<PAGE> 1
Registration No. 333-25433
Registration No. 333-25433-01
Rule 424(b)(4)
$1,030,000,000
PNC STUDENT LOAN TRUST I
STUDENT LOAN ASSET BACKED NOTES, SERIES 1997-2
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PNC BANK, NATIONAL ASSOCIATION
Transferor
PNC Student Loan Trust I, a Delaware business trust (the "Trust"), will
issue $1,030,000,000 aggregate principal amount of its Student Loan Asset Backed
Notes, Series 1997-2, in the classes and original principal amounts set forth
below (collectively, the "Notes"). The assets of the Trust will include a pool
of guaranteed education loans to students and parents of students acquired by
The First National Bank of Chicago, as eligible lender trustee on behalf of the
Trust (the "Eligible Lender Trustee"), from PNC Bank, National Association (the
"Transferor") (the "Financed Student Loans"), collections and other payments
with respect to the Financed Student Loans and monies on deposit in certain
trust accounts to be established (including the Collection Account, the Reserve
Account, the Note Distribution Account, the Expense Account and the Monthly
Advance Account). The Notes will be collateralized by the assets of the Trust.
------------------ (Continued on following page)
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK
FACTORS" BEGINNING ON PAGE 26.
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THE NOTES REPRESENT OBLIGATIONS OF THE TRUST ONLY AND DO NOT REPRESENT INTERESTS
IN OR OBLIGATIONS OF THE TRANSFEROR, THE MASTER SERVICER, THE SERVICERS, THE
ELIGIBLE LENDER TRUSTEE, THE INDENTURE TRUSTEE OR ANY OF THEIR
RESPECTIVE AFFILIATES OR SUBSIDIARIES. THE NOTES ARE NOT DEPOSITS OF
A BANK. THE NOTES ARE NOT GUARANTEED OR INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY GOVERNMENTAL AGENCY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==================================================================================================================================
CLASS FINAL
INTEREST PRICE TO UNDERWRITING PROCEEDS TO MATURITY
RATE PUBLIC DISCOUNT(1) TRANSFEROR(2) DATE(4)
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
$90,000,000 Senior LIBOR Rate Class A-1 Notes.... (3) 100% 0.1544% 99.8456% July 20, 1998
- ----------------------------------------------------------------------------------------------------------------------------------
$107,000,000 Senior Fixed Rate Class A-2 Notes... 6.138% 100% 0.2194% 99.7806% January 25, 2000
- ----------------------------------------------------------------------------------------------------------------------------------
$107,000,000 Senior Fixed Rate Class A-3 Notes... 6.314% 100% 0.2694% 99.7306% January 25, 2001
- ----------------------------------------------------------------------------------------------------------------------------------
$102,000,000 Senior Fixed Rate Class A-4 Notes... 6.446% 100% 0.2944% 99.7056% January 25, 2002
- ----------------------------------------------------------------------------------------------------------------------------------
$94,000,000 Senior Fixed Rate Class A-5 Notes.... 6.530% 100% 0.3194% 99.6806% January 25, 2003
- ----------------------------------------------------------------------------------------------------------------------------------
$72,500,000 Senior Fixed Rate Class A-6 Notes.... 6.572% 100% 0.3444% 99.6556% January 25, 2004
- ----------------------------------------------------------------------------------------------------------------------------------
$121,000,000 Senior Fixed Rate Class A-7 Notes... 6.728% 100% 0.3944% 99.6056% January 25, 2007
- ---------------------------------------------------------------------------------------------------------------------------------
$175,000,000 Senior LIBOR Rate Class A-8 Notes... (3) 100% 0.2444% 99.7556% January 25, 2008
- ----------------------------------------------------------------------------------------------------------------------------------
$125,450,000 Senior LIBOR Rate Class A-9 Notes... (3) 100% 0.3944% 99.6056% January 25, 2017
- ----------------------------------------------------------------------------------------------------------------------------------
$36,050,000 Subordinate LIBOR Rate Class B
Notes.......................................... (3) 100% 0.4944% 99.5056% January 25, 2027
- ----------------------------------------------------------------------------------------------------------------------------------
Total........................................ $1,030,000,000 $3,090,000 $1,026,910,000
==================================================================================================================================
</TABLE>
(1) The Depositor has agreed to indemnify the Underwriters against certain
liabilities under the Securities Act of 1933, as amended.
(2) Before deducting expenses, estimated to be $2,150,000.
(3) The Class Interest Rate for the Class A-1 Notes will equal One-Month LIBOR
minus 0.06%, and the Class Interest Rates for the Class A-8, Class A-9 and
Class B Notes will equal, subject to certain limitations described herein,
One-Month LIBOR plus 0.11%, 0.18% and 0.30%, respectively.
(4) Payment in full of the Notes could occur earlier than their respective final
maturity dates as described herein.
