UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to          .

NELNET, INC.

(Exact name of Registrant as specified in its charter)

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

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS
Class A Common Stock, Par Value $0.01 per Share

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

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

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

Large accelerated filer þ       Accelerated filer o       Non-accelerated filer o

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

The aggregate market value of the Registrant’s voting common stock held by non-affiliates of the Registrant on June 30, 2006 (the last business day of the Registrant’s most recently completed second fiscal quarter), based upon the closing sale price of the Registrant’s Class A Common Stock on that date of $40.55 per share, was $887,731,589. For purposes of this calculation, the Registrant’s directors, executive officers, and greater than 10 percent shareholders are deemed to be affiliates.

As of January 31, 2007, there were 39,055,027 and 13,505,812 shares of Class A Common Stock and Class B Common Stock, par value $0.01 per share, outstanding, respectively.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement to be filed for its 2007 Annual Meeting of Shareholders scheduled to be held May 24, 2007 are incorporated by reference into Part III of this Form 10-K.

 

 

NELNET, INC.
FORM 10-K
TABLE OF CONTENTS

PART I
Item 1.		Business			2
Item 1A.		Risk Factors			16
Item 1B.		Unresolved Staff Comments			26
Item 2.		Properties			26
Item 3.		Legal Proceedings			26
Item 4.		Submission of Matters to a Vote of Security Holders			27
PART II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities			27
Item 6.		Selected Financial Data			29
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operation			30
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			67
Item 8.		Financial Statements and Supplementary Data			71
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			71
Item 9A.		Controls and Procedures			71
Item 9B.		Other Information			73
PART III
Item 10.		Directors, Executive Officers, and Corporate Governance			73
Item 11.		Executive Compensation			73
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters			73
Item 13.		Certain Relationships and Related Transactions and Director Independence			73
Item 14.		Principal Accounting Fees and Services			73
PART IV
Item 15.		Exhibits and Financial Statement Schedules			74
Signatures					81
Amended Share Retention Policy
Computation of Ratio of Earnings to Fixed Charges
Subsidiaries
Consent of KPMG LLP, Independent Registered Public Accounting Firm
Certification Pursuant to Section 302 of Co-Chief Executive Officer
Certification Pursuant to Section 302 of Co-Chief Financial Officer
Certification Pursuant to Section 302 of Chief Financial Officer
Certification Pursuant to Section 906
Response to Final Audit Report, Special Allowance Payments to Nelnet for Loans Funded by Tax-Exempt Obligations

This report contains forward-looking statements and information that are based on management’s current expectations as of the date of this document. When used in this report, the words “anticipate,” “believe,” “estimate,” “intend,” and “expect” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to risks, uncertainties, assumptions, and other factors that may cause the actual results to be materially different from those reflected in such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in “Risk Factors” and elsewhere in this Annual Report on Form 10-K (the “Report”) and changes in the terms of student loans and the educational credit marketplace arising from the implementation of, or changes in, applicable laws and regulations, which may reduce the volume, average term, and costs of yields on student loans under the Federal Family Education Loan Program (the “FFEL Program” or “FFELP”) of the U.S. Department of Education (the “Department”) or result in loans being originated or refinanced under non-FFEL programs or may affect the terms upon which banks and others agree to sell FFELP loans to the Company. The Company could also be affected by changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students, and their families; changes in the general interest rate environment and in the securitization markets for education loans, which may increase the costs or limit the availability of financings necessary to initiate, purchase, or carry education loans; losses from loan defaults; and changes in prepayment rates and credit spreads; and the uncertain nature of the expected benefits from acquisitions and the ability to successfully integrate operations. Additionally, financial projections may not prove to be accurate and may vary materially. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this Report. The Company is not obligated to publicly release any revisions to forward-looking statements to reflect events after the date of this Report or unforeseen events. 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.

PART I.

ITEM 1. BUSINESS

Overview

The Company is an education planning and financing company focused on providing quality products and services to students, families, and schools nationwide. The Company ranks among the nation’s leaders in terms of total student loan assets originated, consolidated, held, and serviced, principally consisting of loans originated under the FFEL Program (a detailed description of the FFEL Program is included in Appendix A to this Report). The Company offers a broad range of pre-college, in-college, and post-college products and services to students, families, schools, and financial institutions. These products and services help students and families plan and pay for their education and students plan their careers. The Company’s products and services are designed to simplify the education planning and financing process and are focused on providing value to students, families, and schools throughout the education life cycle. In recent years, the Company’s acquisitions have enhanced its position as a vertically-integrated industry leader. Management believes these acquisitions allow the Company to expand products and services delivered to customers and further diversify revenue and asset generation streams.

Over the last three years, the Company’s student loan portfolio has increased $10.3 billion to $23.8 billion, a compound annual growth rate of 32 percent. The Company continues to diversify its sources of revenue including those generated from businesses that are not dependent upon government programs reducing legislative and political risk. In 2006, fee-based revenues totaled $308 million or 50% of the Company’s total revenue, compared to $115 million and 22% in 2004.

Management evaluates the company’s GAAP-based financial information as well as operating results on a non-GAAP performance measure referred to as “base net income”. Management believes “base net income” provides additional insight into the financial performance of the core operations. For further information, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

Education Life Cycle

Product and Service Offerings

Operating Segments

The Company is a vertically integrated education services and finance organization that has five operating segments as defined in Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS No. 131”), as follows: Asset Generation and Management, Student Loan and Guaranty Servicing, Tuition Payment Processing and Campus Commerce, Enrollment Services and List Management, and Software and Technical Services. The Company’s operating segments are defined by the products and services they offer or the types of customers they serve, and they reflect the manner in which financial information is currently evaluated by management. During 2006, the Company changed the structure of its internal organization in a manner that caused the composition of its operating segments to change. All earlier years presented have been restated to conform to the 2006 operating segment presentation. In accordance with SFAS No. 131, the Company includes separate financial information about its operating segments in note 17 of the notes to the consolidated financial statements included in this Report.

Asset Generation and Management

The Company’s Asset Generation and Management operating segment is its largest product and service offering and drives the majority of the Company’s earnings. The Company owns a large portfolio of student loan assets through a series of education lending subsidiaries. The Company obtains loans through direct origination or through acquisition of loans.

The Company’s education lending subsidiaries are engaged in the securitization of education finance assets. These education lending subsidiaries hold beneficial interests in eligible loans, subject to creditors with specific interests. The liabilities of the Company’s education lending subsidiaries are not the direct obligations of Nelnet, Inc. or any of its other subsidiaries. Each education lending subsidiary is structured to be bankruptcy remote, meaning that they should not be consolidated in the event of bankruptcy of the parent company or any other subsidiary. The transfers of student loans to the eligible lender trusts do not qualify as sales under the provisions of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS No. 140”), as the trusts continue to be under the effective control of the Company. Accordingly, all the financial activities and related assets and liabilities, including debt, of the securitizations are reflected in the Company’s consolidated financial statements.

Student loans owned by the Company include those originated under the FFEL Program, including the Stafford Loan Program, a program which allows for loans to be made to parents of undergraduate students and to graduate students (“PLUS”), the Supplemental Loans for Students (“SLS”) program, and loans that consolidate certain borrower obligations (“Consolidation”), as well as non-federally insured loans. The following tables summarize the composition of the Company’s student loan portfolio, exclusive of the unamortized costs of origination and acquisition (dollars in thousands):

		As of December 31, 2006								As of December 31, 2005
		Dollars				Percent				Dollars				Percent
Federally insured:
Stafford		$	5,724,586				24.1	%		$	6,434,655				31.8	%
PLUS/SLS			365,112				1.5				376,042				1.8
Consolidation			17,127,623				72.0				13,005,378				64.2
Non-federally insured			197,147				0.8				96,880				0.5
Total			23,414,468				98.4				19,912,955				98.3
Unamortized premiums and deferred origination costs			401,087				1.7				361,242				1.8
Allowance for loan losses:
Allowance — federally insured			(7,601	)			—				(98	)			—
Allowance — non-federally insured			(18,402	)			(0.1	)			(13,292	)			(0.1	)
Net		$	23,789,552				100.0	%		$	20,260,807				100.0	%

The Company’s earnings and earnings growth are directly affected by the size of its portfolio of student loans, the interest rate characteristics of its portfolio, the costs associated with financing, servicing, and managing its portfolio, and the costs associated with origination and acquisition of the student loans in the portfolio, which includes, among other things, borrower benefits and rebate fees to the federal government. The Company generates the majority of its earnings from the spread, referred to as its student loan spread, between the yield it receives on its student loan portfolio and the costs noted above. While the spread may vary due to fluctuations in interest rates, the special allowance payments the Company receives from the federal government ensure the Company receives a minimum yield on its student loans, so long as certain requirements are met.

Student Loan Originations and Acquisitions

During the years ended December 31, 2006 and 2005, the Company originated or acquired a total of $3.5 billion and $6.6 billion, respectively, in student loans (net of repayments, consolidation loans lost, and loans sold), as indicated in the table below (dollars in thousands).

		Year ended December 31,
		2006				2005
Beginning balance		$	19,912,955				13,299,094
Direct channel:
Consolidation loan originations			5,299,820				4,037,366
Less consolidation of existing portfolio			(2,643,880	)			(1,966,000	)
Net consolidation loan originations			2,655,940				2,071,366
Stafford/PLUS loan originations			1,035,695				720,545
Branding partner channel			910,756				657,720
Forward flow channel			1,600,990				1,153,125
Other channels			492,737				796,886
Total channel acquisitions			6,696,118				5,399,642
Repayments, claims, capitalized interest, and other			(1,332,086	)			(1,002,260	)
Consolidation loans lost to external parties			(1,114,040	)			(855,000	)
Loans acquired in portfolio and business acquisitions			—				3,071,479
Loans sold			(748,479	)			—
Ending balance		$	23,414,468				19,912,955

The Company originates and acquires loans through various methods, including: (i) direct-to-consumer channel, (ii) campus based channel, and (iii) spot purchases.

Direct-to-Consumer Channel

Through its direct-to-consumer channel, the Company originates student loans directly with students and parent borrowers. During 2006, a large portion of additions through this channel were attributable to loans originated through the Consolidation program. Student loans that the Company originates directly generally are the most profitable because typically the cost to originate is less than the premiums paid or cost to acquire loans acquired through other channels.

Once a student’s loans have entered the grace or repayment period, their student loans are eligible to be consolidated if they meet certain requirements. Loan consolidation allows borrowers to make a single payment per month with a fixed interest rate, instead of multiple payments on multiple loans, and also enables borrowers to extend their loan repayment period for up to 30 years, depending upon the size of the consolidation loan. The Company’s direct-to-consumer channel, and specifically its consolidation loan activity, allows the Company to add longer-lived assets to its portfolio while also protecting loans in the Company’s portfolio which might be lost to a competitor.

Campus Based Channel

The Company will originate or acquire loans through its campus based channel either directly under one of its brand names or through other originating lenders. Similar to the direct-to-consumer channel, loans originated directly by the Company are generally more profitable because the cost to originate is less than the premiums paid or cost to acquire loans from other originating lenders. In addition to its brands, the Company acquires student loans from lenders to whom the Company provides marketing and/or origination services established through various contracts.

Branding partners are lenders for which the Company acts as a marketing agent in specified geographic areas. A forward flow lender is one for whom the Company provides origination services, but provides no marketing services, or who simply agree to sell loans to the Company under forward sale commitments. Generally, branding partner loans are more profitable for the Company than loans acquired from forward flow lenders. The Company ordinarily purchases loans originated by branding partners and forward flow lenders pursuant to a contractual commitment, at a premium above par, following full disbursement of the loans. The Company ordinarily retains rights to acquire loans subsequently made to the same borrowers, called “serial loans.” Origination and servicing of loans made by branding partners and forward flow lenders is primarily performed by the Company so that loans need not be moved from a different servicer upon purchase by the Company. In addition, the loan origination and servicing agreements generally provide for “life of loan” servicing so that loans cannot be moved to a different servicer.

The Company’s agreements and commitments with these lenders to purchase loans are commonly three to five years in duration and ordinarily contain provisions for automatic renewal for successive terms. The Company is generally obligated to purchase all of the loans originated by the Company on behalf of lenders under these commitments as well as some loans originated elsewhere; however, some branding partners retain rights to portions of their loan originations and in some instances forward flow lenders are only obligated to sell loans originated in certain specific geographic regions or exclude loans that are otherwise committed for sale to third parties. Additionally, branding partners and forward flow lenders are not necessarily obligated to provide the Company with a minimum amount of loans.

Spot Purchases

The Company also acquires student loan portfolios from various entities under “one-time” agreements, or spot purchases. Typically, spot purchased loans have higher costs of acquisition compared to other loan channels.

Student Loan Financing

A significant portion of the net cash flow the Company receives is generated by the interest earnings on the underlying student loans less amounts paid to the bondholders, loan servicing fees, and any other expenses relating to the financing transactions. The Company generally relies upon secured financing vehicles as its most significant source of funding for student loans. The Company’s rights to cash flow from securitized student loans are subordinate to bondholder interests. These secured financing vehicles may be shorter term warehousing programs or longer term permanent financing structures. The size and structure of the financing vehicles may vary, including the term, base interest rate, and applicable covenants. The following chart outlines all of the Company’s funding sources as of December 31, 2006, including financings used by the Company to fund student loans (marked with an asterisk).

Student loan warehousing (Commercial Paper in the above table) allows the Company to buy and manage student loans prior to transferring them into more permanent financing arrangements. The Company uses its large warehouse facilities to pool student loans in order to maximize loan portfolio characteristics for efficient financing and to properly time market conditions for movement of the loans. As of December 31, 2006, the Company had student loan warehousing capacity of $4.2 billion through two commercial paper conduit programs (of which $2.9 billion was outstanding and $1.3 billion was available for future use). The Company also has authorization to fund up to $5 billion in loans through the Company’s own extendible commercial paper conduit, which issues notes under the name of a subsidiary of the Company, and does not rely on bank liquidity support. As of December 31, 2006, the Company had $2.3 billion of notes outstanding and $2.7 billion of remaining authorization under this warehouse program.

The Company had $19.7 billion in asset-backed securities issued and outstanding as of December 31, 2006 (Floating, Auction, and Fixed Rate Notes in the above table). These asset-backed securities allow the Company to finance student loan assets on a long term basis. In 2006, the Company completed three asset-backed securitizations totaling $6.3 billion, which made the Company the second largest issuer of student loan asset-backed securities for the year.

Interest Rate Risk Management

Because the Company generates a significant portion of its earnings from its student loan spread, the interest rate sensitivity of the Company’s balance sheet is actively managed. The current and future interest rate environment can and will affect the Company’s interest earnings, net interest income, and net income. The effects of changing interest rate environments are further outlined in Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk — Interest Rate Risk.”

The interest rate earned by the Company and the interest rate paid by the underlying borrowers on the Company’s portfolio of FFELP loans is set forth in the Higher Education Act of 1965, as amended (the “Higher Education Act”), and the Department’s regulations thereunder and, generally, is based upon the date the loan was originated. The majority of the student loans held by the Company have variable-rate characteristics in certain interest rate environments. Some of the student loans, generally those originated prior to April 1, 2006, include fixed rate components depending upon the rate reset provision or, in the case of consolidation loans, are fixed at the weighted average interest rate of the underlying loans at the time of consolidation. On those FFELP loans with fixed-term borrower rates, primarily consolidation loans, the Company earns interest at the greater of the borrower rate or a variable rate based on the special allowance payment (“SAP”) formula set by the Department. As a result of one of the provisions of the Higher Education Reconciliation Act of 2005 (“HERA”), the Company’s portfolio of FFELP loans originated on or after April 1, 2006, no longer earns interest at the greater of the SAP rate and the borrower rate. For the portfolio of loans originated on or after April 1, 2006, when the borrower rate exceeds the variable rate based on the SAP formula, the Company must return the excess to the Department. Thus, the portfolio of loans originated after April 1, 2006 earns interest only at the variable rate based on the SAP formula.

Since the majority of its portfolio has variable interest rate characteristics, the Company has historically followed a policy of funding the majority of its student loan portfolio with variable-rate debt. In certain interest rate environments, namely when the borrower rate or statutorily defined rate exceeds the normal lender yield in low or declining interest rate environments, the Company has the potential to earn “floor income” based on the mismatch in rates. The Company has used fixed rate debt or derivative instruments in an attempt to hedge this risk and substantially reduce the volatility of its earnings based on interest rate sensitivity. In higher interest rate environments, where the interest rate rises above the borrower rate and the fixed rate loans start to earn at variable rate because of special allowance formulas, the loans are effectively matched with variable rate debt and the impact of rate fluctuations is substantially reduced.

