SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark one)

For the Quarter Ended March 31, 2005

o TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ____________

Commission file number: 000-50846

Collegiate Funding Services, Inc.

10304 Spotsylvania Avenue
Suite 100
Fredericksburg, Virginia 22408
(540) 374-1600
(Name, Address, Including Zip Code and Telephone Number, Including Area Code of Agent for Service)

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of share outstanding of each of the issuer’s classes of common stock, as of the latest practicable date

31,105,184 Shares of Common Stock, par value $.001 per share, were outstanding as of May 1, 2005.

Table of Contents

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PART I. – FINANCIAL INFORMATION

Item 1. Financial Statements

COLLEGIATE FUNDING SERVICES, INC.

CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

See accompanying notes.

3

COLLEGIATE FUNDING SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)

(unaudited)

See accompanying notes.

4

COLLEGIATE FUNDING SERVICES, INC.

CONSOLIDATED STATEMENTS OF EQUITY
(dollars in thousands)

(unaudited)

See accompanying notes.

5

COLLEGIATE FUNDING SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)

(unaudited)

See accompanying notes.

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COLLEGIATE FUNDING SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(dollars in thousands, except per share data)

1. Nature of the Business

     Collegiate Funding Services, Inc., formerly CFSL Holdings Corp. (the Company), established in 2002, is a Delaware Corporation. The Company and a wholly-owned subsidiary, CFSL Acquisition Corp. (CFSL Acquisition) were established for the purpose of acquiring the operations of Collegiate Funding Services, LLC (Predecessor of CFS). The Company continues the business of the Predecessor, which was established in 1998.

     Collegiate Funding Services, Inc. is a vertically integrated education finance company that markets, originates, finances and services education loans. The Company markets education loans primarily through direct-to-consumer programs, including targeted direct mail, telemarketing and the internet. Using its direct-to-consumer platform, or DTC, along with other distribution channels, and its origination capabilities, the Company assists consumers in financing and refinancing the cost of undergraduate, graduate, professional, career and continuing education training. The DTC marketing strategy is supplemented with marketing through channels created by relationships with membership organizations, alumni associations, universities and other entities to reach customers and promote the Company’s products under private label and co-branded offerings. The Company finances, retains and services a substantial portion of the loans it originates.

     Certain completed loan applications are sold to, and funded by, third party lenders whereby the Company receives a fee for its services. Other completed consolidation loan applications are funded through a subsidiary of the Company and held and serviced by the Company. The Company has call centers located in Virginia and Florida. The Company also has a loan-servicing center in Mississippi and an affinity marketing subsidiary in Boston.

     In April, 2004, the Company acquired Members Connect Inc. d/b/a Youth Media & Marketing Networks, (Y2M), a company that provides affinity marketing of products and services, with a focus on education finance products targeted at college students and recent college graduates. The purchase price was $35,890. The operating results of Y2M have been included in the Company’s consolidated financial statements since April 21, 2004.

     The following table summarizes the estimated fair values of the acquired assets and assumed liabilities of Y2M at the date of acquisition:

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COLLEGIATE FUNDING SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED—(Continued)

2. Initial Public Offering

     In July 2004, the Company completed its initial public offering of common stock issuing 9,375,000 shares of common stock at $16.00 per share. The net proceeds of the offering of $135,596 were used to pay the $93,951 liquidation preference of all shares of the preferred stock issued by a subsidiary, and the remaining $41,645 was used to repay a portion of the amounts outstanding under the revolving line of credit. Immediately prior to the consummation of the offering, the Company amended its amended and restated certificate of incorporation to eliminate the Class A Common Stock and Class B Common Stock in order to create a single class of common stock. As of the closing of the offering, the Company’s authorized capital stock consisted of 120,000,000 shares of common stock, par value $0.001 per share and 20,000,000 shares of preferred stock, par value $0.001 per share, of which 30,446,523 shares of common stock were issued and outstanding and no shares of preferred stock were issued and outstanding. In addition, the Company issued 318,325 shares of restricted and unrestricted stock and options for 636,312 shares to management in connection with the initial public offering. As of the closing of the offering the Company had warrants outstanding to purchase 1,430,099 shares at an exercise price of $0.007 per share. Also, options to purchase a total of 1,317,033 shares were outstanding as of the closing of the offering. Of this total, there were options to purchase 450,481 shares at an exercise price of $0.91 per share and 866,552 shares at an exercise price of $16.00 per share.

3. Summary of Significant Accounting Policies

Unaudited Interim Financial Statements

     The accompanying consolidated balance sheet as of March 31, 2005, consolidated statements of income for the three months ended March 31, 2005 and 2004, the consolidated statement of cash flows for the three months ended March 31, 2005 and 2004 and the consolidated statement of equity for the three months ended March 31, 2005, are unaudited. The unaudited financial statements include all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of such financial statements. The information disclosed in the notes to the financial statements for these periods is unaudited. The results of operations for the three months ended March 31, 2005, are not necessarily indicative of the results to be expected for the entire fiscal year or for any future period and should be read in conjunction with the Company’s annual audited consolidated financial statements and notes included in our Annual Report on Form 10-K dated March 29, 2005.

     The Company’s quarterly results of operations have varied significantly in the past and are expected to continue to vary in the future. Quarterly results of operations in any period will be particularly affected by the amount and timing of loan sales. We give borrowers who complete loan applications during the second quarter the option to fund their loans prior to July 1, when the new rate is effective. Accordingly, if any year’s borrower rate increases from the prior year’s borrower rate, a higher percentage of completed applications will likely be originated in the second quarter, conversely, if any year’s borrower rate decreases over the prior year’s borrower rate, the origination of a significant portion of the loan applications completed in the second quarter will be shifted to the third quarter.

Stock Split

     In June 2004, the Company declared a 1.430099-for-one stock split in the form of a stock dividend. Accordingly, all share and per share amounts have been retroactively adjusted to give effect to this event.

Estimates and assumptions

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management believes that the estimates utilized in preparing the financial statements are reasonable and prudent. Actual results could differ from those estimates.

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COLLEGIATE FUNDING SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED—(Continued)

Other accounting polices

     The remainder of our accounting policies are described in the Company’s annual audited consolidated financial statements.

4. Earnings Per Share

     SFAS No. 128, Earnings Per Share, requires the presentation of basic and diluted earnings per share. Basic earnings per common share is computed by dividing income attributable to common stockholders by the weighted average number of common shares outstanding for the period. The diluted earnings per common share data is computed using the weighted average number of common shares outstanding plus the dilutive effect of common stock equivalents, unless the common stock equivalents are anti-dilutive.

