Financial statements and reports of independent certified public accountants

              S 3700.3 F491 2007-2008
c.l
Grant Thornton
Financial statements and reports of independent
certified public accountants
Oklahoma Student Loan Authority
June 30, 2008 and 2007
Contents
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
MANAGEMENT'S DISCUSSION AND ANALYSIS 5
FINANCIAL STATEMENTS
STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN FUND EQUITY 13
BALANCE SHEETS 12
STATEMENTS OF CASH FLOWS 14
NOTES TO FINANCIAL STATEMENTS 16
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON
COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF
FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH
GOVERNMENT AUDITING STANDARDS 36
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Trustees
Oklahoma Student Loan Authority
We have audited the accompanying balance sheets of the Oklahoma Student Loan Authority
(the Authority), a component unit of the State of Oklahoma, as of June 30, 2008 and 2007, and
the related statements of revenues, expenses and changes in fund equity and cash flows for the
years then ended, which collectively comprise the Authority's basic financial statements. These
financial statements are the responsibility of the Authority'S management Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the
United States of America as established by the American Institute of Certified Public
Accountants and the standards applicable to financial audits contained in Government Auditing
Standards, issued by the Comptroller General of the United States. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement An audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Authority's internal control over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects,
the financial position of the Oklahoma Student Loan Authority as of June 30, 2008 and 2007,
and changes in its financial position and its cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
In accordance with Government Auditing Standards, we have also issued our report dated October
27, 2008 on our consideration of the Authority's internal control over financial reporting and
on our tests of its compliance with certain provisions of laws, regulations, contracts and grant
agreements and other matters. The purpose of that report is to describe the scope of our
testing of internal control over financial reporting and compliance and the results of that
testing, and not to provide an opinion on the internal control over financial reporting or on
compliance. That report is an integral part of an audit performed in accordance with Government
Auditing Standards and should be considered in assessing the results of our audit.
Grant Thornton LLP
U.S. member firm of Grant Thornton International LId
Management's Discussion and Analysis on pages five through eleven is not a required part of
the basic financial statements but is supplementary information required by accounting
principles generally accepted in the United States of America. We have applied certain limited
procedures, which consisted principally of inquiries of management regarding the methods of
measurement and presentation of the required supplementary information. However, we did
not audit the information and express no opinion on it.
Oklahoma City, Oklahoma
October 27,2008
Oklahoma Student Loan Authority
Management's Discussion and Analysis
The Oklahoma Student Loan Authority (Authority) functions as a secondary market for the purchase of
student loans from other lenders, as an originating lender for Federal Family Education Loans (FFEL)
Program loans and as a servicer of student loans. As a servicer of student loans, the Authority services its
own student loans and provides origination and pre-acquisition interim servicing for 44 other eligible lenders
during the fiscal year ending June 30, 2008, which are members of the OSLA Student Lending Network.
Given the reduced margins on FFEL Program loans originated since October 1, 2007, and capital market
uncertainties, 17 eligible lenders that were in the OSLA Student Lending Network have made the decision to
exit the FFEL Program. In addition, one major lender decided to centralize its origination of FFEL Program
loans, including those serviced by the Authority, through another servicer, Due to the exiting lenders and
management's decision not to seek or accept new lenders, the Authority had 27 active eligible lenders in the
OSLA Student Lending Network at June 30, 2008. In addition, the Authority provides and supports its in-house
loan servicing system for remote use by other eligible lenders. As members of the OSLA Student
Lending Network, the remote servicing lenders are responsible for their own origination and interim servicing
of their student loans.
The loan servicingwork performed by the Authority is done under the registered trade name "OSLA Student
Loan ServicingTM". Each member of the OSLA Student Lending Network is required to sell its student loans
to the Authority before repayment of the loans begins (subject to the Authority'S available finances to fund
acquisitions).
The Authority was designated as an Exceptional Performer effectiveJanuary 1, 2006 by the U.S. Department
of Education in recognition of its exceptional level of performance in servicing student loans. As a result of
this designation, the Authority received 100%reimbursement on all eligibledefault claims submitted since the
effective date of the Exceptional Performer designation. The reimbursement rate on default claims for non-
Exceptional Performers was 98%. Federal legislation changed these reimbursement rates effective July 1,
2006 to 99% for Exceptional Performers and 97% for non-Exceptional Performers. Effective October 1,
2007, the exceptional performer designation was eliminated.
This section of the Authority'S annual financial report presents a discussion and analysis of the Authority's
financial performance for the fiscal year ended June 30, 2008. Please read it in conjunction with the
Authority's financial statements and the notes to the financial statements, which follow this section.
FINANCIAL HIGHLIGHTS:
• The Authority's total assets at June 30, 2008 were approximately $1,310,417,000,which is an increase
of approximately $179,703,000or 16% over June 30,2007.
• The Authority's net student loans at June 30, 2008 were approximately $1,258,035,000,which is an
increase of approximately $192,357,000or 18% over June 30, 2007.
• The Authority's total operating revenue was approximately $60,391,000 and interest expense was
approximately $57,003,000 for the fiscal year ended June 30,2008, resulting in a net interest margin
of approximately $3,388,000. This is a decrease of approximately $15,951,000or 82% from the fiscal
year ended June 30, 2007.
• The Authority's total other operating expenses (see page 9) for the fiscal year ended June 30, 2008
were approximately $9,703,000,which is an increase of $1,550,000or 19% over the fiscal year ended
June 30, 2007.
• The Authority's change in fund equity for the fiscal year ended June 30, 2008 was approximately
$(6,316,000),which is a decrease of approximately $17,502,000 or 156% from the change in fund
equity for the fiscalyear ended June 30, 2007.
5
OVERVIEW OF THE FINANCIAL STATEMENTS:
In accordance with accounting principles generally accepted in the United States of America (US GAAP) and
the provisions of the Governmental Accounting Standards Board (GASB) Statement No. 20, the Authority
applies all relevant GASB pronouncements as well as Financial Accounting Standards Board (FASB)
pronouncements and Accounting Principles Board (APB) opinions, unless those pronouncements conflict
with or contradict GASB pronouncements, in which case, GASB prevails. Under the accrual basis of
accounting, revenues are recognized in the period in which they are earned and expenses are recognized in
the period in which they are incurred. The format of the Authority's financial statements is presented in
conformity with GASB Statement No. 34, "Basic Financial Statements - and Management's Discussion and
Analysis - for State and Local Governments".
CRITICAL ACCOUNTING POLICIES:
US GAAP requires Authority management to make estimates and assumptions and use judgments that affect
reported income, expenses, assets and liabilities and disclosure of contingent assets and liabilities during
reporting periods; accordingly, actual results could differ from these estimates.
The Authority generates most of its Operating Revenues from borrower interest, and subsidized interest and
special allowance from the U.S. Department of Education (USDE), on its student loan portfolio. Certain
Authority policies affect the generation of Operating Revenues.
The Authority offers the following incentive programs to our borrowers:
TOP Interest Rate Reduction - Most of the Authority's Stafford Loan and PLUS borrowers,
including borrowers of loans that the Authority services for the OSLA Student Lending Network
and will purchase in the future, can earn a 1.5% interest rate reduction by making their first twelve
payments on time. The reduced interest rate will apply for the life of the loan after it has been
earned. The Authority eliminated this interest rate reduction incentive program for loans with first
disbursement dates on or after July 1, 2008 so that loans from the Authority and members of the
OSLA Student Lending Network would be in compliance with the requirements of the USDE's
Participation and Put Programs as authorized by the Ensuring Continued Access to Student Loan
Act (ECASLA) (public Law 110-227).
EZ PAY Interest Rate Reduction - Borrowers can earn a 1.0% interest rate reduction by using the
Authority's electronic debit for making their monthly payments. The reduced interest rate will apply
as long as the borrower uses OSLA's electronic debit, EZ PAY, for making monthly payments. The
Authority increased the interest rate reduction for using EZ PAY from 0.33% to 1.0% effective June
20, 2007. The Authority decreased this interest rate reduction incentive program from 1.0% to
0.25% for loans with first disbursement dates on or after July 1, 2008 so that loans from the
Authority and members of the OSLA Student Lending Network would be in compliance with the
requirements of the USDE's Participation and Put Programs as authorized by ECASLA.
TOP Principal Reduction - Most of the Authority's Stafford Loan and PLUS borrowers can earn a
1% reduction in the principal amount of their loans by making their first three payments on time.
The Authority eliminated this loan principal reduction incentive program for loans with first
disbursement dates on or after July 1, 2008 so that loans from the Authority and members of the
OSLA Student Lending Network would be in compliance with the requirements of the USDE's
Participation and Put Programs as authorized by ECASLA.
Consolidation Loan Principal Reduction - Consolidation loan borrowers can earn a 1% reduction in
the principal amount of their loan by making their first six payments on time. The Authority
discontinued our consolidation loan program effective July 1, 2008.