The Company attempts to match the interest rate characteristics of certain pools of loan assets with debt instruments of substantially similar characteristics, particularly in rising interest rate markets. Due to the variability in duration of the Company’s assets and varying market conditions, the Company does not attempt to perfectly match the interest rate characteristics of the entire loan portfolio with the underlying debt instruments. The Company has adopted a policy of periodically reviewing the mismatch related to the interest rate characteristics of its assets and liabilities, described above, together with the Company’s outlook as to current and future market conditions. Based on those factors, the Company uses derivative instruments as part of its overall risk management strategy. Derivative instruments used as part of the Company’s interest rate risk management strategy include interest rate swaps, basis swaps, interest rate floor contracts, and cross-currency swaps. For further information, see Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk — Interest Rate Risk.”

Credit Risk

The Company’s portfolio of student loan assets is subject to minimal credit risk, generally based upon the type of loan, date of origination, and quality of the underlying loan servicing. The Company’s portfolio of non-federally insured loans is subject to credit risk similar to other consumer loan assets. Substantially all of the Company’s loan portfolio (99% at December 31, 2006) is guaranteed at some level by the Department. Depending upon when the loan was first disbursed, and subject to certain servicing requirements, the federal government currently guarantees 97-98% of the principal of and the interest on federally insured student loans, which limits the Company’s loss exposure to 2-3% of the outstanding balance of the Company’s federally insured portfolio (for older loans disbursed prior to 1993, the guaranty rate is 100%). In September 2005, the Company was re-designated as an Exceptional Performer by the Department in recognition of its exceptional level of performance in servicing FFELP loans. As a result of this designation, the Company receives 99% reimbursement on all eligible FFELP default claims submitted for reimbursement. Only FFELP loans that are serviced by the Company, as well as loans owned by the Company and serviced by other service providers designated as Exceptional Performers by the Department, are eligible for the 99% reimbursement. As of December 31, 2006, more than 99% of the Company’s federally insured loans were serviced by providers designated as Exceptional Performers. The following table shows the activity in the Company’s allowance for loan loss for the three years ended December 31, 2006, 2005 and 2004:

		Year ended December 31,
		2006				2005				2004
		(dollars in thousands)
Balance at beginning of period		$	13,390				7,272				16,026
Provision for loan losses:
Federally insured loans			9,268				280				(7,639	)
Non-federally insured loans			6,040				6,750				7,110
Total provision for loan losses			15,308				7,030				(529	)
Charge-offs, net of recoveries:
Federally insured loans			(1,765	)			(299	)			(1,999	)
Non-federally insured loans			(930	)			(613	)			(6,226	)
Net charge-offs			(2,695	)			(912	)			(8,225	)
Balance at end of period		$	26,003				13,390				7,272
Allocation of the allowance for loan losses:
Federally insured loans		$	7,601				98				117
Non-federally insured loans			18,402				13,292				7,155
Total allowance for loan losses		$	26,003				13,390				7,272
Net loan charge-offs as a percentage of average student loans			0.012	%			0.006	%			0.070	%
Total allowance as a percentage of average student loans			0.120	%			0.085	%			0.062	%
Total allowance as a percentage of ending balance of student loans			0.111	%			0.067	%			0.055	%
Non-federally insured allowance as a percentage of the ending balance of non-federally insured loans			9.334	%			13.720	%			7.914	%
Average student loans		$	21,696,466				15,716,388				11,809,663
Ending balance of student loans			23,414,468				19,912,955				13,299,094
Ending balance of non-federally insured loans			197,147				96,880				90,405

In 2004, the Company’s allowance and the provision for loan losses were each reduced by $9.4 million to account for the estimated effects of the Company’s (and other service providers servicing the Company’s student loans) Exceptional Performance designations. In 2006, the Company’s allowance and the provision for loan losses were each increased by $6.9 million due to a provision in the Deficit Reduction Act that increased risk sharing for student loan holders by one percent on FFELP loans.

Drivers of Growth in the Student Loan Industry

The increase in the Company’s student loan portfolio has been driven in part by the growth in the overall student loan marketplace. The student loan marketplace growth is a result of rising higher education enrollment and the rising annual cost of education, which is illustrated in the following charts.

Higher education enrollment (In million)		Annual cost of Education ($ thousands)(1)
Source: U.S. Department of Education,		Source: The College Board, New York, NY.
National Center for Education Statistics		(1) Annual average tuition at private, four-year institutions using constant 2006 dollars.

As a result of estimated higher education enrollment and the increase in the cost of education, it is estimated that student loan originations will continue to grow similar to historical levels, which is illustrated in the following chart.

Student loan origination volume ($ billions)

Source: U.S. Department of Education, The College Board, National Center for Education Statistics, Octameron Associates

Competition

The Company faces competition from many lenders in the highly competitive student loan industry. Through its size, the Company has successfully leveraged economies of scale to gain market share and to compete by offering a full array of loan products and services. In addition, the Company has attempted to differentiate itself from other lenders through its customer service, comprehensive product offering, vertical integration, technology, and strong relationships with colleges and universities.

The Company views SLM Corporation, the parent company of Sallie Mae, as its largest competitor in loan origination and student loans held. Large national and regional banks are also strong competitors, although many are involved only in the origination of student loans. Additionally, in different geographic locations across the country, the Company faces strong competition from the regional tax-exempt student loan secondary markets. The Federal Direct Lending (“FDL”) Program, in which the Federal government lends money directly to students and families, has also historically reduced the origination volume available for FFEL Program participants.

The following tables summarize the top FFELP loan holders, originators, and consolidators as of September 30, 2005 (the latest date information was available from the Department):

Top FFELP Loan Holders
Rank		Name		$ billions
1		Sallie Mae		$102.3
2		Citigroup		24.6
3		Nelnet		15.8
4		Wachovia		10.7
5		Wells Fargo		9.6
6		Brazos Group		9.0
7		College Loan Corp.		7.8
8		JPMorgan Chase		7.5
9		PHEAA		6.8
10		Goal Financial		5.3

Top FFELP Stafford and PLUS Originators
Rank		Name		$ billions
1		JPMorgan Chase		$5.4
2		Sallie Mae		5.0
3		Nelnet		4.1
4		Citigroup		3.3
5		Bank of America		2.9
6		Wells Fargo		2.3
7		Wachovia		2.1
8		College Loan Corp.		1.2
9		U.S. Bancorp		1.1
10		Access Group		1.1

Top FFELP Consolidators
Rank		Name		$ billions
1		Sallie Mae		$19.3
2		Citigroup		4.8
3		Nelnet		4.1
4		JPMorgan Chase		2.2
5		SunTrust		1.9
6		Northstar		1.7
7		Goal Financial		1.7
8		College Loan Corp.		1.6
9		Brazos Group		1.6
10		PHEAA		1.6

Source: Department of Education, Student Loan Servicing Alliance

Seasonality

The Company earns net interest income on its portfolio of student loans. Net interest income is primarily driven by the size and composition of the portfolio in addition to the prevailing interest rate environment. Although originations of student loans are generally subject to seasonal trends which will generally correspond to the traditional academic school year, the size of the Company’s portfolio, the periodic acquisition of student loans through its various channels, and the run-off of its portfolio limits the seasonality of net interest income. Unlike the lack of seasonality associated with interest income, the Company incurs significantly more asset generation costs prior to and at the beginning of the academic school year.

Student Loan and Guaranty Servicing

The Company’s servicing division offers lenders across the U.S. and Canada a complete line of education loan services, including application processing, underwriting, disbursement of funds, customer service, account maintenance, federal reporting and billing collections, payment processing, default aversion, claim filing, and recovery/collection services. These activities are performed internally for the Company’s portfolio in addition to generating fee revenue when performed for third-party clients. The Company’s student loan servicing division uses proprietary systems to manage the servicing process. These systems provide for automated compliance with most of the regulations adopted under Title IV of the Higher Education Act as well as regulations of the Canadian government-sponsored student loan program. The Company offers four primary product offerings as part of its loan and guaranty servicing functions. These product offerings and percentage of total Student Loan and Guaranty Servicing revenue provided by each during the year ended December 31, 2006 follows:

1. Origination and servicing of FFEL Program loans (34.8%);
2. Origination and servicing of non-federally insured student loans (5.1%);
3. Servicing and support outsourcing for guaranty agencies (23.9% ); and
4. Origination and servicing of loans under the Canadian government-sponsored student loan program (36.2%).

The following table summarizes the Company’s loan servicing volumes as of December 31, 2006 and 2005:

		2006												2005
		Company				Third party				Total				Company				Third party				Total
		(dollars in millions)												(dollars in millions)
FFELP loans		$	21,869				8,725				30,594			$	16,969				10,020				26,989
Canadian loans (in U.S. $)			—				9,043				9,043				—				8,139				8,139
Total		$	21,869				17,768				39,637			$	16,969				18,159				35,128

The Company performs the origination and servicing activities for FFEL Program loans for itself as well as third-party clients. In 2005, the Company was re-designated as an Exceptional Performer. As a result of this designation, the Company’s servicing clients receive 99% reimbursement on all eligible FFELP default claims related to loans serviced by the Company which are submitted for reimbursement. The Company believes service, reputation, and/or execution are factors considered by schools in developing their lender lists and customers deciding who they want servicing their loans. Management believes it is important to provide exceptional customer service in order to increase the Company’s loan servicing and origination volume at schools with which the Company does business.

The Company’s FFELP servicing customers include branding and forward flow lenders who sell loans to the Company as well as other national and regional banks and credit unions. The Company also has various state and non-profit secondary markets as third-party clients. The majority of the Company’s external loan servicing activities are performed under “life of loan” contracts. Life of loan servicing essentially provides that as long as the loan exists, the Company shall be the sole servicer of that loan; however, the agreement may contain “deconversion” provisions where, for a fee, the lender may move the loan to another servicer.

The Company also provides origination and servicing activities for non-federally insured loans. Although similar in terms of activities and functions (i.e., disbursement processing, application processing, payment processing, statement distribution, and reporting) private loan servicing activities are not focused on compliance with provisions of the Higher Education Act and may be more customized to individual client requirements.

The Company also provides servicing support for guaranty agencies, which are the organizations that serve as the intermediary between the U.S. federal government and FFELP lenders, who are responsible for paying the claims made on defaulted loans. The Department has designated 35 guarantors that have been formed as either state agencies or non-profit corporations that provide FFELP guaranty services in one or more states. Approximately half of these guarantors contract for operational or technology services, or both. The services provided by the Company include operational, administrative, financial, and technology services to guarantors participating in the FFEL Program and state agencies that run financial aid grant and scholarship programs.

The Company’s guaranty servicing is limited to a small group of customers. The Company receives virtually all of its guaranty servicing income from three principal guaranty servicing customers - Tennessee Student Assistance Corporation (“TSAC”), College Assist (which is the Colorado state guaranty agency – formerly known as College Access Network), and National Student Loan Program (“NSLP”).

The Company provides student loan administrative services in Canada through its subsidiary, EDULINX Canada Corporation (“EDULINX”). EDULINX provides student loan administrative services, including loan disbursement, in-study account management, loan consolidation, repayment management, customer contact, default prevention, and portfolio management services. In Canada, the principal market for these services consists of the federal government and various provincial governments who deliver

their student loans through direct-financing programs as well as financial institutions who participate in either government-guaranteed and/or risk-shared loan programs.

Substantially all of the Company’s revenues are earned from customers in the United States except for revenue generated from servicing Canadian student loans at EDULINX. For the years ended December 31, 2006 and 2005 and the period from December 1, 2004 (the date of the Company’s acquisition of EDULINX) to December 31, 2004, the Company recognized $69.0 million, $59.2 million, and $4.6 million, respectively, from Canadian student loan servicing customers. The long-lived assets located in Canada related to EDULINX’ business are not significant.

EDULINX has three primary loan servicing customers: the Government of Canada, the Province of Alberta, and the Canadian Imperial Bank of Commerce (“CIBC”). The Government of Canada is EDULINX’s largest customer, accounting for $53.9 million, or 28% of the Company’s loan and guaranty servicing revenue during 2006. On December 22, 2006, EDULINX was notified that the Government of Canada has decided to award the contract to provide financial and related administrative services in support of the Canada and Integrated Student Loan Programs (“CSLP”) to another service provider upon the expiration of the current contract on March 31, 2008. As a result of this decision, EDULINX will be required to transition the existing direct-financed CSLP portfolio it services to the selected service provider. Under the current contract between EDULINX and the Government of Canada, EDULINX can earn performance incentive revenue if certain performance levels are achieved (as defined in the servicing contract). Based on EDULINX achieving certain performance objectives through December 31, 2006, the Company recognized $4.4 million (USD) during the fourth quarter of 2006 related to the incentives under this contract. Additional incentive revenue could be recognized by EDULINX over the remaining term of this contract.

The chart below shows the number of third-party servicing customers, by product, within the Company’s Student Loan and Guaranty Servicing segment as of December 31, 2006:

		Number of Third-party
Product Type		Servicing Customers
FFELP		126
Private		15
Guaranty		27
Canadian		3
Total		171

Competition

There is a relatively large number of lenders and servicing organizations who participate in the FFEL Program. The chart below lists the top ten servicing organizations for FFEL loans as of December 31, 2005 (the latest date information was available from the Department).

Top FFELP Loan Servicers
Rank		Name		$ billions
1		Sallie Mae		$107.3
2		PHEAA		28.4
3		Nelnet		24.4
4		ACS		23.7
5		Great Lakes		23.3
6		Citigroup		19.5
7		JPMorgan Chase		10.7
8		Wells Fargo		8.9
9		Edfinancial		5.3
10		KHEAA		4.5

Source: Department of Education, Student Loan Servicing Alliance

The principal competitor for existing and prospective loan and guaranty servicing business, excluding the Canadian market, is SLM Corporation. Sallie Mae is the largest FFELP provider of origination and servicing functions as well as one of the largest service providers of non-federally guaranteed loans. As the Company expands its student loan origination and acquisition activities, it may face increased competition with some of its servicing customers. The Company also believes the number of guaranty agencies contracting for technology services will increase as states continue expanding the scope of their financial aid grant programs and as a result of existing deficient or outdated systems. Since there is a finite universe of clients, competition for existing and new contracts is

considered high. Agencies may choose to contract for part or all of their services, and the Company believes its products and services are competitive. To enhance its competitiveness, the Company continues to focus on service quality and technological enhancements.

Seasonality

The revenue earned by the Company’s loan and guaranty servicing operations is primarily related to the outstanding portfolio size and composition and the amount of disbursement and origination activity. Revenue generated by recurring monthly activity is driven based on the outstanding portfolio size and composition and has little seasonality. However, a portion of the fees received by the Company under various servicing contracts do relate to services provided in relation to the origination and disbursement of student loans. Stafford, PLUS, and Canadian loans are disbursed as directed by the school and are usually divided into two or three equal disbursements released at specified times during the school year. The two periods of August through October and December through March account for the majority of the Company’s total annual Stafford, PLUS, and Canadian loan disbursements. For private loan origination activities, disbursements peak from June through September and the Company will earn a large portion of its origination fee income during these months. There is also a seasonal fluctuation in guaranty processing levels due to the correlation of the delivery of loans to students attending schools with traditional academic calendars, with peak season occurring from approximately July to September.

Tuition Payment Processing and Campus Commerce

The Company’s Tuition Payment Processing and Campus Commerce operating segment provides products and services to help institutions and education seeking families manage the payment of education costs during the pre-college and college stages of the education life cycle. The Company provides actively managed tuition payment solutions, online payment processing, detailed information reporting, and data integration services to K-12 and post-secondary educational institutions, families, and students. In addition, the Company provides financial needs analysis for students applying for aid in private and parochial K-12 schools.

The K-12 market consists of nearly 30,000 private and faith-based educational institutions nationally. In the K-12 market the Company offers tuition management services as well as assistance with financial needs assessment, enrollment management, and donor management.

Tuition management services include payment plan administration, ancillary billing, accounts receivable management, and record keeping. K-12 educational institutions contract with the Company to administer deferred payment plans where the institution allows the responsible party to make monthly payments over 6-12 months. The Company collects a fee from either the institution or the payer as an administration fee.