     The following details the computation of earnings per common share:

     At March 31, 2005, there were 866,562 stock options that were anti-dilutive and thus excluded from the diluted earnings per share computations, due to the fact that their exercise price was greater than the average market price per share of the quarter.

5. Student Loans

     The Company’s current loan portfolio consists of loans originated under the Federal Family Education Loan Program (FFEL Program or FFELP). The FFEL Program is subject to comprehensive reauthorization every five years and to statutory and regulatory changes. The most recent reauthorization was the Higher Education Amendments of 1998, which are scheduled to expire on September 30, 2005.

     There are three principal categories of FFELP loans: consolidation loans, Parent Loans for Undergraduate Students (PLUS) loans and Stafford loans. Generally, Stafford loans and PLUS loans have repayment periods of between five and ten years. Consolidation loans have repayment periods ranging from 12 to 30 years. At March 31, 2005 and December 31, 2004, the Company retained only FFELP loans in its portfolio.

     The Company’s FFELP loans are guaranteed against the borrower’s default, death, disability or bankruptcy. The guarantee on FFELP loans is provided by certain state or nonprofit guarantee agencies, which are reinsured by the federal government. The loans are 100% guaranteed in cases of death, disability and bankruptcy and are guaranteed for 98% to 100% in other cases. The Company accrues interest until receipt of proceeds from the guarantor.

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COLLEGIATE FUNDING SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED—(Continued)

     The FFELP loans are also subject to regulatory requirements relating to origination and servicing. In the event of default or the borrower’s death, disability or bankruptcy, the Company files a claim with the insurer or guarantor of the loan, who, provided the loan has been properly originated and serviced, pays the Company the unpaid principal balance and accrued interest on the loan, less risk-sharing (in the case of defaults).

     Claims not immediately honored by the guarantor because of servicing or origination defects are returned for remedial servicing, during which period income is not earned. The Company’s servicing experience with FFELP loans resulted in zero rejected claims in both the three months ended March 31, 2005 and the three months ended March 31, 2004. There were three net rejected claims outstanding as of March 31, 2005 and December 31, 2004, respectively. The Company had no non-accrual loans at March 31, 2005 or December 31, 2004.

     The weighted average remaining term of student loans in the Company’s portfolio was approximately 22 years at both March 31, 2005 and December 31, 2004.

6. Allowance for Loan Losses

     The allowance for loan losses represents the amount estimated to absorb probable losses inherent in the portfolio. The evaluation of the allowance for loan losses is inherently subjective, as it requires material estimates that may be susceptible to significant changes. The key estimates used to determine the level of the allowance, include the probability of default and the related loss severity. In assessing the probabilities of default, management considers the performance of the Company’s portfolio, including delinquency and charge-off trends. In addition, because the portfolio has not matured to a point where predictable loss patterns have developed, management reviews the published Department of Education statistics and performance characteristics of the other lenders in developing the Company’s estimates of the probabilities of default. The primary factor impacting our risk sharing rate is the existence of the 98% guarantee of principal and interest on our loans. Generally, our loans carry a 98% guarantee of principal and accrued interest. In May 2004, the Company was notified by the Department of Education that it had been awarded Exceptional Performance status as a servicer and thus its loss claims on loans it services at SunTech, its loan servicing center, will be paid to 100% of the unpaid principal and interest for the twelve month period June 1, 2004 to May 31, 2005. As a result, the average risk-sharing rate used in our allowance computation at March 31, 2005, was 1.76%, compared to 2.00% at March 31, 2004. If this designation is not renewed at the end of May 2005, the average risk-sharing rate used in the allowance computation will increase.

     The following table details the allowance for loan losses:

     A loan is placed on non-accrual status at the point at which a guarantee claim is more than 60 days past due or it is concluded that collection of the claim is in doubt. Loans are charged off upon receipt of the final claim payment from the respective guarantor.

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COLLEGIATE FUNDING SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED—(Continued)

7. Debt

Asset-backed notes and lines of credit

     The Company finances its loan originations through the sale of asset-backed notes in the capital markets, using both public offerings and private placements. Approximately 97% of the notes issued to date by the Company have been structured to a AAA credit rating. The notes issued are indexed to three month LIBOR or are auction rate based. After the initial issuance, interest rates on the auction rate notes are reset every 28 days. Fees are incurred at a rate equal to 0.26% per annum in connection with each monthly auction. These fees are recorded as a component of interest expense. The Company utilizes a warehouse credit facility principally to fund its retention of FFELP loan originations, of which such loans collateralize the associated borrowings. The Company pays the warehouse credit facility a credit spread over the commercial paper rate, typically a 30-day rate. On December 1, 2004, the Company received a temporary increase in the warehouse facility to permit financing up to $1.4 billion through the end of February 2005, after which the facility returned to $1.0 billion. The principal balances outstanding, interest rates and maturity dates are as follows:

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COLLEGIATE FUNDING SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED—(Continued)

Other debt

     The Company entered into a revolving credit agreement on October 30, 2003. Borrowings under this line bear interest at either LIBOR or prime rate at the Company’s option. On May 17, 2002, the Company also issued a fixed-rate note for $15,000 related to the acquisition of the predecessor company by Lightyear Fund, L.P. (Lightyear) and its affiliates.

     In July 2004, the Company repaid $42,109 of the revolving line of credit and the commitments were reduced to $30,000.

8. Derivative Financial Instruments

     The Company has not designated any of its derivatives as SFAS No. 133 hedge relationships and therefore records changes in their value as derivative mark-to-market on the statement of income. The impact of the cash payments and accruals are reported as swap interest on the consolidated statements of income. The fair value of the derivatives that are positive is included with other assets on the balance sheet and the fair value of the derivatives that are negative is included in accrued liabilities on the balance sheet.

