Quarterly Financial Report

March 31, 2009 and 2008

Table of Contents
March 31, 2009 and 2008 Quarterly Financial Report

Management’s Discussion and Analysis 2

Basic Financial Statements:

Statements of Revenues, Expenses, and Changes in Net Assets 39

Statements of Net Assets 40

Statements of Cash Flows 41

Notes to Financial Statements 43

1
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

This discussion and analysis of the financial performance of Pennsylvania Higher Education Assistance Agency
(PHEAA) is required supplementary information. It introduces the basic financial statements and provides an
analytical overview of our financial activities. Please read it in conjunction with the financial statements that follow
this discussion.

Recent Developments Affecting Profitability and Program Changes and Description of Currently
Known Facts, Decisions or Conditions Expected to have a Significant Effect on Net Assets or
Results of Operations

In August 2007, disruptions in the capital markets began increasing the cost of $7.4 billion of auction rate debt
securities that finance our portfolio of student loans. In February 2008, a decline in investor demand in the auction
rate market caused auctions to fail. The failure of an auction does not constitute a default on the bonds, and all
principal and interest has been paid when due on the outstanding bonds. Upon the occurrence of a failed auction,
bondholders are entitled to receive a maximum rate as described in the related auction procedures.

On February 23, 2009, Moody’s Investors Services (Moody’s) downgraded the bonds within the $7.4 billion auction
rate securities from Aaa to A3 and A1 to Baa3. According to Moody’s, the rating actions were prompted by the
increase of funding costs due to continuing and prolonged dislocation of the auction rate securities market. As most
student loan collateral is indexed to the Financial Commercial Paper rate (CP rate), trusts that are funded primarily
by auction rate securities have suffered significant excess spread compression as the yield on the assets has not
increased in tandem with the cost of the liabilities.

Due to the February 23, 2009 Moody’s downgrade of the $7.4 billion auction rate securities, the formula changed
for the failed auction rate securities. The maximum auction rates payable on auction rate securities are based upon
bond agreements, and were generally at 91-day U.S. Treasury Bill rates plus 1.5% or 1.75%, or one-month LIBOR
(London Interbank Offered Rate) rates plus 1% or 2% for the one-year period ending on the auction date although
there are other formulas for some of the auction rate securities. While we continue to assess the situation, there is no
timetable or restructuring plan for these securities at this time.

For the nine months period ending, March 31, 2009, $3.77 billion of auction rate securities were based upon the 91-
day U.S. Treasury Bill rate plus 1.5%; $135 million of auction rate securities were based upon the 91-day U.S.
Treasury Bill rate plus 1.75%; $1.4 billion of auction rate securities were based upon the one-month LIBOR plus
1.0%; and $1.4 billion of auction rate securities were based upon the one-month LIBOR plus 2.0%.

2
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

Of our $7.4 billion of auction rate debt, $6.7 billion is taxable. Before August 2007, the blended rate of our taxable
auctions tracked one-month LIBOR. The following chart displays SAP (special allowance payment) rate, one-month
LIBOR, the blended rate of taxable auctions, and the blended accrued maximum auction rate on which the lender
yield for student loans is based. After the above auctions failed, we accrued for the maximum auction rate to reflect
our expectation that the auctions would continue to fail and the maximum rate would be paid. The maximum rate
was based on the difference between the calculated rate, which was based upon a one-year look-back period, and the
maximum auction rate payable.

14.0%

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%
June 2005 June 2006 June 2007 June 2008

SAP Rate One-month LIBOR Blended rate of taxable auctions Blended accrued maximum auction rate

3
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

Before August 2007, the remaining $791 million of tax-exempt auction rate debt generally tracked the Securities
Industry and Financial Markets Association (“SIFMA”) index. The maximum auction rates payable on tax-exempt
auction rate securities are based upon bond agreements, and are generally the lesser of a maximum rate of 14% or
175% or 200% of the higher of other benchmark rates including the SIFMA index and the AA commercial paper
rate multiplied by 65%. For the nine months period ending, March 31, 2009, $761 million of the senior auction rate
securities are payable based upon 175% of the commercial paper rates; and $30 million of the subordinate auction
rate securities are payable based upon 200% of the commercial paper rates. The following chart displays the SIFMA
index and the blended rate of tax-exempt auctions as well as the SAP rate.

14.0%

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%
June 2005 June 2006 June 2007 June 2008

SIFMA Blended rate of tax-exempt auctions SAP Rate

4
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

In January 2008, a downgrade of Ambac’s credit rating and negative market sentiment began increasing the cost of
$1.8 billion of our tax-exempt variable-rate demand bonds that Ambac insures. In November 2008, a downgrade of
Financial Security Assurance’s (FSA) credit rating and negative market sentiment began increasing the cost of $312
million of our tax-exempt variable rate demand bonds that FSA insures.

On February 6, 2009, Moody’s downgraded $1.8 billion of our variable rate demand bonds. These bonds are
guaranteed by Ambac whose financial strength rating is Baa1. According to Moody’s, the variable rate demand
notes have experienced significant excess spread compression due to the prolonged and continued market
dislocation. Furthermore, almost all of the bonds guaranteed by Ambac were put back to the liquidity banks and a
portion of FSA guaranteed bonds were put back to the liquidity banks. At the bank rate, the trusts are expected to
generate significant negative excess spread.

On April 3, 2009, Moody’s placed $225 million of the variable rate demand bonds on review for possible
downgrade. According to Moody’s, these bonds have been remarketed successfully, but the interest rates involved
have exceeded Moody’s original assumptions and led to negative excess spread. Multi-notch downgrades are likely
for the long-term ratings.

On April 13, 2009, Moody’s downgraded Ambac Assurance Corp’s insurance financial strength rating to Ba3 with a
developing outlook.

Before January 2008, the interest rates paid on the variable-rate demand bonds tracked the SIFMA index. The
following chart displays the SIFMA index, the SAP rate, the daily tax-exempt variable rate demand notes, and the
blended rate of our $2.1 billion of tax-exempt variable-rate demand notes, including the amounts insured by Ambac
and FSA.

14.0%

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%
June 2005 June 2006 June 2007 June 2008

SIFMA Blended rate of 7-day tax-exempt variable rate demand notes SAP Rate Daily tax-exempt variable rate demand notes

5
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

The combination of these adverse market conditions resulted in increased interest expense while interest revenue on
student loans, based upon 90-day financial commercial paper rates, decreased during the year ended June 30, 2008,
as well as the nine months ended March 31, 2009. For the year ended June 30, 2008, net student loan interest
expense was $5.1 million, compared to net student loan interest revenue of $109.8 million in 2007, a decrease of
$114.9 million. For the three months ended March 31, 2009, net student loan interest expense was $3.1 million,
compared to $42.9 million in 2008, a decrease in net student loan interest expense of $39.8 million. For the nine
months ended March 31, 2009, net student loan interest revenue was $8.2 million, compared to net student loan
interest expense of $18.5 million in 2008, an increase in net student loan interest expense of $26.7 million. The
following chart displays net student loan interest revenue (expense) by quarter for the current fiscal year and the last
two fiscal years.

$80,000

$60,000

$40,000

$20,000
(In thousands)

$0

($20,000)

($40,000)

($60,000)
December 2006

June 2007

December 2007

June 2008

December 2008
September 2006

March 2007

September 2007

March 2008

September 2008

March 2009
The net student loan interest expense during the quarter ended March 31, 2008 was caused largely by failed auctions
resetting at a maximum rate based upon a twelve-month look-back on the date of the failed auction. As long as the
auctions continue to fail and we continue to accrue expense at the maximum rate for each auction period, a one-time
transition to the maximum rate, such as the one that occurred in the quarter ended March 31, 2008, should not be
necessary in the future. The net student loan interest expense during the quarter ended March 31, 2009 was caused
by the February 23, 2009 ratings downgrade of the auction-rate securities by Moody’s, which caused an increase in
the maximum auction rate.

Because of an inability to access the credit markets or financing markets necessary to fund student loans, effective
March 7, 2008, we suspended our activities as a lender for any new loans first disbursed on or after that date. As of
March 31, 2009, we have student loan purchase commitments of $579 million that we have been unable to fund, and
we are committed to purchase an additional $25 million of student loans through June 30, 2009 and $280 million
thereafter. Most of the purchase commitments are with financial institutions and we continue to work with those
institutions to renegotiate the terms and timing of these commitments.

6
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

On April 7, 2008, The Education Resources Institute (“TERI”) filed for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. TERI guaranteed $52.2 million of private loans PHEAA held as of March 31, 2009. TERI’s
bankruptcy filing was an event of default for a $25.0 million financing used to finance a portion of the TERI-
guaranteed loans we hold, and that event of default was waived by the provider of the financing on May 15, 2008.
On December 31, 2008, we renegotiated the terms of the financing, which was extended to December 31, 2009.

Events of default were triggered on a $500 million line of credit facility used to finance federally insured student
loans (of which $314.1 million was outstanding at March 31, 2009) due to our inability to fund the student loan
purchase commitments referred to above and the occurrence of certain material adverse changes relating to our
operations, business, properties, liabilities, financial condition, and prospects taken as a whole. The default caused
by the TERI bankruptcy default referred to above, together with other defaults discussed below, also triggered a
cross-default provision with respect to this line of credit facility. On September 18, 2008, the lender informed us that
no future advances would be permitted on the line and on September 28, 2008, the line of credit was reduced to
$415 million. On December 9, 2008, the lender under this facility provided a waiver of previous defaults and
forbearance with respect to future defaults relating to our inability to fund the specified loan purchase commitments.
To obtain this waiver, we agreed to amend the credit agreement to extend the maturity date on this line to March 5,
2009; increase the collateral coverage from 101%, to 103.5%; and increase the interest rate beginning November 1,
2008 from LIBOR plus 0.3% to LIBOR plus 0.75%; among other changes. On March 5, 2009, this line of credit
was extended to March 5, 2010. The lender’s remedies are limited solely to the student loans and other assets in
trust, securing the line of credit.

Similarly, events of default were triggered on a $175 million unsecured line of credit used for operations (of which
$80.0 million was outstanding at March 31, 2009) due to our inability to fund the student loan purchase
commitments and the occurrence of the material adverse changes referred to above. The default related to the TERI
bankruptcy, together with our defaults under the $500 million secured line of credit facility referred to above, and
the $10 million facility referred to below, also triggered a cross-default provision under this line of credit. Effective
September 8, 2008, the unsecured line of credit was reduced to $94 million. We agreed with the provider of this
financing to restructure the debt on December 15, 2008 in exchange for a waiver of past defaults and a conditional
forbearance with respect to future defaults relating to our inability to fund the specified student loan purchase
commitments. Under the new terms, we will make scheduled payments of the debt to amortize it completely by June
30, 2011, and we granted a security interest in otherwise unencumbered assets to secure this previously unsecured
line, among other changes.

Similarly, the events discussed above triggered events of default and cross defaults on a $10 million capital
financing line (of which $8.0 million was outstanding at March 31, 2009). On December 2, 2008, the provider of
this financing waived the events of default and amended the credit agreement such that defaults under our $500
million secured line of credit and any defaults relating to our future inability to fund the specified student loan
purchase commitments would not constitute events of default under this line.

Of the $52.2 million of TERI-guaranteed private loans we held as of March 31, 2009, $18.9 million were in school
and deferment, and $32.0 million were current. Delinquencies were as follows: $151 thousand 31-60 days
delinquent, $240 thousand 61-90 days delinquent, $161 thousand 91-120 days delinquent, $73 thousand 121-180
days delinquent, $59 thousand 181-270 days delinquent, $605 thousand in claims filed and awaiting payment, and
$19 thousand in rejected claims. We have recorded a $737 thousand provision for loan losses related to these
amounts.

As of March 31, 2009, we serviced $707.4 million of loans owned by a Lehman Brothers subsidiary, Campus Door,
which has ceased operations. For the nine months ended March 31, 2009, servicing revenues related to these loans
totaled $1.7 million. As of March 31, 2009, Campus Door owed us $208 thousand for servicing revenues billed, but
unpaid. As of April 20, 2009, Campus Door paid the above outstanding amounts in full. We expect to continue to
bill and collect servicing revenues related to this portfolio.

7
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

These events as well as changes in federal law have adversely affected our operations and our ability to continue to
fund public service initiatives. A recap of significant public service initiatives, changes in federal law, and changes
we have taken to react to reduced revenues follows.

In March 2005, the board of directors adopted a resolution directing that beginning July 1, 2005, an amount up to
$55 million be used to supplement the State Grant Program as part of its Grants and Infrastructure for Tomorrow’s
Students Initiative. The supplement was to increase by $7.5 million annually for years beginning July 1, 2006
through July 1, 2009 barring an unforeseen economic or regulatory change. In November 2006, the board of
directors adopted a resolution to extend the supplement for years beginning July 1, 2010 through July 1, 2011. These
amounts were to be used to help meet the needs of Pennsylvanians seeking higher education opportunities and to
assist in the implementation of the recommendations of the State Grant Task Force. Through March 31, 2009, we
have supplemented the State Grant Program by $138.4 million and provided $27.3 million through the Workforce
Advancement Grant for Education Program related to this initiative.

On September 27, 2007, the President signed the College Cost Reduction and Access Act (“Act”) into law. This Act
was generally effective October 1, 2007 and caused, or will cause, the following reductions in operating revenue.