The Company offers two principal products to the higher education market – actively managed tuition payment plans and campus commerce outsourcing. The Company has actively managed tuition payment plans in place at approximately 460 colleges and universities. Higher educational institutions contract with the Company to administer deferred payment plans where the institution allows the responsible party to make monthly payments on either a semester or annual basis. The Company collects a fee from either the institution or the payer as an administration fee.

The campus commerce solution, QuikPAY^®, is sold as a subscription service to colleges and universities. QuikPAY processes payments through the appropriate channels in the banking or credit card networks to make deposits into the client’s bank account. It can be further deployed to other departments around campus as requested (e.g., application fees, alumni giving, parking, events, etc.). There are approximately 70 colleges and universities using the QuikPAY system. The Company earns revenue for e-billing, hosting/maintenance, credit card convenience fees, and e-payment transaction fees. The two largest campus commerce clients provide annual revenue to the Company of approximately $400,000 each.

Competition

This segment of the Company’s business focuses on two separate markets – private and faith-based K-12 schools and higher education colleges and universities.

The Company is the largest provider of tuition management services to the private and faith-based K-12 market in the United States. Competitors range from banking companies, tuition management providers, financial needs assessment providers, accounting firms, and a myriad of software companies. The Company’s principal competitive advantages are (i) the service it provides to institutions, (ii) the information management tools provided with the Company’s service, and (iii) the Company’s ability to interface with the institution’s clients. Management believes the primary competition in this market comes from new technologies which may offer unique and more cost-efficient service.

In the higher education market, the Company targets business officers at colleges and universities. In this market, there are four primary competitors to the Company: SLM Corporation, TouchNet, CashNet, and solutions developed in-house by colleges and universities. The Company believes its clients select products primarily on technological superiority and feature functionality, but

price and service also impact the selection process. Management is not aware of any published market share information relating to this segment, but believes the Company is second or third in the market based upon the number of students served.

Seasonality

This segment of the Company’s business is subject to seasonal fluctuations which correspond, or are related to, the traditional school year. Tuition management revenue is recognized over the course of the academic year, but the peak operational activities take place in summer and early fall. Revenue associated with providing QuikPAY subscription services is recognized over the service period with the highest revenue months being July through September and December and January. The Company’s operating expenses do not follow the seasonality of the revenues. This is primarily due to fixed year-round personnel costs and seasonal marketing costs.

Enrollment Services and List Management

The Company’s Enrollment Services and List Management operating segment provides products and services to help institutions and education seeking families during primarily the pre-college phase of the education life cycle. The Company provides a wide range of direct marketing products and services to help businesses reach the middle school, high school, college bound high school, college, and young adult market places. In addition, the Company offers enrollment products and services that are focused on helping i) education seeking families plan for and prepare for college and ii) colleges recruiting and retaining students. The Company’s enrollment products and services include:

	•		Test preparation study guides and online courses;
	•		Admissions consulting;
	•		College planning resource center;
	•		Licensing of scholarship data;
	•		Essay and resume editing services;
	•		Financial aid products;
	•		Student recognition publications;
	•		Vendor lead management system;
	•		Pay per click management;
	•		Email marketing;
	•		Admissions lead generation;
	•		List marketing services; and
	•		Call center services.

As with all of the Company’s products and services, the Company’s focus is on the education seeking family – both college bound and in college – and the Company delivers products and services in this segment through institutions of higher learning at the secondary and post-secondary level. Many of the Company’s products in this segment are distributed online; however, products such as study guides and books are distributed as printed materials. In addition, essay and resume editing services are delivered primarily by contract editors and college planning call center services are delivered by the Company’s counselors via inbound and outbound teleservices and web chat.

In addition to its other clients, the Company provides on-line test preparation services and products to the United States Army, Navy, and Air Force under contracts with one year terms.

Competition

In this segment, the primary areas in which the Company competes are: lead generation and management, test preparation study guides and online courses, college planning resource centers, call center services, and student recognition publications.

There are several large competitors in the areas of lead generation, test preparation, and student recognition, but the Company does not believe any one competitor has a dominant position in all of the product and service areas offered by the Company. Additionally, there are few competitors in the college planning resource center arena. The Company has seen increased competition in the area of call center operations, including outsourced admissions, as other companies have recognized the potential in this market.

The Company competes through various methods, including price, brand awareness, depth of product and service selection, and customer service. The Company has attempted to be a “one stop shop” for the education seeking family looking for career assessment, test preparation, and college and financial aid information. The Company also offers its institutional clients a breadth of services unrivaled in the education industry.

Seasonality

As with the Company’s other business segments, portions of the Company’s Enrollment Services and List Management segment are subject to seasonal fluctuations based upon the traditional academic school year, with peaks in January and August. Additionally, the Company recognizes revenue from the sale of lists when the list is distributed to the customer. Revenue from the sale of lists is dependent on demand for the lists and varies from period to period. Also, the Company’s student recognition activities are related to the mailing of two primary publications. These publications have historically been mailed in the December to January and June to July time periods and mailing costs are recorded as incurred, which are three to nine months prior to book shipment.

Software and Technical Services

The Company uses internally developed loan servicing software and also provides this software to third-party student loan holders and servicers. In addition, the Company provides information technology products and services, with core areas of business in student loan software solutions for schools, lenders, and guarantors; technical consulting services; and enterprise content management.

The Company licenses, maintains, and supports the following systems and software:

	•		HELMS/HELM-Net, STAR, and SLSS, systems which are used in the full servicing of FFELP, private, consolidation, and Canadian loans;
	•		Mariner, which is used for consolidation loan origination;
	•		InfoCentre, which is a data warehouse and analysis tool for educational loans; and
	•		Uconnect, a tool to facilitate information sharing between different applications.

The Company’s clients within the education loan marketplace include large and small financial institutions, secondary markets, loan originators, and loan servicers. The Company’s software and documentation is distributed electronically via its web site and, if necessary, on CD-ROM. Primary support for clients is done remotely from the Company’s offices, but the Company does provide on-site support and training when required.

The Company also supplies and supports Enterprise Content Management solutions. The Company’s Technical Consulting Services group provides consulting services, primarily Microsoft related, both within and outside of the educational loan marketplace. The Company’s Microsoft Enterprise Consulting practice also provides product and solutions for the Microsoft platform. Examples of these products are Uconnect^® (an application integration product) and Dynamic Payables^® (an Accounts Payable automation product).

The Company is a reseller of IBM hardware and software, Hummingbird (Open Text), Kofax, and Ultimus document imaging technology, and the Company’s products require third party software from Microsoft. All of these third party products and resources are generally available and in some cases the Company relies on its clients obtaining these products directly from the vendors rather than through the Company. The Company is a Microsoft Gold Certified partner and a Microsoft Business Solutions partner.

A significant portion of the software and technology services business is dependent on the existence of the FFEL Program. If the federal government were to terminate the FFEL Program, the Company’s software and technical services segment would be impacted; however, management believes the Company’s clients would continue to hold significant portfolios which would require servicing and related software and technical services. The Company has some technology and software services contracts with state agencies, but they do not comprise a significant portion of the Company’s business.

Competition

The Company is one of the leaders in the education loan software processing industry. Over 60% of the top 100 lenders in the FFEL Program utilize the Company’s software either directly or indirectly. Management believes the Company’s competitors in this segment are much smaller than the Company and do not have the depth of knowledge or products offered by the Company.

The Company’s primary method of competition in this segment is based upon its depth of knowledge, experience, and product offerings in the education loan industry. The Company believes it has a competitive edge in offering proven solutions, since the Company’s competition consists primarily of consulting firms that offer services and not products.

The Company also faces competition from loan servicers; however, loan servicing companies are outsourcing solutions which do not allow a client to differentiate themselves in the market.

Seasonality

Software demonstrations and decisions to purchase software generally take place during year-end budget season, but management believes implementation timeframes vary enough to provide a consistent revenue stream throughout the year. In addition, software support is a year long ongoing process and not generally affected by seasonality.

Recent Developments Related to the Higher Education Act

The Department’s authority to provide interest subsidy payments, special allowance payments, and federal insurance for FFELP loans terminates on a date specified in the Higher Education Act. The provisions of the Higher Education Act governing the FFEL Program are periodically amended and the Higher Education Act must be reauthorized by Congress from time to time in order to prevent sunset of the Higher Education Act. Although HERA extended the authorization of the FFEL Program through September 30, 2012, the remainder of the Higher Education Act was not reauthorized under HERA. On September 30, 2006, President Bush signed the Third

Higher Education Extension Act of 2006 which provided a temporary extension of the Higher Education Act through June 30, 2007. As of the date of this Report, Congress has not passed any legislation which would reauthorize or further extend the Higher Education Act.

Recently Congress introduced legislation and the President proposed a new budget which contains provisions with significant implications for participants in the FFEL Program. Among other things, these proposals include various reductions in federal government payments to lenders and guaranty agencies and increases in fees paid by lenders. The proposals include:

	•		reducing special allowance payments to lenders;
	•		reducing default insurance rates (including reducing default insurance rates for lenders/servicers with an Exceptional Performer designation) and the possible elimination of the Exceptional Performer program);
	•		increasing lender origination fees on consolidation loans;
	•		reduction of guaranty agency collection retention;
	•		changing the way guaranty agency account fees are charged;
	•		requiring disclosures relating to placement on “preferred lender lists” and various arrangements between lenders and schools;
	•		banning lenders from offering certain gifts to school employees;
	•		encouraging borrowers to maximize their borrowing through government loan programs prior to private loan programs with higher interest rates;
	•		increasing annual and aggregate loan limits for certain Stafford loans;
	•		reducing interest rates for subsidized Stafford loans;
	•		encouraging schools to participate in the FDL Program through increased federal scholarship funds; and
	•		increasing the consolidation rebate fees for certain lenders.

As of the date of this Report, none of these proposals have been enacted into law. While the Company supports the federal government’s efforts to make higher education more accessible and affordable, the Company does not support paying for these efforts by cutting the FFEL Program, which originated approximately 71% of all Stafford, PLUS, and consolidation loans during 2006.

The impact of the proposed legislation is difficult to predict. If the proposed federal government spending cuts and increased fees for FFEL Program participants are enacted, the Company’s revenues would be negatively impacted.

Intellectual Property

The Company owns numerous trademarks and service marks (“Marks”) to identify its various products and services. As of December 31, 2006, the Company had 37 pending and 100 registered Marks. The Company actively asserts its rights to these Marks when it believes harmful infringement may exist. The Company believes its Marks have developed and continue to develop strong brand-name recognition in the industry and the consumer marketplace. Each of the Marks has, upon registration, an indefinite duration so long as the Company continues to use the Mark on or in connection with such goods or services as the Mark identifies. In order to protect the indefinite duration, the Company makes filings to continue registration of the Marks. The Company owns one patent application that has been published, but has not yet been issued, with respect to a customer-loyalty program and has also actively asserted its rights thereunder in situations where the Company believes its claims may be infringed upon. The Company owns many copyright-protected works, including its various computer system codes and displays, Web sites, publications, and marketing collateral. The Company also has trade secret rights to many of its processes and strategies and its software product designs. The Company’s software products are protected by both registered and common law copyrights, as well as strict confidentiality and ownership provisions placed in license agreements which restrict the ability to copy, distribute, or improperly disclose the software products. The Company also has adopted internal procedures designed to protect the Company’s intellectual property.

The Company seeks federal and/or state protection of intellectual property when deemed appropriate, including patent, trademark/service mark, and copyright. The decision whether to seek such protection may depend on the perceived value of the intellectual property, the likelihood of securing protection, the cost of securing and maintaining that protection, and the potential for infringement. The Company’s employees are trained in the fundamentals of intellectual property, intellectual property protection, and infringement issues. The Company’s employees are also required to sign agreements requiring, among other things, confidentiality of trade secrets, assignment of inventions, and non-solicitation of other employees post-termination. Consultants, suppliers, and other business partners are also required to sign nondisclosure agreements to protect the Company’s proprietary rights.

Employees

As of December 31, 2006, the Company had approximately 4,000 employees. Approximately 1,750 of these employees held professional and management positions while approximately 2,250 were in support and operational positions. None of the Company’s employees are covered by collective bargaining agreements. The Company is not involved in any material disputes with any of its employees, and the Company believes that relations with its employees are good.

Available Information

Copies of the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports are available on the Company’s Web site free of charge as soon as reasonably practicable after such reports are filed with or furnished to the United States Securities and Exchange Commission (the “SEC”). Investors and other interested parties can access these reports and the Company’s proxy statements at http://www.nelnet.net. The SEC maintains an Internet site (http://www.sec.gov) that contains periodic and other reports such as annual, quarterly, and current reports on Forms 10-K, 10-Q, and 8-K, respectively, as well as proxy and information statements regarding the Company and other companies that file electronically with the SEC.

The Company has adopted a Code of Business Conduct and Ethics (the “Code of Conduct”) that applies to directors, officers, and employees, including the Company’s principal executive officers and its principal financial and accounting officer, and has posted such Code of Conduct on its Web site. Amendments to and waivers granted with respect to the Company’s Code of Conduct relating to its executive officers and directors which are required to be disclosed pursuant to applicable securities laws and stock exchange rules and regulations will also be posted on its Web site. The Company’s Corporate Governance Guidelines, Audit Committee Charter, Compensation Committee Charter, and Nominating and Corporate Governance Committee Charter are also posted on its Web site and, along with its Code of Conduct, are available in print without charge to any shareholder who requests them. Please direct all requests as follows:

Nelnet, Inc.
121 South 13^th Street, Suite 201
Lincoln, Nebraska 68508
Attention: Secretary

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

ITEM 1A. RISK FACTORS

If any of the following risks actually occurs, the Company’s business, financial condition, results of operations, and cash flows could be materially and adversely affected.

The ratings of the Company or of any securities sold by the Company may change, which may increase the Company’s costs of capital and may reduce the liquidity of the Company’s securities.

Ratings are based primarily on the creditworthiness of the Company, the underlying assets of asset-backed securitizations, the amount of credit enhancement in any given transaction and the legal structure of any given transaction. Ratings are not a recommendation to purchase, hold, or sell any of the Company’s securities inasmuch as the ratings do not comment as to the market price or suitability for investors. There is no assurance that ratings will remain in effect for any given period of time or that current ratings will not be lowered or withdrawn by any rating agency. Ratings for the Company or any of its securities may be increased, lowered, or withdrawn by any rating agency if in the rating agency’s judgment circumstances so warrant. If the Company’s credit ratings are lowered or withdrawn, the Company may experience an increase in interest rates or other costs associated with the capital raising activities by the Company, which may negatively affect the Company’s operations. Additionally, a lowered or withdrawn credit rating may negatively affect the liquidity of the Company’s securities.

The Company may be subject to penalties and sanctions if it fails to comply with governmental regulations or guaranty agency rules.

The Company’s principal business is comprised of originating, acquiring, holding, and servicing student loans made and guaranteed pursuant to the FFEL Program, which was created by the Higher Education Act. The Higher Education Act governs most significant aspects of the Company’s operations. The Company is also subject to rules of the agencies that act as guarantors of the student loans, known as guaranty agencies. In addition, the Company is subject to certain federal and state banking laws, regulations, and examinations, as well as federal and state consumer protection laws and regulations, including, without limitation, laws and regulations governing borrower privacy protection, information security, restrictions on access to student information, and specifically with respect to the Company’s non-federally insured loan portfolio, certain state usury laws and related regulations and the Federal Truth in Lending Act. Also, Canadian laws and regulations govern the Company’s Canadian loan servicing operations. All or most of these laws and regulations impose substantial requirements upon lenders and servicers involved in consumer finance. Failure to comply with these laws and regulations could result in liability to borrowers, the imposition of civil penalties, and potential class action suits.

The Company’s failure to comply with regulatory regimes described above may arise from:

	•		breaches of the Company’s internal control systems, such as a failure to adjust manual or automated servicing functions following a change in regulatory requirements;
	•		technological defects, such as a malfunction in or destruction of the Company’s computer systems; or
	•		fraud by the Company’s employees or other persons in activities such as borrower payment processing.

Such failure to comply, irrespective of the reason, could subject the Company to loss of the federal guaranty on federally insured loans, costs of curing servicing deficiencies or remedial servicing, suspension or termination of the Company’s right to participate in the FFEL Program or to participate as a servicer, negative publicity, and potential legal claims or actions brought by the Company’s servicing customers and borrowers.