     The Company is exposed to interest rate risk as its asset-backed debt notes are indexed to short-term indices (LIBOR and auction rates) and the assets behave as fixed rate assets in the current interest rate environment. Derivative instruments are utilized to reduce the Company’s interest rate risk. The key terms of the derivatives are as follows:

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COLLEGIATE FUNDING SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED—(Continued)

9. Major Business Customers and Sources of Revenue

     Certain business customers generated significant amounts of the Company’s fee income. Fee income from our top two customers was:

10. Stock Incentive Plan

     Effective May 17, 2002, the Company initiated the 2002 Stock Incentive Plan to provide additional incentives to key personnel. The maximum aggregate number of shares of common stock that be issued is 1,001,070 shares of common stock. On May 17, 2002, the Company granted 450,481 stock options with an exercise price of $0.91 per common share, the fair market value of a share of common stock at issuance. Subject to certain conditions, portions of the options may have accelerated vesting to vest on the anniversary dates of the grants. For any year that the specified conditions are not met, the options not then vesting will vest in 2009. In connection with the execution of employment agreements with management entered into at the time of the initial public offering, options to purchase 184,697 shares of common stock vested in July of 2004. At March 31, 2005 and March 31, 2004, 265,784 and 81,087 shares were vested, respectively. In addition, in connection with the initial public offering, the Company amended and restated its stock incentive plan and increased the maximum number of shares which may be issued to 2,788,250 shares of common stock. In July 2004, the Company granted options to purchase 866,552 shares of common stock with an exercise price of $16.00 per share. The Company also granted 262,075 shares of restricted stock, with a fair value of $4,193.

     The fair value of the options granted in 2002 under the Black-Scholes option pricing model assumed: an interest rate of approximately 3%; no dividends; volatility of approximately 25%; and an expected life of seven years. This options pricing model requires the input of subjective assumptions. Using this model, the fair value of the options as of the grant date was approximately $140.

     The fair value of the options granted in 2004 under the Black-Scholes option pricing model assumed an interest rate of approximately 4%; 0.80% dividend yield; volatility of approximately 29%; and an expected life of 4.5 years. Using this model, the fair value of the options as of the grant date was $4,020.

     In accordance with SFAS No. 123, the Company recognized the fair value of the stock options and restricted stock as compensation expense, allocated over the vesting period. Stock compensation expense related to these stock options and restricted stock was $490 for the first quarter of 2005 and $5 for the first quarter of 2004.

     In addition, upon the successful completion of the initial public offering, executive officers were paid a one-time bonus of $500 in cash and $900 in non-cash stock compensation. The executives are restricted from selling the stock for one year following the completion of the initial public offering.

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COLLEGIATE FUNDING SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED—(Continued)

11. Segment Data

     The Company’s reportable segments are its loan origination operations and its loan servicing operations. The Company’s accounting policies for segments are the same as those described in the “Summary of Significant Accounting Policies.”

     The following table presents segment data for the three months ended March 31, 2005:

     Intercompany transactions of $1,933 in other operating expenses in the loan origination segment were paid as fee income to the loan servicing segment and are eliminated in the consolidated financial statements.

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COLLEGIATE FUNDING SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED—(Continued)

     The following table presents segment data for the three months ended March 31, 2004:

     Intercompany transactions of $1,397 in other operating expenses in the loan origination segment were paid as fee income to the loan servicing segment and are eliminated in the consolidated financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion and analysis of our results of operations and financial condition for the three months ended March 31, 2005 and 2004 should be read in conjunction with the Company’s unaudited consolidated financial statements and the notes to those statements included in this report. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. Our results of operations, our financial condition, and the price of our common stock may be affected by many factors, some of which are outside of our control. For a discussion of certain of these factors, see Exhibit 99.1 to this report, which is incorporated herein by reference.

Overview

     We are a vertically integrated education finance company that markets, originates, finances and services education loans. We originated or facilitated the origination of $4.4 billion and $1.0 billion in education loans in the full year 2004 and the first three months of 2005, respectively. We believe we are one of the more significant originators of federal and private education loans in the United States. Of our total loan originations for the full year 2004 and the three months ended March 31, 2005, $4.0 billion and $0.9 billion, respectively, were federally guaranteed consolidation student loans made through the Federal Family Education Loan Program, which we refer to as the FFEL Program or FFELP. Beginning in May 2003, we increased our focus on private education loans and, for the full year 2004 and the three months ended March 31, 2005, we originated or facilitated the origination of $417.1 million and $82.0 million, respectively, of these loans. As of March 31, 2005, we also serviced approximately $11.5 billion in student loans made to over 445,000 customers.

     In 2002, we adopted a strategy of retaining a larger portion of the federally guaranteed loans we originate, which has resulted in our holding a portfolio of loans that has grown from $973.1 million at December 31, 2002, to $5.1 billion at March 31, 2005. Prior to 2002, we sold substantially all of our completed loan applications to third parties and received fees for those applications at the time of sale.

     We believe that retaining FFELP loans in our portfolio benefits the Company because it generally provides greater long-term value to the Company than selling these loans, although our net income in current periods has been lower than it would have been had we sold a larger percentage of the FFELP loans we originate. Among the benefits of retaining loans is our ability to take advantage of these loans’ limited credit risk and other characteristics which allow us to realize a greater revenue stream over the life of the loan. Selling the remainder of our originated loan applications permits us to maintain a diversified source of funding for loan processing and origination and build our relationships with financial institutions that purchase our loans. We have sold and will continue to sell a portion of the FFELP loan applications we originate in order to capitalize upon market opportunities, provide sources of funding for loan processing and origination expenses and generate additional operating cash flow. We do not currently fund, purchase or retain any private loans; however, if we determine that retaining private loans would benefit the Company, we may do so in the future.

     During the first quarter of 2005, the Company continued to expand its marketing channels bringing its total relationships with colleges and universities and other affinity partners to 1,090 at March 31, 2005, an increase of 42 since December 31, 2004.

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     The following table sets forth for the three months ended March 31, 2005 and 2004 our loan applications sold and retained and the loans in our portfolio.

Loan Originations and Portfolio

     In April 2004, we acquired Members Connect Inc. d/b/a Youth Media & Marketing Networks (Y2M). Y2M provides affinity marketing of products and services, with a focus on education finance products and services targeted at college students and recent college graduates. Y2M uses direct mail, the internet and print media in its marketing efforts, which it complements by publishing online college newspapers. From the acquisition of Y2M in April 2004 to December 31, 2004, and for the three months ended March 31, 2005, Y2M facilitated the origination of $358 million and $115 million of FFELP consolidation loans, respectively. Y2M generates revenue from the loans originated through affinity marketing agreements and advertising fees from its online college newspaper publishing operations. Y2M supplements our affinity marketing strategy through which we market and originate loans through relationships with certain alumni associations and industry groups with whom we co-brand our loan products.

     We finance the loans in our portfolio through asset-backed securitizations and a secured warehouse facility and we record the obligations related to these facilities as debt on our consolidated balance sheet. To date, we have completed six securitizations that have provided $5.4 billion of funding, including our most recent securitization of $1.4 billion completed in February 2005. We also have several forward purchase agreements, under which financial institutions have agreed to purchase, or require that we sell to them, a portion of the loans we market and originate.