ƒ For Stafford and Consolidation loans first disbursed on or after October 1, 2007, special allowance
payments to us are 0.4% lower.
ƒ For PLUS loans first disbursed on or after October 1, 2007, special allowance payments to us are 0.7%
lower.
ƒ For all loans first disbursed on or after October 1, 2007, lender origination fees paid to ED increased from
0.5% to 1.0%.
ƒ Effective October 1, 2007, retention of collections on defaulted loans decreased from 23% to 16%.
ƒ Effective October 1, 2007, the account maintenance fee received from ED for outstanding loan guarantees
decreased from 0.1% to 0.06%.
ƒ Effective October 1, 2007, the exceptional performer section of the law was eliminated.
ƒ Effective October 1, 2012, lender insurance for loans first disbursed on or after October 1, 2012 will
decrease from 97% to 95%.
ƒ Effective July 1, 2010, the Parent PLUS Program will be converted to an auction.

On October 19, 2007, because of the passage of the Act, the board of directors adopted a resolution reducing the
supplement to the State Grant Program to $35 million and eliminating funding of the Workforce Advancement
Grant for Education and other financial aid programs for the fiscal year ending June 30, 2009. On April 24, 2008,
due to the above-described capital market developments, the board of directors adopted a resolution eliminating
funding of the supplement to the State Grant Program and other financial aid programs if the board determines that
funding is not available for these programs.

On January 24, 2008, the board of directors adopted a resolution discontinuing annual cash donations to the
Pennsylvania Higher Education Foundation (PHEF), and reducing the amount provided for ongoing operational
support to $300 thousand annually through May 31, 2012 and thereafter until further action of the board.

On April 24, 2008, management announced a workforce optimization program to better support our changing
business needs and to realize greater efficiencies. The program, open to all non-union employees, allowed
participants to receive a one-time cash payout, which was calculated based upon salary and longevity for electing to
voluntarily depart from the Agency. The last day employees could elect to participate in the program was June 23,
2008. Based on the participation in the program, this effort is expected to net annual savings of $20 million.

8
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

On May 7, 2008, President Bush signed H.R. 5715, titled “Ensuring Continued Access to Student Loans Act of
2008,” into law. Among the provisions, the law:

ƒ Increases annual and aggregate Stafford loan limits for loans first disbursed on or after July 1, 2008
ƒ Adds requirements to the Secretary of Education while operating under the Lender of Last Resort (LLR)
program
ƒ Temporarily authorizes the Department to purchase FFELP loans originated on or after October 1, 2003;
however, the Department has chosen to implement a plan which only purchases loans originated on or after
July 1, 2008.

The plan provides lenders with a loan purchase commitment and access to immediate short-term liquidity for new
loans originated for the 2008-09 academic year. Lenders can hold and service loans and enter into agreements to sell
loans to the Department. These participation interests are priced to yield the Department the commercial paper rate
plus 50 basis points. We have indicated our intent to participate, however we are not obligated to do so.

On August 14, 2008, President Bush signed into law H.R. 4137, the Higher Education Opportunity Act. This law
continues Congress’s efforts to make college more affordable and accessible by enacting the following:

ƒ Holds colleges and universities accountable by requiring greater disclosure in costs

ƒ Protects students from aggressive marketing practices by lenders
ƒ Simplifies the federal student aid application process
ƒ Allows students to receive Pell Grant scholarship aid year round
ƒ Increases college aid and support for veterans and military families
ƒ Expands loan forgiveness program
ƒ Amends Truth in Lending Act to prevent unfair and deceptive lending practices

On October 7, 2008, President Bush signed into law H.R. 6889, which amends H.R. 5715 above. H.R. 6889 amends
the Higher Education Act of 1965 to extend by one year, from July 2009 to July 2010, the Secretary of Education's
authority to purchase, or enter into forward commitments to purchase, Federal Family Education Loans (FFELs)
from lenders upon the determination that there is an inadequate availability of loan capital to meet the demand for
such loans. Also, H.R. 6889 extends by one year, from June 30, 2009 to June 30, 2010, the authority of institutions
of higher education (IHEs), with the Secretary's approval, to participate in the FFEL lender-of-last-resort program
for borrowers otherwise unable to obtain such loans; thereby requiring guaranty agencies serving as lenders-of-last-
resort to make FFELs to student and parent borrowers of such IHEs, until such date, regardless of their ability to
otherwise obtain such loans.

Background Information

We are a public corporation and government instrumentality created by the Pennsylvania General Assembly and our
mission is to improve higher education opportunities for Pennsylvanians. Doing business as American Education
Services, we provide financial aid services serving students, families, schools, lenders, and other student financial
aid providers. To fulfill our mission we distribute grants; originate, purchase, and sell student loans; administer the
guaranteed student loan program on behalf of the federal government; service student loans; and provide
information technology services. To serve Pennsylvanians effectively, we operate both inside and outside
Pennsylvania.

Instead of using taxpayer money to support our administration, we manage our business activities to deliver
financial aid as well as to provide additional public service benefits.

9
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

For the nine months ended March 31 (in thousands) 2009 2008

Self-funded $
Federal default fees paid on behalf of borrowers 25,511 34,328
Costs of operating state and federal governmental programs 10,897 13,576
Keystone loan program origination fees and benefits paid on behalf of
borrowers 1,682 17,139
Funding and support of The Pennsylvania Higher Education Foundation, Inc. 311 1,595
Armed Forces Loan Forgiveness Program 31 2,435
Academic Excellence Scholarship (2) 4,099
State Grant Program supplement - 31,266
Workforce Advancement Grant for Education (687) 10,113
Other public service activities and outreach 4,443 8,811

42,186 123,362

Financial support funded by our business partners

Keystone loan program origination fees and benefits paid on behalf of
borrowers 572 17,701

$ 42,758 141,063

Effective July 1, 2006, guarantors are required to deposit a 1% federal default fee into the Federal Fund for new
Stafford and PLUS loans as guaranteed loans are disbursed; however, guarantors are not required to assess the fee to
borrowers, which PHEAA had paid on behalf of borrowers until December 31, 2008. On October 2, 2008,
management announced the suspension of paying the federal default fee on behalf of borrowers for loans guaranteed
on or after January 1, 2009.

We administer state and federal governmental programs at no cost to taxpayers to ensure that every appropriated
dollar goes directly to students and their families.

Under the Keystone family of loan programs, we provided a Keystone Stafford loan for Pennsylvania students with
family incomes of less than $21,000. For Keystone Stafford loans, we paid the 1% federal default fee on behalf of
the borrower. Federally required origination fees of 1.5% were paid on loans originated prior to July 1, 2008. For
Keystone Stafford loans disbursed between July 1, 2007 and October 31, 2007, we provided a 2% interest rate
reduction after 36 on-time payments, a 2% graduation credit, a 0.50% credit after 24 on-time payments and a 0.25%
interest rate reduction for automatic direct debit of payment. For Keystone Stafford loans disbursed on or after
November 1, 2007, we provided a 0.25% interest rate reduction for automatic direct debit of payment. We also
provided a KeystoneBEST and a KeystonePLUS loan for other students. For KeystoneBEST loans, we paid the
entire 1% federal default fee on behalf of the borrower. Federally required origination fees of 1.5% were paid on
loans originated prior to July 1, 2008. For KeystoneBEST loans disbursed between July 1, 2007 and October 31,
2007, we provided a 1% graduation credit, a 2% interest rate reduction after 36 consecutive on-time payments, a
0.50% credit for 24 on-time payments and a 0.25% interest rate reduction for automatic direct debit of payment. For
KeystoneBEST loans disbursed on or after November 1, 2007, we provided a 0.25% interest rate reduction for
automatic direct debit of payment. For KeystonePLUS loans disbursed between July 1, 2007 and October 31, 2007,
we provided a 0.60% immediate interest rate reduction, a 1% rebate of the loan amount for the first 24 consecutive
on-time payments, an additional 1% rebate after 48 consecutive on-time payments, and a 0.25% interest rate
reduction for automatic direct debit of payment. For KeystonePLUS loans disbursed on or after November 1, 2007,
we provided a 0.60% immediate interest rate reduction, an additional 0.50% rebate after 12 consecutive on-time
payments, and a 0.25% interest rate reduction for automatic direct debit of payment.

10
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

Through the 2007-08 academic year, we supplemented the State Grant Program as part of our Grants and
Infrastructure for Tomorrow’s Students Initiative to help meet the needs of Pennsylvanians seeking higher education
opportunities.

Through the 2007-08 academic year, we provided grants to participating postsecondary institutions to assist
Pennsylvania adult students who have demonstrated financial need and are ineligible for a State Grant through the
Workforce Advancement Grant for Education Program

We also developed other programs, which included:

ƒ Academic Excellence Scholarship Award Program through which we provided grants of $1,500 for
Pennsylvanians who have both high academic potential and demonstrated financial need.
ƒ Armed Forces Loan Forgiveness Program through which we forgave up to $2,500 of student loan principal
to borrowers who served in the armed forces in an active duty status since September 11, 2001.
ƒ Nursing Loan Forgiveness for Healthier Futures Program through which we forgave up to $12,500 or 25%
of eligible student loan principal over three years of qualifying employment at a participating Pennsylvania
healthcare facility or participating Pennsylvania postsecondary educational institution.
ƒ Quality Early Education Loan Forgiveness Program through which we forgave up to $3,300 per year of
eligible student loan principal for up to three years for qualified childcare employees.

We administer various grant programs to help students pursuing higher education. The most significant programs
are funded by the Commonwealth of Pennsylvania and are as follows:

ƒ The State Grant Program provides grants up to $4,700 to students based upon financial need.
ƒ The Institutional Assistance Grants Program provides grants to independent postsecondary education
institutions to make sure both public and independent postsecondary institutions are viable in the
Commonwealth.
ƒ The Matching Funds Program provides financial assistance to higher education institutions to assist them in
capturing federal funds that require a state or local match as part of the federal grant award.
ƒ The New Economy Technology Scholarship Program provides financial assistance grants up to $3,000 to
students enrolled in a postsecondary science or technology program approved by the Pennsylvania
Department of Education.

We support The Pennsylvania Higher Education Foundation, Inc., (“PHEF”) which is a tax-exempt organization that
supports postsecondary education. PHEF created the Nursing Education Grant Program and disbursed $15.6 million
of grants during its most recent fiscal year ended May 31, 2008.

Finally, we fund other public service and outreach initiatives to ensure students are aware of the financial aid
opportunities available to them and to avert student loan defaults.

As part of our guaranty operations, we manage the Federal Student Loan Reserve Fund (“Federal Fund”) for the
U.S. Department of Education (“ED”). The Federal Fund is primarily used to pay claims on defaulted loans.

Our operations involved in originating, purchasing, selling, guaranteeing, and servicing student loans generally
operate under FFELP although we also originate, purchase, and service loans that are not part of FFELP. FFELP is
the federal program that allows undergraduate or graduate students at eligible postsecondary schools to obtain low-
cost loans.

11
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

Currently, there are four types of FFELP loans:

ƒ Subsidized Stafford – the federal government pays the interest on these loans while the student is in school,
during the grace period, and during deferments.
ƒ Unsubsidized Stafford – the student is responsible for all interest.
ƒ Parent Loan for Undergraduate Students (“PLUS”) – supplemental loans to parents and graduate students.
ƒ Consolidation – loans that allow borrowers to combine Stafford and certain other education-related loans,
fix the rate of interest, and extend the repayment period.

The interest rate charged to the borrower varies based upon the type of loan and regulations in effect at the time that
the loan was originated.

ED makes or receives interest subsidy and special allowance payments that we account for as interest revenue
(expense). These payments generally result in the loan yield to the lender being higher than the rate charged to
borrowers and the loan yield being variable regardless of whether the rate paid by the borrower is variable or fixed.
The amount of interest subsidy and special allowance payments also varies based upon the type of loan and
regulations in effect at the time that the loan was originated. For the three months ended March 31, 2009, interest
subsidy and special allowance payment expenses were $18.9 million compared revenues of $39.4 million in 2008
and $81.9 million in 2007. For the nine months ended March 31, 2009, interest subsidy and special allowance
payment revenues were $31.5 million compared to $206.8 million in 2008 and $246.4 million in 2007. In 2008 and
2009, interest subsidy and special allowance payments decreased primarily due to the decreases in the 91-day U.S.
Treasury Bill and 3-month financial commercial paper rates.

The minimum special allowance payment rates for loans made on or after October 1, 1980 and financed with
proceeds from tax-exempt obligations issued before October 1, 1993 effectively provided an overall minimum return
of 9.5% on those loans, which was 1.7% above the average return earned on other student loans during the three
months ended September 30, 2006. Such loans amounted to $1.3 billion at September 30, 2006. Effective February
8, 2006, The Deficit Reduction Act of 2005 prohibited the recycling of tax-exempt funds issued before October 1,
1993 into new loans earning the 9.5% minimum return. On January 23, 2007, ED issued Dear Colleague Letter FP-
07-01 (DCL FP-07-01) restating the requirements of the statute and regulations that control whether these loans are
eligible for special allowance payments at the 9.5% minimum return rate. On January 24, 2007, ED stated that they
would pay special allowance payments at the standard rate on these loans until receiving the results of an audit
proving that the loans included in the December 31, 2006 billing met the 9.5% billing requirements. On April 27,
2007, ED issued DCL FP-07-06 providing audit requirements with which FFELP lenders must comply to receive
special allowance payments at the minimum 9.5% rate. We are currently engaged in the audit process with ED’s
auditors to identify those loans that meet the new requirements to receive the 9.5% minimum rate, which could
result in additional earnings. Earnings recorded under this provision amounted to $5.7 million for the three months
ended September 30, 2006 and we have not recorded any earnings under this provision after September 30, 2006.

