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Executives

Steve McGarry - IR

Albert L. Lord – Chairman and CEO

Analysts

Jason Miller

Bill Cavalier—Société Genéralé

Sameer Gokhale - Keefe, Bruyette & Woods

Christina Amon - Merrill Lynch

SLM Corporation (SLM) Q3 2007 Earnings Call December 20, 2007 9:30 AM ET

Operator

At this time I would like to welcome everyone to the SLM Corporation Shareholder Conference Call. (Operator Instructions) I would now like to turn the call over to the Vice President of Investor Relations, Mr. Steve McGarry.

Steve McGarry

Thank you very much, Hilary. Good morning, everybody and thank you for tuning in to our conference call today. First we’ll start by reading a brief Safe Harbor statement. Please note that during the conference call we may discuss predictions, expectations and may make other forward-looking statements. Actual results in the future may differ from those discussed here -- perhaps materially -- based on a variety of factors. Listeners should refer to the discussion of those factors on the company’s Form 10-K and other filings with the SEC.

During the course of this conference call, we will refer to non-GAAP measures that we call our core earnings presentation. The description of core earnings, a full reconciliation of the core earnings presentation to GAAP measures and our GAAP results can be found in our 10-Qs, 10-Ks and supplemental earnings disclosures, all of which are posted on the investors page at our website, SallieMae.com.

After Al’s remarks, we will open up the call to Q&A, but I would ask that due to the overwhelming interest in the call this morning that you limit your questions to one per caller. Thank you.

Albert L. Lord

Good morning. I have to say, this is a unique experience and I’ve learned that we have a record number of participants on one of our conference calls. Let me first apologize for asking you to sit in during the market opening, I wasn’t quite paying attention to that and I do apologize; it certainly was not intentional.

I am talking to you today as your CEO and Chairman for the first time. I’ve been in this seat officially three full days. The purpose of this call really is to reacquaint myself with you and you with me, and try to create some transparency by me as CEO and not part of the LBO transaction committee team.

The point of my coming back to this chair is to engineer the Sallie Mae transition from what is frankly deal limbo to begin to regrow earnings, which we’ve not done in some period of time.

I will confess to you that the Executive Chair role that I had occupied for a brief period was confusing internally, so we bumped along to finally get to the position where I am the CEO.

I am not going to take a great deal of your time today; probably 30 minutes or less. I am here to talk about some broad issues that we are looking at right now and my goals. I am not going to be getting into basis points and FICO scores and modeling and that sort of thing.

I thank you again for listening. I am quite aware that on the back end of a failed transaction that there area lot of unhappy people on the other end of this call. It is ironic, because it was unhappy shareholders who originally put me in this seat in the first place. I’ll talk to you today about the recent past and the near future.

Let me first talk about the deal; I am not going to talk very much about it. As you are well aware, it’s not a deal any longer, it’s litigation. I am going to attempt to engage ina little self-defense, hopefully not defensively.

I and the company and the board have gotten some bad press for not doing a transaction. I know there are many disappointed recent shareholders. Again, the irony is that my objective over a 30-year career representing public companies has been to reward investors -- particularly in this company, which I hold very dear.

As I have told you before, I fought and wona proxy contest in 1995 when the share price was $2.95. There area lot of shareholders rewarded with those results and quite frankly I hope a few of them are listening.

There has been a lot of finger-pointing about who is responsible. I would just say, for that matter, to credibly point at me, our committee or our board you actually must believe that the other side wanted to doa deal and we did not; the exact reverse is the fact. About the deal, I’ll say no more.

I am going to mention few words about my stock sale. My bank sold me out, on Friday, of 1.2 million shares. I will mention that it’s embarrassing and troublesome to me personally. It is not a sign of my disillusionment with the company; in fact, the exact reverse is the case. It’s a short term cost, in my view, of my own belief in my company. I suppose you might say one more victim of an unfinished deal.

I can assure you that I am properly incented to create the earnings growth that this company has been known for and I have no more margin stock -- no more margin.

On a personal level, I’ve been working full-time for a long, long time; 40 years or more. In the last couple of years at Sallie Mae I have not been hands-on, but I can tell you I’ve been working on Sallie Mae every single day since this deal first cracked in July.