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     We currently operate in two reportable segments as follows:

     Loan origination. Includes marketing, origination and financing of loans, including Youth Media & Marketing Networks since its acquisition in April 2004.

     Loan servicing. Includes servicing for our portfolio of loans and third-party loans.

     We generate revenue primarily from three sources, which are described in greater detail below. In our loan origination segment, we generate revenue from fees we receive from the sale of originated loan applications and for marketing loans for third parties, which we refer to collectively as fees on loan sales. We also generate net interest income on our loan portfolio and cash balances in our loan origination segment. In our loan servicing segment, we primarily generate revenue from fees we receive for disbursement on loan applications and for servicing loans.

     Our revenue in any period is directly affected by the amount of loans we originate and service, as well as the percentage of those originated loan applications that we decide to retain. We currently plan to retain in our portfolio approximately 50% of the FFELP loans we originate this year. We will periodically review our allocation of FFELP loan originations between loans we retain and loan applications we sell, and, accordingly, our allocation may change from period to period. Our reasons for altering our loan retention target may include the characteristics of the loans we originate, the interest rate environment, the requirements under our arrangements with financial institutions which acquire loan applications from us and the volume of consolidation loan applications originated during the period. Moreover, because we set this targeted allocation on an annual, rather than quarterly, basis, our quarterly allocations may fluctuate, sometimes significantly.

     Our fee income in any period will be directly affected by the volume of originated loan applications we are able to complete and that we elect to sell to third parties and the pricing we receive on those sales. We expect that the percentage of our net revenue earned from fees on loan applications we sell to decrease as we continue to retain in our portfolio a significant percentage of the loans we originate. We expect the amount of our fees on loan applications we sell from private education loans to increase as a result of an increase in the number of private education loans that we originate or facilitate for origination; however, if we were to retain education loans in the future, we will not receive fees for the loans we retain and the total amount of our fees for sales of private loan application could decrease.

     Our net interest income in any period will be affected by the size of our retained loan portfolio and by the extent to which the interest income we earn on our loan portfolio and cash balances exceeds our interest expense on the debt we incur to finance our portfolio of loans and operating expenses. In general, increases in interest rates will decrease our interest income, while decreases in interest rates will increase our interest income. More specifically, should interest rates rise, we will receive less of the additional yield on our loans which we refer to as fixed rate floor income. Fixed rate floor income is the additional net interest income we earn as a result of a decline in short-term interest rates from the rates used to fix the borrower’s rate on a consolidation loan. As a result of the decline in short-term interest rates over the last three years, we have earned fixed rate floor income during the past three years.

     We believe that a significant driver of the growth in consolidation loan originations during the past three years has been the increased awareness of consolidation loans on the part of many borrowers who have been out of school for more than one year, as well as on the part of more recent graduates. This recent increase in awareness is a result of extensive marketing efforts by us and other lenders in this market coupled with the effects of the recent low interest rate environment that has heightened interest in these products among both borrowers and lenders. We believe that a substantial percentage of borrowers who have been out of school for more than one year have consolidated their loans in the past several years and, as a result, the pool of borrowers seeking to consolidate their loans in the short-term may decrease. We also believe that the decrease should be offset by the growing numbers of graduates entering repayment in 2006 and 2007. Nevertheless, our ability to maintain or grow our consolidation loan origination volume depends heavily upon our ability to increase our share of the consolidation loan origination market. We believe that our recent addition of Youth Media & Marketing Networks should contribute to our ability to increase our market share. We also expect that as the demand grows in financing to bridge the gap between the cost of higher education and government-backed financial aid, the amount of private loans we market or originate in the future will increase through expanded use of our direct-to-consumer marketing platform.

     The most significant components of our operating expenses in our loan origination segment are salaries and benefits and marketing expenses. Substantially all of our marketing expenses and a majority of our salaries and benefits in this segment are incurred in anticipation of generating loan originations. Although such expenses are variable, we may require one to two quarters to reduce expenses. Our results of future operations could be lower due to these expenditures.

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     We increased our marketing expenses from $6.4 million for the first three months of 2004 to $10.6 million for the first three months of 2005. We expect our marketing expenses to be higher in 2005 than in 2004, in part as a result of our marketing of new products and our acquisition of Y2M. We expect that our expenses will also increase as a result of being a public company.

Quarterly Fluctuations

     Our quarterly results of operations have varied significantly in the past and are expected to continue to vary significantly in the future. Our quarterly results of operations in any period will be particularly affected by the amount and timing of our loan application referrals. Because we target a percentage of our loan originations to be retained on an annual, rather than quarterly basis, our quarterly results of operations will fluctuate. A number of additional factors, some of which are outside of our control, will cause our quarterly results to fluctuate, including:

	•	an increase in loan consolidation in November and December, as a result of the expiration of the six-month grace period for spring graduates;
	•	the effects of the July 1 reset in borrower interest rates. We give borrowers who complete loan applications during the second quarter the option to fund their loans prior to July 1, when the old rate is effective, or after July 1, when the new rate is effective. Accordingly, if any year’s borrower rate increases from the prior year’s borrower rate, a higher percentage of completed applications will be originated in the second quarter; conversely, if any year’s borrower rate decreases over the prior year’s borrower rate, the origination of a significant portion of the loan applications completed in the second quarter will be shifted to the third quarter. In light of recent increase in interest rates generally, we expect that borrower interest rates will increase before July 1.
	•	seasonal patterns affecting private in-school loans, primarily an increase in private in-school loan originations in the third and fourth quarter as students obtain loans to pay tuition and a decrease in private in-school loan activity in the second quarter;
	•	seasonal patterns affecting marketing expenses, as we generally market most heavily in the second and third quarters of the year in an effort to inform recent college graduates of their consolidation options and offer private in-school loans to students paying tuition;
	•	the impact of general economic conditions;
	•	changes in interest rates; and
	•	the introduction of new product offerings.

Components of Net Revenue

     We have two primary categories of revenue: net interest income and fee income, which since April 2003 has included servicing fee income and since April 2004 has included advertising income.

Net Interest Income

     Our net interest income is the excess of interest income we earn on our loan portfolio and cash balances over our interest expense on the debt we incur to finance our portfolio of loans and for general operating purposes. Net portfolio margin equals the weighted average yield on our loans and restricted cash less the interest expense on the debt we incur to finance our retained loans. The current and future interest rate environment can and will affect our net interest income and net portfolio margin.