FFELP regulations require up-front origination fees to be deducted from the proceeds of student loans and remitted
to the federal government. These fees decreased from 2% in 2006 to 1.5% in 2007 to 1.0% in 2008, and will
decrease by an additional 0.5% every year until they are 0% effective July 1, 2010.

In the past, we purchased student loans related to the Health Education Assistance Loan (“HEAL”) Program. Under
the HEAL Program, borrowers pay interest at a variable-rate reset quarterly based upon the 91-day U.S. Treasury
Bill plus a spread of up to 3%. The actual limit on the spread in effect for an individual loan is based upon the
contract in effect with the U.S. Department of Health and Human Services at the time the loan was originated.

For our guaranty activities, ED pays us a loan processing and issuance fee that is 0.40% for loans we guarantee as
the loan is disbursed; however, the fee is not paid on new consolidation loans. ED also pays us an annual account
maintenance fee that is 0.06% of the original principal amount of loans guaranteed as long as the guarantee remains
in force. Before October 1, 2007, the annual account maintenance fee received from ED for outstanding loan
guarantees was 0.10%.

12
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

Our major function as a guarantor is to use the Federal Fund to guarantee 98% - 97% of borrower’s outstanding loan
balance if the borrower fails to pay the loan. Under federal regulations, we must manage the Federal Fund so that
there is enough money to pay lenders when their normal collection efforts fail. The federal government reinsures the
Federal Fund, and reinsurance rates vary based upon default rates of our portfolio of guaranteed loans and based
upon the date the loan was disbursed as follows:

ƒ Disbursed before October 1, 1993 80% – 100%

ƒ Disbursed between October 1, 1993 and September 30, 1998 78% – 98%
ƒ Disbursed on or after October 1, 1998 75% – 95%

Our default rate has always been at a level that allowed us to receive the maximum reinsurance rate. In the past, we
were permitted to charge a guarantee fee of up to 1% when we guaranteed a loan; however, we had not charged a fee
in recent years. Effective July 1, 2006, guarantors are required to deposit a 1% federal default fee into the Federal
Fund for new Stafford and PLUS loans as guaranteed loans are disbursed. Guarantors are not required to assess the
fee to borrowers. The fee we pay on behalf of borrowers is reported in grants and other financial aid. On October 2,
2008, management announced the suspension of paying the federal default fee on behalf of borrowers for loans
guaranteed on or after January 1, 2009.

After a loan defaults, we continue to try to collect the amounts and we are allowed to retain up to 16% of the
borrower’s payments collected as revenue. The remaining amount is returned to the federal government. We also
receive rehabilitation payments, which we retain 18.5% of the original principal balance, 100% of the collection
costs (capped at 18.5% of principal and accrued interest) and 100% of accrued interest collected as revenue. Before
October 1, 2007, retention of collections on defaulted loans was 23%.

We also earn default aversion fees as an incentive to help us prevent defaults. These fees are paid from the Federal
Fund and must be repaid if the loan defaults in the future. Since January 1, 2008, we have not recognized any
default aversion fee revenue, as the amounts owed by the Federal Fund for default aversion fee activities are not
expected to be paid by the Federal Fund.

Forward-looking Statements

This financial report contains statements relating to future results that are considered “forward-looking statements.”
These statements relate to, among other things, risk-sharing losses, servicing losses, simulation of changes in interest
rates, litigation results, changes in law and regulations, and the adoption of new accounting standards. These
forward-looking statements are based on assumptions that involve risks and uncertainties and that are subject to
change based on various important factors (some of which are beyond our control). Actual results may differ
materially from those expressed or implied as a result of these risks and uncertainties, including, but not limited to,
interest rate fluctuations; changes in political and economic conditions; competitive product and pricing pressures
within our markets; market fluctuations; the effects of adopting new accounting standards; inflation; technological
change; changes in law; changes in fiscal, monetary, regulatory, and tax policies and laws; success in gaining
regulatory approvals when required; success in the timely development of new products and services; as well as
other risks and uncertainties. Such forward-looking statements speak only as of the date on which such statements
are made, and we undertake no obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

13
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

Description of the Basic Financial Statements

The statements of revenues, expenses, and changes in net assets report our revenues and expenses. The statements
measure the results of our operations.

The statements of net assets include recorded assets and liabilities. Assets are what we own or control, and liabilities
are what we owe. Net assets are what are left over after assets are used to satisfy liabilities.

The statements of cash flows supplement these statements providing relevant information about cash receipts and
payments.

The notes to the financial statements are an integral part of the financial statements and contain important
information necessary to get a complete view of our finances.

Because we are financed and operated in a manner similar to private business enterprises, we are accounted for as an
enterprise fund and follow the economic resources measurement focus and accrual basis of accounting. Revenues
are recorded when earned and expenses are recorded at the time liabilities are incurred, regardless of when the
related cash flows take place. While private business enterprises follow the accounting guidance issued by the
Financial Accounting Standards Board (“FASB”), we follow the guidance issued by the Governmental Accounting
Standards Board (“GASB”). As encouraged by the GASB we have elected not to follow FASB pronouncements
issued after November 30, 1989 to be consistent with the accounting practices of the Commonwealth.

14
 Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

Condensed Financial Information

Statements of Revenues, Expenses, and Changes in Net Assets

Three months ended, Nine months ended,

March 31, March 31,
(In thousands) 2009 2008 2009 2008

Student loan interest revenue $ 65,549 137,459 289,950 492,764

Investment interest revenue 468 1,547 4,078 18,931
Interest expense on student loan financings and
notes and bonds payable (68,633) (180,353) (281,736) (511,266)
Interest expense on capital and other financings (2,898) (2,928) (8,998) (9,993)

Net interest revenue (expense) (5,514) (44,275) 3,294 (9,564)

Provision for loan losses (902) (2,174) (3,019) (11,884)

Net interest revenue (expense) after provision

for loan losses (6,416) (46,449) 275 (21,448)

Servicing fees 39,296 32,541 119,162 97,432

Retention of collections on defaulted loans 21,984 18,875 78,386 69,322
Federal fees 13,274 13,789 36,238 42,715
Default aversion fees, net (42) 3,363 (1,337) 8,181
Residual interest, net 210 (14,648) 5,104 (15,252)
Gains on student loan sales, net 3 - 3 5
Other 30 62 339 201

Total noninterest revenue 74,755 53,982 237,895 202,604

Operating revenues 68,339 7,533 238,170 181,156

Operating expenses (62,833) (68,632) (194,940) (216,639)

Operating income (loss) 5,506 (61,099) 43,230 (35,483)

Commonwealth of Pennsylvania grants 41,311 51,298 463,782 445,317

Federal grants 1,980 - 7,696 6,498
Grants and other financial aid (186,373) (223,728) (439,765) (551,340)
Grant funds returned to the Commonwealth of
Pennsylvania (8) (178) (14,939) (265)
Contributions to Pennsylvania Higher Education
Foundation (77) 4 (311) (1,595)

Changes in net assets $ (137,661) (223,703) 59,693 (136,868)

15
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

Statements of Net Assets

March 31, June 30,
(In thousands) 2009 2008

Student loans receivable, net $ 11,415,206 11,830,205

Cash, cash equivalents, and investments, substantially restricted 555,885 428,742
Interest revenue receivable 210,112 255,837
Capital assets, net 61,471 69,137
Federal Student Loan Reserve Fund assets held for the U.S. Department of
Education 120,936 139,874
Other 195,757 186,266

Total assets 12,559,367 12,910,061

Student loans financings and notes and bonds payable, net 11,602,571 11,962,537
Capital and other financings 222,984 238,407
Amounts related to the Federal Student Loan Reserve Fund 120,936 139,874
Other 208,577 224,637

Total liabilities 12,155,068 12,565,455

Net assets
Invested in capital assets, net of related debt (15,552) (7,500)
Restricted for debt service 228,870 256,326
Restricted for financial aid grant programs 82,053 40,259
Unrestricted 108,928 55,521

Total net assets $ 404,299 344,606

16
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

Results of Operations
Nine months ended March 31

$350,000

$250,000

$150,000
(In thousands)

$50,000

($50,000)

($150,000)

($250,000)
2007 2008 2009

Net interest revenue (expense) Noninterest revenue

Operating expenses Operating income (loss)

Operating income for the three months ended March 31, 2009 was $5.5 million, a 109.0% increase from an
operating loss of $61.1 million in 2008, which was a 274.8% decrease from operating income of $36.1 million in
2007. Operating revenues were $68.3 million in 2009, an 810.7% increase from $7.5 million in 2008. In 2008,
operating revenues decreased 94.9% from $108.0 million in 2007. Net interest expense after provision for loan
losses was $6.4 million in 2009, an 86.2% decrease from net interest expense after provision for loan losses of $46.4
million in 2008, which was principally due to settling interest rates. In 2008, net interest expense after provision for
loan losses decreased 251.1% from net interest revenue after provision of loan losses of $30.7 million in 2007.
Noninterest revenue was $74.8 million in 2009, a 38.5% increase from $54.0 million in 2008, which is due to
decreases in the residual interest in off-balance sheet securitizations and increases in servicing fees. In 2008,
noninterest revenue decreased 30.1% from $77.3 million in 2007. Operating expenses were $62.8 million in 2009,
an 8.5% decrease from $68.6 million in 2008, which is primarily due to decreases in personnel and benefit costs. In
2008, operating expenses decreased 4.6% from $71.9 million in 2007.

Operating income for the nine months ended March 31, 2009 was $43.2 million, a 221.7% increase from an
operating loss of $35.5 million in 2008, which was a 134.9% decrease from operating income of $101.8 million in
2007. Operating revenues were $238.2 million in 2009, a 31.5% increase from $181.2 million in 2008. In 2008,
operating revenues decreased 42.7% from $316.2 million in 2007. Net interest revenue after provision for loan
losses was $275 thousand in 2009, a 101.3% increase from net interest expense after provision for loan losses of
$21.4 million in 2008, which was principally due to settling interest rates. In 2008, net interest expense after
provision for loan losses decreased 120.6% from net interest revenue after provision of loan losses of $103.9 million

17
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

in 2007. Noninterest revenue was $237.9 million, a 17.4% increase from $202.6 million in 2008, primarily due to
decreases in the residual interest in off-balance sheet securitizations. In 2008, noninterest revenue decreased 4.6%
from $212.4 million in 2007. Operating expenses were $194.9 million in 2009, a 10% decrease from $216.6 million
in 2008, primarily due to decreases in personnel and benefit costs. In 2008, operating expenses increased 1.0% from
$214.4 million in 2007.

A more detailed explanation of these items follows.

Net Interest Revenue (Expense)

Nine months ended March 31

$600,000

$400,000

$200,000
(In thousands)

$0

($200,000)

($400,000)

($600,000)
2007 2008 2009

Interest revenue Interest expense Net interest revenue (expense)

Net interest revenue (expense) is created largely from the interest rate margin in our portfolio of student loans,
although we have investments and debt that are not related to student loans. For the three months ended March 31,
2009, net interest expense was $5.5 million, an 87.6% decrease from net interest expense of $44.3 million in 2008,
which was a 239.3% decrease from net interest revenue of $31.8 million in 2007. For the nine months ended March
31, 2009, net interest revenue was $3.3 million, a 134.4% increase from net interest expense of $9.6 million in 2008,
which was a 109.1% decrease from net interest revenue of $106.0 million in 2007. The changes in net interest
margin are explained below.

In August 2007, disruptions in the capital markets began affecting the pricing of $7.4 billion of auction rate debt
securities that finance our portfolio of student loans. In February 2008, a decline in investor demand in the auction-
rate debt market caused auctions to fail. The failure of an auction does not constitute a default on the bonds, and all
principal and interest has been paid when due on the outstanding bonds. Upon the occurrence of a failed auction,
bondholders are entitled to receive a maximum rate as described in the related auction procedures.

18
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

In January 2008, a downgrade of Ambac’s credit rating and negative market sentiment contributed to adverse
pricing of $1.8 billion of our tax-exempt variable-rate demand notes that Ambac insures. On February 6, 2009,
Moody’s downgraded $1.8 billion of our variable rate demand bonds. These bonds are guaranteed by Ambac whose
financial strength rating is Baa1. On February 23, 2009, Moody’s downgraded the bonds within the $7.4 billion
auction rate securities from Aaa to A3 and A1 to Baa3. On April 3, 2009, Moody’s placed $225 million of the
variable rate demand bonds on review for possible downgrade in the future.

Due to the February 23, 2009 Moody’s downgrade of the $7.4 billion auction rate securities, the formula changed
for the failed auction-rate securities. The maximum auction rates payable on auction rate securities are based upon
bond agreements, and were generally at 91-day U.S. Treasury Bill rates plus 1.5% or 1.75%, or one-month LIBOR
rates plus 1% or 2% for the one-year period ending on the auction date although there are other formulas for some of
the auction rate securities. While we continue to assess the situation, there is no timetable or restructuring plan for
these securities at this time.

As of March 31, 2009, there was $1.6 million of variable-rate demand bonds that were put to the liquidity provider
and are in bank bond mode with interest rates ranging from 1-month LIBOR plus 1.75% to prime rate plus 2.0%.
As of May 12, 2009, there was $1.6 billion of variable-rate demand bonds that were put to the liquidity provider and
are in bank bond mode with interest rates ranging from 1-month LIBOR plus 1.75% to prime rate plus 2.0%.

The combination of these adverse market conditions resulted in increased interest expense while earnings on student
loan holdings, based upon 3-month financial commercial paper rates, decreased.

