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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-K

ANNUAL REPORT

PURSUANT TO SECTIONS 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

Commission File Number: 000-29995

EDUCATION LENDING GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s Telephone Number, Including Area Code: (858) 617-6080

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value

Indicate by check mark whether the registrant: (1) 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  x  No  ¨

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x  No  ¨

State the aggregate market value of the voting and non-voting common equity held by nonaffiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $79,516,086 based on a closing price of $11.90 on June 30, 2003 as reported by Commodity Systems, Inc.

Indicate the number of shares outstanding of each registrant’s classes of common stock, as of the latest practicable date. 15,967,622 as of March 4, 2004.

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).

Portions of Part III of this Form 10-K are incorporated by reference to our proxy statement for the 2004 annual meeting.

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EDUCATION LENDING GROUP, INC.

2003 FORM 10-K ANNUAL REPORT

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PART I

Disclosure Regarding Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 relating to our operations and our results of operations that are based on our current expectations, estimates and projections. Words such as “expects,” “intends,” “plans,” “projects,” “believes,” “estimates” and similar expressions are used to identify these forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Forward-looking statements are based upon assumptions as to future events that may not prove to be accurate. Actual outcomes and results may differ materially from what is expressed or forecast in these forward-looking statements.

Available Information

Our website address is www.edlending.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available free of charge on our website as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (the SEC). We also make available through our website other reports filed with the SEC under the Exchange Act, including our proxy statements and reports filed by officers and directors under Section 16(a) of that Act, as well as our Code of Business Ethics and Code of Conduct. We do not intend for information contained in our website to be part of this Annual Report on Form 10-K.

In this Annual Report on Form 10-K, we use the terms “Education Lending Group,” “we,” “our Company,” “our” and “us” to refer to Education Lending Group, Inc. and its subsidiaries. All references to years, unless otherwise noted, refer to our fiscal year, which ends on December 31.

Item 1. Business.

Overview

We are a specialty finance company principally engaged in providing student loan products, services and solutions to students, parents, schools and alumni associations. Our business is focused on originating and purchasing guaranteed student loans made under the Federal Family Education Loan Program, known as FFELP, which includes consolidation loans, Stafford loans and Parent Loans for Undergraduate Students (PLUS). We also offer and purchase alternative supplemental loans that may be guaranteed by a third-party guarantor. As of December 31, 2003, all of our alternative supplemental loans were guaranteed by a third-party guarantor.

To date, the vast majority of loans we have originated have been consolidation loans. We generally hold these loans on our balance sheet. Currently, we sell the majority of Stafford and PLUS loans we originate in the secondary market. During the year ended December 31, 2003, we originated or purchased more than $2.5 billion in student loans. As of December 31, 2003, we held an aggregate of $3.3 billion of student loans on our balance sheet. All of our student loans are currently serviced by third-party servicers. We have recently created a wholly-owned subsidiary which we intend to use to service some of our loans.

We generate revenue primarily by earning interest income on the loans we hold on our balance sheet. This financial model allows us to benefit from the predictable revenue stream of our portfolio, unlike specialty finance companies whose revenues are primarily derived from one-time gains upon the sale of their assets. When we do sell loans, we record a gain on the sale of the loans on our income statement. We have agreements with a number of third-party marketing partners who we engage to provide us with completed loan applications. In accordance with generally accepted accounting principles (GAAP), we expense these marketing partner fees as they are incurred. These fees have historically represented more than 50% of our operating expenses. Accordingly, as a make and hold lender, we have recorded and will continue to record, net losses until our portfolio attains scale to

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generate net interest income sufficient to absorb our expenses, including these marketing partner fees. We expect this to occur during 2004.

The low interest rate environment in the last two years has encouraged many borrowers to consolidate their variable rate student loans into one loan with a low, fixed interest rate. Since we began our student loan operations in September 2001, we have addressed this demand by offering a consolidation loan product through our multiple marketing channels. Our success in originating consolidation loans has allowed us to fund the further development of these channels for offering other student loan products, such as Stafford and PLUS loans. Our management team has developed important relationships in the student loan industry, and has extensive experience marketing loans directly to potential borrowers and in marketing and financing all types of student loans.

Company History

We were incorporated in Delaware on March 26, 1999 as Direct III Marketing, Inc. All of the outstanding shares of capital stock of the corporation were initially owned by Whirlwind Ventures, Inc., a public company incorporated in Florida. On May 24, 1999, we merged with Whirlwind Ventures, Inc. As the surviving corporation, we assumed all obligations and obtained all rights of Whirlwind Ventures, Inc. On May 21, 2002, we changed our name from Direct III Marketing, Inc. to Education Lending Group, Inc.

Between May 1999 and mid 2001, we were principally devoted to identifying and evaluating acquisitions of companies in direct and internet marketing and developing our student loan marketing capabilities. In late 2001, we decided to focus our business on providing direct marketing services for the student loan industry. In August 2001, we began our marketing efforts related to guaranteed consolidation loans. In September 2001, we began originating and purchasing guaranteed student loans. In January 2002, we began marketing student loan products directly to colleges and universities. We are in the process of developing an organization that will begin servicing a portion of our student loan portfolio during 2004.

Our Industry

Overview

The high cost of post-secondary education has resulted in students and parents carrying increasingly high levels of indebtedness and burdensome monthly payments upon graduation. The Higher Education Act created FFELP which provides a convenient, low-cost source of capital for families to utilize to finance college education.

There are three major federal education loan programs:

Together, FFELP and FDLP accounted for 97% of all federal education loan volume in the 2000-2001 academic year.

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The Federal Family Education Loan Program (FFELP)

FFELP, the single largest source of college financial assistance in the United States, is a public-private partnership where lenders make guaranteed student loans to students and parents in coordination with school financial aid offices. During the 2001-2002 academic year, $30.4 billion of new FFELP loans, accounting for approximately 70.5% of all new (non-consolidated) student loan volume, were committed to eligible borrowers according to the College Board’s 2003 report on Trends in Student Aid. According to the Department of Education (DOE), new FFELP volume is projected to grow to $34.0 billion in the 2004 budget year while FDLP volume is projected to grow to $13.6 billion, resulting in total new student loan demand of $47.6 billion in 2004.

