413,875		345,287
Less provision for loan losses	3,500			5,000		3,500		18,500		21,500
Net interest income after provision for loan losses	105,236			99,922		87,098		395,375		323,787
Other income (expense):
Loan and guaranty servicing revenue	63,167			64,582		54,584		243,428		209,748
Tuition payment processing and campus commerce revenue	18,988			19,927		17,735		80,682		74,410
Enrollment services revenue	21,735			22,563		25,890		98,078		117,925
Other income	15,981			8,613		7,023		46,298		39,476
Gain on sale of loans and debt repurchases	799			2,138		3,009		11,699		4,139
Derivative settlements, net	(6,407		)	(6,688	)	(7,112	)	(29,636	)	(14,022	)
Derivative market value and foreign currency adjustments, net	752			(9,960	)	13,769		48,593		(47,394	)
Total other income	115,015			101,175		114,898		499,142		384,282
Operating expenses:
Salaries and benefits	52,120			48,712		48,633		196,169		192,826
Cost to provide enrollment services	13,864			14,668		16,172		64,961		78,375
Depreciation and amortization	5,274			4,340		8,861		18,311		33,625
Other	40,349			39,887		35,578		149,542		128,738
Total operating expenses	111,607			107,607		109,244		428,983		433,564
Income before income taxes	108,644			93,490		92,752		465,534		274,505
Income tax expense	37,556			30,444		36,099		161,193		96,077
Net income	71,088			63,046		56,653		304,341		178,428
Net income attributable to noncontrolling interest	568			216		19		1,669		431
Net income attributable to Nelnet, Inc.	$	70,520		62,830		56,634		302,672		177,997
Earnings per common share:
Net income attributable to Nelnet, Inc. shareholders - basic and diluted	$	1.52		1.35		1.20		6.50		3.76
Weighted average common shares outstanding - basic and diluted	46,502,028			46,496,612		47,277,427		46,570,314		47,369,331

2

Condensed Consolidated Balance Sheets

	As of		As of	As of
	December 31, 2013		September 30, 2013	December 31, 2012
			(unaudited)
Assets:
Student loans receivable, net	$	25,907,589	24,701,112	24,830,621
Non-federally insured student loans receivable - held for sale	—		28,480	—
Cash, cash equivalents, and investments	255,307		284,054	149,343
Restricted cash and investments	902,699		768,621	911,978
Goodwill and intangible assets, net	123,250		124,050	126,511
Other assets	582,004		630,611	589,442
Total assets	$	27,770,849	26,536,928	26,607,895
Liabilities:
Bonds and notes payable	$	25,955,289	24,858,455	25,098,835
Other liabilities	371,570		300,560	343,847
Total liabilities	26,326,859		25,159,015	25,442,682
Equity:
Total Nelnet, Inc. shareholders' equity	1,443,662		1,377,863	1,165,208
Noncontrolling interest	328		50	5
Total equity	1,443,990		1,377,913	1,165,213
Total liabilities and equity	$	27,770,849	26,536,928	26,607,895

3

Overview

The Company is an education services company focused primarily on providing fee-based processing services and quality education-related products and services in four core areas: asset management and finance, 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 interest income on a portfolio of federally insured student loans.

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

	Three months ended						Year ended
	December 31, 2013			September 30, 2013	December 31, 2012		December 31, 2013		December 31, 2012
GAAP net income attributable to Nelnet, Inc.	$	70,520		62,830	56,634		302,672		177,997
Derivative market value and foreign currency adjustments, net of tax	(466		)	6,175	(8,537	)	(30,128	)	29,384
Net income, excluding derivative market value and foreign currency adjustments (a)	$	70,054		69,005	48,097		272,544		207,381
Earnings per share:
GAAP net income attributable to Nelnet, Inc.	$	1.52		1.35	1.20		6.50		3.76
Derivative market value and foreign currency adjustments, net of tax	(0.01		)	0.13	(0.18	)	(0.65	)	0.62
Net income, excluding derivative market value and foreign currency adjustments (a)	$	1.51		1.48	1.02		5.85		4.38

(a) The Company provides non-GAAP information that reflects specific items management believes to be important in the evaluation of its financial position and performance. "Derivative market value and foreign currency adjustments" include (i) the unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP; and (ii) the foreign currency transaction gains or losses caused by the re-measurement of the Company's Euro-denominated bonds to U.S. dollars. The Company believes these point-in-time estimates of asset and liability values related to these financial instruments that are subject to interest and currency rate fluctuations affect the period-to-period comparability of the results of operations. Accordingly, the Company provides operating results excluding these items for comparability purposes.

The increase in earnings in 2013 compared to 2012 was due to an increase in net interest income earned from the Company's student loan portfolio, an increase in revenue and operating margin from the Company's fee-based operating segments, an increase in income from providing investment advisory services, and an increase in gains recognized from the repurchases of the Company's debt.