6
CRITICAL ACCOUNTING POLICIES CONTINUED:
Lender Paid Origination Fees - The Authority and certain members of our Lending Network began
paying the origination fees for Stafford Loans on March 1, 2006 or later that are normally withheld
from the loan disbursements. Participation in this incentive program is at the discretion of the
member of OSLA Lending Network. The Authority will reimburse participating members of OSLA
Lending Network 50% of the lender paid origination fees. The Authority has committed to this
incentive program at least through June 30, 2009.
Default Fee Payment Program - The Authority began paying the 1% Federal Default fee when the
loans' guarantors are charging this fee for Stafford and PLUS loans guaranteed on or after July 1,
2006. The Authority has committed to this incentive program through June 30, 2009.
The achievement of the TOP and EZ PAY Interest Rate Reduction programs and participation in the
Authority's Lender Paid Origination Fee and Default Fee Payment programs results in a reduction, and will
result in a future reduction, in Operating Revenues received and in the average yield for the total student loan
portfolio.
Capitalized Loan Origination Costs - The direct costs associated with originating the loans are
amortized as a reduction to loan interest from borrowers over the estimated life of the loans based
on loan types, not to exceed 72 months.
The Authority expenses the cost associated with the TOP and Consolidation Loan Principal Reduction
programs in the period the incentive was earned as a reduction to loan interest income from borrowers.
The Authority capitalizes various out-of-pocket costs and amortizes these costs over an estimated life. These
capitalized costs include:
Premiums on Loan Acquisitions - Premiums are amortized as a reduction to loan interest from
borrowers over the estimated life of the loans, not to exceed 72 months.
Deferred Loan Fees - Federal Default and Guarantee Fees paid to guarantors and the cost related to
the Authority's Lender Paid Origination Fee incentive program are amortized as a reduction to loan
interest from borrowers over the estimated life of the loans, not to exceed 72 months.
Deferred Financing Costs - The cost associated with the issuance of the Authority's bonds and notes
payable are amortized over the estimated life of the debt issue, not to exceed 72 months.
The Authority maintains an Allowance for Loan Losses to provide for estimated future losses in the loan
portfolio. The Authority will write off loans as uncollectible when that determination is made and has written
off or will write off the applicable percentage (0%,2% or 3%) of principal balance upon payment of default
claims filed with guarantors. The balance of the Allowance for Loan Losses is an estimate of future losses in
the Authority's current portfolio of student loans. The Authority updates the balance of the Allowance for
Loan Losses by periodic expenses through the Provision for Loan Losses.
7
FINANCIAL ANALYSIS OF THE AUTHORITY:
The Authority's total fund equity at June 30, 2008 was approximately $85,995,000, which is a decrease of
approximately $6,316,000 or 7% over June 30, 2007. Components of the Authority's balance sheet are as
follows as of June 30:
Total Fund Equity
2008 2007
$ 3,092,417 $ 6,122,435
815,914 677,919
50,047,498 46,520,876
1,256.461.664 1.077,392,869
$1310417 493 $1 130 714 099
$ 420,305 $ 463,197
171,719,665 28,822,422
1,052,282,517 1.009,117,729
1.224.422.487 1.038.403,348
815,914 677,919
32,459,482 39,452,718
52,719,610 52,180,114
85,995,006 92,310,751
$1 310417 493 $1 130714099
Assets
Current assets
Capital assets
Other noncurrent assets
Restricted assets
Total Assets
Liabilities
Current liabilities
Current liabilities payable from restricted assets
Noncurrent liabilities payable from restricted assets
Total Liabilities
Fund equity
Invested in capital assets
Restricted
Unrestricted
Total Liabilities and Fund Equity
The growth in the Authority's total assets is the continuation of a trend of significant growth in prior years.
Net student loans grew from approximately $1,065,678,000 at June 30, 2007 to approximately $1,258,035,000
at June 30, 2008. The growth in liabilities over the past year relates to net draws on the Series 1993L line of
credit and Series 2005B note payable totaling $93,000,000 and $94,792,406, respectively. The reduction noted
in the Authority's Fund Equity is due to increased debt service costs and a reduction in special allowance
payments from the USDE.
For the fiscal year ended June 30, 2008, the Authority acquired or originated student loans with a principal
balance of approximately $328,013,000. This was a 17% decrease compared to the $395,463,000 acquired or
originated in the fiscal year ended June 30, 2007. This decrease was due primarily to decreased origination of
Consolidation Loans because under the Deficit Reduction Act, as of July 1, 2006, students that are in
in-school status are no longer able to apply for a Consolidation Loan. At June 30, 2008, consolidation loans
represented approximately 42% of our total portfolio of student loans compared to 48% at June 30, 2007.
BeginningJuly 1, 2008, the Authority has discontinued the origination of all Consolidation Loans.
8
FINANCIAL ANALYSIS OF THE AUTHORITY - CONTINUED:
The Authority's change in fund equity for the fiscal year ended June 30, 2008 was approximately $(6,316,000),
which is a decrease of approximately $17,502,000 or 156% from the change in fund equity for the fiscal year
ended June 30, 2007. Components of the statement of revenues, expenses and changes in fund equity for the
fiscal years ending are as follows at June 30:
Investment interest income
2008 2007
$59,216,963 $61,645,648
1.173,639 3,683,235
60,390,602 65,328,883
57,003,410 45,990,112
3,387,192 19,338,771
6,553,069 5,895,572
435,253 409,342
523,115 572,074
2,191,500 1,276,200
9,702,937 8.153,188
$ (6315745) $11185583
Loan interest income, net of consolidation rebate fees
Operating revenue
Less: Interest expense
Net interest margin
Less: Other operating expenses:
General administration
External loan servicing
Professional fees
Provision for loan losses
Total other operating expenses
Change in fund equity
The Change in Fund Equity of approximately $(6,316,000) for the year ended June 30, 2008 relates to both
the Authority's debt service funds (which serve as collateral on outstanding bonds and notes) and to the
Authority's general funds.
The decrease in loan interest income for the fiscal year ended June 30, 2008 is related to the decrease in
Special Allowance Payments from the Department of Education (USDE) on loans first disbursed on or after
October 1, 2007 and the requirement for repayment to the USDE of interest on student loans in excess of
the quarterly lenders' yield for loans first disbursed on or after April 1, 2006 and increases in consolidation
loan rebate fees. The variable interest rates on student loans are reset annually on July 1st. The variable rates
for the fiscal year ended June 30, 2008 ranged from 6.62% to 8.02% and the variable rates for the fiscal year
ended June 30, 2007 ranged from 6.54% to 7.94%. The fixed rates for loans first disbursed on or after July
1, 2006 ranged from 6.8% to 8.5%. See Footnote D, Loans and Allowance for Loan Losses, for explanation
of the quarterly lenders' yield and its relationship with the loans' stated variable or fixed interest rates.
The Authority funds the origination or acquisition of student loans by periodically issuing bonds and notes
and by reinvesting principal payments received on existing loans. The increase in interest expense for the
fiscal year ended June 30, 2008 is related to increasing interest rates for the fiscal year ended June 30, 2008
and the increase of approximately $187,792,000 principal amount in bonds and notes outstanding during the
fiscal year ended June 30, 2008.
Net Interest Margin for the fiscal year ended June 30, 2008 was approximately $3,387,000 which is a decrease
of approximately $15,952,000 or 82% from the fiscal year ended June 30, 2007.
9
FINANCIAL ANALYSIS OF THE AUTHORITY - CONTINUED:
The Authority's interest expense increased significantly due to adverse conditions in the credit market during the
fiscal year ending June 30, 2008. Bond insurers experienced downgrades due to exposure to the sub prime mortgage
crisis and resulting lack of investor confidence. This resulted in increased interest expense on the Authority's
Insured debt to rates as high as 11% during the fiscal year ending June 30, 2008. Additionally, failed auctions on the
Authority's Auctions Rate Securities resulted in interest rates as high as 17% for taxable and 12% for tax-exempt
debt during the fiscal year ending June 30, 2008.
The increase in provision for loan losses is related to the growth in the Authority's student loan notes receivable and
the projected loan losses based on historical trends over the life of the related student loans.
The Authority's other operating expenses for the fiscal year ended June 30, 2008 grew by 19% over the previous
fiscal year. The increase in other operating expenses was related to increased expenses related to the growth in our
loan servicing activities such as postage, telecommunications, professional fees and personnel costs. The Authority
prepares an annual operating budget that is used as a management tool for tracking the various operating expenses.
There were no significant variances between the budget and actual operating expenses for the fiscal year ended June
30,2008.