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The Notes are offered by the Underwriters when, as and if issued by the
Trust, delivered to and accepted by the Underwriters and subject to approval of
certain legal matters by counsel for the Underwriters. The Underwriters reserve
the right to withdraw, cancel or modify such offer and to reject orders in whole
or in part. It is expected that delivery of the Notes will be made in book-entry
form through the Same Day Funds Settlement System of The Depository Trust
Company and also Cedel Bank, societe anonyme or the Euroclear System on or about
June 25, 1997.
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SMITH BARNEY INC. PNC CAPITAL MARKETS, INC.
The date of this Prospectus is June 20, 1997
<PAGE> 2
(Cover continued from previous page)
The Notes will be available for purchase in denominations of $50,000 and
integral multiples of $1,000 in excess thereof in book-entry form only. Interest
on and principal of the Notes will be payable quarterly on or about the 25th day
of each January, April, July and October (or in the case of the Class A-1 Notes,
monthly on or about the 25th day of each month and on July 20, 1998), in each
case commencing July 25, 1997 (each, a "Distribution Date"). No distribution in
respect of principal of the Class B Notes will be payable until each Class of
Class A Notes is paid in full. See generally "Description of the Notes--The
Notes." Interest on the Notes will accrue, subject to certain limitations
described herein, for each Interest Period at the per annum rates set forth in
the table above.
Payment in full of the Notes could occur earlier than their respective final
maturity dates as described herein. In addition, the Notes will be repaid (i) on
any Distribution Date on which the Transferor exercises its option to purchase
the Financed Student Loans, exercisable when the outstanding Pool Balance is
reduced to 5% or less of the Initial Pool Balance and the outstanding aggregate
principal amount of the Fixed Rate Notes has been reduced to zero, (ii) on or
after the Distribution Date occurring in July, 2007, if the Financed Student
Loans are sold pursuant to the auction procedures described under "Description
of the Transfer and Servicing Agreements--Termination," and (iii) under certain
circumstances as described in "Description of the Transfer and Servicing
Agreements--Insolvency Event," upon the insolvency of the Transferor and
subsequent termination of the Trust pursuant to the Trust Agreement (as defined
in "Summary of Terms--The Trust").
There is currently no secondary market for the Notes. Smith Barney Inc.
intends to, and PNC Capital Markets, Inc. may, make a secondary market for the
Notes, but neither of them has any obligation to do so. There can be no
assurance that a secondary market for the Notes will develop or, if one does
develop, that it will continue. The Notes will not be listed on any national
securities exchange.
The Transferor has not authorized any offer of Notes to the public in the
United Kingdom within the meaning of the Public Offers of Securities Regulations
1995 (the "U.K. Regulations"). The Notes may not lawfully be offered or sold to
persons in the United Kingdom except in circumstances which do not result in an
offer to the public in the United Kingdom within the meaning of the U.K.
Regulations or otherwise are in compliance with all applicable provisions of the
U.K. Regulations.
------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE COVERING
TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
UNTIL 90 DAYS AFTER THE DATE HEREOF, ALL DEALERS EFFECTING TRANSACTIONS IN
THE NOTES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 3
AVAILABLE INFORMATION
The Transferor, as depositor of the Trust (the "Depositor"), has filed with
the Securities and Exchange Commission (the "Commission") a registration
statement (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Notes offered hereby. This Prospectus, which forms part of
the Registration Statement, does not contain all the information contained
therein. For further information, reference is made to the Registration
Statement which may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington D.C. 20549;
and at the Commission's regional offices at Seven World Trade Center, Suite
1300, New York, New York 10048; and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and copies of all or any part thereof may be obtained
from the Public Reference Branch of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549 upon the payment of certain fees prescribed by the
Commission. In addition, the Registration Statement may be accessed
electronically through the Commission's Electronic Data Gathering, Analysis and
Retrieval system at the Commission's site on the World Wide Web located at
http://www.sec.gov.
REPORTS TO NOTEHOLDERS
Unless and until Definitive Notes are issued, quarterly and annual
unaudited reports containing information concerning the Financed Student Loans
will be prepared by PNC Bank, National Association, in its capacity as
administrator for the Trust (the "Administrator") and sent on behalf of the
Trust only to Cede & Co. ("Cede"), as nominee of The Depository Trust Company
("DTC") and registered holder of the Notes but will not be sent to any
beneficial holder of the Notes. Such reports will not constitute financial
statements prepared in accordance with generally accepted accounting principles.