The Company earns net interest income on its FFELP student loan portfolio in its Asset Generation and Management ("AGM") operating segment. This segment is expected to generate a stable net interest margin and significant amounts of cash as the FFELP portfolio amortizes. As of December 31, 2013, the Company had a $25.9 billion student loan portfolio that will amortize over the next approximately 20 years. The Company actively seeks to acquire FFELP loan portfolios to leverage its servicing scale and expertise to generate incremental earnings and cash flow.

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

• Student Loan and Guaranty Servicing ("LGS") - referred to as Nelnet Diversified Solutions ("NDS")

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

• Enrollment Services - commonly called Nelnet Enrollment Solutions ("NES")

4

The information below provides the operating results for each reportable operating segment for the years ended December 31, 2013, 2012, and 2011 (dollars in millions).

(a) Revenue includes intersegment revenue of $56.7 million, $65.4 million, and $69.0 million for the years ended December 31, 2013, 2012, and 2011, respectively, earned by LGS as a result of servicing loans for AGM.

(b) Revenue includes "net interest income after provision for loan losses" and "total other income" from the Company's segment statements of income, excluding the impact from changes in fair values of derivatives and foreign currency transaction adjustments, which was income of $35.3 million, an expense of $51.8 million, and income of $7.6 million for the years ended December 31, 2013, 2012, and 2011, respectively. Net income excludes changes in fair values of derivatives and foreign currency transaction adjustments, net of tax, which was income of $21.9 million, an expense of $32.1 million, and income of $4.7 million for the years ended December 31, 2013, 2012, and 2011, respectively.

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

Student Loan and Guaranty Servicing

• As of December 31, 2013, the Company was servicing $138.2 billion in FFELP, private, and government owned student loans, as compared with $97.5 billion and $76.1 billion of loans as of December 31, 2012 and 2011, respectively. The year over year increase was due to an increase in government servicing volume.

• Revenue increased for the year ended December 31, 2013 compared to 2012 and for the year ended December 31, 2012 compared to 2011 due to growth in servicing volume under the Company's contract with the Department and an increase in collection revenue from getting defaulted FFELP loan assets current on behalf of guaranty agencies. These increases were partially offset by decreases in traditional FFELP and guaranty servicing revenue.

• Before tax operating margin increased for the year ended December 31, 2013 compared to 2012, as a result of the investments made and certain costs incurred by the Company in 2012 to improve performance metrics under the Department servicing contract and to implement and comply with the Department's special direct consolidation loan initiative. In addition, intangible assets for this segment were fully amortized in 2012.

Tuition Payment Processing and Campus Commerce

• Revenue increased in the years ended December 31, 2013 and December 31, 2012, compared to the same periods in 2012 and 2011, respectively, due to an increase in the number of managed tuition payment plans as a result of providing more plans at existing schools and obtaining new school customers.

• Before tax operating margin increased for the year ended December 31, 2013 compared to 2012. The increase was the result of efficiencies gained in the operations of the business and a decrease in amortization expense related to intangible

5

assets. In addition, certain investments were made by the Company during 2012 in new products and services to meet customer needs and expand product and service offerings.

Enrollment Services

• Enrollment services revenue has decreased year over year due to a decrease in inquiry generation and management revenue as a result of the regulatory uncertainty regarding recruiting and marketing to potential students in the for-profit college industry, which has caused schools to decrease spending on marketing efforts. Additionally, clients are shifting marketing budgets to more efficient or lower cost channels, which has caused a reduction in volume.

• The Company continues to focus on improving the profitability of this segment by reducing operating expenses in reaction to the ongoing decline in revenue and gross margin.

Asset Generation and Management

• The Company acquired $4.1 billion of FFELP student loans during 2013, compared to $3.9 billion in 2012 and $2.8 billion in 2011. The average loan portfolio balance for the years ended December 31, 2013, 2012, and 2011 was $25.0 billion, $23.7 billion, and $24.0 billion, respectively.

• Core student loan spread increased to 1.54% for the year ended December 31, 2013, compared to 1.44% for the year ended December 31, 2012. This increase was due to the improved corresponding relationship between the interest rate indices governing what the Company earns on its loans and what the Company pays to fund such loans.

• Due to historically low interest rates, the Company continues to earn significant fixed rate floor income. During the years ended December 31, 2013, 2012, and 2011, the Company earned $148.4 million, $145.3 million, and $144.5 million, respectively, of fixed rate floor income (net of $31.0 million, $19.3 million, and $20.2 million of derivative settlements, respectively, used to hedge such loans).

Corporate Activities

• Whitetail Rock Capital Management, LLC ("WRCM"), the Company's SEC-registered investment advisory subsidiary, recognized revenue of $17.4 million, $9.3 million, and $5.1 million for the years ended December 31, 2013, 2012, and 2011, respectively. These amounts include performance fees earned from the sale of managed securities.

Liquidity and Capital Resources

• As of December 31, 2013, the Company had cash and investments of $255.3 million.

• For the year ended December 31, 2013, the Company generated $387.2 million in net cash provided by operating activities.

• Forecasted undiscounted future cash flows from the Company's FFELP student loan portfolio financed in asset-backed securitization transactions are estimated to be approximately $2.17 billion as of December 31, 2013.