The following table shows the average rates earned on interest earning assets and the average rates paid on interest
bearing liabilities.

For the three months ended March 31 2009 2008

(Balances in thousands) Balances Rate Balances Rate

Average interest earning assets

Student loans receivable, net $ 11,719,065 2.24% 11,799,012 4.66%
Investments 533,441 0.35% 631,424 0.98%

$ 12,252,506 2.16% 12,430,436 4.47%

Average interest bearing liabilities

Student loan financings and notes and
bonds payable $ 11,856,120 2.32% 12,017,375 6.00%
Capital and other financings 235,829 4.92% 222,392 5.27%

$ 12,091,949 2.37% 12,239,767 5.99%

Net interest margin (0.21)% (1.52)%

19
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

For the nine months ended March 31 2009 2008

(Balances in thousands) Balances Rate Balances Rate

Average interest earning assets

Student loans receivable, net $ 11,770,250 3.28% 11,666,557 5.63%
Investments 500,904 1.09% 687,866 3.67%

$ 12,271,154 3.19% 12,354,423 5.52%

Average interest bearing liabilities

Student loan financings and notes and
bonds payable $ 11,902,653 3.16% 11,962,548 5.70%
Capital and other financings 238,526 5.03% 209,740 6.35%

$ 12,141,179 3.19% 12,172,288 5.71%

Net interest margin 0.00% (0.19)%

The following table shows the net interest margin on student loans.

Three months ended Nine months ended

March 31, March 31,
2009 2008 2009 2008

Student loan yields 3.47% 5.98% 4.54% 6.96%

Consolidation loan rebate fees (0.68) (0.71) (0.68) (0.71)
Lender origination fees (0.10) (0.11) (0.10) (0.10)
Premium amortization (0.46) (0.51) (0.47) (0.52)

Student loan revenue 2.23 4.65 3.29 5.63

Cost of funds 2.32 6.00 3.16 5.70

Net interest margin on student loans (0.09)% (1.35)% 0.13% (0.07)%

20
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

The following rate/volume analysis shows the relative contribution of changes in interest rates and changes in
volumes to changes in net interest revenue.

Increase (decrease) attributable

to change in
Increase
For the three months ended March 31 (in thousands) (decrease) Rate Volume

2009 vs. 2008

Student loan interest revenue $ (71,910) (70,979) (931)
Investment interest revenue (1,079) (839) (240)

(72,989) (71,818) (1,171)

Student loan financings and notes and bonds payable

interest expense (111,720) (109,300) (2,420)
Capital and other financings interest expense (30) (207) 177

(111,750) (109,507) (2,243)

$ 38,761 37,689 1,072

2008 vs. 2007

Student loan interest revenue $ (21,121) (55,712) 34,591
Investment interest revenue (5,984) (5,398) (586)

(27,105) (61,110) 34,005

Student loan financings and notes and bonds payable

interest expense 48,644 25,489 23,155
Capital and other financings interest expense 321 (346) 667

48,965 25,143 23,822

$ (76,070) (86,253) 10,183

21
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

Increase (decrease) attributable

to change in
Increase
For the nine months ended March 31 (in thousands) (decrease) Rate Volume

2009 vs. 2008

Student loan interest revenue $ (202,814) (207,194) 4,380
Investment interest revenue (14,853) (9,708) (5,145)

(217,667) (216,901) (766)

Student loan financings and notes and bonds payable

interest expense (229,530) (226,970) (2,560)
Capital and other financings interest expense (995) (2,366) 1,371

(230,525) (229,337) (1,188)

$ 12,858 12,435 423

2008 vs. 2007

Student loan interest revenue $ 23,849 (84,485) 108,334
Investment interest revenue (10,785) (11,820) 1,035

13,064 (96,305) 109,369

Student loan financings and notes and bonds payable

interest expense 126,490 41,519 84,971
Capital and other financings interest expense 2,182 784 1,398

128,672 42,302 86,370

$ (115,608) (138,607) 22,999

While the amount that we earn on student loans involves interpreting and complying with complicated regulations
issued by ED, our portfolio of student loans generally consists of variable-rate loans. 4% of the variable-rate loans
change based upon changes in the 91-day U.S. Treasury Bill rate, and 96% change based upon changes in 3-month
financial commercial paper rate. The rates paid by borrowers are set under a different formula and generally reset
annually on July 1. The rate paid by borrowers for loans originated on or after July 1, 2008 is fixed at 6.0%.

22
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

Provision for Loan Losses

Currently, when a FFELP loan defaults, the federal government reimburses the guaranty agency for 95% of its
losses on default claim payments on loans first disbursed on or after October 1, 1998. The guaranty agency
guarantees 97% of the unpaid principal balance for loans first disbursed on or after July 1, 2006, so the holder of the
loan must absorb the remaining 3% not guaranteed as a risk sharing loss on the loan.

Previously, we were designated as an Exceptional Performer by ED in recognition of meeting certain performance

standards set by ED in servicing FFELP loans. Because of this designation, we received 99% reimbursement on all
eligible FFELP default claims submitted for reimbursement on or after July 1, 2006 and before October 1, 2007,
because we remained in compliance with the required standards, which were assessed annually and quarterly
through compliance audits. The ratification of the College Cost Reduction and Access Act on September 27, 2007
eliminated the Exceptional Performer program, resulting in an increase of $9.1 million in the provision for loan
losses for the nine months ended March 31, 2008.

The provision for loan losses represents our estimate of the costs related to the risk sharing on FFELP loans we own.
In making our estimates, we consider the trend in default rates in our portfolio and changes in economic conditions.
We believe the provision for loan losses is adequate to cover inherent losses in the student loan portfolio. An
analysis of our allowance for loan losses is presented in the following table.

Three months ended Nine months ended

March 31, March 31,
(In thousands) 2009 2008 2009 2008

Balance at beginning of period $ 10,287 10,602 11,343 2,728

Provision for losses 902 2,174 3,019 11,884
Charge-offs (1,574) (1,490) (4,747) (3,326)

Balance at end of period $ 9,615 11,286 9,615 11,286

Allowance as a percentage of ending

balance of student loans 0.09% 0.10% 0.09% 0.10%

23
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

Noninterest Revenue

Servicing Fees
Nine months ended March 31

$140,000

$120,000

$100,000
(In thousands)

$80,000

$60,000

$40,000

$20,000

$0
2007 2008 2009

For the three months ended March 31, 2009, servicing fees were $39.3 million, a 20.9% increase from $32.5 million
in 2008, which was a 17.8% increase from $27.6 million in 2007. In 2009, servicing fees increased due to increased
volume of loans serviced. Loans serviced by us for participating financial institutions during the three months ended
March 31, 2009 averaged $49.5 billion, compared to $44.0 billion in 2008 and $38.4 billion in 2007.
For the nine months ended March 31, 2009, servicing fees were $119.2 million, a 22.4% increase from $97.4 million
in 2008, which was a 15.3% increase from $84.5 million in 2007. In 2009, servicing fees increased due to increased
volume of loans serviced. Loans serviced by us for participating financial institutions during the nine months ended
March 31, 2009 averaged $48.4 billion, compared to $41.8 billion in 2008 and $36.8 billion in 2007.

We also provide systems for other servicers and guarantors for a fee. For the three months ended March 31, 2009,
fees earned from servicing systems amounted to $4.0 million, a 2.4% decrease from $4.1 million in 2008, which was
a 24.2% increase from $3.3 million in 2007. For the nine months ended March 31, 2009, fees earned from servicing
systems amounted to $11.1 million, an 8.8% increase from $10.2 million in 2008, which was an 18.6% increase
from $8.6 million in 2007. For the nine months ended March 31, 2009, loans serviced by other servicers using our
systems averaged $34.1 billion, a 5.2% increase from $32.4 billion in 2008, which was a 35.0% increase from $24.0
billion in 2007.

24
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

For the three months ended March 31, 2009, fees earned from guaranty systems amounted to $392 thousand, a
56.8% increase from $250 thousand in 2008, which was a 6.4% decrease from $267 thousand in 2007. For the nine
months ended March 31, 2009, fees earned from guaranty systems amounted to $1.0 million, a 16.4% increase from
$859 thousand in 2008, which was an increase of 0.4% from $856 thousand in 2007. For the nine months ended
March 31, 2009, original principal amount outstanding for guarantors using our systems averaged $4.3 billion, a
10.3% increase from $3.9 billion in 2008, which was an 8.3% increase from $3.6 billion in 2007. Fees earned from
providing systems to other servicers and guarantors are included in total servicing fees discussed above.

Retention of Collections on Defaulted Loans

Nine months ended March 31

$100,000

$80,000

$60,000
(In thousands)

$40,000

$20,000

$0
2007 2008 2009

After a loan defaults, we continue to try to collect on the loan and are allowed to retain up to 16% of the borrower’s
payments collected as revenue. The remaining amount is returned to the federal government. We also receive
rehabilitation payments, which we retain 18.5% of the original principal balance, 100% of the collection costs
(capped at 18.5% of principal and accrued interest) and 100% of accrued interest collected as revenue. Effective
October 1, 2007, the College Cost Reduction and Access Act reduced the retention of collections on defaulted loans
from 23% to 16%.

For the three months ended March 31, 2009, retention of collections on defaulted loans was $22.0 million, a 16.4%
increase from $18.9 million in 2008, which was a 4.1% decrease from $19.7 million in 2007. In 2009, the increase
is due to increasing loan defaults and more aggressive pursuit of rehabilitations. For the three months ended March
31, 2009, retention on rehabilitation collections was $14.0 million, a 30.8% increase from $10.7 million in 2008,
which was a 6.1% decrease from $11.4 million in 2007.

25
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

For the nine months ended March 31, 2009, retention of collections on defaulted loans was $78.4 million, a 13.1%
increase from $69.3 million in 2008, which was a 16.5% increase from $59.5 million in 2007. In 2009, the increase
is due to more aggressive pursuit of rehabilitations. For the nine months ended March 31, 2009, retention on
rehabilitation collections was $54.2 million, a 28.1% increase from $42.3 million in 2008, which was a 20.5%
increase from $35.1 million in 2007.

Federal Fees
Nine months ended March 31

$60,000

$50,000

$40,000
(In thousands)

$30,000

$20,000

$10,000

$0
2007 2008 2009

Account maintenance fees Loan processing and issuance fees

Federal fees are earned from operating the guaranty agency. Under current law, ED pays a loan processing and
issuance fee of 0.40% for loans we guarantee as the loan is disbursed; however, the fee is not paid on new
consolidation loans. ED also pays us an annual account maintenance fee that is 0.06% of the original principal
amount of loans guaranteed as long as the guarantee remains in force. Before October 1, 2007, the account
maintenance fee received from ED for outstanding loan guarantees was 0.10%.

For the three months ended March 31, 2009, federal fees were $13.3 million, a 3.6% decrease from $13.8 million in
2008, which was a 23.3% decrease from $18.0 million in 2007. In 2009, the decrease is due to lower account
maintenance fees as discussed above.

For the nine months ended March 31, 2009, federal fees were $36.2 million, a 15.2% decrease from $42.7 million in
2008, which was a 10.9% decrease from $47.9 million in 2007. In 2009, the decrease is due to the lower account
maintenance fees discussed above. At March 31, 2009, the balance of loans guaranteed was $51.8 billion, compared
to $50.8 billion in 2008.

26
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

Default Aversion Fees

Nine months ended March 31

$21,000

$18,000

$15,000

$12,000
(In thousands)

$9,000

$6,000

$3,000

$0

($3,000)
2007 2008 2009

Default aversion fees are earned when servicers involve guarantors to avert potential defaults and are paid from the
Federal Fund. The fee may only be paid once for a loan and if the loan subsequently does default, the amount must
be returned to the Federal Fund.

For the three months ended March 31, 2009, default aversion fees were a negative $42 thousand, a decrease of
101.2% from $3.4 million in 2008, which was a decrease of 52.1% from $7.1 million in 2007.

For the nine months ended March 31, 2009, default aversion fees were negative $1.3 million, a decrease of 115.9%
from $8.2 million in 2008, which was a 59.0% decrease from $20.0 million in 2007.

As noted above, these fees are paid from the Federal Fund. The decrease in the default aversion fee for the current
year was caused by not recognizing revenue from the default aversion activities since January 1, 2008 due to the
increased doubt about the ultimate collectibility of the default aversion fees from the Federal Fund.

27
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

Residual Interest, net

In a securitization, we sell student loans to a trust that issues bonds backed by the student loans as part of the
transaction. For transactions qualifying as sales, we retain a residual interest, which is recognized on the statements
of net assets as the residual interest in off-balance sheet securitizations. The residual interest is the right to receive
cash flows from the student loans in excess of the amounts needed to pay servicing, administration, and other fees,
as well as, the principal and interest on the bonds backed by the student loans. The residual interest is the present
value of these future expected cash flows. We value the residual interest at the time of sale of the student loans to the
trust and at the end of each subsequent quarter and reflect the change in the value in residual interest, net on the
statements of revenues, expenses, and changes in net assets.

For the three months ended March 31, 2009, an increase in the aggregate carrying value of the residual interest in
off-balance sheet securitizations was $210 thousand compared to decreases of $14.6 million in 2008 and $6.3
million in 2007. For the nine months ended March 31, 2009, an increase in the aggregate carrying value of the
residual interest in off-balance sheet securitizations was $5.1 million compared to decreases of $15.3 million in 2008
and $10.9 million in 2007.

28
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

Operating Expenses

The following table displays operating expenses in more detail.