See "Description of the Notes--Book-Entry Registration" and "--Reports to
Noteholders." The Trust will file with the Commission such periodic reports as
are required under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations of the Commission thereunder. The
Trust intends to suspend the filing of such reports under the Exchange Act when
and if the filing of such reports is no longer statutorily required.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Administrator, on behalf of
the Trust, pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Prospectus and prior to the termination of the
offering of the Notes shall be deemed to be incorporated by reference into this
Prospectus and to be a part hereof. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Administrator will provide without charge to each person to whom a copy
of this Prospectus is delivered, on the written or oral request of any such
person, a copy of any or all of the documents incorporated herein by reference,
except the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Written requests for such copies
should be directed to Glenn Davies, Vice President-Financial Reporting, PNC Bank
Corp., One PNC Plaza, 249 Fifth Avenue, 24th Floor, Pittsburgh, Pennsylvania
15222 or "[email protected]" on the Internet. Telephone requests for such copies
should be directed to (412) 762-1553.
3
<PAGE> 4
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by the Related
Documents. Certain capitalized terms used in this Prospectus are defined
elsewhere herein on the pages indicated in the "Index of Principal Terms"
beginning on page 93 of this Prospectus.
Issuer.......................... PNC Student Loan Trust I (the "Trust") is
a statutory business trust established
under the laws of the State of Delaware.
Securities Offered.............. Senior LIBOR Rate Class A-1 Asset Backed
Notes (the "Class A-1 Notes") in the
aggregate principal amount of $90,000,000,
Senior Fixed Rate Class A-2 Asset Backed
Notes (the "Class A-2 Notes") in the
aggregate principal amount of
$107,000,000, Senior Fixed Rate Class A-3
Asset Backed Notes (the "Class A-3 Notes")
in the aggregate principal amount of
$107,000,000, Senior Fixed Rate Class A-4
Asset Backed Notes (the "Class A-4 Notes")
in the aggregate principal amount of
$102,000,000, Senior Fixed Rate Class A-5
Asset Backed Notes (the "Class A-5 Notes")
in the aggregate principal amount of
$94,000,000, Senior Fixed Rate Class A-6
Asset Backed Notes (the "Class A-6 Notes")
in the aggregate principal amount of
$72,500,000, Senior Fixed Rate Class A-7
Asset Backed Notes (the "Class A-7 Notes")
in the aggregate principal amount of
$121,000,000, Senior LIBOR Rate Class A-8
Asset Backed Notes (the "Class A-8 Notes")
in the aggregate principal amount of
$175,000,000, Senior LIBOR Rate Class A-9
Asset Backed Notes (the "Class A-9 Notes"
and together with the Class A-1 Notes, the
Class A-2 Notes, the Class A-3 Notes, the
Class A-4 Notes, the Class A-5 Notes, the
Class A-6 Notes, the Class A-7 Notes and
the Class A-8 Notes, the "Class A Notes")
in the aggregate principal amount
$125,450,000 and Subordinate LIBOR Rate
Class B Asset Backed Notes (the "Class B
Notes" and, together with the Class A
Notes, the "Notes") in the aggregate
principal amount of $36,050,000. The
original principal amount of each class (a
"Class") of Notes is referred to as its
"Original Amount."
The holders of the Class A-1 Notes, the
Class A-2 Notes, the Class A-3 Notes, the
Class A-4 Notes, the Class A-5 Notes, the
Class A-6 Notes, the Class A-7 Notes, the
Class A-8 Notes and the Class A-9 Notes
are referred to as the "Class A-1
Noteholders," the "Class A-2 Noteholders,"
the "Class A-3 Noteholders," the "Class
A-4 Noteholders," the "Class A-5
Noteholders," the "Class A-6 Noteholders,"
the "Class A-7 Noteholders," the "Class
A-8 Noteholders" and the "Class A-9
Noteholders," respectively, and
collectively as the "Class A Noteholders."
The holders of the Class B Notes are
referred to as the "Class B Noteholders."
The Notes will be issued in minimum
denominations of $50,000 and integral
multiples of $1,000 in excess thereof.
Persons acquiring beneficial ownership
interests in the Notes will hold their
interests in the Notes through DTC in the
United States or Cedel Bank, societe
anonyme ("Cedel") or
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<PAGE> 5
the Euroclear System ("Euroclear") in
Europe. See "Description of the
Notes--Book-Entry Registration."
The Trust will issue the Notes pursuant to
an Indenture dated as of March 27, 1997
and a Second Terms Supplement dated as of
June 25, 1997 authorizing the Notes (as
amended and supplemented from time to
time, the "Terms Supplement" and, together
with the Indenture, as amended and
supplemented from time to time, the
"Indenture") between the Trust and the
Indenture Trustee.
Other Securities................ The Trust has previously issued $1,000
aggregate principal amount of PNC Student
Loan Trust I Asset Backed Certificates
(the "Certificates") in a transaction
exempt from the registration requirements
of the Securities Act. The Certificates
are not being offered hereby.
Transferor...................... PNC Bank, National Association (the
"Transferor"), will contribute the
Financed Student Loans to the Trust
pursuant to the Transfer and Servicing
Agreement (as amended and supplemented
from time to time, the "Transfer and
Servicing Agreement") among the Trust, the
Transferor and the Eligible Lender
Trustee.