• As of December 31, 2013, $45.0 million was outstanding on the Company's unsecured line of credit and $230.0 million was available for future use. The unsecured line of credit has a maturity date of March 28, 2018.

• During the year ended December 31, 2013, the Company repurchased 393,259 shares of Class A common stock for $13.1 million ($33.40 per share).

• During the year ended December 31, 2013, the Company repurchased $90.5 million (par value) of its own asset-backed and unsecured debt securities for a gain totaling $11.7 million.

• During the year ended December 31, 2013, the Company paid cash dividends of $18.6 million.

• The Company intends to use its liquidity position to capitalize on market opportunities, including FFELP student loan acquisitions; strategic acquisitions and investments in its core business areas of loan financing, loan servicing, payment processing, and enrollment services; and capital management initiatives, including stock repurchases, debt repurchases, and dividend distributions.

6

Operating Segments

The Company earns fee-based revenue through its Student Loan and Guaranty Servicing, Tuition Payment Processing and Campus Commerce, and Enrollment Services operating segments. In addition, the Company earns interest income on its student loan portfolio in its Asset Generation and Management operating segment. The Company’s operating segments are defined by the products and services they offer and the types of customers they serve, and they reflect the manner in which financial information is currently evaluated by management. See note 1 of the notes to consolidated financial statements included in the 2013 Annual Report for a description of each operating segment, including the primary products and services offered.

The management reporting process measures the performance of the Company’s operating segments based on the management structure of the Company, as well as the methodology used by management to evaluate performance and allocate resources. Executive management (the "chief operating decision maker") evaluates the performance of the Company’s operating segments based on their financial results prepared in conformity with U.S. generally accepted accounting principles.  

The accounting policies of the Company’s operating segments are the same as those described in the summary of significant accounting policies. Intersegment revenues are charged by a segment that provides a product or service to another segment.  Intersegment revenues and expenses are included within each segment consistent with the income statement presentation provided to management.  Income taxes are allocated based on 38% of income (loss) before taxes for each individual operating segment. The difference between the consolidated income tax expense and the sum of taxes calculated for each operating segment is included in income taxes in Corporate Activity and Overhead.

Corporate Activity and Overhead

Corporate Activity and Overhead includes the following items:

• The operating results of WRCM, the Company's SEC-registered investment advisory subsidiary

• Income earned on certain investment activities

• Interest expense incurred on unsecured debt transactions

• Other product and service offerings that are not considered operating segments

Corporate Activities and Overhead also includes certain corporate activities and overhead functions related to executive management, human resources, accounting, legal, occupancy, and marketing. These costs are allocated to each operating segment based on estimated use of such activities and services.

7

Segment Results of Operations

The following tables include the results of each of the Company's operating segments reconciled to the consolidated financial statements.

	Three months ended December 31, 2013
	Fee-Based
	Student Loan and Guaranty Servicing			Tuition Payment Processing and Campus Commerce		Enrollment Services		Total Fee- Based		Asset Generation and Management		Corporate Activity and Overhead		Eliminations		Total
Total interest income	$	11		—		—		11		165,982		2,725		(847	)	167,871
Interest expense	—			—		—		—		59,031		951		(847	)	59,135
Net interest income (loss)	11			—		—		11		106,951		1,774		—		108,736
Less provision for loan losses	—			—		—		—		3,500		—		—		3,500
Net interest income (loss) after provision for loan losses	11			—		—		11		103,451		1,774		—		105,236
Other income (expense):
Loan and guaranty servicing revenue	63,167			—		—		63,167		—		—		—		63,167
Intersegment servicing revenue	14,369			—		—		14,369		—		—		(14,369	)	—
Tuition payment processing and campus commerce revenue	—			18,988		—		18,988		—		—		—		18,988
Enrollment services revenue	—			—		21,735		21,735		—		—		—		21,735
Other income	—			—		—		—		4,016		13,108		(1,143	)	15,981
Gain on sale of loans and debt repurchases	—			—		—		—		104		695		—		799
Derivative settlements, net	—			—		—		—		(6,150	)	(257	)	—		(6,407	)
Derivative market value and foreign currency adjustments, net	—			—		—		—		(455	)	1,207		—		752
Total other income (expense)	77,536			18,988		21,735		118,259		(2,485	)	14,753		(15,512	)	115,015
Operating expenses:
Salaries and benefits	32,838			9,560		4,229		46,627		583		4,910		—		52,120
Cost to provide enrollment services	—			—		13,864		13,864		—		—		—		13,864
Depreciation and amortization	3,222			1,131		53		4,406		—		868		—		5,274
Other	22,943			2,760		1,634		27,337		7,570		6,585		(1,143	)	40,349
Intersegment expenses, net	1,116			1,639		1,170		3,925		14,617		(4,173	)	(14,369	)	—
Total operating expenses	60,119			15,090		20,950		96,159		22,770		8,190		(15,512	)	111,607
Income (loss) before income taxes and corporate overhead allocation	17,428			3,898		785		22,111		78,196		8,337		—		108,644
Corporate overhead allocation	(1,818		)	(514	)	(500	)	(2,832	)	(801	)	3,633		—		—
Income (loss) before income taxes	15,610			3,384		285		19,279		77,395		11,970		—		108,644
Income tax (expense) benefit	(5,932		)	(1,286	)	(108	)	(7,326	)	(29,410	)	(820	)	—		(37,556	)
Net income (loss)	9,678			2,098		177		11,953		47,985		11,150		—		71,088
Net income attributable to noncontrolling interest	—			—		—		—		—		568		—		568
Net income attributable to Nelnet, Inc.	$	9,678		2,098		177		11,953		47,985		10,582		—		70,520