     Interest income. Substantially all the loans in our portfolio currently are FFELP consolidation loans that bear interest at a fixed rate. In addition, in certain interest rate environments we may earn amounts on FFELP loans in excess of the fixed rate of interest due from the borrower. Specifically, the Department of Education will pay us the amount by which a federally determined floating rate exceeds the fixed borrower rate. This amount is a Special Allowance Payment, or SAP, and is based on a formula with respect to FFELP loans held in our portfolio. SAPs, with respect to our FFELP consolidation loans, are generally paid whenever the average of the 91-day financial commercial paper rate in a calendar quarter plus a spread of 2.64% exceeds the rate of interest which the borrower is obligated to pay. With respect to the Stafford loans in repayment status and PLUS loans in our portfolio, SAPs are generally paid whenever the average of the 91-day financial commercial paper rate in a calendar quarter plus a spread of 2.34% or 2.64%, respectively exceeds the borrower rate. Should interest rates rise, we would receive SAPs on loans in our portfolio.

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     Our interest income is presented net of amortized origination fees. We pay a one-time loan fee of 0.50% to the Department of Education on origination of consolidation, Stafford and PLUS loans, which is amortized over the expected life of the loan. This origination fee is required by the Department of Education to be paid by all lenders upon the origination of FFELP loans. Our interest income is also reduced by a rebate fee, which is required by the Department of Education to be paid to the Department of Education by all holders of FFELP consolidation loans on a monthly basis at a rate equal to 1.05% per annum on the FFELP consolidation loans we hold at the end of the month. Our interest income will also be reduced by incentives we offer to borrowers that are designed to attract new borrowers and improve their payment behavior. One incentive program reduces a borrower’s interest rate by 0.25% per annum for so long as the borrower makes monthly payments through automatic deductions from his or her checking or savings account. Approximately 30% of our borrowers currently participate in this program. In addition, we offer borrowers an on-time incentive program that reduces their interest rates by 1.00% per annum after as they make their first 36 payments on time and for so long as they continue to make subsequent payments on time. Because we have implemented this program only recently, it has not resulted to date in any significant reduction in interest income. However, we expect the on-time incentive program to reduce the interest income we earn on our loan portfolio commencing in 2005, particularly with respect to loans of borrowers participating in the automatic deduction programs.

     We also earn interest income from unrestricted cash as well as restricted cash held in our special purpose entities for our asset-backed securitizations.

     Interest expense. We have three categories of interest expense: interest on our warehouse facility, interest on our asset-backed securitizations and interest on our other debt obligations.

     Interest on our warehouse facility is based on the amount outstanding under the facility plus a fee on unused capacity under the facility. The amount outstanding under the warehouse facility is affected by the amount of loans we originate in such period and the timing of securitizations. Deferred financing costs associated with the warehouse facility are amortized using a method that approximates the effective interest method and are recorded as interest expense.

     Interest on our asset-backed securitizations is based on the principal amount of notes outstanding under the facilities as well as the method of determining the interest rate for each securitization tranche. All of our asset-backed securitizations accrue interest at a variable rate. The rate varies based upon when the notes were issued, the fixed spread above an index, the index used and, in certain cases, auction results. The notes issued are either indexed off of three-month LIBOR or at a rate determined at auction. Interest rates on the auction rate notes are generally reset every 28 days. The relative proportion of our asset-back securitizations that accrue interest based on auction rates and on fixed spreads above an index will affect our cost of funds. Broker-dealer and auction agent fees are incurred monthly at a rate per annum of 0.26% in connection with the periodic auction for the auction rate notes and are reflected in interest expense. Deferred financing costs associated with issuing the asset-backed notes are amortized using the effective interest method and are recorded as interest expense.

     Interest expense on other obligations relates to interest expense on items not associated with financing our loan portfolio.

     Net portfolio margin and net interest income. In certain interest rate environments, part of our net portfolio margin includes fixed-rate floor income. Fixed-ate floor income is the additional net portfolio margin we receive as a result of a decline in short-term interest rates from the rates used to fix the borrower’s rate on a consolidation loan. Fixed-rate floor income represents the amount by which interest income, determined at the borrower’s fixed rate, exceeds the amount determined using the Department of Education computed variable rate. As a result of the decline in short-term interest rates over the last three years, we have earned fixed-rate floor income during the past three years. Fixed-rate floor income is reduced, and can be eliminated, in a rising interest rate environment.

     Provision for loan losses. We record periodic provisions for loan losses to maintain an allowance for loan losses which management believes is sufficient to cover probable losses in the portfolio. The allowance is an estimate based on the level of guarantee on our loans, the historical experience of losses and the delinquency rates on our portfolio. Moreover, since our portfolio is relatively new, we also review industry loss data in assessing probabilities of loan default.

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     In May 2004, we were notified by the Department of Education that we had been awarded Exceptional Performance status as a servicer and thus our loss claims on loans we service at SunTech will be paid to 100% of the unpaid principal and interest for the twelve month period June 1, 2004 to May 31, 2005. Our loan loss allowance at March 31, 2005 reflects this status. If the Exceptional Performance status is not continued after May 31, 2005, then loss claims will be paid to 98% of the unpaid principal and interest and loan losses reserved would need to be increased to reflect this change in status.

     The evaluation of the allowance for loan losses is inherently subjective, as it requires material estimates that may be subject to significant changes. The provision for loan losses reflects activity for the applicable period and provides an allowance at a level that our management believes is adequate to cover probable losses inherent in the loan portfolio.

     A loan is placed on non-accrual status at the point at which its guarantee claim is more than 60 days past due or it is concluded that collection of the claim is in doubt. Through March 31, 2005, no loans had been placed on non-accrual status.

Fee Income

     Fees on loan application sales. In our loan origination segment, we receive fees for selling FFELP consolidation and private consolidation loan applications to third parties and for marketing private in-school loans for third parties. We receive a fixed fee for each completed FFELP application we sell to third parties. Generally, the amount of the fee is set forth in forward purchase agreements with third parties which are negotiated for between one- and three-year terms and apply to an aggregate number of loan applications sold during each year of the agreement. We also receive fee income from third parties to whom we sell completed private consolidation loan applications and for whom we market private in-school loans. We are paid when a private lender funds a loan that we referred to that lender or its originating partner. Generally, the fee is calculated based on a percentage of the funded amount of the loan. This rate is set forth in agreements with the third parties which have a term of one year, with respect to private consolidation loans, and three years, with respect to private loans, and applies to an aggregate amount of loans funded each year. We recognize revenue from the loan application sales when the loans are funded.