Master Servicer and Servicers... The Transferor will act as Master Servicer
with respect to the Financed Student Loans
(in such capacity, the "Master Servicer").
The Financed Student Loans will be
serviced by the Pennsylvania Higher
Education Assistance Agency, an agency of
the Commonwealth of Pennsylvania
("PHEAA"), AFSA Data Corporation ("AFSA")
and USA Group Loan Services, Inc.
("USAG"), or such other parties as may be
approved by the Master Servicer. The
Transferor, PHEAA, AFSA, USAG and each
other party who may, from time to time, be
servicing the Financed Student Loans are
referred to herein as a "Servicer" and
collectively as the "Servicers."
Eligible Lender Trustee......... The First National Bank of Chicago, a
national banking association, will act as
eligible lender trustee under the Trust
Agreement and holder of legal title to the
Financed Student Loans on behalf of the
Trust (the "Eligible Lender Trustee"). See
"Formation of the Trust--Eligible Lender
Trustee."
Indenture Trustee............... Bankers Trust Company, a New York banking
corporation (the "Indenture Trustee"),
will act as trustee under the Indenture.
Administrator................... PNC Bank, National Association, will act
as Administrator on behalf of the Trust
pursuant to an Administration Agreement
(as amended and supplemented from time to
time, the "Administration Agreement"),
among the Administrator, the Eligible
Lender Trustee and the Indenture Trustee.
Distribution Dates.............. Interest on and principal of each Class of
Notes will be payable quarterly on the
25th of each January, April, July and
October or if any such day is not a
Business Day, the next succeeding Business
Day (each, a "Quarterly Distribution
Date"), or in the case of the Class A-1
Notes, monthly on the 25th of each month,
or if any such day is not a
5
<PAGE> 6
Business Day, the next succeeding Business
Day, commencing July 25, 1997.
Notwithstanding the foregoing, amounts if
any, due to the Class A-1 Notes in July
1998 will be paid on July 20, 1998. Each
date on which amounts are payable on the
Notes is referred to as a "Distribution
Date." No distribution in respect of
principal of Class B Notes will be made
until each of the Class A Notes has been
paid in full. See "Description of the
Transfer and Servicing
Agreements--Distributions."
Record Date..................... Payments in respect of the Notes will be
payable to holders of record of the Notes
("Noteholders") as of the second Business
Day preceding the related Distribution
Date (each a "Record Date").
Interest........................ Each Class of Notes will bear interest
during each period (an "Interest Period")
beginning on the 25th day of each month
(or the Closing Date with respect to the
first Interest Period) and ending on and
including the 24th day of the following
month (provided that for any Interest
Period ending immediately prior to a
Distribution Date, such Interest Period
shall end on the day immediately preceding
such Distribution Date and the next
Interest Period will begin on such
Distribution Date) at a rate per annum for
such Class (the "Class Interest Rate") as
described below.
Except as otherwise described in the
following paragraph, the Class Interest
Rate for each Interest Period for each
Class of Notes will equal (i) in the case
of the Class A-1 Notes, One-Month LIBOR as
of the LIBOR Determination Date for such
Interest Period minus the applicable
Margin for such Class, and in the case of
the Class A-8 Notes, the Class A-9 Notes
and the Class B Notes, One-Month LIBOR as
of the LIBOR Determination Date for such
Interest Period plus the applicable Margin
for such Class and (ii) in the case of the
Class A-2 Notes, the Class A-3 Notes, the
Class A-4 Notes, the Class A-5 Notes, the
Class A-6 Notes and the Class A-7 Notes,
6.138% per annum, 6.314% per annum, 6.446%
per annum, 6.530% per annum, 6.572% per
annum and 6.728% per annum, respectively.
See "Description of the Notes--The
Notes--Distributions of Interest." The
"Margin" will be 0.06% for the Class A-1
Notes, 0.11% for the Class A-8 Notes,
0.18% for the Class A-9 Notes and 0.30%
for the Class B Notes. The Class A-1
Notes, the Class A-8 Notes, the Class A-9
Notes and the Class B Notes are referred
to herein collectively as the "LIBOR Rate
Notes" and the Class A-2 Notes, the Class
A-3 Notes, the Class A-4 Notes, the Class
A-5 Notes, the Class A-6 Notes and the
Class A-7 Notes are referred to herein
collectively as the "Fixed Rate Notes."
Interest on each Class of LIBOR Rate Notes
will be calculated on the basis of the
actual number of days elapsed in each
Interest Period divided by 360, and
interest on each Class of Fixed Rate Notes
will be calculated on the basis of a year
consisting of 12 months of 30 days each.
6
<PAGE> 7
"One-Month LIBOR" for any Interest Period
will be determined as described under
"Description of the Notes-- Determination
of LIBOR."