8

	Three months ended September 30, 2013
	Fee-Based
	Student Loan and Guaranty Servicing			Tuition Payment Processing and Campus Commerce		Enrollment Services		Total Fee- Based		Asset Generation and Management		Corporate Activity and Overhead		Eliminations		Total
Total interest income	$	10		—		—		10		158,793		2,201		(767	)	160,237
Interest expense	—			—		—		—		56,100		(18	)	(767	)	55,315
Net interest income (loss)	10			—		—		10		102,693		2,219		—		104,922
Less provision for loan losses	—			—		—		—		5,000		—		—		5,000
Net interest income (loss) after provision for loan losses	10			—		—		10		97,693		2,219		—		99,922
Other income (expense):
Loan and guaranty servicing revenue	64,582			—		—		64,582		—		—		—		64,582
Intersegment servicing revenue	13,519			—		—		13,519		—		—		(13,519	)	—
Tuition payment processing and campus commerce revenue	—			19,927		—		19,927		—		—		—		19,927
Enrollment services revenue	—			—		22,563		22,563		—		—		—		22,563
Other income	—			—		—		—		3,981		4,632		—		8,613
Gain on sale of loans and debt repurchases	—			—		—		—		2,138		—		—		2,138
Derivative settlements, net	—			—		—		—		(6,432	)	(256	)	—		(6,688	)
Derivative market value and foreign currency adjustments	—			—		—		—		(12,660	)	2,700		—		(9,960	)
Total other income (expense)	78,101			19,927		22,563		120,591		(12,973	)	7,076		(13,519	)	101,175
Operating expenses:
Salaries and benefits	29,719			9,229		4,491		43,439		555		4,718		—		48,712
Cost to provide enrollment services	—			—		14,668		14,668		—		—		—		14,668
Depreciation and amortization	2,677			1,117		57		3,851		—		489		—		4,340
Other	19,752			1,908		1,556		23,216		7,939		8,732		—		39,887
Intersegment expenses, net	1,457			1,431		1,139		4,027		13,705		(4,213	)	(13,519	)	—
Total operating expenses	53,605			13,685		21,911		89,201		22,199		9,726		(13,519	)	107,607
Income (loss) before income taxes and corporate overhead allocation	24,506			6,242		652		31,400		62,521		(431	)	—		93,490
Corporate overhead allocation	(1,822		)	(607	)	(607	)	(3,036	)	(1,302	)	4,338		—		—
Income (loss) before income taxes	22,684			5,635		45		28,364		61,219		3,907		—		93,490
Income tax (expense) benefit	(8,620		)	(2,141	)	(17	)	(10,778	)	(23,263	)	3,597		—		(30,444	)
Net income (loss)	14,064			3,494		28		17,586		37,956		7,504		—		63,046
Net income attributable to noncontrolling interest	—			—		—		—		—		216		—		216
Net income attributable to Nelnet, Inc.	$	14,064		3,494		28		17,586		37,956		7,288		—		62,830