The Company has the ability to cure servicing deficiencies and the Company’s historical losses in this area have been minimal. However, the Company’s loan servicing and guaranty servicing activities are highly dependent on its information systems, and while the Company has well-developed and tested business recovery systems, the Company faces the risk of business disruption should there be extended failures of its systems. The Company also manages operational risk through its risk management and internal control processes covering its product and service offerings. These internal control processes are documented and tested regularly.

Although the Company reached an agreement with the Department resolving the audit by the Department’s Office of Inspector General (“OIG”) of the Company’s portfolio of loans receiving 9.5 percent special allowance payments, the Company was informed by the Department that a civil attorney with the Department of Justice has opened a file regarding this issue which the Company understands is common procedure following an OIG audit report. The Company believes that any claim related to this issue has no merit.

The Company must satisfy certain requirements necessary to maintain the federal guarantees of its federally insured loans, and the Company may incur penalties or lose its guarantees if it fails to meet these requirements.

The Company must meet various requirements in order to maintain the federal guaranty on its federally insured loans. These requirements establish servicing requirements and procedural guidelines and specify school and borrower eligibility criteria. The federal guaranty on the Company’s federally insured loans is conditioned on compliance with origination, servicing, and collection standards set by the Department and guaranty agencies. Federally insured loans that are not originated, disbursed, or serviced in accordance with the Department’s regulations risk partial or complete loss of the guaranty thereof. If the Company experiences a high rate of servicing deficiencies (including any deficiencies resulting from the conversion of loans from one servicing platform to another) or costs associated with remedial servicing, and if the Company is unsuccessful in curing such deficiencies, the eventual losses on the loans that are not cured could be material.

A guaranty agency may reject a loan for claim payment as a result of a violation of the FFEL Program due diligence servicing requirements. In addition, a guaranty agency may reject claims under other circumstances, including, for example, if a claim is not timely filed or adequate documentation is not maintained. Once a loan ceases to be guaranteed, it is ineligible for federal interest subsidies and special allowance payments. If a loan is rejected for claim payment by a guaranty agency, the Company continues to pursue the borrower for payment and/or institutes a process to reinstate the guaranty.

Rejections of claims as to portions of interest may be made by guaranty agencies for certain violations of the due diligence collection and servicing requirements, even though the remainder of a claim may be paid. Examples of errors that cause claim rejections include isolated missed collection calls or failures to send collection letters as required.

The Department has implemented school eligibility requirements, which include default rate limits. In order to maintain eligibility in the FFEL Program, schools must maintain default rates below these specified limits, and both guaranty agencies and lenders are required to ensure that loans are made only to or on behalf of students attending schools that do not exceed the default rate limits.

If the Company fails to comply with any of the above requirements, it could incur penalties or lose the federal guaranty on some or all of its federally insured loans. If the Company’s actual loss on denied guarantees were to increase substantially in future periods the impact could be material to the Company’s operations.

The Company could be sanctioned if it conducts activities which are considered prohibited inducements under the Higher Education Act.

The Higher Education Act generally prohibits a lender from providing certain inducements to educational institutions or individuals in order to secure applicants for FFELP loans. The Company has structured its relationships and product offerings in a manner intended to comply with the Higher Education Act and the available communications and guidance from the Department. If the Department

were to change its position on any of these matters, the Company may have to change the way it markets products and services and a new marketing strategy may not be as effective. If the Company fails to respond to the Department’s change in position, the Department could potentially impose sanctions upon the Company that could negatively impact the Company’s business.

On January 11, 2007, the Company received a letter from the Office of the New York State Attorney General (“NYAG”) requesting certain information and documents from the Company in connection with the NYAG’s investigation into preferred lender list activities. “Preferred lender lists” are lists of lenders recommended by college and university financial aid departments to students seeking financial aid. On February 1, 2007, the NYAG announced that the NYAG’s office is conducting an investigation of the student loan industry to determine if there are conflict of interest issues relating to lenders being placed on the preferred lender lists at colleges and universities, and that the NYAG had sent similar requests to other lenders and is also seeking information from a number of colleges and universities nationwide. The Company is cooperating with the NYAG’s investigation and believes its practices comply with all applicable laws and regulations.

Changes in legislation and regulations could have a negative impact upon the Company’s business and may affect its profitability.

Funds for payment of interest subsidy payments, special allowance payments, and other payments under the FFEL Program are subject to annual budgetary appropriations by Congress. Federal budget legislation has in the past contained provisions that restricted payments made under the FFEL Program to achieve reductions in federal spending. Future federal budget legislation may adversely affect expenditures by the Department, and the financial condition of the guaranty agencies.

Furthermore, Congressional amendments to the Higher Education Act or other relevant federal laws, and rules and regulations promulgated by the Secretary of Education, may adversely impact holders of FFELP loans. For example, changes might be made to the rate of interest paid on FFELP loans, to the level of insurance provided by guaranty agencies, or to the servicing requirements for FFELP loans. Such changes could have a material adverse effect on the Company and its results of operations.

HERA was enacted into law on February 8, 2006 and effectively reauthorized the Title IV provisions of the FFEL Program through 2012. HERA did not reauthorize the entire Higher Education Act, which is set to expire on June 30, 2007 (as a result of the Third Higher Education Extension Act of 2006). Therefore, further action will be required by Congress to either extend or reauthorize the remaining titles of the Higher Education Act.

The Company does not anticipate a negative impact from the reauthorization of the remaining titles of the Higher Education Act. However, it cannot predict the outcome of this or any other legislation impacting the FFEL Program, and recognizes that a level of political and legislative risk always exists within the industry. This could include changes in legislation further impacting lender margins, fees paid to the Department, new policies affecting the competition between the FDL Program and FFEL Programs, or additional lender risk sharing. See Part I, Item I, “Business—Recent Developments Related to the Higher Education Act.”

In addition to changes to the FFEL Program and the Higher Education Act, changes to privacy and direct mail legislation could also negatively impact the Company, in particular the Company’s lead generation activities. Changes in such legislation could restrict the Company’s ability to collect information for its lead generation activities and its ability to use the information it collects. In addition, changes to privacy and direct mail legislation could cause the Company to incur expenses related to implementation of any required changes to the Company’s compliance programs.

A loss of customer data requiring notification to customers could negatively impact the Company’s business.

The Company, on its own behalf and on behalf of other entities, stores a significant amount of personal data about the customers to whom the Company provides services. If the Company were to suffer a major loss of customer data, through breach of its systems or otherwise, entities for which the Company provides services might choose to find another service provider.

Variation in the maturities, timing of rate reset, and variation of indices of the Company’s assets and liabilities exposes the Company to interest rate risks which may adversely affect the Company’s earnings.

Because the Company generates the majority of its earnings from the spread between the yield received on its portfolio of student loans and the cost of financing these loans, the interest rate sensitivity of the balance sheet could have a material effect on the Company’s results of operations. The majority of the Company’s student loans have variable-rate characteristics in interest rate environments where the result of the special allowance payment formula exceeds the borrower rate. Some of the Company’s student loans, primarily Consolidation loans, include fixed-rate floor components depending upon loan terms and the rate reset provisions set by the Department. The Company has financed the majority of its student loan portfolio with variable-rate debt. Because some assets have fixed-rate floors, yet the majority of the financings for these loans are variable-rate, absent utilization of derivative instruments, fluctuations in the interest rate environment will affect the Company’s results of operations. Such fluctuations may be material.

From time to time, the Company’s federally insured loan portfolio will yield additional income due to variable-rate liabilities financing student loans which have fixed-rate floors. Absent the use of derivative instruments, a rise in interest rates will have an

adverse effect on earnings due to interest margin compression caused by increasing financing costs, until such time as the federally insured loans earn interest at a variable rate in accordance with the special allowance payment formula discussed in Part I, Item 1, “Business – Operating Segments – Asset Generation and Management – Interest Rate Risk Management.” In higher interest rate environments, where the interest rate rises above the borrower rate and fixed-rate loans effectively become variable rate loans, the impact of the rate fluctuations is reduced. Loans originated after April 1, 2006, no longer have fixed-rate floors, as they are purely variable rate.

Due to the variability in duration of the Company’s assets and varying market conditions, the Company does not attempt to perfectly match the interest rate characteristics of its entire loan portfolio with the underlying debt instruments. Most student loans, even those with fixed-rate floors, are financed with variable-rate debt. In a rising rate environment, this mismatch could have a negative impact on the Company’s results of operations. Because of this, the Company employs various derivative instruments to offset this mismatch. Changes in interest rates and the composition of the Company’s student loan portfolio and derivative instruments will impact the effect of interest rates on the Company’s earnings, and the Company cannot predict any such impact with any level of certainty. See Part I, Item 1, “Business – Operating Segments – Asset Generation and Management — Interest Rate Risk Management.”

The Company is subject to various market risks which may have an adverse impact upon its business and operations and may have a negative effect on the Company’s profitability.

The Company’s primary market risk exposure arises from fluctuations in its borrowing and lending rates, the spread between which could be impacted by shifts in market interest rates. The borrower rates on the Company’s current portfolio of federally insured loans are generally reset by the Department each July 1st based on a formula determined by the date of the origination of the loan, with the exception of rates on consolidation loans, which are generally fixed-rate to the borrower for the life of the loan. For all FFELP loans originated after July 1, 2006, the loans are fixed-rate to the borrower for the life of the loan. For FFELP loans originated prior to April 1, 2006, the interest rate the Company actually receives on federally insured loans is the greater of the borrower rate and a SAP rate determined by a formula based on a spread to either the 91-day Treasury Bill index or the 90-day commercial paper index, depending on when the loans were originated and the current repayment status of the loans. On FFELP loans originated on or after April 1, 2006, the Company only earns interest at the SAP rate determined by a formula based on 90-day commercial paper. For the FFELP portfolio of loans originated on or after April 1, 2006, when the borrower rate exceeds the variable rate based upon the SAP formula, the Company must return the excess to the Department.

The result is that loans originated prior to April 1, 2006, may have fixed-rate floors in declining interest rate environments, however, in rising interest rate environments, all such loans convert to their variable SAP rates. Loans originated on or after April 1, 2006, will no longer experience fixed-rate floors and will only be variable rate in rising or falling interest rate environments.

The Company issues asset-backed securities, the vast majority being variable-rate, to fund its student loan assets. The variable-rate debt is generally indexed to 90-day LIBOR, set by auction or through a remarketing process. The income generated by the Company’s student loan assets is generally driven by short-term indices (Treasury bills and commercial paper) that are different from those which affect the Company’s liabilities (generally LIBOR), which creates basis risk. Moreover, the Company also faces basis risk due to the timing of the interest rate resets on its liabilities, which may occur as infrequently as every quarter, and the timing of the interest rate resets on its assets, which generally occur daily. In a declining interest rate environment, this may cause the Company’s student loan spread to compress, while in a rising rate environment, it may cause it to increase. The Company has used derivatives instruments to hedge basis risk, however, most basis risk is not hedged, since the relationship between the indices for most of the Company’s assets and liabilities is highly correlated. Nevertheless, the basis between the indices may widen from time to time, which would impact the net spread on the portfolio.

The Company is subject to foreign currency exchange risk and such risk could lead to increased costs.

As a result of the Company’s offerings of Euro-denominated notes completed in 2006, the Company is subject to increased foreign currency exchange risk as discussed under the caption “Foreign Currency Exchange Risk” in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk”.

Additionally, the Company is also exposed to market risk related to fluctuations in foreign currency exchange rates between the U.S. and Canadian dollars as a result of the Company’s December 2004 acquisition of EDULINX, a Canadian corporation engaged in the servicing of Canadian student loans. The Company has not entered into any foreign currency derivative instruments to hedge this risk. Fluctuations in foreign currency exchange rates may have an adverse effect on the financial position, results of operations, and cash flows of the Company.

The Company’s derivative instruments may not be successful in managing interest rate and foreign currency exchange risks, which may negatively impact the Company’s operations.

When the Company utilizes derivative instruments, it utilizes them to manage interest rate and foreign currency exchange sensitivity. Although the Company does not use derivative instruments for speculative purposes, its derivative instruments do not qualify for

hedge accounting under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of FASB Statement No. 133 (“SFAS No. 133”); consequently, the change in fair value, called the “mark to market”, of these derivative instruments is included in the Company’s operating results. Changes or shifts in the forward yield curve and foreign currency exchange rates can and have significantly impacted the valuation of the Company’s derivatives. Accordingly, changes or shifts in the forward yield curve and foreign currency exchange rates will impact the financial position, results of operations, and cash flows of the Company. The derivative instruments used by the Company are typically in the form of interest rate swaps, basis swaps, interest rate floor contracts, and cross-currency interest rate swaps.

Developing an effective strategy for dealing with movements in interest rates and foreign currency exchange rates is complex, and no strategy can completely insulate the Company from risks associated with such fluctuations. In addition, a counterparty to a derivative instrument could default on its obligation, thereby exposing the Company to counterparty risk. Further, the Company may have to repay certain costs, such as transaction fees or brokerage costs, if the Company terminates a derivative instrument. Finally, the Company’s interest rate and foreign currency exchange risk management activities could expose the Company to substantial mark to market losses if interest rates or foreign currency exchange rates move materially differently from the environment when the derivatives were entered into. As a result, the Company cannot offer any assurance that its economic hedging activities will effectively manage its interest and foreign currency exchange rate sensitivity or have the desired beneficial impact on its results of operations or financial condition.

When the mark to market of a derivative instrument is negative, the Company owes the counterparty and, therefore, has no counterparty risk. Additionally, if the negative mark to market of derivatives with a counterparty exceeds a specified threshold, the Company may have to pay a collateral deposit to the counterparty. If interest and foreign currency exchange rates move materially, the Company could be required to deposit a significant amount of collateral with its derivative instrument counterparties. The collateral deposits, if significant, could negatively impact the Company’s capital resources. The Company attempts to manage market risks associated with interest and foreign currency exchange rates by establishing and monitoring limits as to the types and degree of risk that may be undertaken.

The Company faces liquidity risks due to the fact that a portion of its operating and warehouse financing needs are provided by third-party sources.

The Company’s primary funding needs are those required to finance its student loan portfolio and satisfy its cash requirements for new student loan originations and acquisitions, operating expenses, and technological development. A portion of the Company’s operating and warehouse financings are provided by third parties, over which it has no control. If such financing sources are unavailable, the Company may be unable to meet its financial commitments to creditors, branding partners, forward flow lenders, or borrowers when due unless the Company is able to find alternative funding mechanisms.

The Company relies upon three conduit warehouse loan financing vehicles to support its funding needs on a short-term basis: a multi-seller bank provided conduit with $4 billion of committed funding for FFELP loans, a single-seller extendible commercial paper conduit authorized to fund up to $5 billion in FFELP loans, and a private loan warehouse with $250 million in uncommitted financing for non-federally insured student loans.

The multi-year committed facility for FFELP loans, which terminates in May 2009, and is supported by 364-day liquidity, which must either be renewed annually or funded by the banks through other means for the term of the conduit. As of December 31, 2006, $2.9 billion was outstanding under this facility and $1.1 billion was available for future use. There can be no assurance the Company will be able to maintain this conduit facility, find alternative funding, or increase the commitment level of such facility, if necessary. While the Company’s bank-supported conduit facilities have historically been renewed for successive terms, there can be no assurance that this will continue in the future.

The extendible commercial paper warehouse for FFELP loans is offered in the Company’s own name (through its wholly owned subsidiary Nelnet Student Asset Funding Extendible CP, LLC), and is not reliant upon liquidity or bank support. As of December 31, 2006, $2.3 billion of commercial paper was outstanding under this facility and $2.7 billion was available for issuance. This facility has no maturity date, however, there can be no assurance that the Company will be able to maintain this conduit facility, find alternative funding, or increase the outstanding amount of such facility, if necessary.

The private loan warehouse facility is an uncommitted facility that is offered to the Company by one banking partner, which terminates in October 2008. As of December 31, 2006, $35 million was outstanding under this facility and $215 million was available for future use. Nelnet guarantees the performance of the assets in the private loan warehouse facility. There can be no assurance that the Company will be able to maintain this conduit facility, find alternative funding, or increase the size of the facility, if necessary. While the Company’s bank supported facilities have historically been renewed for successive terms, there can be no assurance that this will continue in the future.