For the three months ended March 31 (in thousands) 2009 2008
Personnel and Benefits
Compensation $ 25,076 30,691
Health care benefits for employees 4,491 4,898
Health care benefits for retirees including
postemployment benefit expense 4,251 726
Employer’s share of Social Security 1,827 2,219
Independent contractor fees 1,589 1,954
Retirement contributions 782 947
Capitalized loan origination costs - (282)
Capitalized software development costs (668) (1,404)
Other (145) 455
37,203 40,204
Professional services:
Collection agency fees 4,148 4,547
Default aversion outsourcing fees 969 74
Legal fees 692 985
Audit fees 118 407
Other professional fees 257 831
Information technology related expenses 5,114 5,387
Mail services 4,904 5,510
Depreciation 2,787 3,371
Other
Bank fees 1,538 1,483
Building and grounds 1,020 727
Telephone expense 896 1,291
Printing 486 1,264
Utilities 391 475
Office equipment and supplies 247 295
Building security 132 178
Travel and professional development 99 229
Servicing liability 84 952
Vehicle expense 10 (17)
Loss on disposal of assets - -
Advertising expense (31) 623
Donated services to the foundation (77) 3
Other 1,846 (187)
6,641 7,316
$ 62,833 68,632

29
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

For the nine months ended March 31 (in thousands) 2009 2008
Personnel and Benefits
Compensation $ 74,247 90,605
Health care benefits for employees 13,817 14,451
Health care benefits for retirees including
postemployment benefit expense 12,753 11,252
Employer’s share of Social Security 5,785 6,678
Independent contractor fees 4,365 6,746
Retirement contributions 2,458 2,930
Capitalized loan origination costs - (2,106)
Capitalized software development costs (1,876) (3,658)
Other (499) 1,309
111,050 128,207
Professional services:
Collection agency fees 15,224 15,705
Default aversion outsourcing fees 2,577 74
Legal fees 3,203 2,208
Audit fees 797 1,125
Other professional fees 1,742 3,471
Information technology related expenses 15,792 17,192
Mail services 14,316 14,996
Depreciation 8,945 10,155
Other
Bank fees 5,155 4,716
Building and grounds 2,928 3,517
Telephone expense 2,767 3,267
Printing 1,477 2,625
Utilities 1,092 1,314
Office equipment and supplies 776 1,345
Building security 386 654
Travel and professional development 394 1,023
Servicing liability 3,823 4,895
Vehicle expense 63 72
Loss on disposal of assets 653 -
Advertising expense 44 2,595
Donated services to the foundation (311) (1,595)
Other 2,047 (922)
21,294 23,506
$ 194,940 216,639

For the three months ended March 31, 2009, operating expenses were $62.8 million, a decrease of 8.5% from $68.6
million in 2008, which was a 4.6% decrease from $71.9 million in 2007. The decrease is due primarily to a
reduction in personnel and benefit costs.

For the nine months ended March 31, 2009, operating expenses were $194.9 million, a decrease of 10.0% from
$216.6 million in 2008, which was a 1.0% increase from $214.4 million in 2007. The decrease is due primarily to a
reduction in personnel and benefit costs. A more detailed discussion of certain costs follows.

30
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

Personnel and Benefits

For the three months ended March 31, 2009, personnel and benefit costs were $37.2 million, a 7.5% decrease from
$40.2 million in 2008, which was an 8.6% decrease from $44.0 million in 2007. Included in these costs are
healthcare benefits for employees and retirees. For the three months ended March 31, 2009, healthcare benefits for
employees and retirees were $8.7 million, a 55.4% increase from $5.6 million in 2008, which was a 29.1% decrease
from $7.9 million in 2007.

For the nine months ended March 31, 2009, personnel and benefit costs were $111.1 million, a 13.3% decrease from
$128.2 million in 2008, which was a 0.1% increase from $128.1 million in 2007. Included in these costs are
healthcare benefits for employees and retirees. For the nine months ended March 31, 2009, healthcare benefits for
employees and retirees were $26.6 million, a 3.5% increase from $25.7 million in 2008, which was an 8.0% increase
from $23.8 million in 2007.

For the three months ended March 31, 2009, personnel costs relating to capitalized software development and loan
origination costs were $668 thousand, a 60.7% decrease from $1.7 million in 2008, which was a 21.4% increase
from $1.4 million in 2007. For the nine months ended March 31, 2009, personnel costs relating to capitalized
software development and loan origination costs were $1.9 million, a 67.2% decrease from $5.8 million in 2008,
which was a 20.8% increase from $4.8 million in 2007.

Permanent staff makes up 95.9% of the total personnel and benefits costs. For the three months ended March 31,
2009, permanent staff costs were $36.3 million, a 9.0% decrease from $39.9 million in 2008, which was an 8.1%
decrease from $43.4 million in 2007. For the nine months ended March 31, 2009, permanent staff costs were $108.6
million, a 14.6% decrease from $127.2 million in 2008, which was a 0.4% increase from $126.7 million in 2007.
The average permanent staff positions filled were 2,095 for the nine months ended March 31, 2009; a 14.9%
decrease from the 2,462 average permanent staff positions filled for the nine months ended March 31, 2008. This
was a 1.7% decrease from 2,505 average permanent staff positions filled for the nine months ended March 31, 2007.

For the three months ended March 31, 2009, independent contractor costs were $1.6 million, a 20% decrease from
$2.0 million in 2008, which there was no change compared to 2007. For the nine months ended March 31 2009,
independent contracting costs were $4.4 million, a 35.3% decrease from $6.7 million in 2008, which was a 9.7%
increase from $6.2 million in 2007. We generally use independent contractors for specialized services, such as
computer programming. Costs vary based upon changes in computer programming initiatives.

Our workforce consists of union and non-union positions. For union positions, contractual increases are negotiated
and generally include periodic step increases of 2.2%, as well as cost of living adjustments.

Collection Agency Fees

For the three months ended March 31, 2009, collection agency fees were $4.1 million, an 8.9% decrease from $4.5
million in 2008, which was a 36.4% increase from $3.3 million in 2007. For the nine months ended March 31, 2009,
collection agency fees were $15.2 million, a 3.2% decrease from $15.7 million in 2008, which was a 55.4% increase
from $10.1 million in 2007.

31
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

Provision for Servicing Liability

Not meeting servicing regulations can result in losses on the portfolio of loans we own and on the portfolio being
serviced for our customers. We make estimates of what the potential losses are based upon our continuing
evaluation of the loan portfolio, past and anticipated loss experience, current operating information, and changes in
economic conditions. An analysis of our allowance for servicing losses is presented in the following table:

Three months ended Nine months ended

March 31, March 31,
(In thousands) 2009 2008 2009 2008

Balance at beginning of period $ 9,957 9,052 8,172 5,609

Provision for losses 84 952 3,823 4,895
Charge-offs (777) (1,572) (2,731) (2,072)

Balance at end of period $ 9,264 8,432 9,264 8,432

Allowance as a percentage of ending balance of

student loans serviced 0.02% 0.01% 0.02% 0.01%

32
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

Financial Aid Activity

For the three months ended March 31, 2009, grants and other financial aid were $186.4 million, a 16.7% decrease
from $223.7 million in 2008, which was an 11.1% decrease from $251.6 million in 2007. For the nine months ended
March 31, 2009, grants and other financial aid were $439.8 million, a 20.2% decrease from $551.3 million in 2008,
which was a 4.0% decrease from $574.4 million in 2007.

The following table displays financial aid awarded through our various programs.

Three months ended, Nine months ended,

March 31, March 31,
(In thousands) 2009 2008 2009 2008

Self-funded
Federal default fees paid on behalf of borrowers $ 10,216 16,035 25,511 34,328
Keystone loan program origination fees and benefits
paid on behalf of borrowers 419 7,516 1,682 17,139
Guarantee fees that were previously waived on
behalf of borrowers - - 210 (1,951)
Armed Forces Loan Forgiveness Program - 947 31 2,435
Workforce Advancement Grant for Education (122) (401) (687) 10,113
Academic Excellence Scholarship - 2,052 (2) 4,099
State Grant Program supplement - - - 31,266
Other 359 154 742 619

10,872 26,303 27,487 98,048

State and federal funded

State Grant Program 168,368 190,450 351,446 388,270
Institutional Assistance Grant Program (124) (11) 37,745 42,122
Matching Funds Program 3,016 2,199 13,032 14,398
New Economy Technology Scholarship Program 1,463 1,117 3,300 2,466
Other 2,778 3,671 6,755 6,036

175,501 197,426 412,278 453,292

$ 186,373 223,729 439,765 551,340

For the three months ended March 31, 2009, self-funded financial aid was $10.9 million, a 58.6% decrease from
$26.3 million in 2008, which was a 71.0% decrease from $90.7 million in 2007. For the nine months ended March
31, 2009, self-funded financial aid was $27.5 million, a 71.9% decrease from $98.0 million in 2008, which was a
25.0% decrease from $130.7 million in 2007. In 2009, the decrease in the self-funded financial aid was related to
the reduction of the supplement to the State Grant Program, the elimination of the Workforce Advancement Grant
for Education, and the elimination of other financial aid programs.

We paid the federal default fees on behalf of borrowers. Since July 1, 2006, guarantors are required to deposit a 1%
federal default fee into the Federal Fund for new Stafford and PLUS loans as guaranteed loans are disbursed;
however, guarantors are not required to assess the fee to borrowers. For the nine months ended March 31, 2009, we
paid fees totaling $25.5 million to the Federal Fund for loans disbursed from July 1, 2008 through March 31, 2009.
For the nine months ended March 31, 2008, we paid fees totaling $34.3 million to the Federal Fund for loans

33
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

disbursed from July 1, 2007 through March 31, 2008. On October 2, 2008, management announced the suspension
of paying the federal default fee on behalf of borrowers for loans guaranteed on or after January 1, 2009.

We are required to manage the Federal Fund so net assets are greater than 0.25% of the original principal balance of
outstanding guarantees. We were under the required ratio noted above during the federal fiscal years ended
September 30, 2005 and September 30, 2006, which we submitted a management plan to ED on April 20, 2007. ED
approved the plan on May 22, 2007. Under the plan, we agreed to deposit the necessary funds to meet the minimum
reserve ratio of 0.25% by September 30, 2007. At September 30, 2007, the deposit necessary to meet the minimum
funding requirements was $28.6 million, a $2.0 million decrease from the $30.6 million amount estimated at June
30, 2007. This decrease is reflected in the table above as “guarantee fees that were previously waived on behalf of
borrowers”.

Under the Keystone family of loan programs, we provided a Keystone Stafford loan for Pennsylvania students with
family incomes of less than $21,000. For Keystone Stafford loans, we paid the 1% federal default fee on behalf of
the borrower. Federally required origination fees of 1.5% were paid on loans originated prior to July 1, 2008. For
Keystone Stafford loans disbursed between July 1, 2007 and October 31, 2007, we provided a 2% interest rate
reduction after 36 on-time payments, a 2% graduation credit, a 0.50% credit after 24 on-time payments and a 0.25%
interest rate reduction for automatic direct debit of payment. For Keystone Stafford loans disbursed on or after
November 1, 2007, we provided a 0.25% interest rate reduction for automatic direct debit of payment. We also
provided a KeystoneBEST and a KeystonePLUS loan for other students. For KeystoneBEST loans, we paid the
entire 1% federal default fee on behalf of the borrower. Federally required origination fees of 1.5% were paid on
loans originated prior to July 1, 2008. For KeystoneBEST loans disbursed between July 1, 2007 and October 31,
2007, we provided a 1% graduation credit, a 2% interest rate reduction after 36 consecutive on-time payments, a
0.50% credit for 24 on-time payments and a 0.25% interest rate reduction for automatic direct debit of payment. For
KeystoneBEST loans disbursed on or after November 1, 2007, we provided a 0.25% interest rate reduction for
automatic direct debit of payment. For KeystonePLUS loans disbursed between July 1, 2007 and October 31, 2007,
we provided a 0.60% immediate interest rate reduction, a 1% rebate of the loan amount for the first 24 consecutive
on-time payments, an additional 1% rebate after 48 consecutive on-time payments, and a 0.25% interest rate
reduction for automatic direct debit of payment. For KeystonePLUS loans disbursed on or after November 1, 2007,
we provided a 0.60% immediate interest rate reduction, an additional 0.50% rebate after 12 consecutive on-time
payments, and a 0.25% interest rate reduction for automatic direct debit of payment.

Through the 2007-08 academic year, we supplemented the State Grant Program as part of our Grants and
Infrastructure for Tomorrow’s Students Initiative to help meet the needs of Pennsylvanians seeking higher education
opportunities.

Through the 2007-08 academic year, we provided grants to participating postsecondary institutions to assist
Pennsylvania adult students who have demonstrated financial need and are ineligible for a State Grant through the
Workforce Advancement Grant for Education Program.

On October 19, 2007, the board of directors adopted a resolution reducing the supplement to the State Grant
Program to $35 million and eliminating funding of the Workforce Advancement Grant for Education and other
financial aid programs for the fiscal year ending June 30, 2009, because of the passage of the College Cost
Reduction and Access Act on September 27, 2007. On April 24, 2008, due to the decline of the capital markets, the
board of directors adopted a resolution eliminating funding of the supplement to the State Grant Program and other
financial aid programs if the board determines that funding is not available for these programs.