     Fees for servicing. Since acquiring SunTech in April 2003, we have received fee income for performing loan servicing activities for third parties pursuant to servicing agreements. Servicing fees under these agreements are calculated based on the number of accounts serviced for each client and specific activities such as disbursement or filing claims with guarantee agencies. The fees are billed monthly. The terms of the agreements vary from one year to the life of the applicable loan portfolio. The intracompany servicing fees paid to our servicer for servicing our own portfolio are eliminated in our consolidated financial statements. Servicing rights recorded on our balance sheet total $0.6 million at March 31, 2005 and relate to the remaining unamortized balance recorded in connection with our acquisition of SunTech. Because we were not the owner of any loans that we currently service for third parties, nor have we paid for the right to service any other loan, we do not have any other servicing rights recorded on our balance sheet.

     Advertising income. Since acquiring Y2M in April 2004, we have received advertising income associated with its national network of college newspapers. Income is recorded as contracted, with the heaviest volume occurring in the third quarter as advertisers target students returning to school in the fall.

Expenses

     The majority of our operating expenses consist of salaries and related benefits and marketing expenses. Salaries and related benefits include expenses related to granting incentive stock options to our employees, which we expense in accordance with SFAS No. 123. Marketing expenses include the cost of direct mail campaigns, postage, list development, collateral printing, internet marketing, affinity partner fees and school channel expenditures. The amount of marketing expenses and a portion of the amount of salaries and benefits is directly affected by the scope of our marketing campaigns and the amount of loans we originate or facilitate for origination by other lenders. In addition, our expenses include communications and data processing expenses, professional fees, management and consulting fees, depreciation and amortization and other general and administrative expenses.

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     Derivatives. In connection with financing our portfolio, we enter into interest rate swap and cap agreements from time to time. Generally, these agreements have maturities of no more than 24 months. We record expenses relating to payments we make under the swaps and caps and mark-to-market gains and losses based on changes in their fair values from period to period. These expenses and gains and losses are not reflected as part of net interest income.

Critical Accounting Policies

     Our significant accounting policies are described in Note 3 to the Consolidated Financial Statements. We prepare our Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. In Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2004, we summarized the policies and estimates that we believe to be most critical in understanding the judgments involved in preparing our financial statements and the uncertainties that could affect our results of operations, financial condition and cash flows. There have been no material changes on such policies or estimates since we filed our Annual Report on Form 10-K for the year ended December 31, 2004.

Recent Accounting Pronouncements

   Share-based payment

     In December 2004, the FASB issued FASB Statement No. 123 (revised 2004), Share-Based Payment. This statement is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation and establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services and for the recording of liabilities that are based on the fair-value of these equity instruments. The approach is similar to Statement 123; however the revised statement requires all share-based payments to employees be expensed based on fair value, with pro forma disclosure no longer an option. Since we currently expenses costs related to its options issued to employees using the fair-value method as outlined in the original FASB No. 123, the impact of the new statement is expected to be immaterial. We are evaluating the impact of other differences, including recording incremental compensation costs/credits related to modification of terms or conditions of awards and recording the effect of possible future forfeitures. Per a recent SEC announcement, the effective date of this statement has been deferred for non-small business registrants with fiscal years ended December 31 to the beginning of the first interim or annual reporting period that begins after January 1, 2006.

Results of Operations

   Three months ended March 31, 2005 compared to three months ended March 31, 2004

     Net revenue. Net revenue was $47.0 million for the three months ended March 31, 2005, an increase of 35.8% from net revenue of $34.6 million for the three months ended March 31, 2004. The increase in net revenue was primarily the result of increases in net interest income on the expanding student loan portfolio and fee income on loan originations, offset in part by an increase in interest expense on asset-backed securitizations.

   Net interest income

     Interest income. Interest income increased by $27.2 million, or 101.1%, to $54.1 million for the three months ended March 31, 2005 compared with $26.9 million for the three months ended March 31, 2004. This increase was the result of an increase in the average balance of loans in our portfolio, which grew to $4.9 billion in the three months ended March 31, 2005 from $3.1 billion for the comparable period of 2004. We retained $545.1 million of loan originations in the first quarter of 2005. The average yield on our loan portfolio increased to 5.49% for the three months ended March 31, 2005 from 4.44% for the comparable period of 2004 due to increases in short-term interest rates. We received SAPs totaling $15.9 million and $1.1 million for the 2005 and 2004 periods, respectively. We received fixed rate floor income of $2.1 million and $6.5 million for the three months ended March 31, 2005 and March 31, 2004, respectively. The decrease in fixed rate floor income was primarily the result of the decrease in the average balance of loans in our portfolio earning fixed rate floor income, as a result of increasing short-term interest rates. Interest income on restricted cash increased $0.7 million to $0.9 million for the 2005 period compared to $0.2 million for the 2004 period. Other interest income was $0.3 million for the three months ended March 31, 2005 and $0.2 million for the three months ended March 31, 2004. We expect interest rates will increase in the short-term and, as a result our average yield and SAPs should increase, while our floor income should decrease or be eliminated entirely.

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     Interest expense. Interest expense increased by $24.0 million, or 183.2%, to $37.1 million for the three months ended March 31, 2005 from $13.1 million for the comparable period of 2004 as a result of increased debt balances and higher interest rates. Our average debt balance under our warehouse and asset-backed securitizations increased by $1.8 billion to $5.1 billion for the 2005 period from $3.3 billion for the 2004 period. Interest expense on this debt increased $24.2 million to $36.6 million in the three months ended March 31, 2005 compared with $12.4 million in the three months ended March 31, 2004. Our average cost of funds was 2.96% for the 2005 period and 1.54% for the 2004 period. Interest expense on other debt obligations decreased to $0.5 million in the three months ended March 31, 2005 compared with $0.6 million in the comparable three months of 2004, primarily as a result of having no outstanding balance on our revolving line of credit during the first quarter of 2005. We expect interest rates to rise and interest expense to increase.

     Provision for loan losses. We recorded a provision of $0.6 million for the three months ended March 31, 2005 compared with a provision of $0.9 million in the three months ended March 31, 2004. The reduced provision in 2005 resulted from the Company being awarded in May 2004, Exceptional Performance status by the Department of Education and claims with respect to FFELP loans being guaranteed at 100% for the period June 1, 2004 to May 31, 2005. If not renewed, our provision for loan losses would be increased.