The Company maintains a $500 million unsecured line of credit supported by various banking entities. At December 31, 2006, there was $103.0 million outstanding on this line and $397.0 million was available for future uses. The $500.0 million line of credit terminates in August 2010, however, there can be no assurance that the Company will be able to maintain this line of credit, find alternative funding, or increase the amount outstanding under the line, if necessary.

On January 24, 2007, the Company established a $475 million unsecured commercial paper program. Under the program, the Company may issue commercial paper for general corporate purposes. The maturities of the notes issued under this program will vary, but may not exceed 397 days from the date of issue. Notes issued under this program will bear interest at rates that will vary based on market conditions at the time of issuance.

Characteristics unique to asset-backed securitization may negatively affect the Company’s continued liquidity.

The Company has historically relied upon, and expects to continue to rely upon, asset-backed securitizations as its most significant source of funding for student loans on a long-term basis. As of December 31, 2006 and 2005, $19.7 billion and $16.5 billion, respectively, of the Company’s student loans were funded by long-term asset-backed securitizations. The net cash flow the Company receives from the securitized student loans generally represents the excess amounts generated by the underlying student loans over the amounts required to be paid to the bondholders, after deducting servicing fees and any other expenses relating to the securitizations. In addition, some of the residual interests in these securitizations have been pledged to secure additional bond obligations. The Company’s rights to cash flow from securitized student loans are subordinate to bondholder interests, and these loans may fail to generate any cash flow beyond what is due to bondholders.

The interest rates on certain of the Company’s asset-backed securities are set and periodically reset via a “dutch auction” or through a remarketing utilizing broker-dealers and remarketing agents for varying intervals, generally ranging from seven to 35 days. (In a few circumstances, the reset periods may be multiple years.) For auction rate securities, investors and potential investors submit orders through a broker-dealer as to the principal amount of notes they wish to buy, hold, or sell at various interest rates. The broker-dealers submit their clients’ orders to the auction agent, who then determines the clearing interest rate for the upcoming period. For remarketed securities, the remarketing agents set the price, which is then offered to investors. If there are insufficient potential bid orders to purchase all of the notes offered for sale, the Company could be subject to interest costs substantially above the anticipated and historical rates paid on these types of securities. A failed auction or remarketing could also reduce the investor base of the Company’s other financing and debt instruments.

In addition, market factors existing at the time the Company’s asset-backed securities are auctioned or remarketed may cause other competing investments to become more attractive to investors than the Company’s securities, which may decrease the liquidity and/or interest rates of such securities.

Future losses due to defaults on loans held by the Company present credit risk which could adversely affect the Company’s earnings.

As of December 31, 2006, 99% of the Company’s student loan portfolio was comprised of federally insured loans. These loans currently benefit from a federal guaranty of their principal balance and accrued interest. As a result of the Company’s Exceptional Performer designation, the Company received 99% reimbursement on all eligible FFELP default claims submitted for reimbursement during the applicable designation period. See Part I, Item 1, “Business – Operating Segments – Asset Generation and Management – Credit Risk.” The Company is entitled to receive this benefit as long as it and/or its service providers continue to meet the required servicing standards published by the Department. Compliance with such standards is assessed on a quarterly basis. In addition, service providers must apply for re-designation as an Exceptional Performer with the Department on an annual basis.

In June 2006, the Company submitted its application for Exceptional Performer re-designation to the Department to continue receiving reimbursements at the 99% level for the 12-month period from June 1, 2006 through May 31, 2007. As of March 1, 2007, the Department has not notified the Company of its redesignation. Until the Department confirms or denies the Company’s application for renewal, the Company continues to receive the benefit of the Exceptional Performer designation. It is the opinion of the Company’s management, based on information currently known, that there is no reason to believe the Company’s application will be rejected. If the Department rejected the Company’s application for Exceptional Performer status, the Company would have to establish a provision for loan losses related to the risk sharing on those loans that the Company services internally. Based on the balance of federally insured loans outstanding as of December 31, 2006, this provision would be approximately $15.3 million.

The Company bears full risk of losses experienced with respect to the unguaranteed portion of its federally insured loans (the 1% risk sharing on loans serviced by a service provider designated as an Exceptional Performer and 2-3% risk sharing portion on loans not serviced by a service provider designated as an Exceptional Performer). If the Company or a third party service provider were to lose its Exceptional Performer designation, either by the Department or Congress discontinuing the program or by the Company or third party not meeting the required servicing standards, loans serviced by the Company or third-party would become subject to the 2-3% risk sharing loss for all claims submitted after any loss of the Exceptional Performer designation. If the Department discontinued the program or Congress eliminated the program, the Company would have to establish a provision for loan losses related to the 2-3% risk sharing.

Losses on the Company’s non-federally insured loans are borne by the Company. The performance of student loans in the portfolio is affected by the economy, and a prolonged economic downturn may have an adverse effect on the credit performance of these loans.

While the Company has provided allowances estimated to cover losses that may be experienced in both its federally insured and non-federally insured loan portfolios, there can be no assurance that such allowances will be sufficient to cover actual losses in the future.

The Company could experience cash flow problems if a guaranty agency defaults on its guaranty obligation.

A deterioration in the financial status of a guaranty agency and its ability to honor guaranty claims on defaulted student loans could result in a failure of that guaranty agency to make its guaranty payments in a timely manner, if at all. The financial condition of a guaranty agency can be adversely affected if it submits a large number of reimbursement claims to the Department, which results in a reduction of the amount of reimbursement that the Department is obligated to pay the guaranty agency. The Department may also require a guaranty agency to return its reserve funds to the Department upon a finding that the reserves are unnecessary for the guaranty agency to pay its FFEL Program expenses or to serve the best interests of the FFEL Program.

If the Department has determined that a guaranty agency is unable to meet its guaranty obligations, the loan holder may submit claims directly to the Department, and the Department is required to pay the full guaranty claim. However, the Department’s obligation to pay guaranty claims directly in this fashion is contingent upon the Department making the determination that a guaranty agency is unable to meet its guaranty obligations. The Department may not ever make this determination with respect to a guaranty agency and, even if the Department does make this determination, payment of the guaranty claims may not be made in a timely manner, which could result in the Company experiencing cash shortfalls.

As of December 31, 2006, College Assist, Nebraska Student Loan Program, Inc., California Student Aid Commission, Educational Credit Management Corp., United Student Aid Funds, Inc., and American Student Assistance were the primary guarantors of the student loans beneficially owned by the Company’s education lending subsidiaries. Management periodically reviews the financial condition of its guarantors and does not believe the level of concentration creates an unusual or unanticipated credit risk. In addition, management believes that based on amendments to the Higher Education Act, the security for and payment of any of the education lending subsidiaries’ obligations would not be materially adversely affected as a result of legislative action or other failure to perform on its obligations on the part of any guaranty agency. The Company, however, cannot provide absolute assurances to that effect.

Competition created by the FDL Program and from other lenders and servicers may adversely impact the Company’s business.

Under the FDL Program, the Department makes loans directly to student borrowers through the educational institutions they attend. The volume of student loans made under the FFEL Program and available for the Company to originate or acquire may be reduced to the extent loans are made to students under the FDL Program. In addition, if the FDL Program expands, to the extent the volume of loans serviced by the Company is reduced, the Company may experience reduced economies of scale, which could adversely affect earnings. Loan volume reductions could further reduce amounts received by the guaranty agencies available to pay claims on defaulted student loans.

In the FFEL Program market, the Company faces significant competition from SLM Corporation, the parent company of Sallie Mae. The Company also faces intense competition from other existing lenders and servicers. As the Company expands its student loan origination and acquisition activities, that expansion may result in increased competition with some of its servicing customers. This has in the past occasionally resulted in servicing customers terminating their contractual relationships with the Company, and the Company could in the future lose more servicing customers as a result. As the Company seeks to further expand its business, the Company will face numerous other competitors, many of which will be well established in the markets the Company seeks to penetrate. Some of the Company’s competitors are much larger than the Company, have better name recognition, and have greater financial and other resources. In addition, several competitors have large market capitalizations or cash reserves and are better positioned to acquire companies or portfolios in order to gain market share. Consequently, such competitors may have more flexibility to address the risks inherent in the student loan business. Finally, some of the Company’s competitors are tax-exempt organizations that do not pay federal or state income taxes and which usually have the ability to issue tax-exempt securities, which typically carry a lower cost of funds than the Company’s securities. These factors could give the Company’s competitors a strategic advantage.

Higher rates of prepayments of student loans could reduce the Company’s profits.

Pursuant to the Higher Education Act, borrowers may prepay loans made under the FFEL Program at any time without penalty. Prepayments may result from consolidating student loans, which tends to occur more frequently in low interest rate environments, from borrower defaults, which will result in the receipt of a guaranty payment, and from voluntary full or partial prepayments, among other things. High prepayment rates will have the most impact on the Company’s asset-backed securitization transactions priced in relation to LIBOR, since these securities are priced according to their expected average lives. As of December 31, 2006, the Company had 13 transactions outstanding totaling approximately $14.2 billion that had experienced cumulative prepayment rates ranging from 6.9% to 25.0% as compared to 10 transactions outstanding totaling approximately $10.1 billion that had experienced cumulative prepayment rates ranging from 13.0% to 25.2% as of December 31, 2005. The rate of prepayments of student loans may be influenced by a variety of economic, social, and other factors affecting borrowers, including interest rates and the availability of alternative financing. The Company’s profits could be adversely affected by higher prepayments, which would reduce the amount of interest the Company received and expose the Company to reinvestment risk.

Increases in consolidation loan activity by the Company and its competitors present a risk to the Company’s loan portfolio and profitability.

The Company’s portfolio of federally insured loans is subject to refinancing through the use of consolidation loans, which are expressly permitted by the Higher Education Act. Consolidation loan activity may result in three detrimental effects. First, when the Company consolidates loans in its own portfolio, the new consolidation loans have a lower yield than the loans being refinanced due to the statutorily mandated consolidation loan rebate fee of 1.05% per year. Although consolidation loans generally feature higher average balances, longer average lives, and slightly higher special allowance payments, such attributes may not be sufficient to counterbalance the cost of the rebate fees. Second, and more significantly, the Company may lose student loans in its portfolio that are consolidated away by competing lenders. Increased consolidations of student loans by the Company’s competitors may result in a negative return on loans, when considering the origination costs or acquisition premiums paid with respect to these loans. Additionally, consolidation of loans away by competing lenders can result in a decrease of the Company’s servicing portfolio, thereby decreasing fee-based servicing income. Third, increased consolidations of the Company’s own student loans create cash flow risk because the Company incurs upfront consolidation costs, which are in addition to the origination or acquisition costs incurred in connection with the underlying student loans, while extending the repayment schedule of the consolidated loans.

The Company’s student loan origination and lending activities could be significantly impacted by the repeal of the single holder rule. The single holder rule, which generally restricted a competitor from consolidating loans away from a holder that owns all of a student’s loans, was abolished effective June 15, 2006. As a result, a substantial portion of the Company’s non-consolidated portfolio could be at risk of being consolidated away by a competitor. On the other hand, the abolition of the rule has also opened up a portion of the rest of the market to the Company that it previously could not access. As of December 31, 2006, the Company’s non-Consolidation portfolio was 28% of its total portfolio. For the year ended December 31, 2006, the Company’s net consolidation originations were $2.7 billion and the consolidation loans lost to external parties were $1.1 billion.

The volume of available student loans may decrease in the future and may adversely affect the Company’s income.

The Company’s student loan originations generally are limited to students attending eligible educational institutions in the United States. Volumes of originations are greater at some schools than others, and the Company’s ability to remain an active lender at a particular school with concentrated volumes is subject to a variety of risks, including the fact that each school has the option to remove the Company from its “preferred lender” list or to add other lenders to its “preferred lender” list, the risk that a school may enter the FDL Program, or the risk that a school may begin making student loans itself. The Company acquires student loans through forward flow commitments with other student loan lenders, but each of these commitments has a finite term. There can be no assurance that these lenders will renew or extend their existing forward flow commitments on terms that are favorable to the Company, if at all, following their expiration.

In addition, as of December 31, 2006, third parties owned approximately 50.5% of the loans the Company serviced. To the extent that third-party servicing clients reduce the volume of student loans that the Company processes on their behalf, the Company’s income would be reduced, and, to the extent the related costs could not be reduced correspondingly, net income could be adversely affected. Such volume reductions occur for a variety of reasons, including if third-party servicing clients commence or increase internal servicing activities, shift volume to another service provider, perhaps because such other service provider does not compete with the client in student loan originations and acquisitions, or exit the FFEL Program completely, for instance as a result of reduced interest rate margins.

If the Company does not have effective default prevention programs or the borrowers serviced by the Company otherwise go into default in greater numbers than with other servicing companies, schools and other lenders may choose to utilize the services of companies with lower default rates. In particular, schools are required to keep their default rates at or below certain levels under the Higher Education Act. An increase in the Company’s default rate could be attributed to the schools and accordingly the schools cohort default rates could increase. Such an increase may cause schools to utilize servicers with lower default rates, thereby reducing the Company’s servicing and origination volume.

The Company may be limited in its ability to pay dividends or make other payments as a result of the terms of certain outstanding securities issued by the Company.

In September 2006, the Company issued certain junior subordinated hybrid securities (the “Hybrid Securities”). So long as the Hybrid Securities remain outstanding, if the Company has given notice of its election to defer interest payments but the related deferral period has not yet commenced or a deferral period is continuing, then the Company will not, and will not permit any of its subsidiaries to:

	•		declare or pay any dividends or distributions on, or redeem, purchase, acquire or make a liquidation payment regarding, any of the Company’s capital stock;
	•		except as required in connection with the repayment of principal, and except for any partial payments of deferred interest that may be made through the alternative payment mechanism described in the indenture relating to the Hybrid Securities, make

			any payment of principal of, or interest or premium, if any, on, or repay, repurchase or redeem any of the Company’s debt securities that rank pari passu with or junior to the Hybrid Securities; or
	•		make any guaranty payments regarding any guaranty by the Company of the subordinated debt securities of any of the Company’s subsidiaries if the guaranty ranks pari passu with or junior in interest to the Hybrid Securities.

In addition, if any deferral period lasts longer than one year, the limitation on the Company’s ability to redeem or repurchase any of its securities that rank pari passu with or junior in interest to the Hybrid Securities will continue until the first anniversary of the date on which all deferred interest has been paid or cancelled.

If the Company is involved in a business combination where immediately after its consummation more than 50% of the surviving entity’s voting stock is owned by the shareholders of the other party to the business combination, then the immediately preceding sentence will not apply to any deferral period that is terminated on the next interest payment date following the date of consummation of the business combination.

However, at any time, including during a deferral period, the Company will be permitted to:

	•		pay dividends or distributions in additional shares of the Company’s capital stock;
	•		declare or pay a dividend in connection with the implementation of a shareholders’ rights plan, or issue stock under such a plan, or redeem or repurchase any rights distributed pursuant to such a plan; and
	•		purchase common stock for issuance pursuant to any employee benefit plans.

Failures in the Company’s information technology system could materially disrupt its business.

The Company’s servicing and operating processes are highly dependent upon its information technology system infrastructure, and the Company faces the risk of business disruption if failures in its information systems occur, which could have a material impact upon its business and operations. The Company depends heavily on its own computer-based data processing systems in servicing both its own student loans and those of third-party servicing customers. If servicing errors do occur, they may result in a loss of the federal guaranty on the federally insured loans serviced or in a failure to collect amounts due on the student loans that the Company services. The Company regularly backs up its data and maintains detailed disaster recovery plans. With the exception of the Company’s loan servicing systems, the Company does not maintain fully redundant information systems. A major physical disaster or other calamity that causes significant damage to information systems could adversely affect the Company’s business. Additionally, loss of information systems for a sustained period of time could have a negative impact on the Company’s performance and ultimately on cash flow in the event the Company were unable to process borrower payments.

Transactions with affiliates and potential conflicts of interest of certain of the Company’s officers and directors, including one of its Co-Chief Executive Officers, pose risks to the Company’s shareholders that the Company may not enter into transactions on the same terms that the Company could receive from unrelated, third-parties.