Other changes in net assets

For the three months ended March 31, 2009, Commonwealth of Pennsylvania grants were $41.3 million, a 19.5%
decrease from $51.3 million in 2008, which was a 59.5% decrease from $126.6 million in 2007. For the nine
months ended March 31, 2009, Commonwealth of Pennsylvania grants were $463.8 million, a 4.2% increase from
$445.3 million in 2008, which was a 1.3% increase from $439.7 million in 2007.

For the three months ended March 31, 2009, federal grants were $2.0 million as compared to no additional federal
grants funds received in 2008 as compared to $539 thousand in 2007. For the nine months ended March 31, 2009,

34
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

federal grants were $7.7 million, an 18.5% increase from $6.5 million in 2008, which was a 13.3% decrease from
$7.5 million in 2007.

During the three months ended March 31, 2009, we contributed $77 thousand of donated services to PHEF,
compared to no donated services in 2008 and $668 thousand in 2007. During the nine months ended March 31,
2009, we contributed $311 thousand of donated services to PHEF, compared to $1.6 million in 2008 and $1.8
million in 2007. The board of directors had authorized an additional non-contingent $20 million of cash donations
through June 30, 2009 as well as ongoing operational support. However, on January 24, 2008, as a result of our
current financial constraints, the board of directors adopted a resolution changing this authorization by discontinuing
the annual cash donations and reducing the amount provided for ongoing operational support to $300 thousand
annually plus incidental operational support through May 31, 2012 and thereafter until further action of the board.

Federal Student Loan Reserve Fund

Under current law, we are required to manage the Federal Fund so net assets are greater than 0.25% of the original
principal balance of outstanding guarantees. Historically ED has calculated this ratio at September 30, which is the
close of the federal fiscal year, based upon regulatory reports that we file with ED.

The following table displays our calculation of the ratio on a regulatory basis of accounting, which includes gain
contingencies not recognized under generally accepted accounting principles.

March 31, September 30,

(In thousands) 2009 2008

Generally accepted accounting principles – net assets $ (18,160) (6,790)

Deferred federal default fees 4,335 16,295
Gain contingency – default aversion fee rebate payable from PHEAA to the
Federal Fund 18,406 20,593
Gain contingency – collections complement on future default collections 115,654 101,172

Regulatory net assets $ 120,235 131,270

Original principal outstanding $ 51,774,121 52,507,959

0.23% 0.25%

For the three months ended March 31, 2009, purchases of defaulted loans were $304.8 million, a 5.7% decrease
from $323.1 million in 2008, which was a 64.7% increase from $196.2 million in 2007. For the nine months period
ended March 31, 2009, purchases of defaulted loans were $913.4 million, a 0.5% decrease from $918.1 million in
2008, which was a 57.6% increase from $582.6 million in 2007.

Net Asset Position

Most of our net assets are restricted or invested in capital assets. We have unrestricted net assets of $108.9 million at
March 31, 2009. Included in unrestricted net assets is $83.1 million due from the Federal Fund that will likely be
realized over the long term. The most substantial restriction on our net assets relates to restrictions for debt service,
which amounted to $228.9 million. Of that amount, $226.0 million is related to our student loan notes, bonds and
financings. Net assets restricted for financial aid grant programs amounted to $82.1 million. The deficit in net assets
invested in capital assets, net of related debt of $15.6 million occurred because of differences between the timing of
depreciation of the assets and principal payments on the debt.

35
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

Description of Debt Activity and Significant Capital Assets

Our principal funding need is securing capital to fund student loan originations and purchases. Our ability to raise
debt could be limited in the future, because under our enabling legislation there is a formula that imposes a debt
limit. The debt limit is $25.3 billion as of March 31, 2009. As of March 31, 2009, our outstanding debt amounted to
$11.8 billion. The following table shows our debt activity.

Three months ended Nine months ended

March 31, March 31,
(In thousands) 2009 2008 2009 2008

Capital market activity

Proceeds from issuing student loan demand revenue
bonds - - - 400,000
Repayment of student loan demand revenue bonds $ (14,900) - (15,800) -
Repayment of student loan floating rate notes (18,777) (39,632) (60,765) (131,919)

Other financings
Net student loan financing activity (189,200) 151,563 (284,000) 344,247
Net capital financing activity (1,020) 958 349 2,904
Net other financing activity (7,000) - (15,830) 48,275

The following table shows our capital assets, net of accumulated depreciation.

March 31, June 30,

(In thousands) 2009 2008

Land $ 2,946 2,946

Buildings and improvements 39,766 41,151
Software development 9,334 11,716
Purchased software 2,684 4,883
Other, principally information technology equipment 6,741 8,441

$ 61,471 69,137

The most significant ongoing capital item is software development. Our software development is generally related to
customized systems for student financial aid processing that cannot be purchased from vendors. For the nine months
ended March 31, 2009, we capitalized $1.9 million of software development compared to $3.7 million in 2008 and
$2.4 million in 2007.

Interest Rate Risk Management

Student loans are generally variable-rate assets, so we generally fund with variable-rate debt.

In the table on the next page, we categorize variable-rate assets and liabilities by reset date and fixed-rate assets and
liabilities by their maturity dates. An interest rate gap is the difference between volumes of assets and liabilities
maturing or re-pricing during specific future time intervals. The table includes only those assets and liabilities
related to our student loan notes, bonds and financings. As well as other assets and liabilities, we have $236.8
million of cash, cash equivalents and investments and $97.0 million of student loans not included in the analysis.

The following gap analysis reflects rate-sensitive positions at March 31, 2009 and is not necessarily reflective of
positions that existed throughout the period.

36
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

If a period gap is positive, it means there are more assets than liabilities re-pricing during the period. If interest rates
rise in a period with a positive gap, net interest revenue will increase. Conversely, if interest rates fall in a period
with a positive gap, net interest revenue will decrease.

The opposite is true when the period gap is negative. This occurs when more liabilities than assets are re-pricing
during the period. If interest rates rise in a period with a negative gap, net interest revenue will decrease. If interest
rates fall in a period with a negative gap, net interest revenue will increase.

Interest rate sensitivity period

At March 31, 2009 3 months or 3 months to 6 months to 1 to 2 Over 5
(In thousands) less 6 months 1 year years 2 to 5 years years
Assets
Student loans $ 10,648,087 177,256 408,869 30,897 47,704 4,823
Restricted cash and
cash equivalents 319,077 - - - - -
Other assets 91,845 53,165 13,260 25,401 33,914 34,734
Total assets 11,059,009 230,421 422,129 56,298 81,618 39,557
Liabilities
Student loan financings
and notes and bonds
payable 11,256,652 345,919 - - - -
Other liabilities 48,293 11,373 - 258 521 -
Total liabilities 11,304,945 357,292 - 258 521 -
Net assets
Restricted for debt
service $ - - - - - 226,016
Period gap $ (245,936) (126,871) 422,129 56,040 81,097 (186,459)
Cumulative gap $ (245,936) (372,807) 49,322 105,362 186,459 -
Ratio of interest-
sensitive assets to
interest-sensitive
liabilities and net
assets 97.8% 64.5% 0.0% 21820.9% 15665.6% 17.5%
Ratio of cumulative
gap to total assets (2.1%) (3.1%) 0.4% 0.9% 1.6% 0.0%

Typically, we present a table showing the simulated impact of parallel shifts upward and downward on interest rates
on net interest revenue. A parallel shift means that the shift would affect both our assets and our debt in the same
way at the same time. We have omitted such an analysis because currently our interest revenues and expenses are
not moving in parallel and we believe such a disclosure could be misleading.

37
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

Contacting Us

If you have questions about this report, please contact our Financial Management Division at 1200 N. 7th Street,
Harrisburg, PA 17102.

Phone – 717 720-2540

Fax – 717 720-3923
Email – finmgt@pheaa.org

May 12, 2009

38
Statements of Revenues, Expenses, and Changes in Net Assets
(In thousands)

(Unaudited)
Three months ended Nine months ended
March 31, March 31,
2009 2008 2009 2008
Interest revenue
Student loans $ 65,549 137,459 289,950 492,764
Investments 468 1,547 4,078 18,931
Total interest revenue 66,017 139,006 294,028 511,695
Interest expense
Student loan financings and notes and bonds payable 68,633 180,353 281,736 511,266
Capital and other financings 2,898 2,928 8,998 9,993
Total interest expense 71,531 183,281 290,734 521,259
Net interest revenue (expense) (5,514) (44,275) 3,294 (9,564)
Provision for loan losses (902) (2,174) (3,019) (11,884)
Net interest revenue (expense) after provision for loan
losses (6,416) (46,449) 275 (21,448)
Noninterest revenue
Servicing fees 39,296 32,541 119,162 97,432
Retention of collections on defaulted loans 21,984 18,875 78,386 69,322
Federal fees 13,274 13,789 36,238 42,715
Default aversion fees, net (42) 3,363 (1,337) 8,181
Residual interest, net 210 (14,648) 5,104 (15,252)
Gains on student loan sales, net 3 - 3 5
Other 30 62 339 201
Total noninterest revenue 74,755 53,982 237,895 202,604
Operating revenues 68,339 7,533 238,170 181,156
Operating expenses
Personnel 37,203 40,204 111,050 128,207
Professional services 6,184 6,844 23,543 22,583
Information technology related expenses 5,114 5,387 15,792 17,192
Mail services 4,904 5,510 14,316 14,996
Depreciation 2,787 3,371 8,945 10,155
Other 6,641 7,316 21,294 23,506
Total operating expenses 62,833 68,632 194,940 216,639
Operating income (loss) 5,506 (61,099) 43,230 (35,483)
Commonwealth of Pennsylvania grants 41,311 51,298 463,782 445,317
Federal grants 1,980 - 7,696 6,498
Grants and other financial aid (186,373) (223,728) (439,765) (551,340)
Grant funds returned to the Commonwealth of
Pennsylvania (8) (178) (14,939) (265)
Contributions to Pennsylvania Higher Education
Foundation (77) 4 (311) (1,595)
Changes in net assets (137,661) (233,703) 59,693 (136,868)
Net assets, beginning of period 541,960 599,428 344,606 502,593
Net assets, end of period $ 404,299 365,725 404,299 365,725
See accompanying notes to financial statements.

39
Statements of Net Assets
(In thousands)

(Unaudited)
March 31, June 30,
2009 2008

Assets
Cash and cash equivalents $ 35,071 13,388
Restricted cash and cash equivalents 325,935 298,526
Restricted cash and cash equivalents – due to customers 64,718 46,334
Restricted investments 130,161 70,494
Residual interest in off-balance sheet securitizations 21,519 16,415
Student loans receivable, net 11,415,206 11,830,205
Interest income receivable 210,112 255,837
Due from Federal Student Loan Reserve Fund, net 83,133 86,272
Capital assets, net 61,471 69,137
Deferred financing costs, net 46,671 48,295
Other assets 44,434 35,284
Federal Student Loan Reserve Fund assets held for the U.S. Department of
Education 120,936 139,874

Total assets 12,559,367 12,910,061

Liabilities
Due to customers 64,718 46,334
Accounts payable and accrued expenses 143,859 178,303
Student loans financings and notes and bonds payable, net 11,602,571 11,962,537
Capital and other financings 222,984 238,407
Amounts related to the Federal Student Loan Reserve Fund 120,936 139,874

Total liabilities 12,155,068 12,565,455

Net assets
Invested in capital assets, net of related debt (15,552) (7,500)
Restricted for debt service 228,870 256,326
Restricted for financial aid grant programs 82,053 40,259
Unrestricted 108,928 55,521

Total net assets $ 404,299 344,606

See accompanying notes to financial statements.

40
Statements of Cash Flows
(In thousands)

(Unaudited)
Nine months ended
March 31,
2009 2008
Cash flows from operating activities
Interest received on student loans $ 249,245 449,004
Principal received on student loans 844,619 902,873
Student loan originations (2,149) (785,839)
Student loan purchases (343,662) (653,358)
Student loan sales, including net gains 39 255
Interest received on investments 3,661 18,795
Interest paid on student loan financings and notes and bonds payable (311,338) (501,760)
Interest paid on capital and other financings (7,166) (8,136)
Servicing fees 114,468 93,346
Retention of collections on defaulted loans 81,314 33,968
Federal fees 32,892 44,745
Default aversion fees, net of rebate (496) 4,162
Other 339 201
Payment of operating expenses (192,413) (221,417)
Net cash provided by (used for) operating activities 469,353 (623,161)
Cash flows from noncapital financing activities
Proceeds from issuance of noncapital debt - 1,110,100
Principal paid on noncapital debt (376,395) (449,497)
Issuance costs (253) (2,053)
Commonwealth of Pennsylvania grants received 463,782 445,317
Federal grants received 7,696 6,498
Grants and financial aid paid (439,555) (553,292)
Grant funds returned to the Commonwealth of Pennsylvania (14,939) (265)
Cash overdraft - 2,777
Net cash provided by (used for) noncapital financing activities (359,664) 559,585
Cash flows from capital and related financing activities
Proceeds from issuance of capital debt 4,650 5,188
Principal paid on capital debt (4,301) (2,284)
Purchases of capital assets and development of software, net of disposals (1,279) (7,180)
Net cash used for capital and related financing activities (930) (4,276)
Cash flows from investing activities
Proceeds from sales and maturities of investments 471,022 292,166
Purchases of investments (530,689) (275,165)
Net cash provided by (used for) investing activities (59,667) 17,001
Net change in cash and cash equivalents (including restricted cash) 49,092 (50,851)
Cash and cash equivalents (including restricted cash), beginning of period 311,914 365,611
Cash and cash equivalents (including restricted cash), end of period $ 361,006 314,760

(continued)

41
Statements of Cash Flows
(In thousands)

(Unaudited)
Nine months ended
March 31,
2009 2008
Reconciliation of operating income to net cash provided by (used for) operating activities

Operating income $ 43,230 (35,483)

Adjustments to reconcile operating income to net cash provided by (used
for) operating activities:
Depreciation 8,945 10,155
Amortization of premium on loan purchases 41,382 45,175
Amortization of loan origination costs 8,988 9,028
Amortization of deferred financing costs 1,877 2,074
Amortization of deferred amount on refundings of student loan
demand revenue bonds 600 600
Accretion discount on capital and other financings 57 56
Operational support provided to Pennsylvania Higher Education
Foundation (311) (1,595)
Changes in assets and liabilities:
Increase (decrease) in interest income receivable 45,725 7,959
Decrease (increase) in residual interest in off-balance securitizations (5,104) 15,252
Decrease (increase) in student loans receivable 364,629 (630,732)
Decrease (increase) in amounts due from Federal Student Loan
Reserve Fund 2,929 (37,401)
Decrease in other assets (9,150) (2,150)
Increase (decrease) in accounts payable and accrued expenses (34,444) (6,099)

Total adjustments 426,123 (587,678)

Net cash provided by (used for) operating activities $ 469,353 (623,161)

See accompanying notes to financial statements.