     Net portfolio margin and net interest income after provision for loan losses. Net portfolio margin decreased to 1.38% for the three months ended March 31, 2005 from 1.77% for the three months ended March 31, 2004,primarily due to an increase in our average cost of funds, partly offset by a rise in yield on earnings assets. Net portfolio margin is a non-GAAP financial measure. We believe that net portfolio margin is useful in evaluating the earnings performance of our portfolio. A reconciliation of net portfolio margin to the most comparable information which has been prepared in accordance with GAAP is provided below. See “-Net Portfolio Margin Analysis.” As a result of the foregoing, net interest income after provision for loan losses increased by $3.5 million to $16.4 million for the 2005 period compared to $12.9 million for the 2004 period.

     Fee income

     The table below describes the increases in the components of fee income for the period ended March 31, 2005 compared with the period ended March 31, 2004.

     Fees on loan application sales. The increase in fees on loan application sales reflects the higher percentage and increased volume of loans originated and sold to third parties during the 2005 period compared with the 2004 period, as well as better pricing for the sale of completed loan applications under our forward purchase agreements. The amount of loans originated that were sold to, or marketed for, third parties increased to $482.3 million in the 2005 period from $426.4 million for the 2004 period. Included in fees on loan application sales was a one-time payment of $0.8 million as a result of our contract with a liquidity provider. Also, included in our fees on loan application sales were fees for marketing private in-school loans, which increased to $2.7 million for the 2005 period from $1.5 million in the comparable period of 2004, as the volume of private loan applications originated for the quarter increased 78.3% to $82.0 million from $46.0 million a year ago.

     Fees for servicing. On a separate segment basis, we recorded loan servicing income for the 2005 and 2004 periods of $5.1 million and $4.6 million, respectively, including $1.9 million and $1.4 million, respectively from the servicing of loans in our portfolio. As of March 31, 2005, SunTech serviced $11.5 billion of loans, an increase of 5.0% from the amount of loans serviced at December 31, 2004 and an increase of 20.4% from the amount of loans serviced at March 31, 2004.

     Advertising income. The increase in advertising income reflects the online college newspaper publishing operations of Y2M, which was acquired in April 2004.

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     Expenses. Total expenses, excluding derivative related (income) expense, increased $7.5 million, or 27.0%, to $35.3 million for the three months ended March 31, 2005 compared to $27.8 million for the three months ended March 31, 2004, primarily as a result of higher marketing expenses and the April 2004 acquisition of Y2M.

     Salaries and benefits increased $2.0 million, or 14.3%, to $16.0 million for the 2005 period compared to $14.0 million for the 2004 period due to increased salaries and benefits in our loan origination segment primarily from the acquisition of Y2M, increased bonuses and incentives and higher health care costs.

     Marketing expenses increased $4.2 million to $10.6 million for the three months ended March 31, 2005 compared to $6.4 million for the three months ended March 31, 2004, due to an increase in marketing activities across all of our product lines, including an increased focus on marketing private loans, increased direct mail and internet advertising in response to the national “do not call” list introduced in September 2003, and the acquisition of Y2M in April 2004.

     Communications and data processing expenses increased $0.2 million for the three months ended March 31, 2005 compared to the comparable period of 2004 primarily due to higher postage and delivery expenses and increased systems maintenance expenses. Management and consulting fees decreased by $0.3 million to $0.6 million for the 2005 period from $0.9 million for the 2004 period. Professional fees increased $0.6 million to $1.7 million for the three months ended March 31, 2005 compared to $1.1 million for the three months ended March 31, 2004 as a result of an increase in external consultant expenses. Other general and administrative expenses increased $0.3 million, or 12.5%, for the three months ended March 31, 2005 compared to the same period of 2004 as a result of increased travel, recruiting, corporate insurance and disposals of property and equipment. Depreciation and amortization increased $0.5 million to $1.8 million in the 2005 period compared to $1.3 million in the 2004 period, primarily as a result of the acquisition of additional computer equipment, software and other property in 2004 and 2005.

     Derivatives and investments. Our interest rate swaps and cap resulted in aggregate swap interest income of $1.1 million for the three months ended March 31, 2005 compared to $1.6 million of swap interest expense for the three months ended March 31, 2004, and derivative mark-to-market income of $0.3 million for the 2005 period compared to income of $0.2 million for the comparable 2004 period. The increase in aggregate swap interest income and derivative mark-to-market income is primarily the as a result of rising short-term interest rates.

     Income tax provision. Income tax provision increased by $3.0 million to $5.2 million for the three months ended March 31, 2005 compared to a $2.2 million for the three months ended March 31, 2004, reflecting higher earnings.

     Net income. Net income increased to $7.9 million for the three months ended March 31, 2005 from $1.2 million for the three months ended March 31, 2004, primarily as result of the increase in interest and fee income, offset in part by higher selling, general and administrative expenses. Net income for 2004 included a $2.1 million charge for the accretion of dividends on preferred stock compared with no charge in 2005, as a result of the payment of the liquidation preference of the preferred stock with proceeds of the initial public offering in July 2004.

Financial Condition

   At March 31, 2005 compared to December 31, 2004

     Total assets increased $0.6 billion to $5.6 billion at March 31, 2005 from $5.0 billion at December 31, 2004. This was primarily due to an increase in our loan portfolio of approximately $0.4 billion, to $5.1 billion at March 31, 2005 from $4.7 billion at December 31, 2004. All of the loans in our portfolio are FFELP loans and over 99% are consolidation loans.

     Total liabilities increased $0.5 billion to $5.4 billion at March 31, 2005 from $4.9 billion at December 31, 2004. The growth in liabilities was the result of an increase in debt incurred to finance our loan portfolio.

     Stockholders’ equity increased $8.4 million to $200.1 million at March 31, 2005 from $191.7 million at December 31, 2004 primarily as a result of net income for the first three months of 2005.

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Liquidity and Capital Resources

     We finance our operations through operating cash flow and borrowings under a warehouse facility, asset-backed securitizations and a revolving line of credit. Operating activities provided net cash of $16.0 million in the first three months of 2005, an increase of $15.2 million from the net cash provided by operating activities of $0.8 million in the first three months of 2004. This increase in the 2005 period compared with the 2004 period was due in part to an increase in net income of $6.7 million, a decrease in income taxes receivable of $5.5 million and an increase in accrued interest payable of $3.9 million. Net cash used in investing activities decreased to $454.5 million in the first three months of 2005 from $595.9 million in the first three months of 2004 primarily as a result of the lower originations and purchases of student loans in our portfolio and higher net proceeds from student loan principal payments. Net cash provided by financing activities decreased to $449.5 million in the first three months of 2005 from $595.5 million in the first three months of 2004, primarily as a result of a decrease in the net difference between proceeds from and payments on asset-backed notes and lines of credit and an increase in the restricted cash balance. We believe that the use of our warehousing capacity, continued access to the asset-backed securitization market and forward purchase agreements will provide adequate liquidity to fund our operations, loan processing and originations and capital expenditures for the foreseeable future.

