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Rating Action:

Moody's downgrades and reviews five notes from two Sallie Mae student loan deals

18 Feb 2011

Approximately $1.9 billion of asset-backed securities affected.

New York, February 18, 2011 -- Moody's Investors Service has placed under review for possible downgrade three classes of senior notes and downgraded two classes of subordinated notes issued in the 2003-7 and 2004-10 securitizations of FFELP student loans sponsored by Sallie Mae. The subordinated notes remain under review for possible downgrade. Sallie Mae, Inc. is the servicer and administrator of the affected transactions.

Complete rating actions are as follows:

Issuer: SLM Student Loan Trust 2003-7

Cl. A-5A, Aaa Placed Under Review for Possible Downgrade; previously on Jul 28, 2003 Assigned Aaa

Cl. A-5B, Aaa Placed Under Review for Possible Downgrade; previously on Jul 28, 2003 Assigned Aaa

Cl. B, Downgraded to A3 and Remains On Review for Possible Downgrade; previously on Oct 16, 2009 Aa1 Placed Under Review for Possible Downgrade

Issuer: SLM Student Loan Trust 2004-10

Cl. A-8, Aaa Placed Under Review for Possible Downgrade; previously on Nov 3, 2004 Assigned Aaa

Cl. B, Downgraded to A3 and Remains On Review for Possible Downgrade; previously on Oct 19, 2009 Aa1 Placed Under Review for Possible Downgrade

RATINGS RATIONALE

The downgrades and reviews are caused by a material reduction in excess spread in the affected transactions. The main factors affecting excess spread include failed remarketing of some reset-rate notes (RRN) and a change in Moody's methodology as it relates to the basis risk. The combined effect of these factors on our standard cash flow analyses indicated that projected cash flows do not support the current ratings of the securities.

As of the reporting period ending on Dec. 31, 2010, RRNs represented almost the entirety of the 2003-7 and 2004-10 transactions: approximately 84% and 96%, respectively. As a result of the dislocation in the capital markets, RRNs in the 2003-7 transaction were either remarketed at a significantly higher spread (Class A5A) or the remarketing agents have had failed remarketing the notes (Class A5B). Such market conditions suggest that future remarketing of the remaining RRNs could also fail. Upon a failed remarketing interest rates on the RRNs increase to the 3-month LIBOR plus 0.75%, which contributes to a significant reduction of excess spread.

In addition, we revised our interest rate assumptions to reflect the increased spread between LIBOR and the CP rate observed during the second half of 2008. Our updated assumptions were published in November of 2008 in the report entitled "Methodology Update on Basis Risk in FFELP Student Loan-Backed Securitizations". The new assumptions increased transactions' funding costs and reduced excess spread.

During the review period we will analyze these transactions through cash flow stress scenarios using the Structured Finance Workstation® (SFW), a cash flow model developed by Moody's Wall Street Analytics.

The performance expectations for a given variable indicate Moody's forward-looking view of the likely range of performance over the medium term. From time to time, Moody's may, if warranted, change these expectations. Performance that falls outside the given range may indicate that the collateral's credit quality is stronger or weaker than Moody's had anticipated when the related securities ratings were issued. Even so, a deviation from the expected range will not necessarily result in a rating action nor does performance within expectations preclude such actions. The decision to take (or not take) a rating action is dependent on an assessment of a range of factors including, but not exclusively, the performance metrics. Primary sources of uncertainty with regard to excess spread are increased basis risk and the failed remarketing. Ratings on Class B could be upgraded if spread between LIBOR and the financial CP is 10 bps lower, or downgraded if the spread is 10 bps higher.

In monitoring securitizations backed by student loans Moody's evaluates operational and transaction governance risks introduced by non-performance of various transaction parties, in addition to assessing liquidity and credit risks. The adherence of the transaction parties to legal agreements governing securitization transactions is the essential element of assuring that noteholders receive the timely payments of interest and ultimate repayment of their principal investments. Moody's monitors compliance with covenants and other legal provisions of the transaction documents.

In addition, Moody's assesses both liquidity and credit risks of the student loan transactions. The factors affecting liquidity and credit performance of a transaction include defaults, guarantor reject rates, voluntary prepayments, basis risk, borrower benefit utilization, and the number of borrowers in non-repayment status, such as deferment and forbearance. As a part of our analysis, we examine historical FFELP static pool performance data. To the extent that performance data is available from a specific issuer, that information is used to arrive at our cash flow assumptions for that particular issuer. If an issuer's data are either limited or unavailable, our assumptions are based on FFELP performance data received from other participants.

Historical interest rates and spreads are also analyzed to evaluate the basis risk between the interest rate to which the notes are indexed and the interest rate to which the FFELP loans are indexed. This historical data is used to derive at expected, or most likely, outcome for each variable. These expected defaults, prepayments, interest rates, and other assumptions are then stressed in accordance with the rating categories requested by the issuer. Factors that influence the stress levels include the availability of relevant issuer-specific performance data, the seasoning of the loans, collateral concentrations (school types, loan programs), the financial strength and stability of the servicer, and the general economic environment.

These stressed assumptions are then incorporated into a cash flow model that takes into account the FFELP loan characteristics as well as structural (e.g., starting parity, cash flow waterfall, bond tranching, etc.) and pricing features of the transaction. The cash flow model outputs are analyzed to determine whether the transaction as structured by the issuer has sufficient credit protection to pay off the notes by their legal final maturity dates. In certain circumstances where cash flow runs are not available, we rely on model results from similar transactions. We also analyze the liquidity risk of the transaction given that borrowers can be in non-repayment status while in school, grace, deferment or forbearance status, and the transaction can experience delays in default reimbursement and other payments. Basis risk is the primary credit risk in FFELP student loan ABS. Moody's Aaa stressed basis risk assumption between LIBOR and the CP Rate is 25 basis points with certain periods in which the spread increases to 150 basis points. This is based on an analysis of historical spreads between the two indices. For additional information, please see "Methodology Update on Basis Risk in FFELP Student Loan-Backed Securitization," on moodys.com. Other methodologies and factors that may have been considered in the process of rating this issue can also be found in the Rating Methodologies sub-directory on Moody's website. In addition, Moody's publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our website, at www.moodys.com/SFQuickCheck.

Moody's Investors Service did not receive or take into account a third party due diligence report on the underlying assets or financial instruments related to the monitoring of this transaction in the past 6 months.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, confidential and proprietary Moody's Investors Service information and confidential and proprietary Moody's Analytics' information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Irina Faynzilberg
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
JingJing Dang
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades and reviews five notes from two Sallie Mae student loan deals
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