9

	Three months ended December 31, 2012
	Fee-Based
	Student Loan and Guaranty Servicing			Tuition Payment Processing and Campus Commerce		Enrollment Services		Total Fee- Based		Asset Generation and Management		Corporate Activity and Overhead		Eliminations		Total
Total interest income	$	9		—		—		9		154,781		2,079		(880	)	155,989
Interest expense	—			—		—		—		64,113		2,158		(880	)	65,391
Net interest income (loss)	9			—		—		9		90,668		(79	)	—		90,598
Less provision for loan losses	—			—		—		—		3,500		—		—		3,500
Net interest income (loss) after provision for loan losses	9			—		—		9		87,168		(79	)	—		87,098
Other income (expense):
Loan and guaranty servicing revenue	54,584			—		—		54,584		—		—		—		54,584
Intersegment servicing revenue	16,166			—		—		16,166		—		—		(16,166	)	—
Tuition payment processing and campus commerce revenue	—			17,735		—		17,735		—		—		—		17,735
Enrollment services revenue	—			—		25,890		25,890		—		—		—		25,890
Other income	—			—		—		—		3,804		3,219		—		7,023
Gain on sale of loans and debt repurchases	—			—		—		—		2,684		325		—		3,009
Derivative settlements, net	—			—		—		—		(6,361	)	(751	)	—		(7,112	)
Derivative market value and foreign currency adjustments, net	—			—		—		—		10,542		3,227		—		13,769
Total other income (expense)	70,750			17,735		25,890		114,375		10,669		6,020		(16,166	)	114,898
Operating expenses:
Salaries and benefits	29,463			8,543		5,229		43,235		529		4,869		—		48,633
Cost to provide enrollment services	—			—		16,172		16,172		—		—		—		16,172
Depreciation and amortization	4,786			2,066		1,624		8,476		—		385		—		8,861
Other	17,525			2,882		4,933		25,340		6,232		4,006		—		35,578
Intersegment expenses, net	1,448			1,341		944		3,733		16,373		(3,940	)	(16,166	)	—
Total operating expenses	53,222			14,832		28,902		96,956		23,134		5,320		(16,166	)	109,244
Income (loss) before income taxes and corporate overhead allocation	17,537			2,903		(3,012	)	17,428		74,703		621		—		92,752
Corporate overhead allocation	(1,789		)	(596	)	(596	)	(2,981	)	(1,605	)	4,586		—		—
Income (loss) before income taxes	15,748			2,307		(3,608	)	14,447		73,098		5,207		—		92,752
Income tax (expense) benefit	(5,984		)	(877	)	1,370		(5,491	)	(27,777	)	(2,831	)	—		(36,099	)
Net income (loss)	9,764			1,430		(2,238	)	8,956		45,321		2,376		—		56,653
Net income attributable to noncontrolling interest	—			—		—		—		—		19		—		19
Net income (loss) attributable to Nelnet, Inc.	$	9,764		1,430		(2,238	)	8,956		45,321		2,357		—		56,634

10

	Year ended December 31, 2013
	Fee-Based
	Student Loan and Guaranty Servicing			Tuition Payment Processing and Campus Commerce		Enrollment Services		Total Fee- Based		Asset Generation and Management		Corporate Activity and Overhead		Eliminations		Total
Total interest income	$	40		—		—		40		638,604		9,433		(3,267	)	644,810
Interest expense	—			—		—		—		229,533		4,669		(3,267	)	230,935
Net interest income (loss)	40			—		—		40		409,071		4,764		—		413,875
Less provision for loan losses	—			—		—		—		18,500		—		—		18,500
Net interest income (loss) after provision for loan losses	40			—		—		40		390,571		4,764		—		395,375
Other income (expense):
Loan and guaranty servicing revenue	243,428			—		—		243,428		—		—		—		243,428
Intersegment servicing revenue	56,744			—		—		56,744		—		—		(56,744	)	—
Tuition payment processing and campus commerce revenue	—			80,682		—		80,682		—		—		—		80,682
Enrollment services revenue	—			—		98,078		98,078		—		—		—		98,078
Other income	—			—		—		—		15,223		32,218		(1,143	)	46,298
Gain on sale of loans and debt repurchases	—			—		—		—		11,004		695		—		11,699
Derivative settlements, net	—			—		—		—		(27,966	)	(1,670	)	—		(29,636	)
Derivative market value and foreign currency adjustments, net	—			—		—		—		35,256		13,337		—		48,593
Total other income (expense)	300,172			80,682		98,078		478,932		33,517		44,580		(57,887	)	499,142
Operating expenses:
Salaries and benefits	119,092			37,575		19,296		175,963		2,292		17,914		—		196,169
Cost to provide enrollment services	—			—		64,961		64,961		—		—		—		64,961
Depreciation and amortization	11,419			4,518		232		16,169		—		2,142		—		18,311
Other	79,116			9,147		6,084		94,347		30,945		25,393		(1,143	)	149,542
Intersegment expenses, net	4,359			5,989		4,588		14,936		57,572		(15,764	)	(56,744	)	—
Total operating expenses	213,986			57,229		95,161		366,376		90,809		29,685		(57,887	)	428,983
Income (loss) before income taxes and corporate overhead allocation	86,226			23,453		2,917		112,596		333,279		19,659		—		465,534
Corporate overhead allocation	(6,150		)	(1,957	)	(1,943	)	(10,050	)	(3,896	)	13,946		—		—
Income (loss) before income taxes	80,076			21,496		974		102,546		329,383		33,605		—		465,534
Income tax (expense) benefit	(30,430		)	(8,168	)	(369	)	(38,967	)	(125,165	)	2,939		—		(161,193	)
Net income (loss)	49,646			13,328		605		63,579		204,218		36,544		—		304,341
Net income attributable to noncontrolling interest	—			—		—		—		—		1,669		—		1,669
Net income attributable to Nelnet, Inc.	$	49,646		13,328		605		63,579		204,218		34,875		—		302,672