DEBT ADMINISTRATION:
The Authority funds student loan notes receivable by issuing tax-exempt and taxable bonds and notes. The bonds
and notes must be approved by the State of Oklahoma bond oversight process prior to being issued. Tax-exempt
bonds or notes also must receive an allocation of the State of Oklahoma private activity volume ceiling or "cap". In
addition, the issues must comply with federal statutes and with the rules and regulations of the United States
Treasury Department and the United States Securities and Exchange Commission.
At June 30, 2008, the Authority had $1,218,689,256 principal amount of bonds and notes payable outstanding, an
increase of 18% from the $1,030,896,850 principal amount outstanding at June 30, 2007. Detailed information on
the Authority's debt is presented in note E to the financial statements.
$1,008,875,000 of the Authority's debt was publicly held and had long term credit ratings assigned by Moody's
Investors Service (Moody's) and Standard and Poor's (S&P) based on the type of security which is reflected in the
table below. .
Credit Rating(s) Principal Amount Type of Security
AAA Moody's/ AAA S&P $453,200,000 Senior Lien or Insured
A2 Moody's/ AA S&P 518,465,000 Insured
A2 Moody's/A S&P 37,210,000 Subordinate Bonds
$518,465,000 of the Authority debt listed above bears a Weekly Rate and, in addition to the long-term ratings, also
has short-term ratings by Moody's (VMIG 3) and S&P (A-l + or A-i).
The Authority meets its temporary requirements for funding student loan notes receivable through a taxable,
revolving warehouse line of credit and a tax-exempt line of credit commitment provided by commercial banks. The
taxable, revolving line of credit has a commitment amount of $150,000,000, of which $115,000,000 principal amount
was outstanding at June 30, 2008. The tax-exempt line of credit has a commitment amount of $112,314,181, of
which $94,814,256 principal amount was outstanding at June 30, 2008. See note K - Subsequent Events for
additional information.
10
CONDITIONS AFFECTING FINANCIAL POSITION:
At June 30, 2008, the Authority was servicing student loans from members of the OSLA Student Lending Network
with a principal balance of approximately $184,931,000. The total portfolio of gross student loans that the
Authority owns or services for members of the OSLA Student Lending Network was approximately $1,428,206,000
at June 30, 2008. This is an increase of approximately $226,206,000 or 19% from June 30, 2007.
The Authority has experienced significant growth in all aspects of its operations. With the growth in the volume of
student loan applications being processed and the growth in the total loan portfolio serviced by the Authority,
particularly the growth in repayment status loans; the Authority's fiscal year 2009 budget reflects continued growth.
The Authority's budgeted administrative expenses for fiscal year 2009 reflect the additional costs to be incurred as a
result of the Authority's growth.
11
Oklahoma Student Loan Authority
BALANCE SHEETS
June 30,
ASSETS 2008 2007
$ 720,578 $ 67,207
2,136,661 5,270,238
235,178 784,990
3,092,417 6,122,435
49,680,631 46,113,609
815,914 677,919
366,867 407,267
50,863,412 47,198,795
4,230,665 2,981,368
14,741,124 26,788,286
28,184,157 26,641,652
1,208,353,890 1,019,564,080
951,828 1,417,483
1,256,461,664 1,077,392,869
$1,310.417.493 $1 130714099
Current assets
Cash
Investments
Interest receivable
Total current assets
Noncurrent assets
Loans, net of allowance for loan losses
Capital assets, net of accumulated depreciation
Other noncurrent assets
Total noncurrent assets
Restricted assets
Cash
Investments
Interest receivable
Loans, net of allowance for loan losses
Other restricted assets
Total restricted assets
TOTAL ASSETS
LIABILITIES AND FUND EQUITY
Current liabilities
Accounts payable and other accrued expenses
Total noncurrent liabilities payable from restricted assets
$ 420,305 $ 463,197
644,314 1,103,241
4,327,351 5,719,181
115,000,000 22,000,000
51,748,000
171,719,665 28,822,422
341,261 220,879
166,414,256 71,621,850
885,527,000 937,275,000
1,052,282,517 1,009,117,729
1,224,422,487 1,038,403,348
Current liabilities payable from restricted assets
Accounts payable and other accrued expenses
Accrued interest payable
Notes payable
Bonds payable
Total current liabilities payable from restricted assets
Noncurrent liabilities payable from restricted assets
Arbitrage rebate payable
Notes payable
Bonds payable
Total liabilities
Commitments and contingencies (note G)
Fund equity
Invested in capital assets
Restricted
Unrestricted
Total fund equity
815,914
32,459,482
52,719,610
85,995,006
$1,310.417.493
677,919
39,452,718
52.180.114
92310 751
TOTAL LIABILITIES AND FUND EQUITY $1 130714099
The accompanying notes are an integral part of these statements.
12
Oklahoma Student Loan Authority
STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN FUND EQUITY
Year ended June 30,
2008 2007
Operating revenues
Loan interest income
From borrowers $43,170,583 $35,674,118
From U.S. Department of Education (USDE) 16,046,380 25,971,530
Investment interest income 1,173,639 3,683,235
Total operating revenues 60,390,602 65,328,883
Operating expenses
Interest 57,003,410 45,990,112
General administration 6,553,069 5,895,572
External loan servicing fees 435,253 409,342
Professional fees 523,115 572,074
Provision for loan losses 2,191,500 1,276,200
Total operating expenses 66,706,347 54.143,300
CHANGE IN FUND EQUITY (6,315,745) 11,185,583
Fund equity at beginning of year 92,310,751 81.125.168
Fund equity at end of year $85,995,006 $92 310,751
The accompanying notes are an integral part of these statements.
13
Oklahoma Student Loan Authority
STATEMENTS OF CASH FLOWS
Year ended June 30,
Cash flows from operating activities
Receipts of interest income from borrowers
Receipts of interest income from USDE
Receipts of interest on investments
Payments for interest on notes and bonds payable
Payments to Internal Revenue Service for arbitrage rebate
Payments to employees and suppliers
Net cash provided by operating activities
Cash flows from noncapital financing activities
Advances on notes payable
Proceeds from issuance of bonds
Payments of debt financing costs
Payments on notes payable
Net cash provided by noncapital financing activities
Cash flows from investing activities
Proceeds from sales of investments
Receipts of loan principal payments
Increase in student loans receivable and related costs
Purchases of investments
Net cash used in investing activities
Cash flows from capital activities
Purchases of capital assets
NET INCREASE (DECREASE) IN CASH
Cash at beginning of year (including $2,981,368 and $4,952,000 for
2008 and 2007, respectively, reported in restricted assets)
Cash at end of year (including $4,230,665 and $2,981,368 and
$4,952,000 for 2008 and 2007, respectively, reported in
restricted assets)
14
2008 2007
$ 44,459,699 $ 36,358,968
21,595,160 25,936,888
1,443,398 3,879,281
(57,916,440) (44,310,243)
(24,586)
(7 ,661,034) (7.297 ,181)
1,896,197 14,567,713
235,814,256 43,993,762
109,725,000
(13,145) (437,384)
(48,021,850) (50,971 ,912)
187,779,261 102,309 .466
299,920,993 433,863,979
160,762,004 289,285,559
(363,265,716) (424,192,932)
(284,740,255) (417 ,635,387)
(187,322,974) (118,678,781)
(449,816) (123.248)
1,902,668 (1,924,850)
3,048,575 4,973.425
$ 4,951,243 $ 3048,575
Oklahoma Student Loan Authority
STATEMENTS OF CASH FLOWS - CONTINUED
Year ended June 30,
Reconciliation of change in fund equity to net cash provided
by operating activities
Change in fund equity
Adjustments to reconcile change in fund equity to net
cash provided by operating activities
Depreciation on capital assets
Amortization of loan origination costs, guarantee
fees and premiums on loan acquisition
Amortization of deferred financing costs
Provision for loan losses
(Increase) decrease in assets
Interest receivable
Other assets
Increase (decrease) in liabilities
Accounts payable and other accrued expenses
Accrued interest payable
Arbitrage rebate payable
Net cash provided by operating activities
2008 2007
$ (6,315,745) $ 11,185,583
311,821 381,236
7,955,381 6,384,054
478,800 500,642
2,191,500 1,276,200
(992,693) (5,687,497)
40,400 (88,703)
(501,819) (712,727)
(1,391,830) 1,179,228
120,382 149,697
$ 1,896,197 $ 14567713
15
The accompanying notes are an integral part of these statements.
Oklahoma Student Loan Authority
NOTES TO FINANCIAL STATEMENTS
June 30,2008 and 2007
NOTE A - REPORTING ENTITY AND NATURE OF PROGRAM
The Oklahoma Student Loan Authority (the Authority) was created as an express trust under applicable
Oklahoma Statutes and a Trust Indenture dated August 2, 1972, with the State of Oklahoma (the State)
accepting the beneficial interest therein. The Authority is a component unit of the State and is included
in the financial statements of the State as a part of the Enterprise Fund. Enterprise funds are used to
account for the operations and financial position of governmental entities that are fmanced and
operated in a manner similar to private enterprise.
