9.	Private Education Loans

We concluded that we were required to consolidate the PEAKS Trust in our consolidated financial statements beginning on February 28, 2013 and to consolidate the CUSO in our consolidated financial statements beginning on September 30, 2014. See Note 8 – Variable Interest Entities, for a further discussion of the consolidation of the PEAKS Trust and the CUSO (the “Consolidated VIEs”). As a result, the assets and liabilities of the Consolidated VIEs were included on our Consolidated Balance Sheet as of December 31, 2014. The assets and liabilities of the PEAKS Trust were included on our Consolidated Balance Sheet as of December 31, 2013.

As of December 31, 2014, the aggregate carrying amount of the Private Education Loans included under the Private education loan line items on our Consolidated Balance Sheet was $90,876. The outstanding principal balance of the Private Education Loans, including accrued interest, was approximately $184,710 as of December 31, 2014.

Initial Measurement. A significant number of the Private Education Loans were determined to be credit impaired upon consolidation. Loans determined to be credit impaired upon consolidation or acquisition (“Purchased Credit Impaired Loans” or “PCI Loans”), are initially measured at fair value in accordance with ASC 310-30, “Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). A loan is considered a PCI Loan, if it has evidence of deteriorated credit quality following the loan’s origination date. As a result, at the date of consolidation or acquisition, it is probable that all contractually required payments under a PCI Loan will not be collected.

The Private Education Loans that did not individually have evidence of deteriorated credit quality at the time of consolidation were also initially measured at fair value and are accounted for in accordance with ASC 310-30. We believe that following the guidance of ASC 310-30 by analogy with respect to those loans provides the most reasonable presentation of the value of those loans, primarily due to:

•

the evidence of deteriorated credit quality of a significant number of the Private Education Loans; and

•

the probability that all contractually required payments with respect to those loans will not be collected.

All of the Private Education Loans are, therefore, considered to be, and reported as, PCI Loans.

This accounting treatment is consistent with the AICPA December 18, 2009 “Confirmation Letter’, in which the AICPA summarized the SEC staff’s view regarding the accounting in subsequent periods for discount accretion associated with loan receivables acquired in a business combination or asset purchase. In this letter, the AICPA states that it understands that the SEC staff will not object to an accounting policy based on contractual or expected cash flow. We believe that following ASC 310-30 by analogy with respect to the Private Education Loans that did not individually have evidence of deteriorated credit quality at the time of consolidation is an appropriate application of the accounting guidance to determine the initial measurement of the value of those loans.

Aggregation of Loans. PCI Loans recognized upon consolidation or acquisition in the same fiscal quarter may be aggregated into one or more pools, provided that the PCI Loans in each pool have common risk characteristics. The Private Education Loans were considered to be PCI Loans upon consolidation. As of the date of the PEAKS Consolidation or CUSO Consolidation, as applicable, we aggregated the PEAKS Trust Student Loans into 24 separate pools of loans and the CUSO Student Loans into 48 separate pools of loans, based on common risk characteristics of the loans, which included:

•

the fiscal quarter in which the Private Education Loan was purchased by the PEAKS Trust or the CUSO; and

•

the consumer credit score of the borrower.

PCI Loans that do not have evidence of deteriorated credit quality are not aggregated in the same pools with PCI Loans that have evidence of deteriorated credit quality. The same aggregation criteria, however, were used to determine those loan pools. Each loan pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.

Estimated Fair Value, Accretable Yield and Expected Cash Flows. The Private Education Loans were recorded at their estimated fair value upon consolidation. The estimated fair value of the PEAKS Trust Student Loans as of February 28, 2013 and the CUSO Student Loans as of September 30, 2014 was determined using an expected cash flow methodology. Projected default rates and forbearances were considered in applying the estimated cash flow methodology. Prepayments of loans were not considered when estimating the expected cash flows, because, historically, few Private Education Loans have been prepaid. No allowance for loan loss was established as of the date of consolidation of the PEAKS Trust and the CUSO, because all of the Private Education Loans were recorded at fair value and future credit losses are considered in the estimate of fair value.

The excess of any cash flows expected to be collected with respect to a loan pool of the Private Education Loans over the carrying value of the loan pool is referred to as the accretable yield. The accretable yield is not reported on our Consolidated Balance Sheets, but it is accreted and included as interest income using the effective interest method, which is at a level rate of return over the remaining estimated life of the loan pool.

The following table sets forth the estimated fair value, accretable yield and expected cash flows for the PEAKS Trust Student Loans and the CUSO Student Loans, in total and for those loans pursuant to which ASC 310-30 was applied by analogy, as of the dates indicated


	PEAKS Trust Student Loans				CUSO Student Loans
	As of February 28, 2013				As of September 30, 2014
	Total		ASC 310-30 Applied By Analogy		Total		ASC 310-30 Applied By Analogy
Estimated fair value	$	112,116	$	60,177	$	27,199	$	12,799
Accretable yield	$	100,953	$	58,843	$	12,498	$	5,651
Expected cash flows	$	213,069	$	119,020	$	39,697	$	18,450

The following tables set forth information regarding aggregate changes in accretable yield of the loan pools of the PEAKS Trust Student Loans, in total, and for those loans pursuant to which ASC 310-30 was applied by analogy, for the periods indicated:


	Year Ended December 31, 2014
	Total			ASC 310-30 Applied By Analogy
Balance as of January 1	$	70,580		$	42,274
Additions resulting from the PEAKS Consolidation		0			0
Accretion		(11,471	)		(6,700	)
Reclassification from nonaccretable difference and changes in expected cash flows		(7,290	)		(2,920	)