FFELP loans offer below-market interest rates and favorable repayment terms to students who attend eligible institutions on at least a half-time basis, without regard to the student’s credit worthiness. Loans made under FFELP include:

Payment of principal and interest on all FFELP student loans originated after October 1, 1993 are 98% guaranteed by guaranty agencies against default by the borrower as to principal and interest. Guaranty agencies are, in turn, reinsured for up to 95% of their guarantee payments by the federal government. We are required to pay the DOE a one-time 50 basis point origination fee on consolidation, Stafford and PLUS loans and an annual 105 basis point rebate fee on all consolidation loans originated and held after October 1, 1993.

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Consolidation Loans

Unlike other FFELP guaranteed loan programs, the Consolidation Loan Program, (CLP), under the Higher Education Act did not commence until 1986. The CLP allows college or graduate school students to merge their variable-rate federal education loans into a single loan, with a fixed rate, to be repaid over a term of up to 30 years. The consolidation loans are insured and reinsured on a basis similar to Stafford loans. Federal consolidation loans may be obtained in an amount sufficient to pay outstanding principal, unpaid interest and late charges on federally insured or reinsured student loans incurred under FFELP selected by the borrower, as well as loans made pursuant to the FDLP, Perkins and Health Professional Student Loan Programs. Payment of principal and interest on all FFELP consolidation loans originated after October 1, 1993 are 98% guaranteed by a guaranty agency against default by the borrower as to principal and interest. Additionally, the holder receives a direct payment from the government based upon a Special Allowance Payment (SAP) formula. SAP is generally paid whenever the average of all of the applicable floating rates (91-day Treasury bill, commercial paper, 52-week Treasury bill, or the constant maturity Treasury rate) in a calendar quarter, plus a spread of between 1.70% and 3.50% (depending on the loan status and origination date), exceeds the rate of interest which the borrower is obligated to pay. However, the holder is required to pay an annual fee to the DOE of 105 basis points on consolidation loans it holds.

Currently, the interest rate paid by a student on a consolidation loan is fixed at a rate equal to the weighted average of the interest rates on the loans retired, rounded up one-eighth of one percent, not to exceed 8.25% per annum. Once a student consolidates his or her loans, the rate determined at that point is fixed to the student for the life of the loan. The portion, if any, of a consolidation loan that repaid a loan made under other federal programs may have a different variable interest rate.

Legislation has been proposed that would permit borrowers holding consolidation loans made under the Higher Education Act to reconsolidate their loans. Legislation has also been proposed that would abolish the so-called “single holder rule,” which restricts the ability of other lenders to consolidate student loans away from a lender that owns all of a particular borrower’s loans. Should such legislation be approved with the reauthorization of the Higher Education Act, we would have the opportunity to consolidate previously consolidated loans away from other lenders, potentially increasing our loan portfolio. While we would risk losing a portion of our loan portfolio as other lenders consolidate loans away from us, we believe the risk associated with this is minimal as a substantial portion of our consolidation loan portfolio was originated during a record low interest rate environment.

Market Participants

Participants in FFELP include:

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Regulatory Requirements

The guarantee and the lender’s right to subsidy payments on FFELP loans is conditioned on compliance with requirements set by the DOE and guaranty agencies. FFELP loans that are not administered in accordance with DOE regulations risk loss of their guarantee and subsidies, in full or in part. The most common reason for loss of guarantee or subsidies on a loan is violation of federal regulations requiring certain collection steps, such as collection letters and phone calls for loans that become delinquent. Regulations also authorize the DOE and guaranty agencies to limit, suspend or terminate lenders’ participation in FFELP. Additionally, the DOE is authorized to impose civil penalties, if lenders violate certain program regulations. We engage independent third parties to conduct compliance reviews, as required by the DOE, with respect to our student loan portfolio.

In order to maintain eligibility in the FFELP, schools must maintain default rates below specified levels, which have been established by the DOE.

Reauthorization and Proposed Regulatory Changes

The Higher Education Act, and as a result FFELP, is subject to comprehensive reauthorization every five years. The Higher Education Act is scheduled to expire on September 30, 2004, and reauthorization is currently under consideration by the United States Congress. Changes in the Higher Education Act made in the two most recent reauthorizations have included reductions in student loan yields paid to lenders, increased fees paid by lenders and a decreased level of guarantee.

Additionally, funds for payment of interest subsidies and other payments under FFELP are subject to annual budgetary appropriation by Congress. In recent years, federal budget legislation has contained provisions that have restricted payments made under FFELP to achieve reductions in federal spending.

Changes made under this program when the reauthorization occurs may positively or negatively impact our business, depending on the nature of those changes when implemented.

Federal Direct Loan Program (FDLP)

In 1992, Congress created FDLP. Under FDLP, the DOE makes loans directly to student borrowers attending schools that choose to participate in the program. The Direct Lending Consolidation Loan Program (DLCP) following its enactment, grew rapidly because of the ability to consolidate FFELP loans into the DLCP, while FFELP lenders could not consolidate FDLP loans into FFELP loans. With a limited number of lenders focused on originating consolidation loans and the great appeal of the product to student borrowers, there was demand for private sector consolidation loans, and private lenders were given the right to consolidate DLCP loans in 1998.

Alternative Supplemental Loans

Alternative supplemental loans are made to students whose loan eligibility under the FFELP program does not meet their total borrowing needs. Unlike FFELP loans, alternative supplemental loans are credit-based. Depending on the loan program, the credit requirements may be met by a co-borrower. Interest rates are reset

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quarterly and may be tied to prime or to commercial paper (CP) rates. Alternative supplemental loans may be guaranteed by a third-party guarantor. At December 31, 2003, all our alternative supplemental loans were 100% guaranteed by third-party guarantors.

While the alternative supplemental student loan market is small in comparison to the federal student loan market, significant increases over the past three years reflect a growing reliance on private borrowings as an alternative to guaranteed student loans. This is partly because Congress has not raised borrowing limits on guaranteed student loans since 1992. We believe that the alternative supplemental student loan market will continue to fill the gap between the cost of education and the amount of funding available to pay that cost through guaranteed student loans.

Industry Growth

Demand for student loans is highly correlated to growth in the cost of and demand for college education which is expected to continue to increase over the next 10 years. Total college enrollment in 2000 reached a new record of approximately 15.3 million students. Projections from the National Center for Education Statistics indicate that school enrollment will continue to reach record levels over the next nine years. From 2002, total college enrollment is projected to increase by a total of 13% to 17.7 million students in 2012. Additionally, tuition increases have far outpaced growth in personal and family income over the past two decades, and the need for federal and alternative supplemental student aid has increased dramatically. Average tuition at both public and private institutions more than doubled from 1981 to 2002, while the median family income has been relatively stagnant, increasing just 25% during the same period.