The purpose of the Authority is to provide student loan funds to qualified persons at participating post-secondary
educational institutions. The Authority also performs origination and interim status servicing
for other Federal Family Education Loan (FFEL) Program lenders in addition to providing a secondary
market for FFEL Program loans for participating financial institutions. The student loans held by the
Authority under the Federal Higher Education Act of 1965 (Higher Education Act), as amended,
include Federal Stafford Loans (Stafford), Unsubsidized Stafford Loans for Middle Income Borrowers
(Unsubsidized Stafford), Federal Supplemental Loans for Students (SLS), Federal Parent Loans for
Undergraduate Students (PLUS) and Federal Consolidation Loans (Consolidation).
The FFEL Program loans are guaranteed by the Oklahoma State Regents for Higher Education
Guaranteed Student Loan Program (State Guarantee Agency), which is reinsured by the United States
Department of Education (USDE), or guaranteed by other guarantors approved by the USDE
(Guarantee Agencies). The Authority was designated as an Exceptional Performer effective January 1,
2006 by the USDE in recognition of its exceptional level of performance in servicing FFEL Program
loans. As a result of this designation, the Authority received 100% reimbursement (99%
reimbursement effective July 1, 2006) on all eligible FFEL Program default claims submitted since the
effective date of the Exceptional Performer designation. The Exceptional Performer designation was
eliminated effective October 1, 2007 by the College Cost Reduction and Access Act (see note H). As
of June 30, 2008, the majority of loans are guaranteed at 98% or 97% (97% for loans first disbursed on
or after July 1, 2006)
As of June 30, 2008 and 2007, the Authority serviced approximately $184,931,000 and $149,728,000,
respectively, in FFEL Program loans for other financial institutions. As a servicer of FFEL Program
loans, the Authority collects student loan remittances and subsequently disburses these remittances to
the appropriate lending entities.
The Authority also originates and holds private loans through our Supplemental Higher Education
Loan Financing (SHELfTM) Program. These loans are not guaranteed under the Higher Education
Act. The Authority retains a percentage of SHELFTM loan proceeds as a reserve against loan losses.
The Authority discontinued originations of SHELF loans effective July 1, 2008.
16
Oklahoma Student Loan Authority
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2008 and 2007
NOTE B - SUMMARY OF ACCOUNTING POLICIES
The financial statements of the Authority included herein reflect the combined assets, liabilities, fund
equity and changes therein for the Authority.
1. Basis of Accounting
The Authority accounts for its operation as an enterprise fund. Enterprise funds are accounted for on
the flow of economic resources measurement focus and use the accrual basis of accounting, similar to
private business enterprises; Under the accrual basis of accounting, revenues are recognized when
earned and expenses are recorded when incurred. In accordance with the provisions of the Govern-mental
Accounting Standards Board (GASB) Statement No. 20, the Authority applies all relevant
GASB pronouncements as well as Financial Accounting Standard Board (FASB) pronouncements and
Accounting Principles Board (APB) opinions, unless those pronouncements conflict with or contradict
GASB pronouncements, in which case, GASB prevails.
The preparation of financial statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reported period. Actual results could differ from those
estimates.
2. Accounts of the Authority
The accounts of the Authority are organized on the basis of individual funds as prescribed by the
Oklahoma Student Loan Act (the Act) and terms of various debt obligations. The various accounts
assigned to each fund could include any of the following, depending upon the terms of the related debt
obligation: Principal Account, Interest Account, Student Loan Account, Repayment Account, Debt
Service Reserve Account, Rebate Account and General Investment Account.
3. Cash
The Authority considers cash in demand deposit accounts and money market funds to be cash
equivalents. The Authority utilizes bank deposit accounts which periodically sweep cash into uninsured
short-term investment securities. The Authority has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk on such accounts.
4. Investments
Investments consist of repurchase agreements and U.S. Government Securities based mutual funds.
Applicable Oklahoma Statutes authorize certain types of investments the Authority can utilize. As of
June 30, 2008 and 2007, the Authority is in compliance with these investment requirements.
17
Oklahoma Student Loan Authority
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2008 and 2007
NOTE B - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
4. Investments - continued
Investments are stated at fair value, based on quoted prices for mutual funds and at cost for repurchase
agreements, with changes in fair value included in the statements of revenues, expenses and changes in
fund equity.
5. Loans and Allowance for Loan Losses
Loans are stated at cost, net of an allowance for loan losses. The Authority includes as the cost of a
loan any premium paid on student loans purchased. Premiums are amortized over the estimated life of
the loan as an adjustment to interest income. Loan origination costs are capitalized when the loan is
made and are amortized, using the interest method, over the estimated life of the loan.
All of the FFEL Program loans made or acquired by the Authority are guaranteed as described in Note
A. There is still risk to the Authority if the loans should lose their guarantee. The Authority has
established cure and recovery procedures to be applied to loans that have lost their guarantee. If the
cure and recovery procedures are not successful within a maximum of three years, the loan will be
written off as uncollectible.
The allowance for loan losses was established by the Authority's management to provide for this type
of loss, as well as losses on non-guaranteed SHELFTMloans. Student loans are written off when they
are deemed uncollectible and charged against the allowance upon such determination. Any subsequent
collection or recovery on an account written off as uncollectible is credited to the allowance.
6. Capital Assets
The Authority capitalizes expenditures for equipment, system development and leasehold
improvements. Depreciation and amortization are calculated primarily on a straight-line basis of three
to ten years. Accumulated depreciation and amortization on capital assets at June 30, 2008 and 2007
were approximately $2,669,000 and $2,421,000, respectively. Maintenance of equipment and other
assets is expensed as incurred.
7. Restricted Fund Equity
Certain assets of the Authority are restricted by the applicable bond and note covenants for the purpose
of providing collateral for the outstanding debt obligations and paying debt interest and principal
payments that are due (see Note E).
18
Oklahoma Student Loan Authority
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2008 and 2007
NOTE B - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
8. Operating Revenues and Expenses
Balances classified as operating revenues and expenses are those which comprise the Authority's
principal ongoing operations. Since the Authority's operations are similar to those of any other finance
company, all revenues and expenses are considered operating.
9. Interest Income
Interest is earned from the borrowers on the various types of student loans, from the USDE and from
investments. The USDE makes two types of interest payments to the Authority. One is for the
interest on Subsidized Stafford and Consolidation loans when the borrower is not currently required to
make principal and interest payments under the terms of the loan. Such interest income from the
USDE for the years ended June 30, 2008 and 2007 was approximately $13,634,000 and $12,252,000,
respectively. The other type of interest payment from the USDE is "Special Allowance Payments."
The rates for Special Allowance Payments are based on quarterly formulas that differ according to the
type of loan, the date the loan was first disbursed, the interest rate and the type of funds used to finance
such loans (tax-exempt or taxable). These rates are based upon the average rate established in the
auctions of 91-day U.S. Treasury bills during such quarter or the quotes of three-month commercial
paper (financial) in effect for each of the days in such quarter. Special Allowance Payments from the
USDE for the years ended June 30, 2008 and 2007 were approximately $7,858,000 and $18,732,000,
respectively.
Additionally, the Authority pays a consolidation rebate fee to the USDE on a monthly basis. The
consolidation rebate fee is based on the outstanding principal and unpaid accrued interest on
consolidation loans at month end. Consolidation rebate fees paid to the USDE for the years ended
June 30, 2008 and 2007 were approximately $5,446,000 and $5,012,000, respectively. Such fees are
reported as a reduction to loan interest income from USDE.
10. Arbitrage Rebate
The proceeds from the Authority's tax-exempt debt issuances are subject to arbitrage rebate laws under
the Internal Revenue Code. This arbitrage rebate limits the earnings on investment of tax-exempt
proceeds in non-purpose investments. The Authority has calculated and made provisions for the
estimated cumulative rebatable arbitrage that must be remitted to the Internal Revenue Service for the
excess earnings on non-purpose investments.
11. Income Taxes
As a State beneficiary trust, the income of the Authority earned in the exercise of its essential function
is exempt from state and federal income taxes.
19
Oklahoma Student Loan Authority
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2008 and 2007
NOTE C - INVESTMENTS
The Authority invests its idle cash in collateralized repurchase agreements and US. Government
securities-based money market mutual funds in accordance with the Authority's investment policy.
Generally, the policy requires investments in US. Government Obligations or obligations explicitly
guaranteed by the U S. Government to reduce the Authority's related credit risk, custodial credit risk
and interest rate risk. •
The US. Government securities-based money market mutual funds, at June 30, 2008 and 2007 were
rated AAA by the Standards & Poor's Corporation, Aaa by Moody's Investors Service, AAA by Duff &
Phelps and AAAjV1 + by Fitch Ratings. The Authority's restricted investment in US. Government
securities-based mutual funds totalled approximately $14,102,000 and $26,149,000 at June 30, 2008 and
2007, respectively. The Authority's unrestricted investment in US. Government securities-based
mutual funds totalled approximately $2,137,000 and $5,270,000 at June 30, 2008 and 2007, respectively.
