Variable Interests

9 Months Ended

Sep. 30, 2013

Text Block [Abstract]

Variable Interests

9. Variable Interests

On January 20, 2010, we entered into agreements with unrelated third parties to establish the PEAKS Private Student Loan Program (“PEAKS Program”), which is a private education loan program for our students. Under the PEAKS Program, an unaffiliated lender originated private education loans to our eligible students and, subsequently, sold those loans to an unaffiliated trust that purchased, owns and collects private education loans (“PEAKS Trust”). The PEAKS Trust issued senior debt in the aggregate principal amount of $300,000 (“PEAKS Senior Debt”) to investors. The lender disbursed the proceeds of the private education loans to us for application to the students’ account balances with us that represented their unpaid education costs. We transferred a portion of the amount of each private education loan disbursed to us under the PEAKS Program to the PEAKS Trust in exchange for a subordinated note issued by the PEAKS Trust (“Subordinated Note”). No new private education loans were or will be originated under the PEAKS Program after July 2011, but immaterial amounts related to loans originated prior to that date were disbursed by the lender through March 2012.

The Subordinated Note is non-interest bearing and has been recorded net of an unamortized discount based on an imputed interest rate of 9.0% in Other assets on our Condensed Consolidated Balance Sheets. In the three and nine months ended September 30, 2012, the discount was amortized and recognized in Interest income on our Condensed Consolidated Statements of Income over the term of the Subordinated Note. We did not recognize any interest income related to the amortization of the Subordinated Note discount on our Condensed Consolidated Statements of Income in the three or nine months ended September 30, 2013. The maturity date of the Subordinated Note is in March 2026. The face value of the Subordinated Note was approximately $73,000 as of September 30, 2013 and December 31, 2012 and $73,400 as of September 30, 2012.

The PEAKS Trust utilized the proceeds from the issuance of the PEAKS Senior Debt and the Subordinated Note to purchase the private education loans made by the lender to our students. The assets of the PEAKS Trust (which include, among other assets, the private education loans owned by the PEAKS Trust) serve as collateral for, and are intended to be the principal source of, the repayment of the PEAKS Senior Debt and the Subordinated Note. The PEAKS Trust is required to maintain assets having an aggregate value that exceeds the outstanding balance of the PEAKS Senior Debt. As of September 30, 2013, the value of the assets of the PEAKS Trust satisfied this requirement.

We guarantee payment of the principal and interest owed on the PEAKS Senior Debt, the administrative fees and expenses of the PEAKS Trust and the required ratio of assets of the PEAKS Trust to outstanding PEAKS Senior Debt (“PEAKS Guarantee”). We did not explicitly or implicitly provide any financial or other support to the PEAKS Trust during the three or nine months ended September 30, 2013 or 2012 that we were not contractually required to provide, and we do not intend to provide any such support to the PEAKS Trust in the foreseeable future, other than what we are contractually required to provide. Nevertheless, during the three and nine months ended September 30, 2013, we made payments on behalf of certain student borrowers under the PEAKS Program to the organization that services the student loans on behalf of the PEAKS Trust to help those borrowers avoid defaulting on their PEAKS Program private education loans (“Payments on Behalf of Borrowers”), which defaults would have triggered contractually required payments by us under the PEAKS Program. Our guarantee obligations under the PEAKS Program remain in effect until the PEAKS Senior Debt and the PEAKS Trust’s fees and expenses are paid in full. At such time, we will be entitled to repayment of the amount of any payments made under our guarantee (which do not include Payments on Behalf of Borrowers) and payment of the Subordinated Note, in each case only to the extent of available funds remaining in the PEAKS Trust.

In the nine months ended September 30, 2013, we made Payments on Behalf of Borrowers in connection with the PEAKS Program. We made those payments after assessing:

• the likelihood of us being contractually required to make payments under the PEAKS Guarantee in the near future;

• the effect on our liquidity that would result from making payments under the PEAKS Guarantee compared to making Payments on Behalf of Borrowers;

• the effect that Payments on Behalf of Borrowers may have on the funds available to the PEAKS Trust to repay the Subordinated Note to us following full payment of the PEAKS Trust’s other obligations; and

• the fact that we will not be able to recover Payments on Behalf of Borrowers directly from the student borrowers on whose behalf we made those payments.

Payments on Behalf of Borrowers assist in:

• maintaining the ratio of assets of the PEAKS Trust to outstanding PEAKS Senior Debt at the required level; and

• satisfying the following month’s required payment of interest on the PEAKS Senior Debt and administrative fees and expenses of the PEAKS Trust.

We will continue to assess whether it would be economically beneficial to us to make Payments on Behalf of Borrowers in future periods, and we may make Payments of Behalf of Borrowers in the future based on our assessment of the above factors. Making Payments on Behalf of Borrowers does not give us the power to direct the activities that most significantly impact the economic performance of the PEAKS Trust and, therefore, does not change our conclusion that we are not the primary beneficiary of the PEAKS Trust.