     We have a $3.0 million revolving credit facility maturing in July 2005. The revolving line of credit bears interest, payable quarterly, at LIBOR plus 3.50%. We are also required to pay a commitment fee of 0.50% on undrawn amounts under the facility. The facility is secured by substantially all of our non-student loan assets, including the outstanding capital stock or limited liability company membership interests of all of our wholly-owned operating subsidiaries other than subsidiaries that hold our loan portfolio. The credit facility contains certain mandatory prepayment and commitment reduction provisions and event of default provisions (including relating to a change of control), as well as affirmative and negative covenants, which include restrictions on the payment of dividends, incurrence of additional debt and capital expenditures. In addition, we are subject to, and in compliance with, certain financial covenants, including ratios related to fixed charges coverage, interest coverage and leverage. We and certain of our subsidiaries have guaranteed all of our obligations under the credit agreement. As of March 31, 2005, there was no outstanding balance on this revolving line of credit.

     In July 2003, we obtained a one-year, $500.0 million conduit warehouse financing facility to fund our loan originations. In February 2004, we requested and received a temporary increase in this facility to permit financing up to $1.0 billion to permit us to finance additional loans prior to issuing asset-backed securities in April 2004, and as of the end of April 2004 capacity under the facility returned to $500.0 million. In November, 2004, we permanently increased this facility to $1.0 billion. We use the warehouse facility to fund our loan originations until such time as we accumulate sufficient loans to effectively access the asset-backed securitization market, and we may seek to expand our warehouse availability from time to time to continue to most efficiently access that market, although we do not have a contractual right to increase this facility at this time. We pay a fee of 0.14% per annum on the unused portion of the facility and, accordingly, have maintained availability at levels we believe are appropriate to fund our loan originations. The ability to draw on the $1.0 billion warehouse facility expires in July 2005 unless extended. It must be repaid in full by July 2006 unless extended. The $1.0 billion warehouse facility is provided by five commercial paper conduits with liquidity support provided by two national financial institutions. The facility is secured by our portfolio of loans financed under the facility. The interest rate on funds advanced by the conduit lender is calculated based on the commercial paper rate plus a margin and for funds advanced by the liquidity provider at the Eurodollar rate plus 1.0% or the alternate base rate. The interest rate on amounts outstanding under the warehouse facility on March 31, 2005 was 3.02%. As of March 31, 2005, $304.7 million was outstanding under our warehouse facility. The conduit facility contains certain affirmative and negative covenants as well as reporting requirements and covenants relating to loan servicing. The affirmative covenants require us to, among other things, preserve the federal guarantee on our FFELP loan portfolio. An event of default under the conduit facility will occur if, among other things, the federal guarantee on FFELP loans is reduced, the excess spread on the loans in our portfolio drops below a certain rate or the default rate of loans in our portfolio exceeds a certain percentage. The Company expects to extend or replace this facility.

     In February 2005 and in 2004, 2003 and 2002 we issued $1.4 billion, $1.1 billion, $1.9 billion and $500.0 million, respectively, of asset-backed notes in order to retain loans on our balance sheet. These secured financings were issued primarily in the domestic capital markets and are secured by separate pools of FFELP loans. Securities issued in our securitizations accrue interest based on a rate of a spread to LIBOR or set under an auction procedure related to the securities as more fully described below. The securitization transactions require certain levels of cash reserves and require that we distribute cash flows to the bondholders on a priority basis. Other than cash paid for servicing and administration, all of the cash flows from our securitized assets have been paid to the bondholders and, therefore, have not been available to us for business operations.

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     As part of our securitization transactions, we borrowed funds in excess of the principal balance of the loans included in the applicable securitization transactions. A portion of these additional funds was used to repay our other indebtedness and fund our operations. The timing of future cash flows may be affected by the amount of loans in our portfolio in grace or deferment status or for which we have granted forbearance and the level of delinquencies. In the first three months of 2005, we made $84.7 million in principal payments and in the comparable 2004 period, we made $35.0 million in principal payments on our asset-backed securitizations. Our rights to cash flows from securitized loans are subordinate to noteholders interests and these loans may fail to generate any cash flows beyond what is due to be paid to the noteholders. We anticipate continuing to access the domestic asset-backed securitization market in 2005 and subsequent years. The timing of future issuances will depend on market conditions.

     On May 17, 2002, in connection with our acquisition by Lightyear and its affiliates, CFSL Acquisition Corp. issued a 4.47% subordinated note, due June 30, 2007, in the principal amount of $15.0 million to the previous owners of the Company. The note may be redeemed at any time at the option of the Company, and must be redeemed in the event of a change of control of the Company.

     The following tables summarize our indebtedness and capital leases outstanding as of March 31, 2005 and December 31, 2004:

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     Payments on outstanding indebtedness and capital and operating lease obligations are due after March 31, 2005, in varying amounts as follows:

     In addition, we have forward purchase agreements under which we are obligated to sell a minimum amount of FFELP loan applications, refer private education loan applications and sell all of the funded private consolidation loan applications we originate. These commitments generally run for between one and three years. As of March 31, 2005 and December 31, 2004, we were obligated to sell approximately one-third of calendar year 2005 FFELP consolidation volume in loan applications at contractual rates under various agreements through December 31, 2005.

Off Balance Sheet Arrangements

     We do not have any off balance sheet arrangements. As described above, all of our asset-backed securitizations are treated as indebtedness on our balance sheet.

Loan Portfolio

     The table below describes the components of our loan portfolio as of March 31, 2005 and December 31, 2004:

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     The table below shows the repayment status of loans and delinquency amounts as of March 31, 2005 and December 31, 2004. Delinquencies have the potential to adversely impact our earnings through increased servicing and collection costs and write-offs.

The following table summarizes our loan portfolio by interest rate ranges as of March 31, 2005 and December 31, 2004.:

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Net Portfolio Margin Analysis

     The following table sets forth the net portfolio margin on average student loans and restricted cash for the periods indicated. Net portfolio margin is a non-GAAP financial measure. Net portfolio margin equals the weighted average yield on our loans and restricted cash after amortization of capitalized origination costs and purchase accounting adjustments, less the weighted average interest expense on the debt we incur to finance our loans. A reconciliation of net portfolio margin to the most comparable financial measurement that has been prepared in accordance with GAAP is provided below. Management believes that net portfolio margin provides investors with information that is useful in evaluating the earnings performance of our loan portfolio.