Investments at fair value consist of the following at June 30:
2008 2007
Restricted
US. Government securities-based mutual funds
Total restricted investments
$14,102,024 $26,149,186
639.100 639.100
14,741,124 26,788,286
2.136,661 5,270,238
$16877 785 $32058524
Repurchase agreements
Unrestricted
U.S. Government securities-based mutual funds
Total investments
20
Oklahoma Student Loan Authority
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2008 and 2007
NOTE D - LOANS AND ALLOWANCE FOR LOAN LOSSES
The Authority originates purchases and holds various types of student loans as described in Note A.
The terms of these loans, which vary on an individual basis, depending upon loan type and the date the
loan was originated, generally provide for repayment in monthly installments of principal and interest
over a period of up to 30 years for Consolidation loans and generally up to ten years for other loans.
The repayment period begins after a grace period of six months following graduation or loss of
qualified student status for the Stafford and Unsubsidized Stafford loans. The repayment period for
Consolidation, SLS and PLUS loans begins within 60 days from the date the loan is fully disbursed.
Loans consist of the following as of June 30:
Net loans
2008 2007
$ 371,926,019 $ 294,271,577
294,818,332 218,634,974
48,217,306 35,630,532
525,336,296 500,968,132
2,976.798 3,025,760
1,243,274,751 1,052,530,975
7,300,850 3,865,222
19,018,517 17,581,700
(2,260,920) (638,253)
(9.298,677) (7,661.955)
$1 258034521 $1.065 677 689
Stafford
Unsubsidized Stafford
PLUS/SLS
Consolidation
SHELFTM
Total gross loans
Unamortized loan default and guarantee fees
Unamortized loan premiums and loan origination costs
Unprocessed loan payments
Allowance for loan losses
An analysis of the change in the allowance for loan losses is as follows as of June
Balances at beginning of year
2008 2007
$7,661,955 $6,619,319
(554,778) (233,564)
2,191,500 1.276.200
$9,298677 $7,661 955
Loans charged off, net of recoveries of $21,329 and $21,395
for 2008 and 2007, respectively
Provision for loan losses
Balance at end of year
21
Oklahoma Student Loan Authority
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2008 and 2007
NOTE D - LOANS AND ALLOWANCE FOR LOAN LOSSES - CONTINUED
The stated interest rates on student loans which are based on USDE regulations ranged from 2.0% to
11.0% for the fiscal year ended June 30, 2008 depending upon the type and date of origination of the
individual loan and whether the borrower had earned any of the Authority's interest rate reduction
incentives. This stated interest rate is paid by the borrowers or by USDE. For loans that had first
disbursement on or after April 1, 2006, the lenders' yield on student loans is based on a quarterly
calculation that uses the quarterly average rates of either the 91 day Treasury Bills or 90 day Commercial
Paper - Financial indices. The lender yield is calculated using these quarterly average rates plus an
allowable mark-up that is based on the type and date of the loan's first disbursement. If the quarterly
lenders' yield on the loans is less than the stated interest rate, the lender must rebate the excess to
USDE. The excess of the loans' stated interest rate over the quarterly lenders' yield is referred to as
Negative SAP. The Authority's loan portfolio at June 30, 2008 consisted of approximately 39%
Negative SAP loans. The calculated quarterly lenders' yield ranged from 8.03% to 4.09% for the fiscal
year ending June 30, 2008.
All FFEL Program student loans are guaranteed as to principal and accrued interest. Federal Default
and Guarantee fees paid by the Authority are capitalized when the loan is made and are amortized,
using the interest method, over the estimated life of the loan. In order for the loans to be or remain
guaranteed, certain due-diligence requirements in loan servicing must be met. As of June 30, 2008 and
2007, approximately $334,000 and $244,000, respectively, of loans were no longer considered to be
guaranteed.
The Authority also withholds certain origination fees from the loan disbursements on FFEL Program
loans to the borrowers and remits these fees to the USDE. The amount of the origination fees is a
certain percentage of the gross loan amount. The Authority and most members of the Authority's
lending network implemented a new borrower incentive program effective March 1, 2006 or later to
pay these origination fees on Stafford loans. Participation in this incentive program is at the discretion
of the members of OSLA Lending Network. The Authority will reimburse participating members of
OSLA Lending Network 50% of the lender paid origination fees. The Authority has committed to this
incentive program at least through June 30, 2009.
The Authority is also required to pay to the USDE certain lender origination and consolidation loan
rebate fees. The amount of the lender fees includes a certain percentage of the gross loan amount on
all FFEL Program loans originated after October 1, 1993 and a certain percentage of the carrying value
of the Consolidation loans.
The capitalized loan origination costs, net of accumulated amortization, at June 30, 2008 and 2007 were
approximately $1,666,000 and $1,817,000, respectively.
Premiums paid on student loans purchased, net of accumulated amortization, at June 30, 2008 and 2007
were approximately $17,353,000 and $15,765,000, respectively.
22
Oklahoma Student Loan Authority
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2008 and 2007
NOTE D - LOANS AND ALLOWANCE FOR LOAN LOSSES - CONTINUED
The deferred cost for Federal Default and Guarantee fees paid by the Authority and the Authority's
Lender Paid Origination Fees, net of accumulated amortization, at June 30, 2008 and 2007 were
approximately $7,301,000 and $3,865,000, respectively.
As discussed in Note A, the Authority was designated as an Exceptional Performer during 2007.
Effective July 1, 2006, the reimbursement rate on all eligible FFEL Program default claims for
Exceptional Performers was reduced to 99% as the result of legislative changes. Effective October 1,
2007, the exceptional performer designation was eliminated (see note H).
Generally, student loans of the Authority are pledged as collateral for the various obligations of the
Authority.
NOTE E - NOTES AND BONDS PAYABLE
The Authority periodically issues notes and bonds for the purpose of funding student loans. All notes
and bonds payable are primarily secured by student loans, related accrued interest and by the amounts
on deposit in accounts established under the respective bond resolution or financing agreement as
maintained by the corporate trustees. The Authority is in compliance with all significant financing
agreement requirements and bond covenants.
Generally, for variable rate demand obligations interest rates are set on a weekly basis by the
remarketing agent and credit enhancement is provided through insurance issued by a monoline insurer.
During the year ended June 30, 2008, the monoline insurer's ratings were downgraded due to exposure
to the sub prime mortgage market. The downgrades and the resulting lack of investor confidence and
lack of demand for monoline insured debt resulted in remarketing rates as high as 11.0% during the
year. The lack of demand also resulted in certain of these obligations becoming "Bank Bonds" as
defined by the terms of the standby bond purchase agreements. The terms of the Bank Bonds provide
for accelerated principal payments (generally requiring equal annual principal payments over
approximately five years) and for interest, payable monthly, determined by a defined spread to an index,
such as the prime rate or LIBOR. Bank Bonds under the standby bond purchase agreements resulted in
rates as high as 7.25% during the year ended June 30, 2008. At June 30, 2008, variable rate demand
obligations totaling $356,895,000 had become Bank Bonds under such agreements. Also, at June 30,
2008, $51,900,000 of variable rate demand obligations were not held as Bank Bonds, but became Bank
Bonds subsequently. As a result of these circumstances, the Authority's cost of funds for this type of
debt increased significandy during the year ended June 30, 2008.
At June 30, 2008, the Authority's notes and bonds payables also consisted of auction rate securities
(ARS's) totaling $412,575,000, of which $237,575,000 was tax-exempt with interest rates set every 35
days and $175,000,000 was taxable with interest rates set every 28 days. Beginning in February of 2008,
auction procedures utilized to establish interest rates failed and subsequent auctions have continued to
fail. The ARS's provide for a maximum interest rate, generally referenced to a defined index rate, when
the rate is not set by auction; however, the Authority temporarily amended, through March 30, 2008,
certain maximum rate provisions resulting in rates as high as 17% for taxable and 12% for tax-exempt
ARS's.
23
Oklahoma Student Loan Authority
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2008 and 2007
NOTE E - NOTES AND BONDS PAYABLE - CONTINUED
Notes payable at June 30, 2008 and 2007 consist of the following:
$150,000,000 Taxable Variable Rate Revenue Note (line of credit), Series 1993L (1993L), dated
May 30, 2008, payable at the offices of JP Morgan Chase Bank, N.A., as administrative agent.