In 1992, Congress last raised federal loan limits. In the 1991-1992 school year, FFELP loans, excluding consolidation loans, were $14.0 billion. Total FFELP loans, excluding consolidation loans, grew to $30.4 billion in the 2001-2002 school year. In connection with the proposed reauthorization of the Higher Education Act, Congress is considering raising federal loan limits again, which, combined with increased college enrollment and tuition costs, may result in increased demand for federal student loans.

Our Strengths

We offer a full array of guaranteed student loan products. Our portfolio of student loans continues to grow and we expect it to provide substantial future cash flow. We believe the following factors will continue to be instrumental in maintaining our growth and securing our position in the student loan industry:

Predictable cash flow from a high quality loan portfolio

As of December 31, 2003, we held $3.3 billion of student loans on our balance sheet, of which more than 99% are guaranteed FFELP loans. We expect this portfolio to generate predictable cash flows for the duration of the loan portfolio, which is currently approximately 21.8 years. FFELP loans carry a guarantee of at least 98% on the principal and accrued interest. As of December 31, 2003, less than 1% or $10 million of our portfolio, consisted of alternative supplemental loans. These loans are fully guaranteed by The Education Resource Institute, Inc., or TERI, a third party guaranty agency.

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Multi-channel loan origination

We have developed a highly diversified marketing strategy which allows us to market our products and services through four channels, including strategic alliances, school preferred lender-lists, direct marketing to consumers and secondary market acquisitions. Our multiple channel origination strategy limits our reliance on any one source, permits greater penetration into the student loan market, reduces seasonality of loan originations and enables us to customize our marketing approach to each market segment we serve.

Strong marketing alliances

We have forged strong marketing relationships with third parties to leverage their marketing platforms and access their established and growing customer bases. These entities conduct business with us because of our expertise in providing a full array of student loan products and services, our reputation and our competitive compensation arrangements. We partner with these entities by creating and managing marketing campaigns geared towards their existing and targeted customers. We then purchase the resulting completed loan applications. Through these marketing relationships, we are able to access a large number of borrowers without incurring the incremental overhead costs of hiring additional sales and marketing employees.

Access to cost-efficient, flexible financing

We have access to a warehouse loan facility of $500 million. From time to time our lender has approved temporary increases in the warehouse loan facility, with the largest increase to date allowing us to borrow up to $1.25 billion. We use this facility to fund the origination and purchase of student loans. Our warehouse loan capacity allows us to fund and pool student loans until we aggregate sufficient volume to access the securitization markets for more cost-efficient financing.

Experienced management team

Our executive management team has extensive experience in all aspects of the student loan industry, including marketing, financing, securitizing, servicing and processing. Prior to forming Education Lending Group, our CEO, Robert deRose, was a founder, president and chief executive officer of American Express Educational Loans. Michael H. Shaut, our President and COO, was the president and chief executive officer of Student Loan Funding Resources, Inc. prior to its acquisition by Sallie Mae. Other members of our executive management team also have significant experience in the student loan industry.

Our Strategy

Our objective is to strengthen our position as a leader in delivering student loan products, services and solutions directly to consumers in the medium of their choice. We believe that we can accomplish our objective by pursuing the following key strategies:

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Our Products and Services

As mentioned above, we are a specialty finance company principally engaged in providing student loan products, services and solutions to students, parents, schools and alumni associations. Our business is focused on originating and purchasing guaranteed student loans made under FFELP. This includes consolidation loans, PLUS loans and Stafford loans. We also offer and purchase alternative supplemental loans that may be guaranteed by a third party guarantor.

We market our products and services through four channels:

Strategic Alliances and Other Marketing Relationships

We have forged strong marketing relationships with third parties to leverage their marketing platforms and access their established and growing customer bases. Currently, we have relationships with 13 third parties who market our guaranteed consolidation loans, Stafford loans and PLUS loans to potential and existing borrowers. The services these marketing partners provide include marketing our federal consolidation loans offered and originated under FFELP and providing us with qualified leads to prospective loan applicants. Approximately 66% of the loans generated during 2003 were originated through this channel. The agreement terms and termination rights of the parties vary, but generally, the parties have the right to terminate upon the occurrence of material breach, regulatory changes and bankruptcy. Each party has agreed to indemnify the other in connection with their activities under the agreement, subject to certain limitations.

These entities conduct business with us because of our expertise in providing student loan products and services, our reputation and our competitive compensation arrangements. We partner with these entities by creating and managing marketing campaigns geared towards their existing customers. We then purchase the resulting completed loan applications. Through these marketing relationships, we are able to access a large number of borrowers without incurring the incremental overhead costs of hiring additional sales and marketing employees.

School Preferred Lender-Lists

Stafford and PLUS Loan Originations. We originate student loans through the school preferred lender-list marketing channel. This activity accounted for approximately 9% of our loan originations during 2003. We have

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a national sales force of experienced professionals in the field that focuses on implementing this strategy by educating college financial aid officers about us and offering our products and services to them in order to be added to the school’s preferred lender-list. This preferred lender-list participation drives Stafford and PLUS loan volume from the students and parents who select their lender from the school’s preferred lender-list.

Preferred lender-lists came to prominence in the student loan industry in the early 1990’s by streamlining the student lending process, which had been unwieldy and heavily paper intensive. Financial aid offices had little control over where their students were obtaining their loans. Schools created preferred lender-lists to simplify the administration of the program in financial aid offices. Many schools like to have preferred lenders because these lenders typically provide the school with products and services that ease the financial aid process for their students and help reduce the workload for the financial aid office.

The following is an example of the lender-list loan origination process:

In this channel, our objective is to be included on a school’s preferred lender-list. We are currently on the preferred lender-list at over 400 schools and expect to be included on the preferred lender-list for more than 450 schools by the end of 2004. Being on a preferred lender-list at an educational institution provides us an opportunity to generate more student loans, primarily federal Stafford and PLUS loans, at that institution than we otherwise would if we were not on the preferred lender-list. By the end of 2004, we intend to establish relationships with an additional 150 schools that we expect will process our loan applications from their students even though we are not included in their preferred lender-list.