Notwithstanding the foregoing, if the
Class Interest Rate with respect to any
Class of LIBOR Rate Notes (other than the
Class A-1 Notes) for any Interest Period
is greater than the Net Loan Rate (as
defined in "--Net Loan Rate" below), then
such Class Interest Rate for such Interest
Period will be the Net Loan Rate. However,
in no event will the Class Interest Rate
for any Class of LIBOR Rate Notes, other
than the Class A-1 Notes, exceed 18.0% per
annum. See "Description of the Notes--The
Notes--Distributions of Interest."
If the Class Interest Rate for any Class
of LIBOR Rate Notes for any Interest
Period is based on the Net Loan Rate, the
excess of (a) the amount of interest such
Class of Notes would have accrued in
respect of the related Interest Period had
interest been calculated based on the
applicable Class Interest Rate (without
giving effect to the Net Loan Rate), over
(b) the amount of interest such Class of
Notes actually accrued in respect of such
Interest Period based on the Net Loan Rate
(such excess, together with the unpaid
portion of any such excess from prior
Interest Periods and interest accrued
thereon calculated based on One-Month
LIBOR is referred to as the "Noteholders'
Interest Carryover") will be paid on the
dates and in the priority set forth herein
under "--Assets of the Trust--Collection
Account; Note Distribution Account;
Certificate Distribution Account; and
Expense Account." The ratings of the LIBOR
Rate Notes do not address the likelihood
of the payment of the amount of any
Noteholders' Interest Carryover.
Net Loan Rate................... For any Interest Period, the "Net Loan
Rate" will equal the weighted average
Effective Interest Rate for the Collection
Period immediately preceding the last day
of such Interest Period, less the Program
Operating Expense Percentage (or less
1.181% per annum during the period from
the Closing Date through December 31,
1998).
The "Effective Interest Rate" means, for
any Financed Student Loan and any
Collection Period, the per annum rate at
which such Financed Student Loan accrues
interest during such Collection Period
after giving effect to all applicable
Interest Subsidy Payments and Special
Allowance Payments due with respect to
such Financed Student Loan.
The "Program Operating Expense Percentage"
is the fraction (expressed as a percentage
and calculated as of the end of each
calendar year by the Administrator) the
numerator of which is the annualized
operating expenses of the Trust for the
calendar month then ended, including,
without limitation, the Transaction Fees
and the Consolidation Loan Fees, and the
denominator of which is the Pool Balance
as of the last day of such calendar year.
Swap Agreements................. Pursuant to the Transfer and Servicing
Agreements, on the Closing Date, the Trust
will enter into separate interest rate
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<PAGE> 8
swap agreements with respect to each Class
of Fixed Rate Notes (each a "Swap
Agreement," and collectively, the "Swap
Agreements") with a Counterparty, pursuant
to which the Trust will be obligated to
pay such Counterparty on each Quarterly
Distribution Date, an amount accrued on
the Notional Amount of such Swap Agreement
during the three Interest Periods
immediately preceding such Quarterly
Distribution Date (or, in the case of the
first Quarterly Distribution Date, since
the Closing Date) at a variable interest
rate (the "Variable Swap Rate") based on
the T-Bill Rate. In addition, the
Counterparty under each Swap Agreement
will be obligated to pay the Trust on such
Quarterly Distribution Date an amount
accrued during such Interest Periods on
the Notional Amount of such Swap Agreement
at a fixed rate. The payment obligations
of the Trust and each Counterparty to each
other will be netted on each Quarterly
Distribution Date and only the party with
any payment remaining after such netting
will be required to remit such amount to
the other. The Trust's obligations to make
such payments to the Counterparties under
the Swap Agreements will rank equally
without preference with the Trust's
obligations to pay interest on the Class A
Notes and will generally be funded from
Available Funds, Monthly Advances and
amounts, if any, on deposit in the Reserve
Account remaining after deposit of the
Transaction Fees and Consolidation Loan
Fees in the Expense Account. Any net
payments received from the Counterparties
under the Swap Agreements will be
deposited in the Collection Account and
will be included as Available Funds for
the related Quarterly Distribution Date.
See "Description of Transfer and Servicing
Agreements--Swap Agreements."
"Counterparty" means any one of, and
"Counterparties" means both of, Deutsche
Bank AG, New York Branch ("Deutsche Bank")
and Morgan Guaranty Trust Company of New
York ("Morgan"). The Counterparty with
respect to the Class A-3 Notes, the Class
A-4 Notes and the Class A-6 Notes will be
Deutsche Bank, and the Counterparty with
respect to the Class A-2 Notes, the Class
A-5 Notes and the Class A-7 Notes will be
Morgan. See "Transfer and Servicing
Agreements--Counterparties under the Swap
Agreements."