The interest rate is adjusted periodically based on a LIBOR index plus 0.8% (LIBOR index plus
0.5% prior to May 30, 2008) and is payable on a monthly basis. The interest rate ranged from
3.25% to 3.28% as of June 30, 2008 and was 5.82% as of June 30, 2007. The principal amount
outstanding on this line at June 30, 2008 was $115,000,000. The principal is due at maturity on
September 2, 2008. Advances and payments can be made under the provisions of the note,
provided that the amount outstanding does not exceed the note amount. This line of credit is not
rated. See note K - Subsequent Events for additional information.
$21,600,000 Senior Notes, Series 1995A-1 (1995A-1) dated November 9, 1995. The interest rate
on these ARS's is 2.905% and 3.745% as of June 30, 2008 and 2007, respectively. The principal is
due at maturity on September 1, 2025.
$50,000,000 Senior Notes, Series 2001A-4 (2001A-4) dated December 20, 2001. The interest rate
is adjusted quarterly to the three-month financial Commercial Paper Rate with rates of 2.745%
and 5.38% as of June 30, 2008 and 2007 respectively. Interest is payable on a quarterly basis.
The principal is 'due at maturity on December 1, 2017.
$112,314,181 Line of Credit Commitment for Variable Rate Revenue Notes, Series 2005B
(2005B), payable to Bank of America, N.A., issued under a financing agreement dated August 1,
2007. The interest rate is adjusted periodically based on USD - Securities Industry and Financial
Markets Association Municipal Swap Index (SIFMA) plus 0.9% with rates of 2.45% and 5.32% as
of June 30, 2008 and 2007, respectively. Presently, two notes in an aggregate principal amount of
$94,814,256 are outstanding on this line. The notes are subject to a put on September 1, 2010.
The tax-exempt line of credit is not rated. See note K - Subsequent Events for additional
information.
24
Oklahoma Student Loan Authority
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2008 and 2007
NOTE E - NOTES AND BONDS PAYABLE - CONTINUED
The following schedules summarize the notes payable outstanding as of June 30:
2008
Beginning Ending
balance Additions Retirements balance
1993L $22,000,000 $141,000,000 $48,000,000 $115,000,000
1995A-1 21,600,000 21,600,000
2001A-4 50,000,000 50,000,000
2005B 21,850 94,814,256 21.850 94,814,256
$93621 850 $235814 256 $48021 850 $281 414 256
2007
Beginning Ending
balance Additions Retirements balance
1993L $ 22,000,000 $ $ $22,000,000
1995A-1 21,600,000 21,600,000
1995A-2 7,000,000 7,000,000
2001A-4 50,000,000 50,000,000
2005B 43,993.762 43,971.912 21.850
$100600000 $43993762 $50971912 $93621850
25
Oklahoma Student Loan Authority
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2008 and 2007
NOTE E - NOTES AND BONDS PAYABLE - CONTINUED
The following schedules sununarize the bonds payable outstanding as of June 30:
2008
Beginning Ending
balance Additions Retirements balance
5.80% Series 1995B-1 Subordinate, $ 2,000,000 $ $ $ 2,000,000
due 9-1-08
6.35% Series 1995B-2 Subordinate,
due 9-1-25 3,980,000 3,980,000
Variable rate demand obligations
Series 1996A, (a) 32,580,000 32,580,000
5.10% Series 1996B-2 Subordinate,
due 8-1-08 6,230,000 6,230,000
Variable rate demand obligations
Series 1997A, (a) 33,000,000 33,000,000
Variable rate demand obligations
Series 1998A, (a) 33,100,000 33,100,000
Variable rate Series 2000A-l,
2000A-2 and 2000A-3, due
6-1-30 100,000,000 100,000,000
Variable rate demand obligations
Series 2000A-4, (b) 20,945,000 20,945,000
5.625% Senior Series 2001A-l, due
6-1-31 15,625,000 15,625,000
Variable rate Series 200lB-l, Sub-ordinate,
due 6-1-31 25,000,000 25,000,000
Variable rate Series 2001A-2 and
2001A-3, due 12-1-31 75,000,000 75,000,000
Variable rate demand obligations
Series 2002A-1, (a) 40,625,000 40,625,000
5.30% Series, 2003A-1, due 12-1-32 9,670,000 9,670,000
Variable rate demand obligations
Series 2003A-2, (b) 30,955,000 30,955,000
Variable rate Series 2004A-l,
due 12-1-33 40,625,000 40,625,000
Variable rate Series 2004A-2,
due 6-1-34 40,625,000 40,625,000
Senior floating rate Series 2004A-3,
due 9-1-34 100,000,000 100,000,000
Variable rate demand obligations
Series 2005A, (a) 65,045,000 65,045,000
Variable rate demand obligations
Series 2006A-1, (a) 152,545,000 152,545,000
Variable rate Series 2007A-1,
due 3-1-37 109,725,000 109,725,000
$937275000 $ $ $937275000
26
Oklahoma Student Loan Authority
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2008 and 2007
NOTE E - NOTES AND BONDS PAYABLE - CONTINUED
(a.) Became held as Bank Bonds during the year ended June 30, 2008 due to either investor tenders to liquidity facility
providers and/or expiration and subsequent non-renewal of liquidity facility by provider in accordance with the terms
of standby bond purchase agreements.
(b.) Became held as Bank Bonds subsequent to June 30, 2008 due to either investor tenders to liquidity facility providers
and/ or expiration and subsequent to non-renewal of liquidity facility by provider in accordance with the terms of
standby bond purchase agreements.
5.80% Series 1995B-1 Subordinate,
due 9-1-08
6.35% Series 1995B-2 Subordinate,
due 9-1-25
Variable rate demand obligations
Series 1996A, due 6-1-26
5.10% Series 1996B-2 Subordinate,
due 8-1-08
Variable rate demand obligations
Series 1997A, due 12-1-26
Variable rate demand obligations
Series 1998A, due 6-1-28
Variable rate Series 2000A-1,
2000A-2 and 2000A-3, due
6-1-30; 2000A-4 (demand obli-gation)
due 6-1-29
5.625% Senior Series 2001A-1, due
6-1-31
Variable rate Series 200lB-l, Sub-ordinate,
due 6-1-31
Variable rate Series 2001A-2 and
2001A-3, due 12-1-31
Variable rate demand obligations
Series 2002A-l, due 12-1-31
5.30% Series, 2003A-l, due 12-1-32
Variable rate demand obligations
Series 2003A-2, due 12-1-32
Variable rate Series 2004A-l,
due 12-1-33
Variable rate Series 2004A-2,
due 6-1-34
Senior floating rate Series 2004A-3,
due 9-1-34
Variable rate demand obligations
Series 2005A, due 12-1-34
Variable rate demand obligations
Series 2006A-l, due 3-1-36
Variable rate Series 2007A-l,
due 3-1-37
2007
Beginning
balance -
$ 2,000,000 $
3,980,000
32,580,000
6,230,000
33,000,000
33,100,000
Additions Retirements
Ending
balance
$ 2,000,000
3,980,000
32,580,000
6,230,000
33,000,000
33,100,000
$
120,945,000 120,945,000
15,625,000 - - 15,625,000
25,000,000 - - 25,000,000
75,000,000 75,000,000
40,625,000 - 40,625,000
9,670,000 - 9,670,000
30,955,000 - - 30,955,000
40,625,000 - 40,625,000
40,625,000 - 40,625,000
100,000,000 - - 100,000,000
65,045,000 - - 65,045,000
152,545,000 - - 152,545,000
109,725,000 - 109,725,000
$827,550,000 $109725000 $ $937.275.000
27
Oklahoma Student Loan Authority
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2008 and 2007
NOTE E - NOTES AND BONDS PAYABLE - CONTINUED
The variable rates on the Variable Rate Demand Obligations, Series 1996A are 3.01% and 3.80% as of
June 30, 2008 and 2007, respectively. These obligations became held as Bank Bonds during the year
ended June 30, 2008 under the terms of a standby bond purchase agreement with interest payable
monthly. During fiscal year 2008, the interest rates were as high as 9.00% due to distress with the
related monoline insurer.
The variable rates of the Variable Rate Demand Obligations, Series 1997A are 3.01% and 3.78% as of
June 30, 2008 and 2007, respectively. These obligations became held as Bank Bonds during the year
ended June 30, 2008 under the terms of a standby bond purchase agreement with interest payable
monthly. During fiscal year 2008, the interest rates were as high as 11.00% due to distress with the
related monoline insurer.
The variable rates on the Variable Rate Demand Obligations, Series 1998A are 3.50% and 3.78% as of
June 30, 2008 and 2007, respectively. These obligations became held as Bank Bonds during the year
ended June 30, 2008 the terms of a standby bond purchase agreement with interest payable monthly.
During fiscal year 2008, the interest rates were as high as 11.00% due to distress with the related
monoline insurer.
The variable rates on the Senior Taxable Auction Rate Bonds, Series 2000A-1, 2, 3 are 3.48%, 3.45%
and 3.45% as of June 30, 2008 and 5.25%, 5.28% and 5.27% as of June 30, 2007, respectively. Interest
is payable at each auction. Due to failed auctions associated with these bonds during fiscal year 2008,
interest rates were as high as 17.00%.