11

	Year ended December 31, 2012
	Fee-Based
	Student Loan and Guaranty Servicing			Tuition Payment Processing and Campus Commerce		Enrollment Services		Total Fee- Based		Asset Generation and Management		Corporate Activity and Overhead		Eliminations		Total
Total interest income	$	53		8		—		61		610,194		7,305		(3,707	)	613,853
Interest expense	—			—		—		—		263,788		8,485		(3,707	)	268,566
Net interest income (loss)	53			8		—		61		346,406		(1,180	)	—		345,287
Less provision for loan losses	—			—		—		—		21,500		—		—		21,500
Net interest income (loss) after provision for loan losses	53			8		—		61		324,906		(1,180	)	—		323,787
Other income (expense):
Loan and guaranty servicing revenue	209,748			—		—		209,748		—		—		—		209,748
Intersegment servicing revenue	65,376			—		—		65,376		—		—		(65,376	)	—
Tuition payment processing and campus commerce revenue	—			74,410		—		74,410		—		—		—		74,410
Enrollment services revenue	—			—		117,925		117,925		—		—		—		117,925
Other income	—			—		—		—		18,219		21,257		—		39,476
Gain on sale of loans and debt repurchases	—			—		—		—		3,814		325		—		4,139
Derivative settlements, net	—			—		—		—		(11,792	)	(2,230	)	—		(14,022	)
Derivative market value and foreign currency adjustments, net	—			—		—		—		(51,809	)	4,415		—		(47,394	)
Total other income (expense)	275,124			74,410		117,925		467,459		(41,568	)	23,767		(65,376	)	384,282
Operating expenses:
Salaries and benefits	115,126			34,314		22,816		172,256		2,252		18,318		—		192,826
Cost to provide enrollment services	—			—		78,375		78,375		—		—		—		78,375
Depreciation and amortization	18,415			7,240		6,491		32,146		—		1,479		—		33,625
Other	70,505			10,439		10,416		91,360		16,435		20,943		—		128,738
Intersegment expenses, net	5,280			5,383		3,768		14,431		66,215		(15,270	)	(65,376	)	—
Total operating expenses	209,326			57,376		121,866		388,568		84,902		25,470		(65,376	)	433,564
Income (loss) before income taxes and corporate overhead allocation	65,851			17,042		(3,941	)	78,952		198,436		(2,883	)	—		274,505
Corporate overhead allocation	(5,904		)	(1,968	)	(1,968	)	(9,840	)	(5,306	)	15,146		—		—
Income (loss) before income taxes	59,947			15,074		(5,909	)	69,112		193,130		12,263		—		274,505
Income tax (expense) benefit	(22,780		)	(5,728	)	2,244		(26,264	)	(73,387	)	3,574		—		(96,077	)
Net income (loss)	37,167			9,346		(3,665	)	42,848		119,743		15,837		—		178,428
Net income attributable to noncontrolling interest	—			—		—		—		—		431		—		431
Net income (loss) attributable to Nelnet, Inc.	$	37,167		9,346		(3,665	)	42,848		119,743		15,406		—		177,997

12

Net Interest Income, Net of Settlements on Derivatives

The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Derivative settlements for each applicable period should be evaluated with the Company's net interest income.

The following table summarizes the components of “net interest income” and “derivative settlements, net” included in the attached consolidated statements of income.

	Three months ended							Year ended
	December 31, 2013			September 30, 2013		December 31, 2012		December 31, 2013		December 31, 2012
Variable student loan interest margin, net of settlements on derivatives	$	62,683		59,100		49,537		235,480		192,021
Fixed rate floor income, net of settlements on derivatives	38,849			37,810		35,533		148,431		145,345
Investment interest	2,006			1,562		1,326		6,668		4,616
Non-portfolio related derivative settlements	(258		)	(256	)	(752	)	(1,671	)	(2,232	)
Corporate debt interest expense	(951		)	18		(2,158	)	(4,669	)	(8,485	)
Net interest income (net of settlements on derivatives)	$	102,329		98,234		83,486		384,239		331,265

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Student Loan Servicing Volumes (dollars in millions)

Company owned	$23,727	$22,650	$22,277	$21,926	$21,504	$21,237	$20,820	$20,629	$20,715	$21,397
% of total	38.6%	29.8%	27.1%	25.6%	23.2%	21.8%	18.5%	17.7%	15.3%	15.5%
Number of servicing borrowers:
Government servicing	2,804,502	3,036,534	3,096,026	3,137,583	3,588,412	3,892,929	4,261,637	4,396,341	5,145,901	5,305,498
FFELP servicing	1,912,748	1,799,484	1,779,245	1,724,087	1,659,020	1,626,146	1,586,312	1,529,203	1,507,452	1,462,122
Private servicing	155,947	164,554	163,135	161,763	175,070	173,948	170,224	173,588	178,935	195,580
Total:	4,873,197	5,000,572	5,038,406	5,023,433	5,422,502	5,693,023	6,018,173	6,099,132	6,832,288	6,963,200
Number of remote hosted borrowers	545,456	9,566,296	8,645,463	7,909,300	7,505,693	6,912,204	5,001,695	3,218,896	1,986,866	1,915,203

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Other Income

The following table summarizes the components of "other income" included in the attached consolidated statements of income.