"Notional Amount" as to any Distribution
Date with respect to any Swap Agreement
means the percentage of the Original
Amount of the related Class of Fixed Rate
Notes set forth on the Scheduled Principal
Balance Table attached hereto as Schedule
I (the "Scheduled Principal Balance
Table") for such Class for the
Distribution Date immediately preceding
such Distribution Date (or in the case of
the first Distribution Date, the initial
principal amount of such Class of Fixed
Rate Notes on the Closing Date).
The "T-Bill Rate" means the rate
determined by the Master Servicer on each
Reset Date (as defined in the next
succeeding paragraph) at which United
States Treasury Bills with a maturity of
13 weeks ("91-day Treasury Bills") are
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<PAGE> 9
auctioned as set forth in H.15(519) for
the day opposite such maturity under the
caption "U.S. Government
Securities/Treasury Bills/Auction Average
(Investment)". If on any Reset Date 91-day
Treasury Bills have been auctioned on a
Reset Date but such rate for such Reset
Date is not yet published in H.15(519),
the rate for that Reset Date will be the
bond equivalent yield of the auction
average rate for those Treasury Bills as
announced by the United States Department
of the Treasury. If 91-day Treasury Bills
are not auctioned during any period of
seven consecutive calendar days ending on
and including any Friday and a Reset Date
would have occurred if such 91-day
Treasury Bills had been auctioned during
that seven day period, then the rate for
that Reset Date will be the T-Bill Rate in
effect as a result of the last such
auction and will remain in effect until
such time, if any, as the results of the
91-day Treasury Bills shall again be so
published or such auction is held.
"Reset Date" means the first Business Day
of each week.
Principal....................... Principal of the Notes will be payable
quarterly on each Quarterly Distribution
Date (or in the case of the Class A-1
Notes, monthly on each Distribution Date)
generally in the order of priority set
forth under "Description of the Transfer
and Servicing Agreements--Distributions."
The Fixed Rate Notes have been structured
so that they will receive no payments of
principal prior to the Distribution Date
occurring in October, 1998 (with respect
to the Class A-2 Notes), October, 1999
(with respect to the Class A-3 Notes),
October, 2000 (with respect to the Class
A-4 Notes), October, 2001 (with respect to
the Class A-5 Notes), October, 2002 (with
respect to the Class A-6 Notes) and
October, 2003 (with respect to the Class
A-7 Notes). Thereafter, no Class of Fixed
Rate Notes will receive as a payment of
principal on any Distribution Date more
than the amount needed to reduce its
respective principal balance to the
percentage of the Original Amount set
forth for such Class for such Distribution
Date on the Scheduled Principal Balance
Table.
The amount of principal available to be
paid on a Distribution Date will be equal
to the Noteholders' Principal Distribution
Amount for such Distribution Date, less
any portion thereof being used to pay
Transaction Fees, overdue Transaction
Fees, Consolidation Loan Fees, overdue
Consolidation Loan Fees and interest on
the Notes on such Distribution Date. See
"Description of the Transfer and Servicing
Agreements--Distributions." The
Noteholders' Principal Distribution Amount
generally will be equal to the amount of
principal paid with respect to the
Financed Student Loans (plus any Realized
Losses thereon), proceeds realized upon
the sale of Financed Student Loans by the
Trust and Adjustment Payments (reduced by
the amount of any Issuer Consolidation
Payments). In addition, until the Parity
Percentage equals 102.5%, accelerated
principal payments will be made in respect
of the Notes from collections
9
<PAGE> 10
of interest and certain amounts available
therefor in the Reserve Account.
As of any date of determination, the
"Parity Percentage" will be the fraction
expressed as a percentage, the numerator
of which is the sum of (i) the then Pool
Balance and (ii) all amounts on deposit in
the Collection Account and the Reserve
Account and the denominator of which is
the sum of the aggregate outstanding
principal balance of the Notes and the
Certificates, accrued and unpaid interest
thereon plus accrued and unpaid
Transaction Fees and Consolidation Loan
Fees.
Notwithstanding the foregoing, if an Event
of Default has occurred with respect to
payment of the Notes, principal will be
paid to each Class of Class A Notes pro
rata, based upon the outstanding principal
amount of each such Class of Class A
Notes. See "Description of the Transfer
and Servicing Agreements--Distributions."