The school preferred lender-list business is seasonal as the majority of the loans are originated in the August/September/October and January/February/March time frames, which corresponds to the college disbursement calendar.

Consolidation Loan Originations. We also use the school preferred lender-list channel to market our Consolidation Assistance Program^® (CAP) to targeted educational institutions and related alumni associations. In this channel our primary target borrowers are current students and recent graduates. We believe our easy application process is attractive to many potential borrowers. We provide a streamlined consolidation loan process, expert assistance and competitive borrower benefits programs to help borrowers take advantage of the simplicity and money management advantages of the federal consolidation loan program.

Diversified Products and Services. We also use the school preferred lender-list channel to market our Grad Partners^® School as Originator Program to targeted graduate schools, our electronic entrance and exit interviews and our loans for foreign students enrolled in schools in the United States.

Direct Marketing to Consumers

The student loan marketplace is evolving. As a result of technological innovations such as electronic processing of loan applications, electronic disbursements and e-signatures, we believe that marketing of student loans is likely to begin to move away from marketing channels, such as schools’ preferred lender-lists, to more direct marketing to consumers. This is evident in the recent emergence of direct marketing of consolidation and PLUS loans to parents. Once it was evident that the process did not intrude on the financial aid office, and in fact

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enhanced administration of financial aid, resistance to direct marketing of consolidation and PLUS loans diminished. During 2003, approximately 24% of our loan business came to us through our direct marketing efforts.

We view student loans as consumer loans that can be originated in any fashion convenient for the student, parent or school. We market some of our products and services, such as consolidation and PLUS loans directly to students, parents and alumni associations utilizing our website, web advertising, print advertising and direct mail. A large portion of our direct marketing to consumers is geared towards driving calls from eligible borrowers to our Education Finance Center^SM where callers receive information specific to their eligibility for different loan programs. All of our Education Finance Center^SM associates are trained education finance specialists. Each associate participates in intensive training developed with the assistance of our advisory board of financial aid administrators. We attempt to operate our Education Finance Center^SM like a school financial aid office. Our associates take an easy-to-understand, engaging approach to education finance. They provide parents and students specific, concise and accurate financial aid information. They can typically qualify a borrower over the phone for consolidation, Stafford and PLUS loans in less than 10 minutes. Additionally, the availability of e-application and e-signature expedites the application process. In order to build this channel to scale, we will continue to work closely with financial aid offices to insure conformity to their internal systems for Stafford and PLUS loans.

Secondary Market Acquisitions

Since September 2001, we have used this channel to purchase additional student loan volume. After a lender funds a loan, the lender can either hold the loan and collect the payments or sell the loan in the secondary market. Many FFELP lenders sell their loans. As a result, there is a robust secondary market for student loans. Less than 1% of the loans added to our balance sheet during 2003 came to us through such acquisitions.

We fund our acquisitions of loans in the secondary market through our commercial warehouse line of credit and from direct access to the asset-backed securitization marketplace. On our secondary market purchases, we earn income on the portfolio based on the difference between the student loan borrower rate and the interest cost of our borrowings under the commercial warehouse line of credit or asset-backed securitization market, less the amortization expense of the acquisition cost of the portfolio. We intend to maximize revenue and build our balance sheet over time by holding most of the student loans we acquire. Our management team has extensive experience in buying student loans in the secondary market.

Our Competition

In the FFELP market, we face significant competition from numerous competitors, including SLM Corporation, the parent company of Sallie Mae. SLM Corporation’s subsidiaries collectively service nearly one-half of all outstanding FFELP loans and constitute the largest holder of student loans. Another major competitor, Student Loan Corporation, originates, holds and services federally sponsored student loans under FFELP and also holds student loans that are not insured under FFELP. Through a series of acquisitions and mergers, Nelnet, Inc. has substantially expanded its presence in the student loan business as an originator, holder and servicer of student loans. They offer a range of financial services and technology-based products, including student loan origination and a suite of internet-based software solutions.

We also face competition from the FDLP. Under FDLP, the DOE makes loans directly to student borrowers through the educational institutions they attend. The volume of student loans made under FFELP and available for us to originate or acquire may be reduced to the extent loans are made to students under FDLP. In addition, if FDLP expands, we may experience reduced economies of scale, which could adversely affect our earnings. Loan volume reductions could further reduce amounts received by the guaranty agencies available to pay claims on defaulted student loans.

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The market for consolidation loans has generally not been as competitive as the market for other guaranteed loans primarily because many market participants are not long-term holders of student loans. Additionally, those lenders who are long-term holders of loans in repayment have traditionally avoided the consolidation market because they found it less attractive than holding their existing loans without consolidation. However, many of these banks and secondary market holders recently have begun to engage in defensive consolidations. They consolidate loans for borrowers in their portfolio who ask for consolidation and extended repayment.

As interest rates have fallen and the market for consolidation loans has increased, new companies have entered the business of directly marketing to consumers who are eligible for consolidation of their student loans. The DOE also offers consolidation loans and has marketed this product widely in prior years, primarily through the Internet. However, they have recently reduced their marketing relating to consolidation loans. Since 2001, private market lenders like Collegiate Funding Services, LLC, (CFS), have been able to market consolidation loans to DOE Loan Program borrowers. CFS continues to be one of the largest new competitors in the consolidation loan market. Other potential competitors in this arena include larger banks, which hold their student loan portfolios into repayment. Several of these larger banks, which are significant originators of FFELP volume, buy their consolidation volume rather than market the product themselves. In addition, there are several new market entrants looking to take advantage of the favorable interest rate environment. In July of 2002, Sallie Mae began actively marketing consolidation loans and, as a result of its substantial market presence, quickly became the leading originator in the consolidation marketplace.

Further, other student loan companies and financial institutions that originate or purchase guaranteed and alternative supplemental student loans compete for our business. As we seek to further expand our business, we will face numerous other competitors, many of whom are already well established in the markets we seek to penetrate. Some of our competitors are much larger than we are, have better name recognition than we do and have greater financial and other resources than we do. In addition, several of our competitors have large market capitalizations or cash reserves and are better positioned to acquire companies or portfolios in order to gain market share than we are. Additionally, some of our competitors have captive servicers.

Employees

At December 31, 2003, we employed approximately 108 full-time employees and one part-time employee. None of our employees are unionized, and we believe that our relations with our employees are good.