The variable rates on the Variable Rate Demand Obligations, Series 2000A-4 are 10.00% and 3.78% as
of June 30, 2008 and 2007, respectively. A portion of these obligations became held as Bank Bonds
subsequent to June 30, 2008 under the terms of a standby bond purchase agreement and with interest
payable monthly. During fiscal year 2008, rates were as high as 11.00% due to distress with the related
monoline insurer.
The variable rates of the Subordinate Auction Rate Obligations, Series 2001B-1 are 2.53% and 3.90% as
of June 30, 2008 and 2007, respectively. Due to failed auctions associated with this bond in fiscal 2008,
interest rates were as high as 10.00%. Interest is payable at each auction.
The variable rates of the Senior Taxable Auction Rate Bonds, Series 2001A-2 and Series 2001A-3 are
0.00% and 0.00% as of June 30, 2008 and 5.25% and 5.25% as of June 30, 2007, respectively. Interest
is payable at each auction. The 0.00% rates at June 30, 2008 were due to maximum rate calculations
from failed auctions associated with these bonds, interest rates were as high as 17.00% during fiscal year
2008.
The rates of the Variable Rate Demand Obligations, Series 2002A-1 are 2.80% and 3.78% as of June 30,
2008 and 2007, respectively. These obligations became held as Bank Bonds during the year ended June
30, 2008 under the terms of a standby bond purchase agreement with interest payable monthly. During
fiscal year 2008, the interest rates were as high as 11.00% due to distress with the related monoline
insurer.
28
Oklahoma Student Loan Authority
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2008 and 2007
NOTE E - NOTES AND BONDS PAYABLE - CONTINUED
The rates of the Variable Rate Demand Obligations, Series 2003A-2 are 10.00% and 3.7S% as of June
30, 200S and 2007, respectively. A portion of these obligations became held as Bank Bonds subsequent
to June 30, 200S under the terms of a standby bond purchase agreement with interest payable monthly.
During fiscal year 200S, the interest rates were as high as 11.00% due to distress with the related
monoline insurer.
The variable rates of the Senior Auction Rate Bonds, Series 2004A-1 are 2.7S% and 3.S7% as of June
30, 200S and 2007, respectively. Due to failed auctions associated with these bonds in fiscal 200S,
interest rates were as high as 12.00%. Interest is payable at each auction.
The variable rates of the Senior Auction Rate Bonds, Series 2004A-2 are 0.00% and 3.S2% as of June
30, 200S and 2007, respectively. The 0.00% interest rate at June 30, 200S was due to maximum rate
calculations from failed auctions associated with these bonds, interest rates were as high as 12.00%
during fiscal year 200S.
The floating rates of the Senior Taxable Bonds, Series 2004A-3 are based on the three-month LIBOR
rate plus a spread factor of O.lS% with a rate of 2.S6% and 5.54% as of June 30, 200S and 2007,
respectively. Interest is payable on a quarterly basis.
The rates of the Variable Rate Demand Obligations, Series 2005A are 6.25% and 3.7S% as of June 30,
200S and 2007, respectively. These obligations became held as Bank Bonds during the year ended June
30, 200S under the terms of a standby bond purchase agreement with interest payable monthly. During
fiscal year 200S, the interest rates were as high as 11.00% due to distress with the related monoline
insurer.
The rates of the Variable Rate Demand Obligations, Series 2006A-1 are 6.25% and 3.S0% as of June 30,
2008 and 2007, respectively. These obligations became held as Bank Bonds during the year ended June
30, 2008 under the terms of a standby bond purchase agreement with interest payable monthly. The
conversion of this debt to Bank Bonds during fiscal year 200S has resulted in rates as high as 7.25%.
The rates of the Senior Auction Rate Bonds, Series 2007A-1 are 2.98% and 3.82% as of June 30, 200S
and 2007, respectively. Due to failed auctions associated with this bond in fiscal year 200S, interest rates
were as high as 12.00%.
Interest on the Authority's bonds payable is payable on a semi-annual basis unless noted otherwise.
29
Oklahoma Student Loan Authority
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2008 and 2007
NOTE E - NOTES AND BONDS PAYABLE - CONTINUED
Fiscal year debt service requirements to maturity or redemption date, assuming interest rates on variable
rate debt remains at June 30, 2008 levels, are as follows:
Principal Interest Total
Year ending June 30
2009 $ 166,748,000 $ 45,609,620 $ 212,357,620
2010 76,759,000 41,600,573 118,359,573
2011 171,573,256 35,566,660 207,139,916
2012 76,759,000 31,054,384 107,813,384
2013 76,759,000 26,978,779 103,737,779
2014 - 2018 83,241,000 113,929,291 197,170,291
2019 - 2023 106,989,881 106,989,881
2024 - 2028 25,580,000 103,922,417 129,502,417
2029 - 2033 250,295,000 71,307,872 321,602,872
2034 - 2038 290,975,000 16.458,363 307.433,363
$1.218689256 $593,417,840 $1 812 107026
NOTE F - RETIREMENT PLAN
The Authority contributes to the Teachers Retirement System of Oklahoma (the TRS), a cost-sharing
multiple-employer public employee retirement system which is self-administered. The TRS provides
retirement, disability and death benefits to plan members and beneficiaries. The benefit provisions are
established and may be amended by the legislature of the State. Title 70 of the Oklahoma Statutes,
Sections 17-101 through 116.9, as amended, assigns the authority for management and operation of the
plan to the Board of Trustees of the TRS. The TRS issues a publicly available annual financial report
that includes financial statements and required supplementary information for the TRS. That annual
report may be obtained by writing to the TRS, P. O. Box 53524, Oklahoma City, OK 73152 or by
calling 1-405-521-2387.
Employees of the Authority, as TRS members, are required to contribute to the plan at a rate set by
State Statute (employees' contributions). The contribution rate for TRS members is based on 7% of
their covered salary. The Authority made the system members' required contribution on behalf of its
employees in 2008 and 2007.
The Authority itself is required to contribute a statutory percentage of participating employees' regular
annual compensation for administration of the plan (employer's contributions). The contribution rate
for the Authority was 7.85% through December 31, 2007 and increased to 8.35% at January 1,2008.
The Authority's total payments to the TRS for the employees' and employer's contributions were
approximately $498,000, $430,000 and $386,000 for the years ended June 30, 2008, 2007 and 2006,
respectively.
30
Oklahoma Student Loan Authority
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2008 and 2007
NOTE G - COMMITMENTS AND CONTINGENCIES
The Authority conducts certain programs subject to audit by various federal and state agencies.
Amounts questioned as a result of audits, if any, may result in refunds to these governmental agencies.
As part of its lender network activities for FFEL Program loans, the Authority has entered into various
loan purchase commitments with certain financial institutions for which it performs interim status loan
servicing. Under such loan purchase commitments, the seller is required to offer these FFEL Program
loans to the Authority and the Authority is required to purchase the loans (subject to the Authority's
available finances to fund acquisitions) under certain terms and conditions. As of June 30, 2008 and
2007, the Authority was committed to purchase such loans totalling approximately $268,000,000 and
$214,256,000, respectively.
Proceeds from the Authority's tax-exempt debt that are invested in student loans are subject to the
federal government yield adjustment payment rebate law which limits the earnings rate on funds
received by an organization which issues tax-exempt debt. Any excess student loan interest over the
allowable debt yield and spread would be rebated to the student loan borrowers as interest rate
reductions or loan principal forgiveness, or rebated to the Internal Revenue Service at the maturity of
the related debt. The Authority's management is actively monitoring and managing this spread and will
take necessary action to maintain student loan yields within the allowable spread over the life of the
respective debt issuances. In recent years, the excess interest estimate has shown a significant
decreasing trend.
The Authority leases certain facilities and equipment under noncancelable operating leases that expire at
various dates through January 2013. Related rent expense for the years ended June 30, 2008 and 2007
was approximately $385,000 and $309,000, respectively. The following is a schedule of future minimum
rental payments under operating leases as of June 30, 2008:
Year ending June 30
2009
2010
2011
2012
2013
$ 436,000
448,000
458,000
467,000
271.000
$2.080.000
31
Oklahoma Student Loan Authority
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2008 and 2007
The Higher Education Act is the subject of frequent amendments, including amendments from the
federal government's budget process. Legislation passed in 2008 and 2007 implemented, or will
implement, various changes to the FFEL Program.
NOTE H - STUDENT LOAN LEGISLATION
The Ensuring Continued Access to Student Loans Act of 2008 (ECASLA) signed into law on May 7,
2008, will implement the following changes:
• Create a Parent PLUS loan deferment whereas the borrower can elect to postpone repayment until
six months after their dependent for whom the loan was borrowed fails to carry at least one-half
the normal full-time workload. Effective for loans first disbursed on or after July 1,2008.