42
Notes to Financial Statements
March 31, 2009 and 2008 Quarterly Financial Report

Note 1 – About PHEAA

Organization

Pennsylvania Higher Education Assistance Agency (“PHEAA”), doing business as American Education Services
(“AES”), is a public corporation and government instrumentality created by the Pennsylvania General Assembly on
August 7, 1963. Our mission is to improve higher education opportunities for Pennsylvanians.

We are a discretely presented component unit of the Commonwealth of Pennsylvania. That means that our financial
information is included in the financial statements of the Commonwealth, but we are not considered part of the
primary government.

Blended Component Unit

We formed PHEAA Student Loan Foundation, Inc. on August 6, 2002. The foundation is exempt from federal
income tax under Section 501(a) of the Internal Revenue Code as an organization described in Section 501(c)(3). Its
charitable purpose is to carry out student loan securitization transactions for our benefit. The foundation is a blended
component unit, because we appoint a majority of the foundation’s board of directors, can impose our will on the
foundation, and it provides services entirely to us. As a blended component unit, its transactions are consolidated in
our financial statements.

Discretely Presented Component Unit

The Pennsylvania Higher Education Foundation, Inc.

We supported the formation of The Pennsylvania Higher Education Foundation, Inc. (“PHEF”), which is tax-exempt
under Section 501(c)(3) of the Internal Revenue Code. Its charitable purposes include, but are not limited to,
activities intended to improve or enhance postsecondary education opportunities for students in Pennsylvania and
elsewhere. PHEF is a discretely presented component unit, because our Executive Committee appoints a majority of
the foundation’s board of directors, we can impose our will on the foundation, but it does not provide services
entirely to us. As a discretely presented component unit, its transactions are not consolidated in our financial
statements, but they are presented in the notes of the annual financial report.

PHEF’s financial statements are available on its website – www.higheredfoundation.org.

Related Organization

The Higher Education Foundation, Inc.

We also supported the formation of The Higher Education Foundation, Inc. (“HEF”), and it is also tax-exempt under
Section 501(c)(3) of the Internal Revenue Code. Its charitable purpose is exclusively for the benefit of PHEF and the
directors of PHEF are directors of HEF. HEF was formed to assist with fundraising and program administration
particularly for projects that may extend beyond Pennsylvania. We cannot impose our will on HEF, there is no
financial burden or benefit associated with it, and its financial transactions are not included in our financial
statements. PHEF prepares consolidated financial statements that include transactions for HEF.

Note 2 – Recent Developments

As a result of the disruptions in the credit markets during the year ended June 30, 2008 and continuing through the
nine months ended March 31, 2009, we had net losses before transfers in our student loan financing segment. During
the year ended June 30, 2008, we had a net loss before transfers of $87.1 million compared to net income before
transfers in the segment of $31.2 million for the year ended June 30, 2007. During the three months ended March

43
Notes to Financial Statements
March 31, 2009 and 2008 Quarterly Financial Report

31, 2009, we had a net loss before transfers of $17.5 million in our student loan financing segment compared to a net
loss before transfers of $63.1 million in 2008. During the nine months ended March 31, 2009, we had a net loss
before transfers of $34.3 million compared to a net loss before transfers of $85.3 million in 2008.

The auction-rate debt securities and variable-rate demand bonds financing this activity are limited obligations
payable only from student loans and other assets pledged and held in trust. While the financings are non-recourse to
the unrestricted assets of PHEAA and non-recourse to the Commonwealth of Pennsylvania, the result of the reduced
margin in these financings limits our historic ability to use student loan principal payments received by the trusts to
purchase additional loans. Additionally, we were able to transfer $41.6 million of excess funds from the trusts to
unrestricted operations in the year ended June 30, 2007, and only $2.8 million in the year ended June 30, 2008.
During the three months ended March 31, 2009, we transferred $0.2 million of funds from unrestricted operations to
the trusts compared to $3.5 million in 2008. During the nine months ended March 31, 2009, we transferred $7.3
million of funds from unrestricted operations to the trusts compared to $2.3 million in 2008. Excess funds are not
expected to be made available during the remainder of the year ending June 30, 2009.

Because of an inability to access the credit or financing markets needed to fund student loans, effective March 7,
2008, we temporarily suspended our activities as a lender for any new loans first disbursed on or after that date. As
of March 31, 2009, we have student loan purchase commitments of $579 million that we have been unable to fund,
and we are committed to purchase an additional $25 million of student loans through June 30, 2009 and $280
million thereafter. Most of the purchase commitments are with financial institutions and we continue to work with
those institutions to renegotiate the terms and timing of these commitments. The loans held by these financial
institutions are all serviced and guaranteed (at least at 97%) by PHEAA and are federally reinsured (at least at 95%).
Also, as a result of changes in federal law, effective November 1, 2007, we provided notice to the institutions that
we would no longer accept additional commitments for loans originated after that date. Until the credit markets
begin to function, the only current source of financing available to honor the existing purchase commitments is the
repayments of student loans in trusts that allow recycling of repayments into new loans. These loan repayments are
insufficient to cover all of our existing purchasing commitments.

On April 7, 2008, The Education Resources Institute (“TERI”) filed for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. TERI guaranteed $52.2 million of private loans PHEAA held as of March 31, 2009. TERI’s
bankruptcy filing was an event of default for a $25.0 million financing used to finance a portion of the TERI-
guaranteed loans we hold, and that event of default was waived by the provider of the financing on May 15, 2008.
On December 31, 2008, we renegotiated the terms of the financing, which were extended to December 31, 2009.

Events of default were triggered on a $500 million line of credit facility used to finance federally insured student
loans (of which $314.1 million was outstanding at March 31, 2009) due to our inability to fund the student loan
purchase commitments referred to above and the occurrence of certain material adverse changes relating to our
operations, business, properties, liabilities, financial condition, and prospects taken as a whole. The default caused
by the TERI bankruptcy default referred to above, together with other defaults discussed below, also triggered a
cross-default provision with respect to this line of credit facility. On September 18, 2008, the lender informed us that
no future advances would be permitted on the line and on September 28, 2008, the line of credit was reduced to
$415 million. On December 9, 2008, the lender under this facility provided a waiver of previous defaults and
forbearance with respect to future defaults relating to our inability to fund the specified loan purchase commitments.
To obtain this waiver, we agreed to amend the credit agreement to extend the maturity date on this line to March 5,
2009; increase the collateral coverage from 101%, to 103.5%; and increase the interest rate beginning November 1,
2008 from LIBOR plus 0.3% to LIBOR plus 0.75%; among other changes. On March 5, 2009, this line of credit
was extended to March 5, 2010. The lender’s remedies are limited solely to the student loans and other assets in
trust, securing the line of credit.

Similarly, events of default were triggered on a $175 million unsecured line of credit used for operations (of which
$80.0 million was outstanding at March 31, 2009) due to our inability to fund the student loan purchase
commitments and the occurrence of the material adverse changes referred to above. The default related to the TERI

44
Notes to Financial Statements
March 31, 2009 and 2008 Quarterly Financial Report

bankruptcy, together with our defaults under the $500 million secured line of credit facility referred to above, and
the $10 million facility referred to below, also triggered a cross-default provision under this line of credit. Effective
September 8, 2008, the unsecured line of credit was reduced to $94 million. We agreed with the provider of this
financing to restructure the debt on December 15, 2008 in exchange for a waiver of past defaults and a conditional
forbearance with respect to future defaults relating to our inability to fund the specified student loan purchase
commitments. Under the new terms, we will make scheduled payments of the debt to amortize it completely by June
30, 2011, and we granted a security interest in otherwise unencumbered assets to secure this previously unsecured
line, among other changes.

Similarly, the events discussed above triggered events of default and cross defaults on a $10 million capital
financing line (of which $8.0 million was outstanding at March 31, 2009). On December 2, 2008, the provider of
this financing waived the events of default and amended the credit agreement such that defaults under our $500
million secured line of credit and any defaults relating to our future inability to fund the specified student loan
purchase commitments would not constitute events of default under this line.

We have successfully renegotiated other student loan financings, including a $500 million student loan financing,
which was reduced to $422 million and the maturity date was extended from December 31, 2008 to July 31, 2009.

The events described above, as well as changes in federal law, have adversely affected our operations and our ability
to continue to fund public service initiatives. As a result, the board of directors and management have taken steps to
reduce discretionary public service funding and reduce operating expenses, including workforce reductions. Self-
funded financial aid programs, which are discretionary, were $124.5 million during the year ended June 30, 2008
and are planned to be reduced to approximately $35.9 million for the year ending June 30, 2009. During the nine
months ended March 31, 2009, amounts expended related to self-funded financial aid programs totaled $27.5
million.

Note 3 – Summary of Significant Accounting Policies

We prepared the accompanying unaudited financial statements in accordance with accounting principles generally
accepted in the United States of America for interim financial information. Accordingly, we did not include all of
the information and notes required for annual financial statements. In our opinion, we have included all adjustments
necessary for a fair presentation.

Because we are financed and operated in a manner similar to private business enterprises, we are accounted for as an
enterprise fund and follow the economic resources measurement focus and accrual basis of accounting. Revenues
are recorded when earned and expenses are recorded at the time liabilities are incurred, regardless of when the
related cash flows take place. While private business enterprises follow the accounting guidance issued by the
Financial Accounting Standards Board (“FASB”), we follow the guidance issued by the Governmental Accounting
Standards Board (“GASB”). As encouraged by the GASB we have elected not to follow FASB pronouncements
issued after November 30, 1989 to be consistent with the accounting practices of the Commonwealth.

The accounting policies followed in the presentation of interim financial statements are the same as those followed
on an annual basis as described in the June 30, 2008 financial statements.

To prepare financial statements in conformity with accounting principles generally accepted in the United States of
America, we must make estimates and assumptions that influence the reported assets, liabilities, revenues, and
expenses. In the future, actual results could be different from our estimates.

Operating results for the nine months ended March 31, 2009 are not necessarily indicative of the results for the year
ending June 30, 2009.

45
Notes to Financial Statements
March 31, 2009 and 2008 Quarterly Financial Report

Note 4 – New Accounting Pronouncements

In June 2007, the GASB issued GASB Statement No. 51, Accounting and Financial Reporting for Intangible Assets.
We have not completed our analysis of this statement, which must be adopted for the year ending June 30, 2010.

Note 5 – Federal Student Loan Reserve Fund and Assets Held for the U.S. Department of
Education

As a part of our guaranty operations, we manage the Federal Fund for the U.S. Department of Education (ED). The
Federal Fund is used to pay claims on defaulted loans and belongs to the federal government. On the statements of
net assets, we report the total assets of the Federal Fund under the caption “Federal Student Loan Reserve Fund
assets held for the U.S. Department of Education.” We also report the same amount as a liability on the statements
of net assets. Because the Federal Fund has both assets and liabilities, we use a net asset approach in the following
tables to report activity in the fund.

The following table shows the changes in net assets held by us for ED in the Federal Fund.

Three months ended Nine months ended

March 31, March 31,
(In thousands) 2009 2008 2009 2008

Additions
Reinsurance from the U.S. Department of Education $ 292,902 309,696 877,461 881,411
Collections on defaulted loans 98,872 79,694 321,688 260,088
Federal default fees 13,736 16,034 31,571 32,376
Net appreciation (depreciation) in fair value of
investments 5 (1,028) 126 566

Total additions 405,515 404,396 1,230,846 1,174,441

Deductions
Purchases of defaulted loans from lenders 304,828 323,139 913,371 918,058
Reimbursement to U.S. Department of Education for
federal share of defaulted loans collections 73,973 58,871 233,889 184,511
Reimbursement to PHEAA for our retention of
defaulted loans collections 21,984 18,875 78,386 69,322
Default aversion fees, net 6,348 7,000 18,868 22,192

Total deductions 407,133 407,885 1,244,514 1,194,083

Net decrease (1,618) (3,489) (13,668) (19,642)

Net assets (liabilities), beginning of period (16,542) 11,673 (4,492) 27,826

Net assets (liabilities), end of period $ (18,160) 8,184 (18,160) 8,184

46
Notes to Financial Statements
March 31, 2009 and 2008 Quarterly Financial Report

The following table shows the detail of the net assets held by us for ED in the Federal Fund.