Item 2. Properties.

San Diego, California

Our executive offices are located in San Diego, California. Prior to February 1, 2002, our office space comprised a total of approximately 1,981 square feet. The premises were subject to a lease dated March 17, 1999 that would have expired on March 16, 2004, under which we are the tenant. The annual rent was approximately $51,110, in addition to pass-through expenses for utilities, increases in real estate taxes, assessments and increases in insurance.

In order to accommodate our growing San Diego office needs, we entered into a new lease for additional office space in the same office complex as our current executive offices. Effective on February 1, 2002, we entered into a new combined lease that comprises a total of 7,537 square feet. Annual rent for this lease was $235,154 for the first year, $244,560 for the second and $254,343 for the third and final year, in addition to the pass-through expenses set forth above. On January 1, 2003 and on December 15, 2003, we added an additional 1,544 and 1,430 square feet, respectively, to our office space under the current lease on the same terms and conditions. The combined lease is now for 10,511 square feet at an annual rent of $354,506 in 2004 and $29,555 for the balance of the term, which ends on January 31, 2005. We have the right to renew the new lease for an additional five-year period.

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Cincinnati, Ohio

We lease additional office space in Cincinnati, Ohio. The office space currently comprises approximately 9,456 square feet. These premises are subject to a lease that expires on March 31, 2007. Our initial lease was for 4,728 square feet, with annual rent of $54,372 through March, 2003, after which time it was increased to $56,736 annually for the remainder of the lease. On September 15, 2002, we entered into a second office lease for an additional 4,728 square feet in the same building as the existing lease. This second office lease also expires on March 31, 2007, and provides for annual rent of $58,154 throughout the term.

Cleveland, Ohio

In March 2004, we reached an agreement in principle to lease approximately 23,985 rentable square feet of office space in Cleveland, Ohio, to be used as the central location for our new loan servicing company, Education Loan Servicing Corp. The lease term is for a period of 10 years and is renewable for two five-year periods subsequent to the expiration of the initial lease term. At the commencement of the lease, the premises will be approximately 16,192 rentable square feet. Within the first 16 months of the commencement, the premises shall be increased in size to be approximately 20,102 rentable square feet. Within 25 months of the commencement, the premises shall again be increased in size to be approximately 23,985 rentable square feet.

Item 3. Legal Proceedings.

We may be subject to various claims, lawsuits and proceedings that arise in the ordinary course of business from time to time. Currently there are no claims or legal proceedings against us.

Item 4. Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of stockholders during the quarter ended December 31, 2003.

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PART II

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases

 of Equity Securities.

Market Price of Common Stock

Our common stock has been trading on the Nasdaq National Market since September 18, 2003, under the symbol “EDLG.” Our common stock was initially traded, commencing on April 27, 1999, in the over-the-counter market through the OTC Bulletin Board system under the symbol “DRCT.” Due to our name change from Direct III Marketing, Inc. to Education Lending Group, Inc. on May 21, 2002, we changed our ticker symbol to “EDLG” and on July 25, 2003, our common stock began trading on the Nasdaq SmallCap Market.

The trading of our common stock is relatively limited. The following table presents the range of the high and low closing price and average daily volume (computed for days in which the shares traded) for our common stock for the periods indicated. The quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not represent actual transactions.

The information in the table above was provided by The Nasdaq Stock Market and Commodity Systems, Inc. Records of American Stock Transfer and Trust, our transfer agent, indicate that as of March 4, 2004, there were 85 record holders of our common stock.

Dividend Policy

We have neither paid nor declared any dividends since our inception and do not intend to declare any such dividends in the foreseeable future. We currently anticipate that we will retain all of our future earnings, if any, for use in the operation of our business. The declaration, payment and amount of future dividends, if any, will be subject to the discretion of our Board of Directors.

Equity Compensation Plan Information

Our Stock Option Plan provides for the grant of incentive stock options and non-qualified stock options to our officers, Directors and employees selected by the Board of Directors and/or the Compensation Committee. The term of the Stock Option Plan was set by the Compensation Committee and may not exceed 10 years from the date of the plan’s approval. The Compensation Committee also sets the term of the options granted under the plan. The purpose of the Stock Option Plan is to recognize and compensate officers, Directors and selected employees who contribute to our development and success, to maintain our competitive position by attracting and retaining qualified employees, to provide incentive compensation to officers and key employees based upon our performance and to encourage our officers, Directors and employees to acquire a proprietary and vested interest in our growth and performance.

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The following table shows the number of securities to be issued upon the exercise of outstanding options, warrants and rights, the weighted average exercise price of the outstanding employee options and the number of securities remaining available for future issuance under all of our equity compensation plans as of December 31, 2003. The Compensation Committee has recommended that we amend and restate the Stock Option Plan as the Education Lending Group Long-Term Incentive Plan (LTIP). Under the LTIP the number of shares reserved for issuance would be increased from 3,000,000 to 4,500,000. The amendment and restatement of the Stock Option Plan as the LTIP is subject to stockholder approval.

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Item 6. Selected Financial Data.

Summary Consolidated Financial Data

The following table summarizes selected financial data that was derived from our audited consolidated financial statements for and as of each of the four years ended December 31, 2003, 2002, 2001 and 2000 and for and as of the period from March 1, 1999 to December 31, 1999. Historical operating results are not necessarily indicative of the results that may be expected for any future period. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and the related notes and our other financial information included in this Annual Report on Form 10-K.

Consolidated statements of operations data:

Consolidated balance sheet data:

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of the financial statements in accordance with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related notes. The following discussion and analysis should be read in conjunction with, and is qualified in its entirety by our consolidated financial statements and the notes thereto included in this Annual Report on Form 10-K. This discussion and analysis also contains forward-looking statements and should also be read in conjunction with the disclosures and information contained in the section of this Annual Report on Form 10-K entitled “Disclosure Regarding Forward-Looking Statements.”

Business Overview

We are a specialty finance company principally engaged in providing student loan products, services and solutions to students, parents, schools and alumni associations. Our business is focused on originating and purchasing guaranteed student loans made under the Federal Family Education Loan Program, known as FFELP, which includes consolidation loans, Stafford loans and Parent Loans for Undergraduate Students (PLUS). We also offer and purchase alternative supplemental education loans that may be guaranteed by a third-party guarantor. As of December 31, 2003, all of our alternative supplemental loans were guaranteed by a third-party guarantor.