Final Maturity Dates............ The Final Maturity Dates with respect to
each Class of Notes are as follows:
<TABLE>
<CAPTION>
Class of Notes Final Maturity Date
---------------- --------------------
<S> <C> <C>
Class A-1 Notes July 20, 1998
Class A-2 Notes January 25, 2000
Class A-3 Notes January 25, 2001
Class A-4 Notes January 25, 2002
Class A-5 Notes January 25, 2003
Class A-6 Notes January 25, 2004
Class A-7 Notes January 25, 2007
Class A-8 Notes January 25, 2008
Class A-9 Notes January 25, 2017
Class B Notes January 25, 2027
</TABLE>
The actual maturity of one or more Classes
of Notes could occur sooner than such
dates as a result of a variety of factors,
including (i) as a result of prepayments
on the Financed Student Loans; (ii) the
exercise by the Transferor of its option
to repurchase the Financed Student Loans
when the aggregate principal balance is
reduced to 5% or less of the Initial Pool
Balance and the outstanding aggregate
principal amount of the Fixed Rate Notes
has been reduced to zero; (iii) in the
event the Indenture Trustee is successful
in offering any Financed Student Loans
remaining in the Trust for sale on or
after May 1, 2007 as described under
"Description of the Transfer and Servicing
Agreements--Termination"; or (iv) under
certain circumstances upon the insolvency
of the Transferor and subsequent
termination of the Trust pursuant to the
Trust Agreement as described under
"Description of the Transfer and Servicing
Agreements--Insolvency Event." See "The
Financed Student Loan Pool--Maturity and
Prepayment Assumptions."
Servicing Fee................... The Master Servicer will receive a
quarterly fee (the "Servicing Fee") in an
amount equal to 1.00% per annum of the
average Pool Balance as of the last day of
each of the three
10
<PAGE> 11
Collection Periods immediately preceding
such Distribution Date. The Servicing Fee
will be payable quarterly in advance, out
of Available Funds and amounts on deposit
in the Reserve Account, on each
Distribution Date (or in the case of the
initial Servicing Fee, on the Closing
Date) based on the Administrator's good
faith estimate of the Servicing Fee that
will accrue during the Collection Period
immediately succeeding such Distribution
Date (or in the case of the initial
Servicing Fee, the Collection Period
immediately succeeding the Closing Date)
plus (or minus) the difference (or excess)
of the actual Servicing Fee accrued for
the three Collection Periods immediately
preceding such Distribution Date.
Administration Fee.............. The Administrator will receive a fee (the
"Administration Fee"), payable quarterly
in advance on each Distribution Date, in
an amount equal to 0.02% per annum of the
outstanding principal amount of the Notes
and Certificates.
The Trust....................... The Trust is a Delaware statutory business
trust established by a Trust Agreement
dated as of March 27, 1997 (as amended and
supplemented from time to time, the "Trust
Agreement"), between the Transferor, as
depositor, the Eligible Lender Trustee and
First Chicago Delaware, Inc., as Delaware
trustee. The activities of the Trust and
the Eligible Lender Trustee are limited by
the terms of the Trust Agreement to
issuing one or more classes of its
certificates and notes, acquiring, owning,
selling and managing the Financed Student
Loans and the other assets of the Trust as
described herein, collecting and making
payments thereon and other activities
related thereto.
Assets of the Trust............. The assets of the Trust will include the
following:
A. Financed Student Loans..... The Financed Student Loans will consist of
certain education loans to students and
parents of students ("Student Loans")
enrolled in accredited institutions of
higher education and will include rights
to receive payments made with respect to
such Financed Student Loans and the
proceeds thereof. On June 25, 1997 (the
"Closing Date"), the Transferor will
transfer and contribute Student Loans (the
"Initial Financed Student Loans") having
an aggregate principal balance plus
accrued interest thereon to be capitalized
upon repayment of approximately $1 billion
and $13.7 million, respectively, as of
June 6, 1997 (the "Cut-off Date") (the
"Initial Pool Balance") to the Eligible
Lender Trustee on behalf of the Trust,
pursuant to the Transfer and Servicing
Agreement. Following the Closing Date and
during the Exchange Period (described
below), it is anticipated that, subject to
certain conditions described herein, the
Transferor will transfer to the Eligible
Lender Trustee on behalf of the Trust,
certain Serial Loans and Consolidation
Loans owned by the Transferor (the
"Exchanged Financed Student Loans") in
exchange for certain Financed Student
Loans owned by the Trust. See "Description
of the Transfer and
11
<PAGE> 12
Servicing Agreements--Exchange Period and
Exchanged Financed Student Loans."
Certain of the Financed Student Loans have
been or will be originated by the
Transferor and the remainder of the
Financed Student Loans will have been
originated by independent third parties
and subsequently sold to the Transferor.
The Financed Student Loans constituting
the assets of the Trust include some or
all of the following types of Student
Loans: (i) Parental Loans for
Undergraduate Students ("PLUS Loans"),
(ii) Stafford Loans (formerly known as
Guaranteed Student Loans), (iii)
Unsubsidized Stafford Loans, (iv)
Supplemental Loans for Students ("SLS
Loans"), and (v) Consolidation Loans, all
of which loans (collectively, the "Federal
Loans") are part of the federal
government's Federal Family Education Loan
Program (the "Federal Loan Program").