Making Payments on Behalf of Borrowers:

• may result in us paying amounts to the PEAKS Trust in advance of when a guarantee payment would be due, which would negatively impact our liquidity in a particular period;

• may result in us paying a lesser amount than we otherwise would have been required to pay in future periods under the PEAKS Guarantee, which would positively impact our liquidity in a particular period; and

• may reduce the amount that we could receive following full payment of the PEAKS Senior Debt and fees and expenses of the PEAKS Trust, because that amount is limited to the amounts we paid under the PEAKS Guarantee (which do not include Payments on Behalf of Borrowers) and the amount due to us under the Subordinated Note.

The amount owed to us under the Subordinated Note was approximately $73,000 as of September 30, 2013. In determining the estimated default rate used in the assumptions to establish our liability for guarantee obligations, we considered the payment performance of the private education loans under the PEAKS Program. Any Payments on Behalf of Borrowers that we made with respect to those loans, however, were not considered to be payments on those loans for purposes of that determination.

The following table sets forth the guarantee payments and Payments on Behalf of Borrowers that we made related to the PEAKS Program in the periods indicated:

	Three Months Ended September 30,				Nine Months Ended September 30,
Type of Payment	2013		2012		2013		2012
Guarantee	$	138	$	243	$	1,377	$	502
Payments on Behalf of Borrowers		2,502		0		7,647		0
Total	$	2,640	$	243	$	9,024	$	502

See Note 12 – Contingencies, for further discussion of the PEAKS Guarantee.

The PEAKS Trust is a variable interest entity as defined under ASC 810. We held variable interests in the PEAKS Trust as of September 30, 2013 as a result of the Subordinated Note and PEAKS Guarantee. To determine whether we were the primary beneficiary of the PEAKS Trust, we:

• assessed the risks that the PEAKS Trust was designed to create and pass through to its variable interest holders;

• identified the variable interests in the PEAKS Trust;

• identified the other variable interest holders and their involvement in the activities of the PEAKS Trust;

• identified the activities that most significantly impact the PEAKS Trust’s economic performance;

• determined whether we have the power to direct those activities; and

• determined whether we have the right to receive the benefits from, or the obligation to absorb the losses of, the PEAKS Trust that could potentially be significant to the PEAKS Trust.

We determined that the activities of the PEAKS Trust that most significantly impact the economic performance of the PEAKS Trust involve:

• establishing the underwriting criteria of, and the interest rates and fees charged on, the private education loans acquired by the PEAKS Trust; and

• the servicing (which includes the collection) of the private education loans owned by the PEAKS Trust.

To make that determination, we analyzed various possible scenarios of student loan portfolio performance to evaluate the potential economic impact on the PEAKS Trust. In our analysis, we made what we believe are reasonable assumptions based on historical data for the following key variables:

• the composition of the credit profiles of the borrowers;

• the interest rates and fees charged on the loans;

• the default rates and the timing of defaults associated with similar types of loans; and

• the prepayment and the speed of repayment associated with similar types of loans.

Based on our analysis, we concluded that we are not the primary beneficiary of the PEAKS Trust, because we do not have the power to direct the activities that most significantly impact the economic performance of the PEAKS Trust. As a result, we are not required under ASC 810 to include the financial results of the PEAKS Trust in our condensed consolidated financial statements for the three or nine months ended September 30, 2013. Our conclusion that we are not the primary beneficiary of the PEAKS Trust did not change from the prior reporting period. Therefore, there was no effect on our condensed consolidated financial statements.

On February 20, 2009, we entered into agreements with an unaffiliated entity (the “2009 Entity”) to create a program that made private education loans available to our students to help pay the students’ cost of education that student financial aid from federal, state and other sources did not cover (the “2009 Loan Program”). Under the 2009 Loan Program, an unaffiliated lender originated private education loans to our eligible students and, subsequently, sold those loans to the 2009 Entity. The 2009 Entity purchased the private education loans from the lender utilizing funds received from its owners in exchange for participation interests in the private education loans acquired by the 2009 Entity. The lender disbursed the proceeds of the private education loans to us for application to the students’ account balances with us that represented their unpaid education costs. No new private education loans were or will be originated under the 2009 Loan Program after December 31, 2011, but immaterial amounts related to loans originated prior to that date were disbursed by the lender through June 2012.