To date, the vast majority of loans we have originated have been consolidation loans. We generally hold these loans on our balance sheet. We currently sell in the secondary market the majority of Stafford and PLUS loans we originate. During the year ended December 31, 2003, we originated or purchased more than $2.5 billion in student loans. As of December 31, 2003, we held an aggregate of $3.3 billion of student loans on our balance sheet. All of our student loans are currently serviced by third-party servicers. We have recently created a wholly-owned subsidiary which we intend to use to service some of our loans.

We generate revenue primarily by earning interest income on the loans we hold on our balance sheet. This financial model allows us to benefit from the predictable revenue stream of our portfolio, unlike specialty finance companies whose revenues are primarily derived from one-time gains upon the sale of their assets. When we do sell loans, we record a gain on the sale of the loans on our income statement. We have agreements with a number of third-party marketing partners who we engage to provide us with completed loan applications. In accordance with GAAP, we expense these marketing partner fees as they are incurred. These fees have historically represented more than 50% of our operating expenses. Accordingly, as a make and hold lender, we have and will continue to record net losses until our portfolio attains scale to generate net interest income sufficient to absorb our expenses, including these marketing partner fees.

Critical Accounting Policies and Estimates

We believe the following critical accounting policies, among others, affect the more significant judgments and estimates used in preparation of our consolidated financial statements.

Principles of Consolidation—The financial results included in this report are stated in conformity with accounting principles generally accepted in the United States of America and all normal recurring adjustments that Education Lending Group, Inc. considers necessary for a fair presentation of the results for such periods.

These consolidated financial statements include the accounts of Education Lending Group, Inc., Student Loan Xpress, Inc. (SLX), Education Loan Servicing Corp. (ELSC) and Education Lending Services, Inc. (ELS). SLX, ELSC and ELS are our wholly owned subsidiaries. ELS consists of Education Funding Resources,

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LLC (EFR) and Education Funding Capital I, LLC (EFC I). (ELS is the sole member of EFR and EFC I). Additionally, we have formed Education Funding Capital Trust I, Education Funding Capital Trust II and Education Funding Capital Trust III, all of which are Delaware statutory trusts and wholly-owned subsidiaries of EFC I. All significant intercompany accounts and transactions have been eliminated in consolidation.

Student Loans—Student loans, consisting of federally sponsored student loans guaranteed by third parties and alternative supplemental loans (not federally sponsored but guaranteed by other third parties) are carried at their purchase price, including unamortized premiums and unamortized origination costs. Loan fees and certain direct loan origination costs are deferred. Net deferred loan origination costs are amortized into interest expense over the contractual life of the loan using the straight-line method which approximates the effective interest method. Deferred fees and costs associated with loans that have been repaid are recorded in the income statement in the period of repayment.

Student Loans Held for Resale—The majority of the student loans originated through the traditional school preferred lender-list channel are subsequently sold to one of two entities. According to the terms of our agreements with the entities who purchase these loans from us, loans sold to one of the entities are sold immediately upon initial disbursement. Costs related to the origination of these loans are netted against gain on sale when the loans are sold rather than capitalized and amortized as discussed above. Loans sold to the other entity are sold 120 days subsequent to the final disbursement. Interest is earned on these loans for the period of time they are held on our balance sheet. Once the loan is sold, the gain on the sale is recorded as discussed below. Costs related to the origination of these loans are capitalized and amortized until the loan is sold. When the loan is sold the remaining unamortized costs are written off (netted against gain on sale). Loans held for resale are reflected on our balance sheet at the lower of cost or market.

Student Loan Income and Net Interest Income—We recognize student loan income as earned, including amortization of premiums. We amortize the premiums and origination fees over the estimated life of the loan. With the guarantee on the student loans applicable to both principal and interest, we recognize interest on student loans as earned regardless of delinquency status. If a student loan should lose its guaranteed status, interest would be recognized as received. To date, there are no student loans in our portfolio which have lost their guaranteed status. Net interest income is derived largely from our portfolio of student loans that remain on the balance sheet and is the spread between interest earned on student loans and our cost of generating that interest income. These costs include interest expense on the warehouse facility and permanent financings, amortization of deferred financing costs, fees paid to third-party servicers to service the loans, mark-to-market adjustments related to interest rate swaps that have not been designated as cash flow hedges, fees paid to the DOE, and amortization of premiums paid to acquire student loans. All servicing of our student loans is currently outsourced to third-party servicers to whom we pay a fee.

Gain on Sale of Student Loans—We currently sell the majority of the Stafford and PLUS loans we originate. Additionally, from time to time, we may elect to sell consolidation loans. We book the sale in the period the loan is sold and record the transaction on the income statement as a gain on the sale of student loans. Sales of student loans are accounted for under Statement of Financial Accounting Standard (SFAS) 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” (SFAS 140). Student loans are sold with the servicing rights released and without recourse. Gains or losses on sales of student loans are recognized based on the difference between the selling prices and the carrying values of the related student loans sold. Deferred origination fees and expenses are netted against gain on sale when the loans are sold. According to the terms of our agreements with the entities who purchase these loans from us, loans sold to one of the entities are sold immediately upon initial disbursement. Loans sold to the other entity are sold 120 days subsequent to the second disbursement. The school preferred lender-list business is rather seasonal as the majority of the loans are originated in the August/September/October and January/February/March time frames, which corresponds to the college disbursement calendar.

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Allowance for Student Loan Losses—We have established an allowance for potential losses on the existing balance sheet portfolio of student loans, both securitized and unsecuritized. These student loan assets are presented net of the respective allowances on the balance sheet. In evaluating the adequacy of the allowance for losses, we consider several factors, including trends in student loan claims rejected for payments by guarantors, default rates on alternative supplemental student loans and the amount of FFELP loans held subject to two percent risk-sharing. The allowance is based on periodic evaluations of our loan portfolio, changes to federal student loan programs, current economic conditions and other relevant factors. We utilize these factors to estimate a projected default rate for our student loan portfolio. This estimate, along with the applicable risk-sharing percentage, is used to calculate the allowance for student loan losses. The allowance is maintained at a level that management believes is adequate to provide for probable credit losses. Currently, approximately 98% of our student loan portfolio is guaranteed. The allowance for student loan losses is calculated by multiplying the principal balance of the student loans we carry on our balance sheet by 2% (the uninsured portion of the federally sponsored student loans on our balance sheet) and then multiplying that amount by the projected default rate. The projected default rate we utilize is based on industry norms and industry experience. The increases in the provision and allowance between periods are strictly related to the increase in the student loan assets held by us at the end of each period. This evaluation is inherently subjective as it requires estimates that may be susceptible to significant changes.