This is a very challenging time. The goal here is to get out of deal mode and into the growth mode; the same growth mode that we’ve been in for the last 25 years. I have very, very specific goals. They are going to take a little time. For what its worth – and I have had this question asked to mea number of times -- this very, very much feels right to me. I feel like I amin the right place at the right time.

I can assure you also, while it’s not forever, you’ve got me for at least two years.

My immediate plans? As I said, I’ve just become CEO on Friday -- it’s Wednesday, I think. My first goal -- probably my first goal and second goal -- is to strengthen our balance sheet. The unfinished deal cost us a single-A rating. We are now BBB. The first objective is to solidify that BBB; the next goal is to improve it from BBB to single-A. This is very much my first priority.

In order to do that, obviously, we are going to add capital, we are going to need to add capital. In this marketplace capital is king and frankly only recently have I begun to believe that capital may be king in almost all economic environments.

The company needs to diversify its funding base, putting ourselves in deal mode put us on a very specific path that was very consistent with the way this company was going to be run; we need to get off to that path.

I’d like to sign a truce with the unsecured lending community, and I very much understand that is likely to be covenant-heavy, not covenant-light as in the past; and in fact, we may very well be prepared to talk with some of our existing creditors in the unsecured community to help pave the way for the future.

We have to disarm our equity-forward contracts. Those equity-forward contracts were struck ina way that were extraordinarily accretive to the buyers who didn’t buy, but they are dilutive to our current owners when the stock price goes down. We are dealing with that immediately.

Another key objective is to build off-balance sheet capacity. We obviously offload assets through the securitization route. We need other avenues as well, as we move into the future.

The objective of more capital, obviously, is to strengthen the balance sheet. It is also to reduce our funding costs. I’ll talk ina couple of minutes about our current earnings situation, but clearly higher funding costs in this tighter credit environment are causing some of that downturn. The combination of the deal, and having funneled our funding through the buyers channel has bumped our funding costs.

The other immediate goal -- and it’s already been started by the company -- is to focus directly on the highest quality private credit asset channels.

Intermediate goals: intermediate for me means -- I guess you’d call itthe ‘08 lending season, it begins in the summer of ‘08 so we’re really talking about maybe July. It is at that point that I hope we begin to restore a viable, long-term earnings growth rate for the company.

We’ll continue to capitalize on our on-campus strength and build that private credit channel. There are numerous opportunities to consolidate the industry. We have to be very discriminating in that effort, but I see massive opportunity for us to increase share. Again, to acquire that capacity we will likely use stock. We will not do dilutive transactions. We will not increase our goodwill and these opportunities will be taken also to build capital.

When people think about this company in terms of its earnings growth rate --and we’ve had a pretty impressive growth rate for 25 years – it comes down to very simple, simple basics: it is the growth in the number students, the growth in thecost of schools and our ability to grow market share.

Our focus, particularly now in light of events, including legislation will be to focus our growth targets even more directly on the four-year schools where we want to build market share.

Sallie Mae has had a strong double-digit growth rate for 25 years. We first listed this company in 1983 when I was the CFO. The success we’ve earned over that period has been as a consequence of what I just mentioned: the growth in higher ed, our market share growth. We’ve achieved those double-digit growth rates in the face of 25 years of margin cuts. This recent round of margin cuts was significant, but is not new. It changes the landscape for us but if anybody is prepared to deal with that, we are.

These macroeconomic facts did not change just because of a failed deal.

You folks have raised issues with me over a period of time; in the most recent period of time I’ll try to deal with those issues and then I’ll take some of your questions.

Recently we restruck or reforecast or reguided -- or whatever it is, the language we need to use -- our fourth quarter earnings and our 2008 outlook. I am being asked, “why?” I am not going to get precise, but the issue is predominately funding costs.

Our securitization market costs are out over 25 basis points; access there is not as free or infinite as it once was. We have discovered an index mismatch between commercial paper on which the student loans earn their interest, and LIBOR. This credit crunch has exposed that mismatch which had never opened in the roughly ten years we’ve had this commercial paper index, but it’s widened out into double-digits.

The interim financing facility provided by the buyer has high financing costs. Replacing it will probably involve higher financing costs. This is not a great time to be financing.

We made a decision on the basis of trying to increase market share, not to knock out our borrower benefits in response to the recent legislation; the original forecast had us knocking our benefits out. We’ve moved our private credit provision up a little bit since we’ve talked to you in October. Since we talked to you in October this credit crunch re-emerged, and sobe it.