• Provide the Secretary of Education (Secretary) the temporary authority to purchase certain FFEL
Program loans (as well as participation interests in these loans) made during the 2008-2009
academic year. The Secretary's authority to purchase loans under this section expires September
30,2010.
The College Cost Reduction and Access Act that was signed into law on September 27, 2007,
implemented the following changes with a general effective date of October 1, 2007 or other effective
dates to be set by regulations to be issued by the Department:
• Reduced Special Allowance Payments to not-for-profit lenders by 40 basis points on Stafford,
Stafford Unsubsidized and Consolidation loans and by 70 basis points on PLUS loans.
• Increased the lender origination fee from 0.5% to 1.0% for all loans.
• Eliminated the Exceptional Performer designation.
• Decreased the guarantor's reimbursement rate on default claims from 99% for Exceptional
Performers to 97% for all lenders. The guarantor's reimbursement rate on default claims is also
scheduled to be reduced to 95% for all lenders in 2012.
• Decreased the borrowers' fixed interest rate on Stafford loans from 6.8% to 3.4% over the next
four years
• Created new borrower payment plans that guarantees borrowers will not have to pay more than
15% of their discretionary income in loan repayments, effective July 1, 2009.
• Allowed borrowers in economic hardship to have their loans forgiven after 25 years, effective July
1,2009.
32
Oklahoma Student Loan Authority
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2008 and 2007
NOTE I - RELATED PARTIES
Certain members of the Authority's Board of Trustees are officers or directors of lenders in the
Authority'S student lending network. The following relates to these lenders:
June 30,
2008 2007
Loans purchased by the Authority
for the year
Loans being serviced at year end
$25,259,000
3,337,000
$18,398,000
269,000
These related party lenders participate in the Authority's student lending network on terms and
conditions available to other network lenders similarly situated.
NOTE J - FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods and assumptions are set forth below for the Authority'S financial
instruments. Carrying amounts and estimated fair values of financial instruments at June 30 are
summarized as follows:
2008 2007
Carrying
amount
Estimated
fair value
Carrying
amount
Estimated
fair value
Financial assets
Cash
Investments
Interest receivable
Loans, net
$ 4,951,243 $ 4,951,243 $ 3,048,575 $ 3,048,575
16,877,785 16,877,785 32,058,524 32,058,524
28,419,335 28,419,335 27,426,642 27,426,642
1,258,034,521 1,258,034,521 1,065,677,689 1,065,677,689
4,327,351 4,327,351 5,719,181 5,719,181
281,414,256 281,414,256 93,621,850 93,621,850
937,275,000 936,794,450 937,275,000 938,004,000
Financial liabilities
Accrued interest payable
Notes payable
Bonds payable
The carrying amount for cash, interest receivable and accrued interest payable approximates fair value
because of the short maturity of these financial instruments. The fair value of investments is based
upon quoted prices.
The carrying value of loans approximates fair value because of the variable rate nature of the majority
of loans and the Special Allowance Payments by the USDE.
The carrying value of notes payable approximates fair value for 2008 and 2007 because all notes were
variable rate and approximated rates currently available for notes with similar terms and remaining
maturities. The fair value of bonds payable has been determined based on a fair value appraisal
performed by a third-party broker.
33
Oklahoma Student Loan Authority
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2008 and 2007
NOTE K - SUBSEQUENT EVENTS
The Ensuring Continued Access to Student Loans Act of 2008 (ECASLA)
The Authority expects to utilize the loan participation option offered by USDE through ECASLA to
provide funding for student loans made subsequent to June 30, 2008. The Authority has filed a Notice
of Intent to Participate and had all of the Authority's network lenders file these Notices. The Authority
has filed a Master Participation Agreement and selected Bank of Oklahoma as Custodian. The
Authority plans to submit the first Participation Funding Request in November of 2008.
New Finance Issuance to Refinance High Cost Debt
Beginning in the fall of 2007 and continuing throughout 2008, financial markets have been disrupted
significandy. Aspects of this disruption have adversely impacted asset backed securities, including
student loan asset backed securities. The disruptions affect bonds and notes issued in the past, which
have been subjected to severe deterioration in the auction rate securities market, severe deterioration in
markets for obligations enhanced by monoline bond insurers, and very limited market availability of
credit and liquidity support. These events have caused the Authority to suffer increased debt service
costs and a need to restructure much of its debt as a response to market conditions by issuing new
obligations under a new Bond Resolution, separate from two other master trusts currently outstanding.
The two existing master trusts are:
• the senior-subordinate 1995 Master Bond Resolution, as Supplemented, which includes numerous
parity supplemental bond resolutions; and
• the monoline bond insured Series 1996A Bond Resolution, as Supplemented, which includes
numerous parity supplemental bond resolutions.
The Authority is actively working to refinance current outstanding tax-exempt debt by issuing variable
rate demand obligations supported by irrevocable transferable direct pay letters of credit. As a result,
the Authority is finalizing plans to issue Series 2008A Bonds that will refund several, but not all of the
outstanding tax-exempt issues. The Authority anticipates the first issuance of the Series 2008A Bonds
in the amount of $175,305,000 in October 2008.
1993L Revolving Taxable Line of Credit
The commitment amount of the taxable line of credit is $150,000,000, of which $115,000,000 was
outstanding at June 30, 2008 and all $150,000,000 was outstanding as of August 31, 2008. The taxable
line of credit was renewed September 2,2008 and expires on June 1,2009. By its revised terms the line
will not be renewed upon expiration. Consequently, the Authority plans to refinance this debt before its
expiration date.
34
Oklahoma Student Loan Authority
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 2008 and 2007
NOTE K - SUBSEQUENT EVENTS - CONTINUED
2005B Non Revolving Tax-Exempt Line of Credit
The remaining commitment amount of the tax-exempt line of credit at June 30, 2008 was $17,499,925,
but that commitment is being terminated by agreement between the lender and the Authority.
Presently, two notes in an aggregate principal amount of $94,814,256 are outstanding on this line. The
notes are subject to a put on September 1, 2010. Consequently, the Authority plans to refinance this
debt before its put date.
35
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Report of Independent Certified Public Accountants on Internal Control Over Financial
Reporting and on Compliance and Other Matters Based on an Audit of Financial
Statements Performed in Accordance with Government Auditing Standards
Board of Trustees
Oklahoma Student Loan Authority
We have audited the financial statements of the Oklahoma Student Loan Authority (the
Authority) as of and for the year ended June 30, 2008, and have issued our report thereon dated
October 27, 2008. We conducted our audit in accordance with auditing standards generally
accepted in the United States of America as established by the American Institute of Certified
Public Accountants and the standards applicable to financial audits contained in Government
Auditing Standards, issued by the Comptroller General of the United States.
Internal Control Over Financial Reporting
In planning and performing our audit, we considered the Authority's internal control over
financial reporting as a basis for designing our auditing procedures for the purpose of
expressing our opinion on the financial statements, but not for the purpose of expressing an
opinion on the effectiveness of the Authority's internal control over financial reporting.
Accordingly, we do not express an opinion on the effectiveness of the Authority's internal
control over financial reporting.
A control deficiency exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, to
prevent or detect misstatements on a timely basis. A significant deficiency is a control
deficiency, or combination of control deficiencies, that adversely affects the entity's ability to
initiate, authorize, record, process, or report financial data reliably in accordance with generally
accepted accounting principles such that there is more than a remote likelihood that a
misstatement of the entity's financial statements that is more than inconsequential will not be
prevented or detected by the entity's internal control.
A material weakness is a significant deficiency, or combination of significant deficiencies, that
results in more than a remote likelihood that a material misstatement of the financial statements
will not be prevented or detected by the entity's internal control.
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Our consideration of internal control over financial reporting was for the limited purpose
described in the first paragraph of this section and would not necessarily identify all deficiencies
in internal control that might be signiftcant deficiencies or material weaknesses. We did not
identify any deficiencies in internal control over financial reporting that we consider to be
material weaknesses, as defined above.
Compliance and Other Matters
As part of obtaining reasonable assurance about whether the Authority's financial statements
are free of material misstatement, we performed tests of its compliance with certain provisions
of laws, regulations, contracts and grant agreements, noncompliance with which could have a
direct and material effect on the determination of financial statement amounts. However,
providing an opinion on compliance with those provisions was not an objective of our audit
and, accordingly, we do not express such an opinion. The results of our tests disclosed no
instances of noncompliance or other matters that are required to be reported under Government
Auditing Standards.
This report is intended solely for the information and use of management, the Board of
Trustees, others within the Authority and federal awarding agencies and is not intended to be
and should not be used by anyone other than these specified parties.
Oklahoma City, Oklahoma
October 27,2008
37
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