Marketing Partner Fees—We have established relationships with various third-party marketing partners to market student loans on our behalf. These fees represent a significant cost to us. SFAS 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases,” (SFAS 91) establishes the accounting for nonrefundable fees and costs associated with lending, committing to lend, or purchasing a loan or group of loans. SFAS 91 specifies that costs incurred to identify and attract potential borrowers should be expensed as incurred. As such, fees we pay to our marketing partners are expensed during the period incurred. These fees are included in sales and marketing operating expenses in the income statement.

Additionally, some of these marketing partners have been awarded performance-based stock options, which vest in relation to certain performance criteria being met by the partner. These options are accounted for under SFAS 123, “Accounting for Stock-Based Compensation,” (SFAS 123), Emerging Issues Task Force (EITF) Issue 96-18, “Accounting for Equity Instruments that Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and FASB Interpretation Number 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Options or Award Plans.” Under the guidelines established by these pronouncements, each quarter until performance under the marketing partner agreement is completed, we must record an expense related to the options that are vested as of the end of the quarter. This expense includes a charge equal to the fair market value of the options which vested during the quarter, and a mark-to-market adjustment for the options which vested in previous quarters. This non-cash charge is directly related to our stock price and the performance of our marketing partners, and will fluctuate from quarter to quarter based on the performance of our stock and the number of options which vest during the quarter. This expense is a component of marketing partner fees which are a component of the sales and marketing expenses line item on the income statement.

Derivatives and Hedging Activities—SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” (SFAS 133) requires companies to recognize all derivative contracts as either assets or liabilities on the balance sheet and to measure them at fair value. If certain conditions are met, a derivative is specifically designated as a hedge. The methodology by which a gain or loss is recognized depends upon whether the derivative may be specifically designated as a hedge. SFAS 133, as amended by SFAS 137, “Accounting for Derivative Instruments and Hedging Activities, Deferral of the Effective Date of SFAS 133,” SFAS 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities” and SFAS 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” is effective for all fiscal quarters for fiscal years beginning after June 15, 2000. During the fourth quarter of 2002, we entered into an interest rate swap that was not specifically designated as a hedge. As required by SFAS 133, the fair market value of the interest rate swap contract (mark-to-market) was recognized during the period as an additional liability and treated as

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additional expense/(income) on our income statement. During the second and fourth quarters of 2003 we entered into an additional interest rate swap agreement, which was designated as and is effective as a cash flow hedge. This swap is also recorded in the accrued expenses and other liabilities section of the balance sheet. As this agreement qualifies as a cash flow hedge, changes in the agreement’s fair values (mark-to-market) are recorded in the other comprehensive loss section of the balance sheet rather than as an expense on the income statement. Accrued interest receivable or payable related to the interest rate swap agreements is recorded in interest expense.

Results Of Operations

Earnings Summary.

For the year ended December 31, 2003, our net loss calculated in accordance with GAAP was $7.7 million, or $0.61 per share, compared to a loss of $28.3 million, or $2.77 per share in 2002 and a net loss of $4.1 million, or $0.78 per share in 2001. We commenced loan operations in September of 2001, therefore our 2001 loss represents only a partial year of full scale business activity. During 2002, our business grew significantly as we added staff and infrastructure to support our organization. Illustrative of the growth we experienced during this time frame is the increase in employee count. We began 2001 with three employees and finished 2002 with 96 employees. We had 109 employees at December 31, 2003. We saw our loans held on our balance sheet grow from $44 million at December 31, 2001 to $1.3 billion at December 31, 2002 and $3.3 billion at December 31, 2003.

Our net earnings are composed of several key components, the most significant of which is loan volume. As our loan volume increases (measured by the amount of loans held on our balance sheet), our student loan income and corresponding expenses increase accordingly. We have several marketing partners who advertise, identify and attract potential borrowers. We pay these marketing partners for each completed student loan application they provide to us. These fees are expensed during the period incurred. Therefore, as our loan origination volume increases, marketing partner fees increase. Since we earn interest on the loans over the life of the loan, the expense of the marketing partner fees will cause operating losses until our balance sheet reaches sufficient scale for the interest income related to existing loans to offset the marketing partner fees related to new loans. As illustrated above, while our loan portfolio, and, correspondingly, our student loan income increased significantly from 2002 to 2003, our net loss did not decline as significantly as might be expected, largely due to the $15.9 million increase (from $16.7 million in 2002 to $32.6 million in 2003) in marketing partner fees during that period.

Although we are primarily a make-and-hold lender, under certain circumstances, discussed more fully below, we sell some of our loans to third parties. When we sell loans, we record a gain on the sale of student loans on our income statement. We did not sell any loans in 2001. In 2002 we recorded gains on sale of $1.9 million. This amount increased to $11.1 million in 2003, also contributing to the significantly reduced net loss in 2003 as compared to 2002.

Employee compensation is another significant component of our net earnings. Employee compensation increased $2.3 million from 2002 to 2003, reflecting the increased headcount between the periods, and a $0.9

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million increase in incentive-based cash bonuses earned in 2003 ($3.0 million in 2003 compared to $2.1 million in 2002). The increase in employee compensation expenses from 2001 to 2002 accounts for $7.6 million of the increase in net loss between those years. Included in the 2002 amount are the $2.1 million of incentive-based cash bonuses mentioned above that we paid to employees. Our Compensation Committee determined the amounts of the bonuses paid in 2003 and 2002, based on the growth of student loans on our balance sheet and other performance criteria. These bonuses were then approved by our Board of Directors.

Net Interest Income. Net interest income is derived largely from our portfolio of student loans that remains on our balance sheet. It represents the spread between interest earned on student loans and our cost of generating that interest income. All servicing of our student loans is outsourced to third party servicers. The cost of interest income is composed of interest expense on the warehouse facility and the permanent financings we use to fund our loan portfolio, income or expense related to mark-to-market adjustments for interest rate swaps that are not designated as cash flow hedges as well as interest expense related to all our interest rate swaps, costs paid to a third party servicer to service our loans, amortization of DOE fees (as described in Note 3 of the financial statements), the provision for loan losses, and amortization of premiums paid to acquire loans.