As I said, I don’t want to get into FICO scores and basis points. Steve can help you guys with your models with respect to these issues, and he will.

Of course I hear a lot of questions about private credit quality. I would direct you to our securitization data which is actually showing mild improvement, at least on a delinquency data versus prior quarters. It seems to be moving in the right direction. I am not the least bit Polly-Annish because of those numbers.

This is a delicate economic environment, at least it seems to be, so we are watching them very closely. I am pleased they are going in the right direction but I also would tell you they are -- we are comparing them to first half statistics which bear thecost of some operational issues and make it a little bit difficult to fully analyze that data.

We have analyzed our defaults and we have a highly sophisticated and professional group of collectors in our collection function and they have analyzed these defaults and we are on them. We’ve moved quickly to cut off those loans, the most difficult loans, at their source and I believe we have a very good understanding of that. This is a very high priority of mine in my new seat.

The very good news is the demand for this product is as strong as ever and it grows. Almost all marginal funding student borrowing is in the private credit area. Almost every student has used up whatever guaranteed loans are available, so whatever growth and whatever demand increase there is is typically in the private area. I say that’s good news. It gives us the luxury of applying a little more care in the selection of these assets.

I hear noise from a variety of places, some of which make me less than happy, about our refinancing our interim facility. That facility comes due in May, although in February it becomes much more expensive. As I said, there seems to bea lot of interest in this facility. We need to remember that this is a fully secured facility and while it’s a bad time to be negotiating interest rates, we are very much in that process. We have a great deal of interest in this and in my view, it’s a matter of cost.

The long-term, I think it’s worth noting that the company has never had an interim facility in its 30-year history. This is a by-product of a deal. The goal will be of course to have back-up facilities in sufficient amount long-term, but obviously the long-term goal as we build capital is to reduce the size of it and certainly the cost of it.

I’ve been CEO and CFO of this company for 24 years. I think the largest that underlying facility had ever been was $6 billion. That would clearly be insufficient today but this is a unique situation.

Our other goal, as I said earlier, I think is to have -- is to build other avenues to move our assets off balance sheet.

I’m going to wrap up. As I said, this company has been around for 35 years. It has led the financing of higher education for 35 years. The macroeconomics of this industry remain the same. There have been a variety of changes, particularly in the legislative area and in the credit markets underlying all of this, but we are talking about a company that seeks to lead and does lead the higher education finance industry and has been in effect wandering off in a different path for the last nine months now. We need to get off that path and get back on the right path and get back to the double-digit earnings growth that we’ve had in the past.

I’ve had a 26-year -- of the company’s 35 years, I’ve been associated with it for 26 years. I’m extraordinarily proud of it. This is just one more major challenge for this company. We will exceed that challenge. There are lots of worriers in this environment. Just remember, those of you who are worrying, that this business is one of the very few that has -- it’s not totally recession proof but it is virtually recession proof.

I will now take a few of your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Jason Miller. Your line is open, sir.

Jason Miller

Yes, I wanted to ask -- you’re going to shore up the balance sheet. Does that mean you are going to be selling equity?

Albert L. Lord

The most preferred type of equity is common equity. I’m not going to -- at this point, I’m not going to get very precise with you. The idea is to strengthen the equity, the capital count with financing somewhere beneath the long-term credit lines.

Jason Miller

Do you think you’d need to raise to get back to the credit rating you would like and what are your thoughts about the dividend?

Albert L. Lord

All right. This is the last question I answer that’s more than one part. We will look at the dividend in the second half of the year.

Jason Miller

Okay.

Albert L. Lord

Thank you.

Jason Miller

And you didn’t mention how much equity you were going to need to get back up to the single A rating.

Albert L. Lord

You’re talking to the wrong guy. I don’t know that answer.

Jason Miller

Thank you.

Operator

Our next question is from Bill Cavalier.

Bill Cavalier—Société Genéralé

Can you talk a little bit about the pass-through market? Clearly there’s pretty much no appetite for student loan paper at this point. What are you being told about when you think there will bea market for your pass-through notes so that we can start to --

Albert L. Lord

You’re talking about our securitizations, I assume? Look, we’ve not been -- we’ve not done as much as we’d like to do. We’d like to doall of our current production and actually liquidate even some of our inventory but we’ve done a securitization this month. We did a securitization in several preceding months. They’ve been maybe 60%, 70% of what we wanted to do.