In connection with the 2009 Loan Program, we entered into a risk sharing agreement (the “2009 RSA”) with the 2009 Entity. Under the 2009 RSA, we guarantee the repayment of any private education loans that are charged off above a certain percentage of the private education loans made under the 2009 Loan Program, based on the annual dollar volume. The following table sets forth the payments that we made to the 2009 Entity related to our guarantee obligations under the 2009 RSA, net of recoveries, in the periods indicated:

Three Months Ended September 30,				Nine Months Ended September 30,
2013		2012		2013		2012
$	458	$	560	$	738	$	1,141

We asserted the right to offset amounts owed to us by the 2009 Entity under a revolving promissory note (the “Revolving Note”) related to the 2009 RSA, net of recoveries, of $47 in the three months ended September 30, 2013 and $8,023 in the nine months ended September 30, 2013. Approximately $6,800 of the amount that we claimed as an offset against the Revolving Note in the nine months ended September 30, 2013 related to our election under the 2009 RSA to discharge our guarantee obligations with respect to certain defaulted private education loans under the 2009 Loan Program. We recorded all of the amounts claimed as offsets in Other current liabilities on our Condensed Consolidated Balance Sheet as of September 30, 2013. See Note 12 – Contingencies, for further discussion of the 2009 RSA. Claiming an offset against the Revolving Note related to our election under the 2009 RSA to discharge our guarantee obligations with respect to certain defaulted private education loans does not give us the power to direct the activities that most significantly impact the economic performance of the 2009 Entity and, therefore, does not change our conclusion that we are not the primary beneficiary of the 2009 Entity. If we believe that doing so would be economically beneficial to us, we may elect in future periods to accelerate the timing of certain guarantee payments to the 2009 Entity that we would otherwise be required to make at a later date, in order to discharge our guarantee obligations under the 2009 RSA related to certain 2009 Loan Program private education loans that default (“Discharge Payments”). Making Discharge Payments would not give us the power to direct the activities that most significantly impact the economic performance of the 2009 Entity and, therefore, would not change our conclusion that we are not the primary beneficiary of the 2009 Entity.

In addition, we have made advances to the 2009 Entity under the Revolving Note. We did not make any advances in the three or nine months ended September 30, 2013 or 2012 to the 2009 Entity under the Revolving Note that we were not contractually required to make. Certain of the assets of the 2009 Entity serve as collateral for the Revolving Note. The Revolving Note bears interest, is subject to customary terms and conditions and is currently due and payable in full. The amount owed to us under the Revolving Note, excluding the offsets described above, was approximately $8,200 as of September 30, 2013, $8,300 as of December 31, 2012 and $8,600 as of September 30, 2012.

The advances under the Revolving Note were primarily used by the 2009 Entity to purchase additional private education loans under the 2009 Loan Program that otherwise may not have been originated. We have no immediate plans to significantly increase the amount of advances that we make to the 2009 Entity under the Revolving Note.

The 2009 Entity is a variable interest entity as defined under ASC 810. We held variable interests in the 2009 Entity as of September 30, 2013 as a result of the Revolving Note and 2009 RSA. To determine whether we were the primary beneficiary of the 2009 Entity, we:

• assessed the risks that the 2009 Entity was designed to create and pass through to its variable interest holders;

• identified the variable interests in the 2009 Entity;

• identified the other variable interest holders and their involvement in the activities of the 2009 Entity;

• identified the activities that most significantly impact the 2009 Entity’s economic performance;

• determined whether we have the power to direct those activities; and

• determined whether we have the right to receive the benefits from, or the obligation to absorb the losses of, the 2009 Entity that could potentially be significant to the 2009 Entity.

To identify the activities of the 2009 Entity that most significantly impact the economic performance of the 2009 Entity, we analyzed various possible scenarios of private education loan portfolio performance. In our analysis, we made what we believe are reasonable assumptions based on historical data for the following key variables:

• the composition of the credit profiles of the borrowers;

• the interest rates and fees charged on the loans;

• the default rates and the timing of defaults associated with similar types of loans; and

• the prepayment and the speed of repayment associated with similar types of loans.

We determined that the activities of the 2009 Entity that most significantly impact its economic performance involve:

• establishing the underwriting criteria of, and the interest rates and fees charged on, the private education loans acquired by the 2009 Entity; and

• the servicing (which includes the collection) of the private education loans owned by the 2009 Entity.

Based on our analysis, we concluded that we are not the primary beneficiary of the 2009 Entity, because we do not direct those activities. As a result, we are not required under ASC 810 to include the financial results of the 2009 Entity in our condensed consolidated financial statements for the three or nine months ended September 30, 2013. Our conclusion that we are not the primary beneficiary of the 2009 Entity did not change from the prior reporting period. Therefore, there was no effect on our condensed consolidated financial statements.

In the three months ended December 31, 2012, we determined that the Subordinated Note and the Revolving Note were impaired and recorded an impairment charge in the aggregate amount of $15,200. The aggregate carrying value of the Subordinated Note and the Revolving Note was approximately $2,500 as of September 30, 2013, $2,900 as of December 31, 2012 and $18,000 as of September 30, 2012 and was included on our Condensed Consolidated Balance Sheet in Prepaid expenses and other current assets as of September 30, 2013 and in Other assets as of December 31, 2012 and September 30, 2012. The accrual of interest (in the case of the Revolving Note) and the accretion of discount (in the case of the Subordinated Note) is discontinued when, in our opinion, the borrower may be unable to make payments owed under the note as they become due. We did not recognize any interest income related to the Subordinated Note or the Revolving Note in our Condensed Consolidated Statements of Income during the time that the Subordinated Note and Revolving Note were impaired, which included the three and nine months ended September 30, 2013.