The Company has entered into certain contractual arrangements with entities controlled by Michael S. Dunlap, the Company’s Chairman and Co-Chief Executive Officer and a principal shareholder, and members of his family and, to a lesser extent, with entities in which other directors and members of management hold equity interests or board or management positions. Such arrangements constitute a significant portion of the Company’s business and include sales of student loans and student loan origination rights by such affiliates to the Company. These arrangements may present potential conflicts of interest. Many of these arrangements are with Union Bank and Trust Company (“Union Bank”), in which Michael S. Dunlap owns an indirect interest and of which he serves as non-executive chairman. The Company intends to maintain its relationship with Union Bank, which management believes provides substantial benefits to the Company, although there can be no assurance that any transactions between the Company and entities controlled by Mr. Dunlap, his family, and/or other officers and directors of the Company are, or in the future will be, on terms that are no less favorable than what could be obtained from an unrelated third party.

Imposition of personal holding company tax would decrease the Company’s net income.

A corporation is considered to be a “personal holding company” under the U.S. Internal Revenue Code of 1986, as amended (the “Code”), if (1) at least 60% of its adjusted ordinary gross income is “personal holding company income” (generally, passive income) and (2) at any time during the last half of the taxable year more than half, by value, of its stock is owned by five or fewer individuals, as determined under attribution rules of the Code. If both of these tests are met, a personal holding company is subject to an additional tax on its undistributed personal holding company income, currently at a 15% rate. Five or fewer individuals hold more than half the value of the Company’s stock. In June 2003, the Company submitted a request for a private letter ruling from the Internal Revenue Service seeking a determination that its federally guaranteed student loans qualify as assets of a “lending or finance business,” as defined in the Code. Such a determination would have assured the Company that holding such loans does not make it a personal holding company. Based on its historical practice of not issuing private letter rulings concerning matters that it considers to be primarily factual, however, the Internal Revenue Service has indicated that it will not issue the requested ruling, taking no position on the merits of the legal issue. So long as more than half of the Company’s value continues to be held by five or fewer individuals, if it

were to be determined that some portion of its federally guaranteed student loans does not qualify as assets of a “lending or finance business,” as defined in the Code, the Company could become subject to personal holding company tax on its undistributed personal holding company income. The Company continues to believe that neither Nelnet, Inc. nor any of its subsidiaries is a personal holding company. However, even if Nelnet, Inc. or one of its subsidiaries was determined to be a personal holding company, the Company believes that by utilizing intercompany distributions, it could eliminate or substantially eliminate its exposure to personal holding company taxes, although it cannot assure that this will be the case.

“Do not call” registries limit the Company’s ability to market its products and services.

The Company’s direct marketing operations are or may become subject to additional federal and state “do not call” laws and requirements. In January 2003, the Federal Trade Commission amended its rules to provide for a national “do not call” registry. Under these federal regulations, consumers may have their phone numbers added to the national “do not call” registry. Generally, the Company is prohibited from calling anyone on that registry with whom it does not have an existing relationship. In September 2003, telemarketers first obtained access to the registry and since that time have been required to compare their call lists against the national “do not call” registry at least once every 90 days. The Company is also required to pay a fee to access the registry on a quarterly basis. Enforcement of the federal “do not call” provisions began in the fall of 2003, and the rule provides for fines of up to $11,000 per violation and other possible penalties. This and similar state laws may restrict the Company’s ability to effectively market its products and services to new customers. Furthermore, compliance with this rule may prove difficult, and the Company may incur penalties for improperly conducting its marketing activities.

The Company’s inability to maintain its relationships with significant branding and forward flow partners and/or customers could have an adverse impact on its business.

The Company’s inability to maintain strong relationships with significant schools, branding and forward flow partners, servicing customers, guaranty agencies, and software licensees could result in loss of:

	•		loan origination volume with borrowers attending certain schools;
	•		loan origination volume generated by some of the Company’s branding and forward flow partners;
	•		loan and guaranty servicing volume generated by some of the Company’s loan servicing and guaranty agency customers; and
	•		software licensing volume generated by some of the Company’s licensees.

The Company cannot make any assurances that its forward flow channel lenders or its branding partners will continue their relationships with the Company. Loss of a strong branding or forward flow partner or relationships with schools from which a significant volume of student loans is directly or indirectly acquired, could result in an adverse effect on the Company’s business.

The business of servicing Canadian student loans by EDULINX is limited to a small group of servicing customers and the agreement with the largest of such customers is currently scheduled to expire on March 31, 2008. As discussed in Part I, Item 1, “Business – Operating Segments – Student Loan and Guaranty Servicing”, EDULINX has been notified that the Government of Canada has decided to award a competitive contract to provide financial and related administrative services in support of the CSLP, upon the expiration of the current EDULINX contract for such services, to another service provider. During 2006, the Company recognized $53.9 million, or 28.3% of its loan and guaranty servicing income, from this customer.

As a result of the non-renewal of the CSLP contract, the Company is exploring various options for EDULINX. The Company may incur charges or losses in connection with the disposal, through sale or otherwise, or continued operation of EDULINX. Such losses or charges may be significant and would have a material adverse effect on the Company’s operations.

The Company’s failure to successfully manage business and certain asset acquisitions could have a material adverse effect on the Company’s business, financial condition, and/or results of operations.

The Company may acquire new products and services or enhance existing products and services through acquisitions of other companies, product lines, technologies, and personnel, or through investments in other companies. During 2004 through 2006, the Company acquired the stock and certain assets of 17 different entities. Any acquisition or investment is subject to a number of risks. Such risks may include diversion of management time and resources, disruption of the Company’s ongoing business, difficulties in integrating acquisitions, dilution to existing stockholders if the Company’s common stock is issued in consideration for an acquisition or investment, incurring or assuming indebtedness or other liabilities in connection with an acquisition, lack of familiarity with new markets, and difficulties in supporting new product lines. The Company’s failure to successfully manage acquisitions or investments, or successfully integrate acquisitions, could have a material adverse effect on the Company’s business, financial condition, and/or results of operations. Correspondingly, the Company’s expectations to the accretive nature of the acquisitions could be inaccurate.

ITEM 1B. UNRESOLVED STAFF COMMENTS

The Company has received no written comments regarding its periodic or current reports from the staff of the Securities and Exchange Commission that were issued 180 days or more preceding the end of its 2006 fiscal year and that remain unresolved.

ITEM 2. PROPERTIES

The following table lists the principal facilities owned or leased by the Company. The Company owns the building in Lincoln, Nebraska where its principal office is located.

								Lease
				Approximate				expiration
Location		Primary Function or Segment		square feet				date
Jacksonville, FL.		Student Loan and Guaranty Servicing, Software and Technical Services			109,000			January 2014
Aurora, CO		Asset Generation and Management, Student Loan and Guaranty Servicing, Software and Technical Services			114,000			February 2008
Mississauga, Ontario		Student Loan Servicing			113,000			August 2009
Lincoln, NE.		Corporate Headquarters, Asset Generation and Management, Student Loan and Guaranty Servicing			109,000			—
Indianapolis, IN		Asset Generation and Management, Student Loan and Guaranty Servicing			62,000			February 2008
Lawrenceville, NJ.		Enrollment Services and List Management			62,000			April 2011

The Company leases other facilities located throughout the United States. These properties are leased on terms and for durations that are reflective of commercial standards in the communities where these properties are located. The Company believes that its respective properties are generally adequate to meet its long-term business goals. The Company’s principal office is located at 121 South 13^th Street, Suite 201, Lincoln, Nebraska 68508.

On October 13, 2006, the Company completed the purchase of the building in Lincoln, Nebraska in which the Company’s corporate headquarters are located. The Company acquired the building through the Company’s indirectly, wholly-owned subsidiary M & P Building, LLC (“M & P”). In connection with the acquisition of the building M & P assumed the outstanding note and deed of trust on the property.

ITEM 3. LEGAL PROCEEDINGS

General

The Company is subject to various claims, lawsuits, and proceedings that arise in the normal course of business. These matters principally consist of claims by borrowers disputing the manner in which their loans have been processed and disputes with other business entities. On the basis of present information, anticipated insurance coverage, and advice received from counsel, it is the opinion of the Company’s management that the disposition or ultimate determination of these claims, lawsuits, and proceedings will not have a material adverse effect on the Company’s business, financial position, or results of operations.

Report by the Office of Inspector General of the Department of Education

On January 19, 2007, the Company entered into a Settlement Agreement (the “Settlement Agreement”) with the Department to resolve the audit by the OIG of the Company’s portfolio of student loans receiving 9.5% special allowance payments. Under the terms of the Settlement Agreement, the Company will retain the 9.5% special allowance payments that the Company received from the Department prior to July 1, 2006. In addition, the Settlement Agreement will effectively eliminate all 9.5% special allowance payments with respect to the Company’s portfolios of loans for periods on and after July 1, 2006.

As previously reported, the OIG audit report contained a finding by the OIG that an increase in the amount of 9.5% special allowance payments that had been received by the Company was based on what the OIG deemed to be ineligible loans. Such loans were deemed by the OIG to be ineligible for 9.5% special allowance payments due to interpretive issues as outlined in the Settlement Agreement.

The Company disagrees with the OIG audit report, and continues to believe that the Company billed for the 9.5% special allowance payments in accordance with applicable laws, regulations, and the Department’s previous guidance. As a part of the Settlement Agreement, the Company and the Department acknowledge a dispute exists related to guidance previously issued by the Department and the application of the existing laws and regulations related to the Company receiving certain 9.5% special allowance payments, and that the Settlement Agreement is based in part on the parties’ desire to avoid costly litigation regarding that dispute. The new guidance provided to the Company in the Settlement Agreement will effectively eliminate all future 9.5% special allowance payments for the Company. These loans will continue to receive special allowance payments using other applicable special allowance formulas.

The Settlement Agreement resolves all issues between the Company and the Department that arise out of or relate to the contents of the OIG audit report and the Department’s review of the issues raised therein related to the receipt of the 9.5% special allowance.

The Settlement Agreement does not preclude any other government agency from reviewing the issues raised in the OIG audit report. The Company was informed by the Department that a civil attorney with the Department of Justice has opened a file regarding this issue which the Company understands is common procedure following an OIG audit report. The Company believes that any claim related to this issue has no merit.

Investigation by the New York Attorney General’s Office

On January 11, 2007, the Company received a letter from the NYAG requesting certain information and documents from the Company in connection with the NYAG’s investigation into preferred lender list activities. “Preferred lender lists” are lists of lenders recommended by college and university financial aid departments to students seeking financial aid. The Company understands that the NYAG’s office is conducting an investigation to determine if there are conflict of interest issues relating to lenders being placed on the preferred lender lists at colleges and universities. The Company understands that the NYAG has sent similar requests to other lenders and is also seeking information from a number of colleges and universities nationwide. The Company is cooperating with the NYAG’s investigation and believes its practices comply with all applicable laws and regulations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2006.

PART II.

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s Class A Common Stock is listed and traded on the New York Stock Exchange under the symbol “NNI,” while its Class B Common Stock is not publicly traded. The number of holders of record of the Company’s Class A Common Stock and Class B Common Stock as of February 22, 2007 was 388 and nine, respectively. Because many shares of the Company’s Class A Common stock are held by brokers and other institutions on behalf of shareholders, the Company is unable to estimate the total number of beneficial owners represented by these record holders. The following table sets forth the high and low sales prices for the Company’s Class A Common Stock for each full quarterly period in 2006 and 2005.

		2006																2005
		1st Quarter				2nd Quarter				3rd Quarter				4th Quarter				1st Quarter				2nd Quarter				3rd Quarter				4th Quarter
High		$	43.19			$	42.97			$	40.65			$	30.79			$	34.75			$	38.12			$	38.01			$	40.68
Low			40.00				36.04				28.52				25.24				26.27				31.00				33.65				35.99

The Company did not pay cash dividends on either class of its Common Stock during the two most recent fiscal years. On February 7, 2007, the Company’s Board of Directors approved a cash dividend of $0.07 per share on the Company’s Class A and Class B Common Stock to be paid on March 15, 2007 to shareholders of record as of March 1, 2007. The Company intends to continue paying a quarterly dividend in the future.

Performance Graph

The following graph compares the change in the cumulative total shareholder return on the Company’s Class A Common Stock to that of the cumulative return of the Dow Jones U.S. Total Market Index and the Dow Jones U.S. Financial Services Index. The graph assumes that the value of an investment in the Company’s Class A Common Stock and each index was $100 on December 11, 2003 (the date of the Company’s initial public offering of its Class A Common Stock), and that all dividends, if applicable, were reinvested. The performance shown in the graph represents past performance and should not be considered an indication of future performance.

COMPRASION OF CUMULATIVE TOTAL RETURN
AMONG NELNET, INC., THE DOW JONES US TOTAL MARKET INDEX,
AND THE DOW JONES US FINANCIAL SERVICES INDEX

Company/Index		12/11/2003				12/31/2003				12/31/2004				12/31/2005				12/31/2006
Nelnet, Inc.		$	100.00			$	102.75			$	123.53			$	186.61			$	125.50
Dow Jones U.S. Total Market Index		$	100.00			$	103.71			$	116.17			$	123.52			$	142.75
Dow Jones U.S. Financial Services Index		$	100.00			$	103.63			$	118.41			$	128.33			$	163.95

The preceding information under the caption “Performance Graph” shall be deemed to be “furnished” but not “filed” with the Securities and Exchange Commission.

Stock Repurchases

The following table summarizes the repurchases of Class A Common Stock during the fourth quarter of 2006 by the Company or any “affiliated purchaser” of the Company, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934.

										Total number of				Maximum number
										shares purchased				of shares that may
		Total number				Average				as part of publicly				yet be purchased
		of shares				price paid				announced plans				under the plans
Period		purchased (1)				per share				or programs (2) (3)				or programs (4)
October 1 - October 31, 2006			—			$	—				—				4,401,512
November 1 - November 30, 2006			90,684				25.60				90,684				4,467,944
December 1 - December 31, 2006			—				—				—				4,418,535
Total			90,684			$	25.60				90,684

(B / C)

(A + D)

Approximate dollar

Closing price on

Approximate

Approximate

Maximum number of

value of shares that

the last trading

numberof shares

number of shares

shares that may yet be

may yet be

day of the

that may yet be

that may yet be

purchased under the

purchased under

Company's Class

purchased under

purchased under

2006 Plan

the 2006 ESLP

A Common Stock

the 2006 ESLP

the 2006 Plan and

As of

(A)

(B)

(C)

(D)

2006 ESLP

October 31, 2006

3,059,800

$

39,500,000

$

29.44

1,341,712

4,401,512

November 30, 2006

3,059,800

37,175,000

26.40

1,408,144

4,467,944

December 31, 2006

3,059,800

37,175,000

27.36

1,358,735

4,418,535

Equity Compensation Plans

For information regarding the Company’s equity compensation plans, see Part III, Item 12 of this Report.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial and other operating information of the Company. The selected financial data in the table is derived from the consolidated financial statements of the Company. As a result of several business and asset acquisitions made by the Company and the Company’s rapid organic growth, the period-to-period comparability of the Company’s financial position and results of operations may be difficult. In addition, the Company began recognizing interest income in 2004 on a loan portfolio in which it earned a minimum of 9.5 percent. Interest income earned on this portfolio has decreased as a result of rising interest rates and the pay down of the portfolio. As a result of the Company’s settlement entered into with the Department, beginning July 1, 2006 the Company no longer recognizes income on this loan portfolio. As such, the following data should be read in conjunction with the consolidated financial statements, the related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operation” included in this Report.

Management evaluates the (Company’s GAAP-based financial information as well as operating results on a non-GAAP performance measure referred to as “base net income”. Management believes “base net income.” provides additional insight into the financial performance of the core operations.