Following is a comparison of the components of net interest income for 2003 as compared to 2002 and for 2002 as compared to 2001.

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Our interest income, cost of interest income and provision for loan losses were higher in 2003 as compared to 2002, and in 2002 as compared to 2001 primarily due to the increase in volume in our student loan portfolio. The increases in interest income and the cost of interest income due to increased loan volume from 2002 to 2003 were partially offset by lower interest rates related to both our earning assets and our borrowings. In 2002, increases in the cost of interest income related to increased volume, as compared to 2001, were partially offset by lower interest rates on our borrowings due to a securitization completed in April of 2002, which affords us less expensive financing than our warehouse line of credit. These changes are detailed in the following rate/volume analysis which shows the relative contribution of changes in interest rates and asset volumes.

Our borrowings are generally variable rate and are indexed primarily to commercial paper, the London Interbank Offer Rate (LIBOR) and our auction rate securities. The following table summarizes the average balance of our debt (by index, after giving effect to the impact of interest rate swaps) and the corresponding average interest rate paid on the debt related to each index, respectively, for the years ended December 31, 2003, 2002 and 2001. We have no off-balance sheet debt or financing.

We provide an allowance for potential loan losses on our balance sheet. The allowance is based on periodic evaluations of our loan portfolio, changes to federal student loan programs, current economic conditions and other relevant factors. We utilize these factors to estimate a projected default rate for our student loan portfolio. This estimate, along with the applicable risk-sharing percentage, is used to calculate the allowance for student loan losses. The allowance is maintained at a level that management believes is adequate to provide for probable credit losses. Currently, approximately 98% of our student loan portfolio is guaranteed. The allowance for student loan losses is calculated by multiplying the principal balance of the student loans we carry on our balance sheet by 2% (the uninsured portion of the federally sponsored student loans on our balance sheet) and then multiplying that amount by the projected default rate. The projected default rate we utilize is based on industry norms and industry experience. We do not reserve for loan losses related to the alternative supplemental loan portion of our portfolio as currently these loans are 100% guaranteed by a third party agency. Should this situation change, we would reserve for such potential losses as appropriate.

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Although our alternative supplemental loans are currently 100% guaranteed, we track delinquency trends related to these loans for informational purposes and as historical data should future loans not be 100% guaranteed and therefore require a loss reserve. The following table shows delinquency trends related to alternative supplemental loans for the years ended December 31, 2003, 2002 and 2001.

Gain on Sale of Student Loans. As market conditions have dictated, we currently sell the majority of loans we originate in the preferred lender-list marketing channel while retaining loans originated in the consolidation marketing channel. The preferred lender-list business is rather seasonal as the majority of the loans are originated in the August/September/October and January/February/March time frame which corresponds to the college disbursement calendar. From time to time, we may also elect to sell some portion of our consolidation loans to take advantage of a specific business opportunity or if required to generate cash for operations.

The following table shows the gain on sale of student loans that we recorded for the years ended December 31, 2003, 2002 and 2001.

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The following table shows total loans sold, by type for each quarter of and for the year ended December 31, 2003, along with the gains on those sales and the corresponding premiums earned.

The increase in gain on sales of lender-list loans for 2002 over 2001 is due to the fact that we did not begin loan originations in this area until the first quarter of 2002. Correspondingly, the increase in gain on sales of lender-list loans for 2003 over 2002 is attributable to having a full year of operations leading into the period and an established pipeline from which to draw.

Due to changes in our arrangement with the purchaser of a portion of these loans, beginning with the third quarter of 2003, we hold some loans on our balance sheet for 120 days after final disbursement, instead of selling them immediately after first disbursement as had been done previously. This change will push a portion of these sales into 2004, which resulted in reduced gain on sale for the latter part of 2003 when compared to the comparable period of 2002. At December 31, 2003, total student loans on our balance sheet included approximately $75.4 million of loans held for sale.

As mentioned above, from time to time we may choose to sell consolidation loans. Accordingly, in addition to the sale of loans generated in the school preferred lender-list channel, during 2003 we chose to sell approximately $247 million of consolidation loans. This resulted in additional gain on sale of approximately $8.5 million for 2003 compared to no sales from this source in 2002 or 2001. As a result, we had total gain on sale during 2003 of approximately $11.1 million compared to $1.9 million during 2002 and $0 during 2001.

Other Income, net. Other income consists of late fees and interest from operating cash balances. Other income, net was approximately $83,000, $19,000 and $72,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

The increase in other income in 2003 as compared to 2002 is due primarily to increased late fees received as a result of a greater number of student loans held on the balance sheet at December 31, 2003 as compared to loans held at December 31, 2002. The decrease in other income from 2001 to 2002 is due primarily to lower interest rates and lower cash balances during the year ended December 31, 2002 compared to the year ended December 31, 2001.

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General and Administrative Expenses.

General and administrative expenses are those expenses associated with the infrastructure that supports our student loan operations, including but not limited to, salaries and benefits for our administrative and research and development employees, consulting, rents and utilities, legal expenses and fees paid to our independent accountants.

General and administrative expenses increased from $9.1 million in 2002 to $10.9 million in 2003, primarily as a result of increased salaries and payroll taxes as we continued to add employees to support our rapid growth. Additionally, trustee fees (those fees paid to the entities holding our indentures) and public administration costs (costs such as our NASDAQ listing fees and other expenses related to being a publicly held corporation) increased significantly from 2002 to 2003.

The increase in general and administrative expenses from $2.2 million in 2001 to $9.1 million in 2002 was due to additional expenses incurred in connection with the continued growth of our operations related to originating and purchasing student loans. These increases included the addition of 26 employees to our general and administrative staff when compared to the same period in 2001, as well as increased consulting and legal expenses which were necessary to facilitate our rapid growth. As we began operations late in 2001, we rapidly increased our cost structure during 2002 to accommodate our increased loan origination volumes.

In addition to the salary expense discussed above, during 2003 we recorded a charge of approximately $414,000 related to performance-based options granted to employees during the year. The options are being expensed in accordance with GAAP, and will continue to be expensed through 2005, which is when the options become fully vested.

Sales and Marketing Expenses.