My own view, and this is where I usually getin trouble, but my own view is that that market -- that, along with a lot of other markets, is shut down for the year 2007 until people take a look at their 12/31 balance sheets and figure out what they are doing. But I don’t have the bottom line answer to your question.

Bill Cavalier—Société Genéralé

Okay, but clearly you’ve been talking to the arranging banks and they must be telling you something.

Albert L. Lord

I’m not sure what you’re talking about. I’ve been talking to whom?

Bill Cavalier—Société Genéralé

When you doa securitization, you have a bank that arranges -- that actually does the arranging, right? You have an arranging bank and somebody must be telling you something about what the market is looking like, what their expectations are for next year. We’re trying to put together projections here, Al. We’re trying to make -- we’re trying to figure out what your stock is going to be worth and you’ve got to give us some guidance, you’ve got to give us some numbers. I don’t even seea margin number here for the stuff that you’ve done. Can you give us some handle on what your stock is worth?

Albert L. Lord

You should give Steve a call.

Bill Cavalier—Société Genéralé

But you’re the CEO. You’re the guy who just took over the company.

Albert L. Lord

Yeah, that’s exactly right. I’m the CEO. You should give Steve a call. Next question.

Operator

Our next question is from Sameer Gokhale from KBW. Your line is open.

Sameer Gokhale - Keefe, Bruyette & Woods

Thanks. I just had a question, Al. You talked about opportunities to buy portfolios in the market. Have you been seeing any early signs of smaller competitors exiting with the new legislation that’s come, that was enacted as well as some of the funding challenges that you mentioned but presumably the smaller companies are facing those as well. Is it too early to tell yet or are you seeing or hearing about any signs of smaller companies exiting? That would be helpful. Thank you.

Albert L. Lord

Thank you for the question. Yes, we’re seeing quite a few signs. This will bean overstatement but it’s a little bit -- I think everybody is looking at their plans in this business and we have heard from a number of players, small, medium, and large, to talk about what we might doin the future. And it is one of the reasons why I’ve come so quickly to the realization that we need to bump our equity capital so that we can play in that marketplace as we roll into 2008.

Sameer Gokhale - Keefe, Bruyette & Woods

That’s helpful and just a quick follow-up, if I may; do you have a sense for what kind of return hurdles you would expect on portfolio purchases versus issuing stock and the return that investors expect? I don’t know if that’s something you can answer at this point but I was just curious if you have any thoughts on that.

Albert L. Lord

You know what, I failed to mention -- I don’t know how I missed it in my notes -- look, I’m going to put myself in front of you folks in January, in mid-January in New York and I would really like to use that occasion to get into more specificity with respect to different -- any returns that may differ from what we’ve tried to achieve in the past and more specific plans.

As I said, I’ve been in this seat for three days. I wanted to get to you guys -- look, I have along history of dealing with shareholders openly. I’ve been very much under wraps for the last nine months and I wanted to get before you today and so when I stand before you in January, I will be prepared to take all of your questions and I would suggest maybe you get there early because I can assure you, you’ll be going through a metal detector.

Sameer Gokhale - Keefe, Bruyette & Woods

Thank you.

Operator

Our next question is from Christina [Amon] from Merrill Lynch. Your line is open.

Christina Amon - Merrill Lynch

Good morning. Thanks for the question. I just wanted to follow up quickly on the $30 billion facility that had been associated with the deal, now that that’s going to be going away, I’ve been reading in your recent releases that you are soliciting interest from other financial institutions and it seems like there was pretty good interest in securing some funding either to the $30 billion mark or in excess of that. I just wondered if you could provide us with some updates or comments on that, please.

Albert L. Lord

Those conversations go on. I think in terms of substantive movement, you are talking about early next year and I’m quite pleased with the progress and the tenor of those conversations. So -- I mean, it’s inappropriate for me to give any further depth than that.

Christina Amon - Merrill Lynch

Okay. Thank you.

Operator

(Operator Instructions)

Albert L. Lord

How good is this? Steve, let’s go. There’s no -- no questions. Let’s get the fuck out of here.

Steve McGarry

Okay, Hilary, if there are no more questions, we’ll end the call. Thank you, everybody for tuning in and if you do have follow-up questions, please feel free to call myself or Joe Fischer. Thank you. That ends the call.

Albert L. Lord

Goodbye. Thank you.

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