						Year ended Decmber 31,
		2006				2005				2004				2003				2002
						(dollars in thousands, except share data)
Income Statement Data:
Net interest income		$	308,692				329,097				398,166				171,722				185,029
Less provision (recovery) for loan losses			15,308				7,030				(529	)			11,475				5,587
Net interest income after provision (recovery) for loan losses			293,384				322,067				398,695				160,247				179,442
Other income			332,131				204,962				124,529				121,976				127,941
Derivative market value, foreign currency, and put option adjustments			(31,075	)			96,227				(11,918	)			(1,183	)			2,962
Derivative settlements, net			23,432				(17,008	)			(34,140	)			(1,601	)			(3,541	)
Salaries and benefits			(246,116	)			(172,732	)			(133,667	)			(124,273	)			(106,874	)
Amortization of intangible assets			(25,122	)			(9,479	)			(8,768	)			(12,766	)			(22,214	)
Impairment expense			(31,090	)			—				—				—				—
Other operating expenses			(208,675	)			(140,092	)			(100,316	)			(96,111	)			(101,875	)
Income before income taxes and minority interest			106,869				283,945				234,415				46,289				75,841
Net income			68,155				181,122				149,179				27,103				48,538
Earnings per share, basic and diluted		$	1.27				3.37				2.78				0.60				1.08
Weighted average shares outstanding			53,593,056				53,761,727				53,648,605				45,501,583				44,971,290
Other Data:
Origination and acquisition volume (a)		$	6,696,118				8,471,121				4,070,529				3,093,014				1,983,403
Average student loans		$	21,696,466				15,716,388				11,809,663				9,316,354				8,171,898
Student loans serviced (at end of period)		$	39,636,502				35,127,452				28,288,622				18,773,899				17,863,210
Ratios:
Core student loan spread			1.42	%			1.51	%			1.66	%			1.78	%			1.65	%
Net loan charge-offs as a percentage of average student loans			0.012	%			0.006	%			0.070	%			0.080	%			0.047	%
Shareholders’ equity to total assets (at end of period)			2.51	%			2.85	%			3.01	%			2.56	%			1.12	%
						As of December 31,
		2006				2005				2004				2003				2002
						(dollars in thousands)
Balance Sheet Data:
Cash and cash equivalents		$	106,086				103,650				39,989				198,423				40,155
Student loans receivables, net			23,789,552				20,260,807				13,461,814				10,455,442				8,559,420
Goodwill and intangible assets			354,414				252,652				20,509				11,630				23,909
Total assets			26,796,873				22,798,693				15,169,511				11,932,831				9,766,583
Bonds and notes payable			25,562,119				21,673,620				14,300,606				11,366,458				9,447,682

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

OVERVIEW

The Company is an education planning and financing company focused on providing quality products and services to students, families, and schools nationwide. The Company is a vertically-integrated organization that offers a broad range of pre-college, in-college, and post-college products and services to its customers.

Built through a focus on long-term organic growth and further enhanced by strategic acquisitions, the Company earns its revenues from net interest income on its portfolio of student loans as well as from fee based revenues related to its education finance and service operations.

During 2006, the Company continued to become more vertically-integrated and focused on complimenting solid asset growth with revenue diversification. The table below summarizes the percentage of revenue earned from net interest income and fee based income over the past three years.

The Company accomplished revenue diversification through (i) growth of existing fee based activities such as list sales and tuition payment management services and (ii) business acquisitions. During 2006, the Company acquired infiNET which expanded its campus commerce product offerings, and CUnet and Petersons which contribute to the Company’s Enrollment Services and List Management segment.

While revenue diversification and student loan asset growth were the highlights of 2006 for the Company, several other events in 2006 affected the Company’s results of operations.

	•		On February 8, 2006, the Higher Education Reconciliation Act (“HERA”) of 2005 was enacted into law. One of the provisions of HERA reduced guarantee rates on FFELP loans. As a result, in February 2006, the Company recorded an expense of $6.9 million ($4.3 million after tax) to increase the Company’s allowance for loan losses.
	•		The Company experienced compression of its core student loan yield primarily due to changes in portfolio mix and a reduction of floor income earned on its fixed rate portfolio. The Company’s portfolio of consolidation student loan assets was 72.0% as of December 31, 2006 compared to 64.2% as of December 31, 2005. In addition rising interest rates reduced the amount of floor income earned by the Company on loans earning at fixed rates, however, the Company had hedged a substantial portion of this risk.
	•		Beginning in the third quarter 2006, the Company sold student loans to an unrelated party. Loans sold were not serviced by the Company and, as such, management believed these loans were at a greater risk of being consolidated away from the Company by third parties. These loan sales resulted in a $14.0 million gain.
	•		In December 2006, EDULINX, a subsidiary of the Company, was notified that the Government of Canada had decided to award its contract to another service provider upon the expiration of the contract with EDULINX on March 31, 2008. As a result, the Company recognized a $9.4 million impairment charge on long-lived assets. See “Recent Developments” for additional information about this event.
	•		In January 2007, the Company entered into a Settlement Agreement with the Department that resulted in the elimination of 9.5% special allowance payments and recognized a charge of $21.7 million in 2006 as a result of the Agreement. See “Recent Developments” for additional information about the Settlement Agreement.
	•		During 2006, the Company repurchased and retired 1,940,200 shares of Class A Common Stock for $62.4 million.

RESULTS OF OPERATIONS

The Company’s operating results are primarily driven by the performance of its existing portfolio, the cost necessary to generate new assets, the revenues generated by its fee based business, and the cost to provide those services. The performance of the Company’s portfolio is driven by net interest income and losses related to credit quality of the assets along with the cost to administer and service the assets and related debt.

Acquisitions

Management believes the Company’s business and asset acquisitions in recent years have enhanced the Company’s position as a vertically-integrated industry leader and established a strong foundation for growth. Although the Company’s assets, loan portfolios, and fee-based revenues increase through such transactions, a key aspect of each transaction is its impact on the Company’s prospective organic growth and the development of its integrated platform of services. Management believes these acquisitions allow the Company to expand the products and services offered to education and financial institutions and students and families throughout the education and education finance process. In addition, these acquisitions diversify the Company’s asset generation streams and/or

diversify revenue by offering other products and services that are not dependent on government programs, which reduces the Company’s exposure to legislation and political risk. The Company also expects to reduce costs from these acquisitions through economies of scale and by integrating certain support services. In addition, the Company expects to increase revenue from these acquisitions by offering multiple products and services to its customers. As a result of these recent acquisitions and the Company’s rapid organic growth, the period-to-period comparability of the Company’s results of operations may be difficult.

Net Interest Income

The Company generates a significant portion of its earnings from the spread, referred to as its student loan spread, between the yield the Company receives on its student loan portfolio and the cost of funding these loans. This spread income is reported on the Company’s consolidated statement of operations as net interest income. The amortization of loan premiums, including capitalized costs of origination, the consolidation loan rebate fee, and yield adjustments from borrower benefit programs, are netted against loan interest income on the Company’s statements of income. The amortization of debt issuance costs is included in interest expense on the Company’s statements of income.

The Company’s portfolio of FFELP loans originated prior to April 1, 2006 earns interest at the higher of a variable rate based on the special allowance payment (SAP) formula set by the Department and the borrower rate. The SAP formula is based on an applicable index plus a fixed spread that is dependent upon when the loan was originated, the loan’s repayment status, and funding sources for the loan. As a result of one of the provisions of HERA, the Company’s portfolio of FFELP loans originated on or after April 1, 2006 earns interest at a variable rate based on the SAP formula. For the portfolio of loans originated on or after April 1, 2006, when the borrower rate exceeds the variable rate based on the SAP formula, the Company must return the excess to the Department.

On most consolidation loans, the Company must pay a 1.05% per year rebate fee to the Department. Those consolidation loans that have variable interest rates based on the SAP formula earn an annual yield less than that of a Stafford loan. Those consolidation loans that have fixed interest rates less than the sum of 1.05% and the variable rate based on the SAP formula also earn an annual yield less than that of a Stafford loan. As a result, as consolidation loans matching these criteria become a larger portion of the Company’s loan portfolio, there will be a lower yield on the Company’s loan portfolio in the short term. However, due to the extended terms of consolidation loans, the Company expects to earn the yield on these loans for a longer duration, making them beneficial to the Company in the long term.

Because the Company generates a significant portion of its earnings from its student loan spread, the interest rate sensitivity of the Company’s balance sheet is very important to its operations. The current and future interest rate environment can and will affect the Company’s interest earnings, net interest income, and net income. The effects of changing interest rate environments are further outlined in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk — Interest Rate Risk.”

Investment interest income, which is a component of net interest income, includes income from unrestricted interest-earning deposits and funds in the Company’s special purpose entities which are utilized for its asset-backed securitizations.

Provision for Loan Losses

The allowance for loan losses is estimated and established through a provision charged to expense. Losses are charged against the allowance when management believes the collectibility of the loan principal is unlikely. Recovery of amounts previously charged off is credited to the allowance for loan losses. The allowance for federally insured and non-federally insured loans is maintained at a level management believes is adequate to provide for estimated probable credit losses inherent in the loan portfolio. This evaluation is inherently subjective because it requires estimates that may be susceptible to significant changes. The Company analyzes the allowance separately for its federally insured loans and its non-federally insured loans.

The allowance for the federally insured loan portfolio is based on periodic evaluations of the Company’s loan portfolios considering past experience, trends in student loan claims rejected for payment by guarantors, changes to federal student loan programs, current economic conditions, and other relevant factors. One of the changes to the Higher Education Act as a result of HERA’s enactment in February 2006 was to lower the guarantee rates on FFELP loans, including a decrease in insurance and reinsurance on portfolios receiving the benefit of the Exceptional Performance designation by 1%, from 100% to 99% of principal and accrued interest (effective July 1, 2006), and a decrease in insurance and reinsurance on portfolios not subject to the Exceptional Performance designation by 1%, from 98% to 97% of principal and accrued interest (effective for all loans first disbursed on and after July 1, 2006). In February 2006, as a result of the change in these legislative provisions, the Company recorded an expense of $6.9 million ($4.3 million after tax) to increase the Company’s allowance for loan losses.

In September 2005, the Company was re-designated as an Exceptional Performer by the Department in recognition of its exceptional level of performance in servicing FFELP loans. As a result of this designation, the Company receives 99% reimbursement (100% reimbursement prior to July 1, 2006) on all eligible FFELP default claims submitted for reimbursement. Only FFELP loans that are serviced by the Company, as well as loans owned by the Company and serviced by other service providers designated as Exceptional Performers by the Department, are eligible for the 99% reimbursement. As of December 31, 2006, more than 99% of the Company’s

federally insured loans were serviced by providers designated as Exceptional Performers. If the Company or a third party servicer were to lose its Exceptional Performer designation, either by a legislative discontinuance of the program or the Company or third party servicer not meeting the required servicing standards or failing to get re-designated during the annual application process, loans serviced by the Company or such third party would become subject to the 3% risk sharing for all claims submitted after loss of the designation (2% risk sharing effective for all loans disbursed prior to July 1, 2006).

In June 2006, the Company submitted its application for Exceptional Performer redesignation to the Department to continue receiving reimbursements at the 99% level for the 12-month period from June 1, 2006 through May 31, 2007. As of March 1, 2007, the Department has not notified the Company of its redesignation. Until the Department confirms or denies the Company’s application for renewal, the Company continues to receive the benefit of the Exceptional Performer designation. It is the opinion of the Company’s management, based on information currently known, that there is no reason to believe the Company’s application will be rejected. If the Department rejected the Company’s application for Exceptional Performer status, the Company would have to establish a provision for loan losses related to the risk sharing on those loans that the Company services internally. Based on the balance of federally insured loans outstanding as of December 31, 2006, this provision would be approximately $15.3 million.

In determining the adequacy of the allowance for loan losses on the non-federally insured loans, the Company considers several factors including: loans in repayment versus those in a nonpaying status, months in repayment, delinquency status, type of program, and trends in defaults in the portfolio based on Company and industry data. The Company places a non-federally insured loan on nonaccrual status and charges off the loan when the collection of principal and interest is 120 days past due.

Other Income

The Company also earns fees and generates income from other sources, including principally loan and guaranty servicing income; fee-based income on borrower late fees, payment management activities, and certain marketing and enrollment services; and fees from providing software services.

Loan and Guaranty Servicing Income – Loan servicing fees are determined according to individual agreements with customers and are calculated based on the dollar value or number of loans serviced for each customer. Guaranty servicing fees are calculated based on the number of loans serviced or amounts collected. Revenue is recognized when earned pursuant to applicable agreements, and when ultimate collection is assured.

Other Fee-Based Income – Other fee-based income includes borrower late fee income, payment management fees, the sale of lists and print products, and subscription-based products and services. Borrower late fee income earned by the Company’s education lending subsidiaries is recognized when payments are collected from the borrower. Fees for payment management services are recognized over the period in which services are provided to customers. Revenue from the sale lists and printed products is generally earned and recognized, net of estimated returns, upon shipment or delivery. Revenues from the sales of subscription-based products and services are recognized ratably over the term of the subscription. Subscription revenue received or receivable in advance of the delivery of services is included in deferred revenue.

Software Services – Software services income is determined from individual agreements with customers and includes license and maintenance fees associated with student loan software products. Computer and software consulting services are recognized over the period in which services are provided to customers.

Other income also includes the derivative market value and foreign currency adjustments and derivative net settlements from the Company’s derivative instruments and Euro Notes as further discussed in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk.” The change in the fair value of put options (issued as part of the consideration for certain business combinations) is also included in other income.

Operating Expenses

Operating expenses includes indirect costs incurred to generate and acquire student loans, costs incurred to manage and administer the Company’s student loan portfolio and its financing transactions, costs incurred to service the Company’s student loan portfolio and the portfolios of third parties, costs incurred to provide tuition payment processing, campus commerce, enrollment, list management, software, and technical services to third parties, and other general and administrative expenses. Operating expenses also includes the depreciation and amortization of capital assets and intangible assets.

Recent Developments

Department of Education Settlement

Based on provisions of the Higher Education Act and regulations and guidance of the Department and related interpretations, education lenders may receive special allowance payments from the Department which provide a minimum 9.5% interest rate (the “9.5% Floor”) on loans currently financed or financed prior to September 30, 2004 with proceeds of tax-exempt obligations originally

issued prior to October 1, 1993. A portion of the Company’s FFELP loan portfolio is comprised of loans financed prior to September 30, 2004 with tax-exempt obligations originally issued prior to October 1, 1993. As of December 31, 2006, the Company had $3.0 billion of FFELP loans it determined were eligible to receive special allowance payments at the 9.5% Floor rate. Of this portfolio, $2.4 billion in loans were financed prior to September 30, 2004 with proceeds of tax-exempt obligations originally issued prior to October 1, 1993 and then subsequently sold to taxable obligations, without retiring the tax-exempt obligations. Loan interest earned on this $2.4 billion portfolio is referred to as the “special allowance yield adjustment” by the Company.

In May 2003, the Company sought confirmation from the Department regarding whether the Company was allowed to receive the special allowance payments based on the 9.5% Floor on loans being acquired with funds obtained from the proceeds of tax-exempt obligations originally issued prior to October 1, 1993 and then subsequently sold using proceeds of taxable obligations without retiring the tax-exempt obligations. In June 2004, after consideration of certain clarifying information received in connection with the guidance the Company had sought, and based on written and verbal communications with the Department, including written confirmation from the Department that the public could continue to rely on a Department guidance letter issued in March 1996, the Company concluded that the earnings process had been completed and recognized the previously deferred income of $124.3 million on this portfolio. Pending satisfactory resolution of this issue, the Company deferred recognition of that portion of the 9.5% Floor income generated by these loans which exceeded statutorily defined special allowance rates under a taxable financing. As of December 31, 2003, the amount of deferred excess interest income on these loans was $42.9 million and was included in other liabilities on the Company’s consolidated balance sheet.

In June 2005, the Office of Inspector General of the Department of Education (the “OIG”) commenced an audit of the portion of the Company’s student loan portfolio receiving 9.5% Floor special allowance payments. On September 29, 2006, the Company received a final audit report from the OIG which contained a finding by the OIG that an increase in the amount of 9.5% special allowance payments that have been received by the Company was based on what the OIG deemed to be ineligible loans.

On January 19, 2007, the Company entered into a Settlement Agreement with the Department to resolve the audit by the OIG of the Company’s portfolio of student loans receiving 9.5% special allowance payments. Under the terms of the Settlement Agreement, the Company will retain the 9.5% special allowance payments that it received from the Department prior to July 1, 2006. In addition, the Settlement Agreement will eliminate all 9.5% special allowance payments with respect to the Company’s portfolios of loans for periods on and after July 1, 2006.

The Company disagrees with the OIG audit report, and continues to believe that it billed for the 9.5% special allowance payments in accordance with applicable laws, regulations, and the Department’s previous guidance. As a part of the Settlement Agreement, the Company and the Department acknowledge a dispute exists related to guidance previously issued by the Department and the application of the existing laws and regulations related to the Company receiving certain 9.5% special allowance payments, and that the Settlement Agreement is based in part on the parties’ desire to avoid costly litigation regarding that dispute. The new guidance provided to the Company in the Settlement Agreement will effectively eliminate all future 9.5% special allowance payments for the Company. These loans will continue to receive special allowance payments using other applicable special allowance formulas.