	Three months ended				Year ended
	December 31, 2013		September 30, 2013	December 31, 2012	December 31, 2013	December 31, 2012
Borrower late fee income	$	3,021	2,927	3,211	12,686	13,876
Investment advisory fees	5,907		2,352	553	17,422	9,347
Realized and unrealized gains/(losses) on investments, net	3,944		1,096	936	6,094	6,914
Other	3,109		2,238	2,323	10,096	9,339
Other income	$	15,981	8,613	7,023	46,298	39,476

Derivative Settlements

The following table summarizes the components of "derivative settlements, net" included in the attached consolidated statements of income.

	Three months ended							Year ended
	December 31, 2013			September 30, 2013		December 31, 2012		December 31, 2013		December 31, 2012
Settlements:
1:3 basis swaps	$	827		781		844		3,301		4,495
Interest rate swaps - floor income hedges	(7,005		)	(7,178	)	(7,033	)	(31,022	)	(19,270	)
Interest rate swaps - hybrid debt hedges	(257		)	(256	)	(752	)	(1,670	)	(2,231	)
Cross-currency interest rate swaps	28			(35	)	(162	)	(245	)	3,228
Other	—			—		(9	)	—		(244	)
Total settlements - income (expense)	$	(6,407	)	(6,688	)	(7,112	)	(29,636	)	(14,022	)

Derivative Market Value and Foreign Currency Adjustments

"Derivative market value and foreign currency adjustments" include (i) the unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP; and (ii) the foreign currency transaction gains or losses caused by the re-measurement of the Company's Euro-denominated bonds to U.S. dollars.

The following table summarizes the components of “derivative market value and foreign currency adjustments” included in the attached consolidated statements of income.

	Three months ended							Year ended
	December 31, 2013			September 30, 2013		December 31, 2012		December 31, 2013		December 31, 2012
Change in fair value of derivatives - income (expense)	$	10,135		30,014		39,516		83,878		(27,833	)
Foreign currency transaction adjustment - income (expense)	(9,383		)	(39,974	)	(25,747	)	(35,285	)	(19,561	)
Derivative market value and foreign currency adjustments - income (expense)	$	752		(9,960	)	13,769		48,593		(47,394	)

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Student Loans Receivable

The table below outlines the components of the Company’s student loan portfolio:

	As of			As of			As of
	December 31, 2013			September 30, 2013			December 31, 2012
	Held for investment			Held for investment		Held for sale	Held for investment
Federally insured loans
Stafford and other	$	6,686,626		6,884,348		—	7,261,114
Consolidation	19,363,577			17,908,229		—	17,708,732
Total	26,050,203			24,792,577		—	24,969,846
Non-federally insured loans	71,103			66,283		28,480	26,034
	26,121,306			24,858,860		28,480	24,995,880
Loan discount, net of unamortized loan premiums and deferred origination costs	(158,595		)	(103,551	)	—	(113,357	)
Allowance for loan losses – federally insured loans	(43,440		)	(42,406	)	—	(40,120	)
Allowance for loan losses – non-federally insured loans	(11,682		)	(11,791	)	—	(11,782	)
	$	25,907,589		24,701,112		28,480	24,830,621

Loan Activity

The following table sets forth the activity of loans:

	Three months ended December 31,					Year ended December 31,
	2013			2012		2013		2012
Beginning balance	$	24,887,340		22,644,880		24,995,880		24,359,625
Loan acquisitions	1,858,241			2,986,532		4,058,997		3,885,138
Repayments, claims, capitalized interest, participations, and other	(479,035		)	(461,261	)	(2,375,806	)	(1,807,144	)
Consolidation loans lost to external parties	(113,234		)	(158,847	)	(514,108	)	(1,331,163	)
Loans sold	(32,006		)	(15,424	)	(43,657	)	(110,576	)
Ending balance	$	26,121,306		24,995,880		26,121,306		24,995,880

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Student Loan Spread

The following table analyzes the student loan spread on the Company’s portfolio of student loans, which represents the spread between the yield earned on student loan assets and the costs of the liabilities and derivative instruments used to fund those assets.

	Three months ended							Year ended
	December 31, 2013			September 30, 2013		December 31, 2012		December 31, 2013		December 31, 2012
Variable student loan yield, gross	2.58		%	2.58	%	2.61	%	2.58	%	2.63	%
Consolidation rebate fees	(0.78		)	(0.76	)	(0.76	)	(0.77	)	(0.75	)
Discount accretion, net of premium and deferred origination costs amortization	0.05			0.02		0.03		0.03		—
Variable student loan yield, net	1.85			1.84		1.88		1.84		1.88
Student loan cost of funds - interest expense	(0.90		)	(0.89	)	(1.05	)	(0.91	)	(1.09	)
Student loan cost of funds - derivative settlements	0.01			0.01		0.01		0.01		0.03
Variable student loan spread	0.96			0.96		0.84		0.94		0.82
Fixed rate floor income, net of settlements on derivatives	0.60			0.61		0.60		0.60		0.62
Core student loan spread	1.56		%	1.57	%	1.44	%	1.54	%	1.44	%
Average balance of student loans	$	25,770,607		24,491,516		23,766,653		24,960,521		23,694,388
Average balance of debt outstanding	25,687,958			24,470,096		24,086,770		24,954,546		23,932,304

A trend analysis of the Company's core and variable student loan spreads is summarized below.