Balance as of December 31	$	51,819		$	32,654


	Year Ended December 31, 2013
	Total			ASC 310-30 Applied By Analogy
Balance as of January 1	$	0		$	0
Additions resulting from the PEAKS Consolidation		100,953			58,843
Accretion		(12,996	)		(7,243	)
Reclassification from nonaccretable difference and changes in expected cash flows		(17,377	)		(9,326	)

Balance as of December 31	$	70,580		$	42,274

The following table sets forth information regarding aggregate changes in accretable yield of the loan pools of the CUSO Student Loans, in total, and for those loans pursuant to which ASC 310-30 was applied by analogy, for the periods indicated:


	Year Ended December 31, 2014
	Total			ASC 310-30 Applied By Analogy
Balance as of January 1	$	0		$	0
Additions resulting from the CUSO Consolidation		12,498			5,651
Accretion		(699	)		(333	)
Reclassification from nonaccretable difference and changes in expected cash flows		(71	)		539

Balance as of December 31	$	11,728		$	5,857

Contractually Required Payments. The excess of the contractually required payments of the Private Education Loans over the expected cash flows is referred to as the nonaccretable difference. The following table sets forth the contractually required future principal and interest payments, expected cash flows and the nonaccretable difference, in total and for those loans pursuant to which ASC 310-30 was applied by analogy for the PEAKS Trust Student Loans and the CUSO Student Loans, as of the dates indicated:


	PEAKS Trust Student Loans				CUSO Student Loans
	As of February 28, 2013				As of September 30, 2014
	Total		ASC 310-30 Applied By Analogy		Total		ASC 310-30 Applied By Analogy
Contractual future principal and interest payments	$	487,800	$	213,600	$	111,159	$	36,715
Expected cash flows		213,069		119,020		39,697		18,450

Nonaccretable difference	$	274,731	$	94,580	$	71,462	$	18,265

Allowance for Private Education Loan Losses. On a quarterly basis subsequent to the PEAKS Consolidation and the CUSO Consolidation, as applicable, we estimate the principal and interest expected to be collected over the remaining life of each loan pool. These estimates include assumptions regarding default rates, forbearances and other factors that reflect then-current market conditions. Prepayments of loans were not considered when estimating the expected cash flows, because, historically, few Private Education Loans have been prepaid.

If a decrease in the expected cash flows of a loan pool is probable and would cause the expected cash flows to be less than the expected cash flows at the end of the previous fiscal quarter, we would record the impairment as:

•

a provision for private education loan losses in our Consolidated Statement of Operations; and

•

an increase in the allowance for loan losses on our Consolidated Balance Sheet.

The provision for private education loan losses represents the increase in the allowance for loan losses that occurred during the period. The allowance for loan losses is the difference between the carrying value and the total present value of the expected principal and interest collections of each loan pool, discounted by the loan pool’s effective interest rate at the end of the previous fiscal quarter. If a significant increase in the expected cash flows of a loan pool is probable and would cause the expected cash flows to be greater than the expected cash flows at the end of the previous fiscal quarter, we would:

•

first reverse any allowance for loan losses with respect to that loan pool that was previously recorded on our Consolidated Balance Sheet, up to the amount of that allowance; and

•

record any remaining increase prospectively as a yield adjustment over the remaining estimated lives of the loans in the loan pool.

The following table sets forth information regarding changes in the allowance for loan losses of the loan pools of the PEAKS Trust Student Loans in the aggregate for the periods indicated:


	Year Ended December 31,
	2014			2013
Balance at beginning of period	$	29,349		$	0
Loans charged off		(1,199	)		0
Recoveries from charged off loans		2,092			0
Provision for loan losses		12,111			29,349

Balance at end of period	$	42,353		$	29,349

The following table sets forth information regarding changes in the allowance for loan losses of the loan pools of the CUSO Student Loans in the aggregate for the period indicated:


	Year Ended December 31, 2014
Balance at beginning of period	$	0
Loans charged off		0
Recoveries from charged off loans		0
Provision for loan losses		2,039

Balance at end of period	$	2,039

Adjustments to the interest income of a loan pool are recognized prospectively, if those adjustments are due to:

•

changes in variable interest rates; or

•

any other changes in the timing of the expected cash flows of the loan pools.

Loan Modifications and Charge Offs. Modifications were made to PCI Loans in the fiscal years ended December 31, 2014 and 2013 and were primarily due to forbearances granted with respect to the payment of those loans. We consider the impact of any modifications made to PCI Loans as part of our quarterly assessment of whether:

•

a probable and significant change in the expected cash flows of the PCI Loans has occurred; and

•

the loans should continue to be accounted for and reported as PCI loans.

In evaluating the impact of modifications made to PCI Loans on the expected cash flows of those loans, we consider the effect of any foregone interest and the potential for future default. These default estimates are used to calculate expected credit losses with respect to each loan pool. In developing these probabilities of default estimates, we considered the relationship between the credit quality characteristics of the loans in the loan pool and certain assumptions based on the performance history of the Private Education Loans and industry data related to the severity and recovery lag of defaults applicable to private education loans. Loans for which Payments on Behalf of Borrowers were made were assumed to be defaulted loans in our default estimates.

The charge off of a PCI Loan results in the removal of that loan from the underlying PCI Loan pool and reduces the loan pool discount. If the discount for principal losses for a particular PCI Loan pool has been fully depleted, the charge off of a PCI Loan will reduce the PCI Loan pool’s allowance for loan losses. Removal of a PCI Loan from the underlying PCI Loan Pool does not change the effective yield of the PCI Loan Pool.