March 31, June 30,

(In thousands) 2009 2008

Assets
Cash and cash equivalents $ 23,945 11,246
Receivable from the U.S. Department of Education 91,664 25,060
Other receivables 5,302 8,420
Interest income receivable - 250
Investments 25 94,898

Total assets 120,936 139,874

Liabilities
Accounts payable and accrued expenses 5,593 26,274
Payable to U.S. Department of Education - 956
Deferred federal default fees 4,335 7,162
Amounts payable to PHEAA 129,168 109,974

Total liabilities 139,096 144,366

Net assets (liabilities) $ (18,160) (4,492)

Under the Higher Education Amendments of 1998, we are to act as a fiduciary in managing the assets of the Federal
Fund.

Under current law, we are required to manage the Federal Fund so net assets are greater than 0.25% of the original
principal balance of outstanding guarantees. Historically ED has calculated this ratio at September 30, which is the
close of the federal fiscal year, based upon regulatory reports that we file with ED.

Because we were under the required ratio during the federal fiscal years ended September 30, 2005 and 2006, we
submitted a management plan to ED on April 20, 2007 and ED approved the plan on May 22, 2007. Under the plan,
we agreed to deposit the necessary funds to meet the minimum reserve ratio requirement of 0.25% by September 30,
2007. At September 30, 2007, the deposit necessary to meet the minimum funding requirements was $28.6 million.

During the years ended June 30, 2008 and 2007, and the nine months ended March 31, 2009, we have managed the
cash flow of the fund in a manner to assure our customers that sufficient funds are available in the Federal Fund to
continue to pay default claims. In addition to paying default claims, the fund is also used to pay default aversion fees
and our share of retention on defaulted loan collections. During the years ended June 30, 2008 and 2007, and the
nine months ended March 31, 2009, we allowed this liability to us to increase.

47
Notes to Financial Statements
March 31, 2009 and 2008 Quarterly Financial Report

Note 6 – Segment Information

We generally finance student loan portfolios by issuing notes, bonds, and other financings and the earnings are
pledged in support of the debt. Because the revenue stream of the student loan portfolios is pledged to support the
debt, we are reporting condensed financial information about this segment. The notes, bonds, and other financings
related to this segment are limited obligations payable only from the pledged assets.

Statements of revenues, expenses, and changes in net assets

Three months ended Nine months ended

March 31, March 31,
(In thousands) 2009 2008 2009 2008
Interest revenue $ 71,047 145,134 308,348 523,233
Interest expense 68,633 180,303 281,736 511,211

Net interest revenue (expense) 2,414 (35,169) 26,612 12,022

Provision for loan losses (913) (2,160) (2,972) (11,783)

Net interest revenue (expense) after provision for

loan losses 1,501 (37,329) 23,640 239

Gains on student loan sales, net 3 - 3 5

Total operating revenues 1,504 (37,329) 23,643 244

Operating expenses 18,714 21,364 56,604 72,652

Operating loss (17,210) (58,693) (32,961) (72,408)

Financial aid (311) (4,431) (1,338) (12,912)

Loss before transfers (17,521) (63,124) (34,299) (85,320)

Transfers from unrestricted net assets 247 3,537 7,262 2,252

Change in net assets (17,274) (59,587) (27,037) (83,068)

Net assets, beginning of period 243,290 319,473 253,053 342,954

Net assets, end of period $ 226,016 259,886 226,016 259,886

48
Notes to Financial Statements
March 31, 2009 and 2008 Quarterly Financial Report

Statement of net assets

March 31, June 30,
(In thousands) 2009 2008
Restricted cash and cash equivalents $ 319,077 296,226
Student loans receivable 11,317,636 11,712,483
Other, principally interest income receivable 252,319 299,875
Total assets 11,889,032 12,308,584
Student loan financings and notes and bonds payable, net 11,602,571 11,962,537
Other, principally accrued interest payable 60,445 92,994
Total liabilities 11,663,016 12,055,531
Net assets, restricted for debt service $ 226,016 253,053

Statements of cash flows

For the nine months ended March 31 (in thousands) 2009 2008
Interest received on student loans $ 248,446 447,717
Principal received on student loans 839,034 900,367
Student loan originations (1,599) (784,871)
Student loan purchases (347,462) (646,229)
Student loan sales, including net gains 5,198 4,250
Interest received on investments 2,841 14,535
Interest paid on student loan financings and notes and bonds payable (311,340) (501,705)
Payment of operating expenses (57,373) (83,231)
Net cash provided by (used for) operating activities 377,745 (649,167)
Proceeds from issuance of noncapital debt - 1,060,100
Principal paid on noncapital debt (360,565) (447,773)
Other 5,671 (12,713)
Net cash provided by (used for) noncapital financing activities (354,894) 599,614
Net change in restricted cash and cash equivalents 22,851 (49,553)
Restricted cash and cash equivalents, beginning of period 296,226 361,127
Restricted cash and cash equivalents, end of period $ 319,077 311,574

49
Notes to Financial Statements
March 31, 2009 and 2008 Quarterly Financial Report

There are 30 separate trusts with parity ratios, a ratio of assets to liabilities, ranging from 0.947 to 1.110 at March
31, 2009.

As of May 12, 2009, there were $1.6 billion of variable-rate demand bonds that were put to the liquidity provider
and are in bank bond mode with interest rates ranging from 1-month LIBOR plus 1.75% to prime rate plus 2.0%.

The following chart displays parity ratios for variable-rate demand bonds.

(Dollars in thousands)

Debt December March June September December March

Issue Outstanding 2007 2008 2008 2008 2008 2009

1988A $ 100,000 1.042 1.037 1.028 1.018 1.010 0.999

1988B 107,900 1.051 1.047 1.041 1.039 1.034 1.031
1988C 72,900 1.056 1.053 1.047 1.049 1.046 1.043
1988E 35,000 1.091 1.101 1.108 1.103 1.101 1.100
1994A 125,000 1.053 1.050 1.044 1.034 1.024 1.013
1995A 125,000 1.061 1.057 1.032 1.033 1.028 1.026
1997A 121,100 1.039 1.037 1.036 1.031 1.030 1.028
1999A 100,000 1.049 1.046 1.032 1.033 1.030 1.028
2000A 95,900 1.055 1.055 1.053 1.051 1.050 1.050
2001A 75,000 1.045 1.045 1.044 1.043 1.039 1.032
2001B 92,500 1.037 1.040 1.039 1.039 1.038 1.035
2002A 170,000 1.032 1.037 1.037 1.039 1.036 1.031
2002B 50,000 1.041 1.039 1.042 1.047 1.049 1.051
2003A 147,800 1.068 1.069 1.065 1.061 1.059 1.055
2006A 225,000 0.979 0.974 0.995 0.989 0.984 0.976
2007A 400,000 0.983 0.969 0.967 0.961 0.956 0.947

There are no parity requirements for these trusts; however, if parity drops for two consecutive quarters and parity is
below 1.02, recycling of new loans into the trusts is suspended.

The master trust that issued auction rate securities holds $7.4 billion of debt. The parity ratio for this trust 1.003 at
September 30, 2007; 1.002 at December 31, 2007; 0.995 at March 31, 2008; 1.001 at June 30, 2008; 1.006 at
September 30, 2008; 0.999 at December 31, 2008 and 1.000 at March 31, 2009. There is no parity requirement for
this trust.

Note 7 – Restrictions on Net Assets

Net assets restricted for debt service amounted to $228.9 million at March 31, 2009. Of that amount, $226.0 million
is related to net assets held under various indentures related to financing our student loan portfolios, and the
remaining $2.9 million of net assets restricted for debt service is related to capital and other financings.

The $82.1 million of net assets restricted for financial aid grant programs results from Commonwealth of
Pennsylvania grants and federal grants related to specific programs. Those net assets are restricted until we disburse
program-related grants.

Under Commonwealth law, our purpose is to increase higher education opportunities for Pennsylvania residents. Net
assets that we report as unrestricted are statutorily restricted to our purpose. The Higher Education Amendments of
1998 also restrict our use of net assets related to FFELP guaranty activities to fulfilling our guaranty responsibilities

50
Notes to Financial Statements
March 31, 2009 and 2008 Quarterly Financial Report

and other student financial aid related activities selected by us. Because that restriction is consistent with our
statutory purpose, we consider net assets related to those activities to be unrestricted.

Note 8 – Student Loan Securitizations

In a securitization, we sell student loans to a trust that issues bonds backed by the student loans as part of the
transaction. For transactions qualifying as sales, we retain a residual interest, which is recognized on the statements
of net assets as the residual interest in off-balance sheet securitizations. The residual interest is the right to receive
cash flows from the student loans in excess of the amounts needed to pay servicing, administration, and other fees,
as well as, the principal and interest on the bonds backed by the student loans. The residual interest is the present
value of these future expected cash flows. We value the residual interest at the time of sale of the student loans to the
trust and at the end of each subsequent quarter and reflect the change in the value in residual interest, net on the
statements of revenues, expenses, and changes in net assets.

During the years ended June 30, 2004 and 2005, we sold a total of $1.2 billion of student loans originated under the
Federal Family Education Loan Program to PHEAA Student Loan Trust I, Inc. through the PHEAA Student Loan
Foundation, Inc. We retain a 100 percent residual interest in these student loans purchased and held by the PHEAA
Student Loan Trust I.

The following table summarizes the present value of our residual interests, along with the significant assumptions
used to determine that present value.

March 31, June 30,

(Dollars in thousands) 2009 2008

Present value of residual interest $ 21,519 16,415

Weighted average life 11.25 years 12.0 years

Constant prepayment rate 4.0% 5.0%
Residual cash flow discount rate 5.1% 4.4%

When we sell student loan receivables in securitizations of student loans, we enter into a servicing agreement with
the securitization trust and earn annual servicing fees from the trust of 0.25% per year on the outstanding balance of
consolidation loans and 0.50% per year on the outstanding balance of Stafford and PLUS loans. We also entered
into an administration agreement with the trust and generally earn annual administration fees of 0.25% per year on
the outstanding balance of student loans in the trust. For the three months ended March 31, 2009, we earned $803
thousand, compared to $885 thousand in 2008 and $1.0 million in 2007. For the nine months ended March 31, 2009,
we earned $2.5 million, compared to $2.7 million in 2008 and $3.1 million in 2007. The amount earned is included
in servicing fees on the statement of revenues, expenses, and changes in net assets.

The PHEAA Student Loan Trust I filed a monthly Form 8-K and an annual Form 10-K with the SEC through
November 30, 2005 and those filings are available on the SEC’s website at www.sec.gov. In December 2005, the
PHEAA Student Loan Trust I filed Form 15 with the SEC to provide notice for the suspension of duty to file these
reports under Sections 13 and 15(d) of the Securities Exchange Act of 1934. Condensed unaudited financial
information for the PHEAA Student Loan Trust I is presented in the following table:

51
Notes to Financial Statements
March 31, 2009 and 2008 Quarterly Financial Report

March 31, June 30,

(In thousands) 2009 2008

Assets:
Cash and cash equivalents $ 28,371 29,580
Student loans receivable, net 631,432 677,477
Interest income receivable 6,164 8,672
Other assets 3,072 3,440

Total assets 669,039 719,169

Liabilities:
Notes payable $ 640,978 692,978
Interest payable 2,357 2,876
Other liabilities 3,856 2,932

Total liabilities 647,191 698,786

Net assets $ 21,848 20,383

Note 9 – Risk Management and Contingencies

We are exposed to various risks of loss, such as theft, damage to and destruction of assets, etc. To handle those risks,
we purchase insurance coverage, and there have been no material claims.

Federal programs in which we participate are subject to audit in accordance with the provisions of the U.S. Office of
Management and Budget Circular A-133, Audits of States, Local Governments and Non-Profit Organizations. The
provisions of this circular do not limit the authority of ED or other federal audit officials to perform, or contract for,
audits and evaluations of federal financial assistance programs. Therefore, our operations in current and prior years
are subject to audit. We believe we are in substantial compliance with applicable federal regulations and that any
adjustment because of future audits will not be material.

We have appealed one finding in a Program Review conducted by ED related to our processing of 9.5% floor loans.
On November 19, 2007, the Office of Inspector General of the U.S. Department of Education issued its final audit
report titled Special Allowance Payments to the Pennsylvania Higher Education Assistance Agency for Loans
Funded by Tax-Exempt Obligations. Finding No. 1 of the report questions payments of $14.1 million and duplicates
the Program Review finding already under appeal. Finding No. 2 of the report questions payments of $21.3 million.
On January 25, 2008, the U.S. Department of Education closed Finding No. 2 by concluding that this finding did not
rest on an accurate characterization of DCL 96-L-186 and the statutory and regulatory provisions it interpreted. On
August 21, 2008, the U.S. Department of Education adjusted the questioned payments in Finding No. 1 to $11.3
million. As of March 31, 2009, Finding No. 1 remains open and the amount of the questioned payment above has
not been accrued in the accompanying financial statements.

Separately, on April 27, 2007, ED issued DCL FP-07-06 providing audit requirements, which FFELP lenders must
comply with to receive special allowance payments at the minimum 9.5% rate. We have completed the audit process
with ED’s auditors to identify those loans that meet the new requirements to receive the 9.5% minimum rate, which
was done as of December 31, 2006, and we estimated additional billings of $5.2 million through March 31, 2009.
Pending resolution of the appeal, and at the direction of ED, we have not sought special allowance payments at the
minimum 9.5% rate since September 30, 2006.

We are involved in various legal matters in the normal course of business. Considering available information, we do
not believe that resolution of any such matters will have a material impact on the financial statements.

52