(a) Prior to April 1, 2012, the interest earned on the majority of the Company's FFELP student loan assets was indexed to the three-month commercial paper rate.  As allowed by legislation, effective April 1, 2012, the Company elected to change the index on which the Special Allowance Payments are calculated for FFELP loans from the commercial paper rate to the one-month LIBOR rate.  The Company funds the majority of its assets with three-month LIBOR indexed floating rate securities.  The relationship between the indices in which the Company earns interest on its loans and funds such loans has a significant impact on student loan spread.  This table (the right axis) shows the difference between the Company's liability base rate and the one-month LIBOR (Q2 2012 - Q4 2013) or commercial paper rate indices (Q1 2011 - Q1 2012) by quarter. 

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Variable student loan spread increased during the year ended December 31, 2013 as compared to 2012 as a result of the tightening of the Asset/Liability Base Rate spread as reflected in the previous table.

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 student loan spread follows:

	Three months ended							Year ended
	December 31, 2013			September 30, 2013		December 31, 2012		December 31, 2013		December 31, 2012
Fixed rate floor income, gross	$	45,854		44,988		42,566		179,453		164,615
Derivative settlements (a)	(7,005		)	(7,178	)	(7,033	)	(31,022	)	(19,270	)
Fixed rate floor income, net	$	38,849		37,810		35,533		148,431		145,345
Fixed rate floor income contribution to spread, net	0.60		%	0.61	%	0.60	%	0.60	%	0.62	%

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

Fixed Rate Floor Income

The following table shows the Company’s student loan assets that are earning fixed rate floor income as of December 31, 2013:

Fixed interest range	Borrower/lender weighted average yield	Estimated variable conversion rate (a)	Loan balance
< 3.0%	2.87%	0.23%	$	1,753,639
3.0 - 3.49%	3.20%	0.56%	2,101,999
3.5 - 3.99%	3.65%	1.01%	1,919,895
4.0 - 4.49%	4.20%	1.56%	1,448,691
4.5 - 4.99%	4.72%	2.08%	845,296
5.0 - 5.49%	5.24%	2.60%	578,336
5.5 - 5.99%	5.67%	3.03%	350,308
6.0 - 6.49%	6.18%	3.54%	405,238
6.5 - 6.99%	6.70%	4.06%	367,927
7.0 - 7.49%	7.16%	4.52%	151,774
7.5 - 7.99%	7.71%	5.07%	259,141
8.0 - 8.99%	8.17%	5.53%	612,919
> 9.0%	9.04%	6.40%	295,420
			$	11,090,583

(a) The estimated variable conversion rate is the estimated short-term interest rate at which loans would convert to a variable rate. As of December 31, 2013, the weighted average estimated variable conversion rate was 1.83%. As of December 31, 2013, the short-term interest rate was 17 basis points.

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The following table summarizes the outstanding derivative instruments as of December 31, 2013 used by the Company to economically hedge loans earning fixed rate floor income.

Maturity	Notional amount		Weighted average fixed rate paid by the Company (a)
2014	$	1,750,000	0.71	%
2015	1,100,000		0.89
2016	750,000		0.85
2017	1,250,000		0.86
	$	4,850,000	0.81	%

(a) For all interest rate derivatives, the Company receives discrete three-month LIBOR.

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 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.

As of December 31, 2013, 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 $2.17 billion as detailed below.  The $2.17 billion includes approximately $432.5 million (as of December 31, 2013) of overcollateralization included in the asset-backed securitizations.  These excess net asset positions are reflected variously in the following balances on the consolidated balance sheet:  "student loans receivable," "restricted cash and investments," and "accrued interest receivable."

The forecasted cash flow presented below includes all loans funded in asset-backed securitizations as of December 31, 2013.  As of December 31, 2013, the Company had $24.6 billion of loans included in asset-backed securitizations, which represented 94.6 percent of its total FFELP student loan portfolio. The forecasted cash flow does not include cash flows that the Company expects to receive related to loans funded in its warehouse facilities or loans acquired subsequent to December 31, 2013.

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

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Prepayments:  The primary variable in establishing a life of loan estimate is the level and timing of prepayments. Prepayment rates equal the amount 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 loan consolidation activity, borrower default rates, and utilization of FFEL Program debt management options such as income-based repayment, deferments, and forbearance.  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 the Company’s 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 $240 million to $300 million.

Interest rates:  The Company funds the majority of its student loans with three-month LIBOR indexed floating rate securities.  Meanwhile, the interest earned on the Company’s student loan assets is indexed primarily to a one-month LIBOR rate.  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 three-month LIBOR will exceed one-month LIBOR 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 three-month and one-month 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, 2013, the net fair value of the Company’s interest rate derivatives used to hedge loans earning fixed rate floor income was a net liability of $8.7 million.

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