The Company believes the prospective loss of the 9.5% special allowance payments will not have a material adverse affect on the Company’s operations. In addition, the Company does not expect the Settlement Agreement to have any material adverse effect on the outstanding debt obligations issued by the Company’s education lending subsidiaries in the securitization of student loan assets. The Settlement Agreement resolves all issues between the Company and the Department that arise out of or relate to the contents of the OIG audit report and the Department’s review of the issues raised therein. The Settlement Agreement does not preclude any other government agency from reviewing the issues raised in the OIG audit report.

As a result of the Settlement Agreement, the Company recognized an impairment charge of $21.7 million in 2006 related to loan premiums paid on loans acquired in 2005 from the acquisition of LoanSTAR Funding Group, Inc. (“LoanSTAR”) that were previously considered eligible for 9.5% special allowance payments.

EDULINX – Loss of Servicing Contract

Under its existing contract with the Government of Canada, EDULINX, a subsidiary of the Company, provides services in support of the Canada and Integrated Student Loan Programs (“CSLP”) for student borrowers attending public institutions. The Government of Canada is EDULINX’s largest customer. EDULINX’s servicing revenue for the year ended December 31, 2006 was $69.0 million, of which $53.9 million was earned under the CSLP contract.

On December 22, 2006, EDULINX was notified that the Government of Canada had decided to award the CSLP contract to another service provider upon the expiration of the contract with EDULINX on March 31, 2008. As a result of this decision, EDULINX will be required to transition the existing direct-financed CSLP portfolio it services to the selected service provider. As a result of the Government of Canada’s decision to award the CSLP contract to another service provider, the Company recorded an impairment charge of $9.4 million in 2006 related to certain EDULINX assets, including servicing software and hardware under development ($6.8 million), goodwill ($1.5 million), and intangible assets ($1.1 million).

Recent Developments Related to the Higher Education Act

See Part I, Item 1, “Business — Recent Developments Related to the Higher Education Act,” for additional information regarding current legislative proposals that could have an impact on the Company’s results of operations.

Year ended December 31, 2006 compared to year ended December 31, 2005

Net Interest Income

		Year ended
		December 31,				December 31,
		2006				2005				$ Change
		(dollars in thousands)
Interest income:
Loan interest		$	1,455,715				904,949				550,766
Investment interest			94,151				44,259				49,892
Total interest income			1,549,866				949,208				600,658
Interest expense:
Interest on bonds and notes payable			1,241,174				620,111				621,063
Net interest income			308,692				329,097				(20,405	)
Provision for loan losses			15,308				7,030				8,278
Net interest income after provision for loan losses		$	293,384				322,067				(28,683	)

Net interest income decreased $28.7 million for the year ended December 31, 2006 compared to 2005. Net interest income for 2006 and 2005 included $24.5 million and $94.7 million of excess yield related to the Company’s 9.5% special allowance yield adjustment. Excluding the excess yield net interest income increased $41.5 million, or 18.3%. This increase was the result of a 38% increase in average student loans and was offset by a decrease in the Company’s student loan yield, recognition of $6.9 million in expense for provision of loan losses related to HERA, and the increase in interest expense as a result of additional issuances of unsecured debt. Additional analysis of net interest income is included in the Company’s operating segment discussion under the Asset Generation and Management operating segment.

Other Income

		Year ended
		December 31,				December 31,
		2006				2005				$ Change
		(dollars in thousands)
Loan and guaranty servicing income		$	190,563				152,493				38,070
Other fee-based income			102,318				35,641				66,677
Software services income			15,890				9,169				6,721
Other income			23,360				7,659				15,701
Derivative market value, foreign currency, and put option adjustments			(31,075	)			96,227				(127,302	)
Derivative settlements, net			23,432				(17,008	)			40,440
Total other income		$	324,488				284,181				40,307

Loan and guaranty servicing income increased due to growth from acquisitions and an increase in Canadian loan servicing income offset by a decrease in FFELP loan servicing income. Other fee-based income increased largely due to recent acquisitions. In

addition, the Company experienced an increase in borrower late fee income related to loan portfolio growth, an increase in the number of managed tuition payment plans, and an increase in list sales volume which also contributed to the growth in other fee-based income. Software services income increased due to the acquisition of 5280 Solutions, LLC (“5280”). The increase in other income is from the gains on the sales of student loan assets. Additional analysis of the increase in income for the year ended December 31, 2006 compared to 2005 is included in the discussion of the results of operations for each of the Company’s operating segments. The change in derivative market value, foreign currency, and put option adjustments was caused by a change in the fair value of the Company’s derivative portfolio and foreign currency rate fluctuations which are further discussed in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk.”

Operating Expenses

Operating expenses increased $188.7 million for the year ended December 31, 2006 compared to 2005. Operating expenses of the Company’s acquisitions, in which there were no comparable operations during 2005, resulted in $143.6 million of this increase. In addition, during 2006, the Company recorded impairment expense of $31.1 million related to the loss of the EDULINX CSLP contract and the Settlement Agreement with the Department.

										Net change
		Year ended				Impact of				after				Year ended
		December 31, 2005				acquisitions				acquistions				December 31, 2006
						(dollars in thousands)
Salaries and benefits		$	172,732				60,222				13,162				246,116
Other expenses			140,092				65,709				2,874				208,675
Amortization of intangible assets			9,479				17,641				(1,998	)			25,122
Impairment expense			—				—				31,090				31,090
Total operating expenses		$	322,303				143,572				45,128				511,003

Excluding the impact of acquisitions and the impairment loss, salaries and benefits and other expenses increased $16.0 million, or 5.1%. This increase was a result of (i) increased costs to develop systems to support a larger organizational structure and (ii) organic growth of the organization, specifically that of the Company’s school-based marketing efforts. The Company’s costs to develop its corporate structure include projects such as recruitment, development, and retention of intellectual capital and technology enhancements to support a larger, more diversified customer and employee base. Additional analysis of the increase in operating expenses for the year ended December 31, 2006 compared to 2005 is included in the discussion of the results of operations for each of the Company’s operating segments.

The Company’s effective tax rate has remained consistent from 2005 to 2006 at 36%. During 2006, the Company’s effective tax rate would have been negatively affected due to a put option adjustment, but was offset by a favorable rate adjustment from the resolution of various federal and state tax positions.

Year ended December 31, 2005 compared to year ended December 31, 2004

Net Interest Income

		Year ended
		December 31,				December 31,
		2005				2004				$ Change
		(dollars in thousands)
Interest income:
Loan interest		$	904,949				635,014				269,935
Investment Interest			44,259				17,762				26,497
Total interest income			949,208				652,776				296,432
Interest expense:
Interest on bonds and notes payable			620,111				254,610				365,501
Net interest income			329,097				398,166				(69,069	)
Provision (recovery) for loan losses			7,030				(529	)			7,559
Net interest income after provision (recovery) for loan losses		$	322,067				398,695				(76,628	)

Net interest income decreased $76.6 million for the year ended December 31, 2005 compared to 2004. The Company’s 9.5% special allowance yield adjustment decreased $108.8 million to $94.7 million in 2005 from $203.5 million in 2004. During 2004, the Company recognized $42.9 million of special allowance yield adjustments that had been previously deferred. Excluding the special allowance yield adjustment, net interest income increased $32.2 million, or 16.5%, driven by a 33% increase in average student loans, the reduction of the allowance for loan losses by $9.4 million as a result of the Company’s (and other service providers servicing the

Company’s student loans) Exception Performer Designations, and offset by a decrease in student loan spread and an increase in interest expense related to the issuance of unsecured debt. Additional analysis of net interest income is included in the Company’s operating segment discussion under the Asset Generation and Management operating segment.

Other Income

		Year ended
		December 31,				December 31,
		2005				2004				$ Change
		(dollars in thousands)
Loan and guaranty servicing income		$	152,493				100,130				52,363
Other fee-based income			35,641				7,027				28,614
Software services income			9,169				8,051				1,118
Other income			7,659				9,321				(1,662	)
Derivative market value, foreign currency, and put option adjustments			96,227				(11,918	)			108,145
Derivative settlements, net			(17,008	)			(34,140	)			17,132
Total other income		$	284,181				78,471				205,710

Loan and guaranty servicing income increased as the result of acquisitions offset by a decrease in FFELP loan servicing income. Other fee-based income increased largely due to recent acquisitions and an increase in borrower late fee income related to loan portfolio growth. Software services income increased due to the acquisition of 5280 on November 1, 2005. The decrease in other income is from the gain on the sale of a fixed asset in 2004. Additional analysis of the increase in income for the year ended December 31, 2005 compared to 2004 is included in the discussion of the results of operations for each of the Company’s operating segments. The change in derivative market value, foreign currency, and put option adjustments was caused by a change in the fair value of the Company’s derivative portfolio, which is further discussed in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk.”

Operating expenses

Operating expenses increased $79.5 million for the year ended December 31, 2005 compared to 2004. Operating expenses of the Company’s acquisitions, in which there were no comparable operations during 2004, resulted in a $88.3 million of this increase in expenses. This was offset by certain intangible assets that became fully amortized during 2004 and a decrease in the amount of incentive plan compensation for 2005 compared to 2004.

										Net change
		Year ended				Impact of				after				Year ended
		December 31, 2004				acquisitions				acquistions				December 31,
						(dollars in thousands)
Salaries and benefits		$	133,667				43,909				(4,844	)			172,732
Other expenses			100,316				36,620				3,156				140,092
Amortization of intangible assets			8,768				7,782				(7,071	)			9,479
Total operating expenses		$	242,751				88,311				(8,759	)			322,303

Additional analysis of the increase in operating expenses for the year ended December 31, 2005 compared to 2004 is included in the discussion of the results of operations for each of the Company’s operating segments.

Financial Condition as of December 31, 2006 compared to December 31, 2005

		As of December 31,								Change
		2006				2005				$ Change				% Change
						(dollars in thousands)
Assets:
Student loans receivable, net		$	23,789,552				20,260,807				3,528,745				17.4	%
Cash, cash equivalents, and investments			1,777,494				1,645,797				131,697				8.0
Goodwill			191,420				99,535				91,885				92.3
Intangible assets, net			162,994				153,117				9,877				6.5
Fair value of derivative instruments			146,099				82,837				63,262				76.4
Other assets			729,314				556,600				172,714				31.0
Total assets		$	26,796,873				22,798,693				3,998,180				17.5	%
Liabilities:
Bonds and notes payable		$	25,562,119				21,673,620				3,888,499				17.9	%
Fair value of derivative instruments			27,973				71				27,902				39,298.6
Other liabilities			534,931				474,884				60,047				12.6
Total liabilities			26,125,023				22,148,575				3,976,448				18.0
Minority interest			—				626				(626	)			100.0
Shareholders’ equity			671,850				649,492				22,358				3.4
Total liabilities and shareholders’ equity		$	26,796,873				22,798,693				3,998,180				17.5	%

The Company’s total assets increased $4.0 billion, or 17.5%, during 2006 primarily due to an increase in student loans receivable and related assets. The Company originated or acquired $6.7 billion in student loans which was offset by repayments and loan sales. The Company financed the increase in student loans and total assets through the issuance of bonds and notes payable. In addition, in September 2006, the Company issued $200.0 million of unsecured debt, a portion of which was used to repurchase 1.9 million shares of the Company’s Class A Common Stock for $62.4 million under its existing share repurchase program.

OPERATING SEGMENTS

The Company has five operating segments as defined in SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS No. 131”), as follows: Asset Generation and Management, Student Loan and Guaranty Servicing, Tuition Payment Processing and Campus Commerce, Enrollment Services and List Management, and Software and Technical Services. The Company’s operating segments are defined by the products and services they offer or the types of customers they serve, and they reflect the manner in which financial information is currently evaluated by management. During 2006, the Company changed the structure of its internal organization in a manner that caused the composition of its operating segments to change. All earlier years presented have been restated to conform to the 2006 operating segment presentation. 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 to another segment that provides the product or service. The amount of intersegment revenue is based on comparable fees charged in the market. Intersegment revenues and expenses are included within each segment consistent with the income statement presentation provided to management.

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. Management, including the Company’s chief operating decision maker, evaluates the performance of the Company’s operating segments based on their profitability. As discussed further below, management measures the profitability of the Company’s operating segments based on “base net income.” Accordingly, information regarding the Company’s operating segments is provided based on “base net income.” The Company’s “base net income” is not a defined term within GAAP and may not be comparable to similarly titled measures reported by other companies. Unlike financial accounting, there is no comprehensive, authoritative guidance for management reporting.

“Base net income” is the primary financial performance measure used by management to develop the Company’s financial plans, track results, and establish corporate performance targets and incentive compensation. While “base net income” is not a substitute for reported results under GAAP, the Company relies on “base net income” in operating its business because “base net income” permits management to make meaningful period-to-period comparisons of the operational and performance indicators that are most closely

assessed by management. Management believes this information provides additional insight into the financial performance of the core business activities of the Company’s operating segments.

Accordingly, the tables presented below reflect “base net income” which is reviewed and utilized by management to manage the business for each of the Company’s operating segments. Reconciliation of the segment totals to the Company’s consolidated operating results in accordance with GAAP are also included in the tables below. Included below under “Non-GAAP Performance Measures” is further discussion regarding “base net income” and its limitations, including a table that details the differences between “base net income” and GAAP net income by operating segment.

																		Year ended December 31, 2006
						Student				Tuition				Enrollment																				“Base net
		Asset				Loan				Payment				Services				Software								Corporate								income”
		Generation				and				Processing				and				and								Activity				Eliminations				Adjustments				GAAP
		and				Guaranty				and Campus				List				Technical				Total				and				and				to GAAP				Results of
		Management				Servicing				Commerce				Management				Services				Segments				Overhead				Reclassifications				Results				Operations
																		(dollars in thousands)
Total interest income		$	1,534,423				9,190				4,029				531				105				1,548,278				4,446				(2,858	)			—				1,549,866
Interest expense			1,215,529				—				8				—				—				1,215,537				28,495				(2,858	)			—				1,241,174
Net interest income			318,894				9,190				4,021				531				105				332,741				(24,049	)			—				—				308,692
Less provision for loan losses			15,308				—				—				—				—				15,308				—				—				—				15,308
Net interest income after provision for loan losses			303,586				9,190				4,021				531				105				317,433				(24,049	)			—				—				293,384
Other income (expense):
Loan and guarantee servicing income			—				190,563				—				—				—				190,563				—				—				—				190,563
Other fee-based income			11,867				—				35,090				55,361				—				102,318				—				—				—				102,318
Software services income			238				5				—				157				15,490				15,890				—				—				—				15,890
Other income			19,966				92				—				—				—				20,058				3,302				—				—				23,360
Intersegment revenue			—				63,545				503				1,000				17,877				82,925				662				(83,587	)			—				—
Derivative market value, foreign currency, and put option adjustments			—				—				—				—				—				—				—				—				(31,075	)			(31,075	)
Derivative settlements, net			18,381				—				—				—				—				18,381				5,051				—				—				23,432
Total other income (expense)			50,452				254,205				35,593				56,518				33,367				430,135				9,015				(83,587	)			(31,075	)			324,488
Operating expenses:
Salaries and benefits			53,036				115,430				17,607				15,510				22,063				223,646				32,977				(12,254	)			1,747				246,116
Impairment expense			21,687				9,403				—				—				—				31,090				—				—				—				31,090
Other expenses			51,085				56,240				8,371				30,854				3,238				149,788				58,887				—				25,122				233,797
Intersegment expenses			52,857				12,577				1,025				17				—				66,476				4,857				(71,333	)			—				—
Total operating expenses			178,665				193,650				27,003				46,381				25,301				471,000				96,721				(83,587	)			26,869				511,003
Income (loss)  before income taxes			175,373				69,745				12,611				10,668				8,171				276,568				(111,755	)			—				(57,944	)			106,869
Income tax expense (benefit) (a)			63,134				25,108				4,540				3,840				2,942				99,564				(40,836	)			—				(20,256	)			38,472
Net income (loss) before minority interest			112,239				44,637				8,071				6,828				5,229				177,004				(70,919	)			—				(37,688	)			68,397
Minority interest in subsidiary income			—				—				(242	)			—				—				(242	)			—				—				—				(242	)
Net income (loss)		$	112,239				44,637				7,829				6,828				5,229				176,762				(70,919	)			—				(37,688	)			68,155
Total assets		$	26,174,592				798,248				177,105				152,962				29,359				27,332,266				37,268				(572,661	)			—				26,796,873