The Financed Student Loans are guaranteed
to the extent described herein as to the
payment of principal and interest by the
California Student Aid Commission, an
agency of the State of California, the
Florida Department of Education, an agency
of the State of Florida, the Georgia
Higher Education Assistance Corporation, a
public non-profit corporation, Great Lakes
Higher Education Corporation, a public
non-profit corporation, the Illinois
Student Assistance Commission, an agency
of the State of Illinois, the Kentucky
Higher Education Assistance Authority, an
agency of the Commonwealth of Kentucky
("KHEAA"), the Michigan Higher Education
Assistance Authority, an autonomous agency
of the Michigan Department of the
Treasury, the New Jersey Higher Education
Assistance Authority, an agency of the
State of New Jersey, the New Mexico
Student Loan Guarantee Corporation, a New
Mexico non-profit corporation, PHEAA and
United States Aid Funds, Inc., a Delaware
non-profit corporation ("USAF") (each such
entity, a "Guarantor," and collectively,
the "Guarantors"), which are in each case
reinsured to the extent described herein
by the United States Department of
Education (the "Department"). See "The
Financed Student Loan Pool--Guarantors for
the Federal Loans." Financed Student Loans
made before October 1, 1993 are 100%
guaranteed by the applicable Guarantor,
and reinsured against default by the
Department from 80% up to 100% of
Guarantee Payments. Financed Student Loans
made on or after October 1, 1993 are 98%
guaranteed by the applicable Guarantor,
and reinsured against default by the
Department from 78% up to a maximum of 98%
of Guarantee Payments. To the extent
borrowers default on Financed Student
Loans, and amounts in the Reserve Account
and other available funds are not
sufficient to cover the un-guaranteed
portion thereof, the Class B Noteholders
(and thereafter, the Class A Noteholders)
may ultimately experience a loss of the 2%
of the outstanding principal of and
interest on such Financed Stu-
12
<PAGE> 13
dent Loans that is not guaranteed. All
references herein to the guarantee and
reinsurance coverage with respect to the
Financed Student Loans shall be understood
to mean such 100% guarantee, and 100%
maximum reinsurance coverage,
respectively, with respect to Financed
Student Loans made before October 1, 1993
and such 98% guarantee and 98% maximum
reinsurance coverage, respectively, with
respect to Financed Student Loans made on
or after October 1, 1993. See "The
Financed Student Loan Pool--Insurance of
Student Loans; Guarantors of Federal
Loans."
Certain incentive programs currently or
hereafter made available by the Transferor
to borrowers may also be made available by
the Master Servicer to borrowers with
Financed Student Loans. See "Risk
Factors--Risk Resulting From Changes in
Repayment Terms of Financed Student Loans
Pursuant to Incentive Programs" and "The
Financed Student Loan Pool--Incentive
Programs."
During the period (the "Exchange Period")
from the Closing Date until June 30, 2002,
in the event that a borrower on a Financed
Student Loan who is also a borrower under
one or more Student Loans (whether or not
all such loans are in the Trust) elects to
consolidate such loans with the proceeds
of a Consolidation Loan to be made by the
Transferor, the Eligible Lender Trustee,
at the option of the Transferor and
subject to certain conditions, will be
obligated to transfer to the Transferor,
subject to certain conditions described
herein, the Financed Student Loans being
consolidated by the Transferor in exchange
for the related Consolidation Loan to be
made by the Transferor. See "Description
of the Transfer and Servicing
Agreements--Exchange Period and Exchanged
Financed Student Loans." In addition,
during the Exchange Period, the Eligible
Lender Trustee, at the option of the
Transferor and subject to certain
conditions, will be obligated to exchange
with the Transferor existing Financed
Student Loans owned by the Trust for
Federal Loans owned by the Transferor that
are serial to existing Financed Student
Loans owned by the Trust, provided that
certain conditions described herein are
satisfied. Each such transfer of an
Exchanged Financed Student Loan will be
made pursuant to a transfer agreement
(each a "Transfer Agreement") among the
Transferor, the Trust and the Eligible
Lender Trustee. See "Description of the
Transfer and Servicing
Agreements--Exchange Period and Exchanged
Financed Student Loans."
Any Consolidation Loan made with respect
to a Financed Student Loan after the
Closing Date, whether made by the
Transferor or another lender, will result
in a prepayment to the Trust of such
Financed Student Loan unless such
Consolidation Loan is transferred to the
Eligible Lender Trustee as an Exchanged
Financed Student Loan, as described above,
or unless the proceeds of such
Consolidation Loan are used as Issuer
Consolidation Payments. See "Description
of
13
<PAGE> 14
the Transfer and Servicing
Agreements--Exchange Period and Exchanged
Financed Student Loans."
With respect to certain of the Financed
Student Loans, during the period (the
"Deferral Phase") in which the related
borrower is in school and for certain
authorized periods as described in the
Higher Education Act of 1965, as amended
(such Act, together with all rules and
regulations promulgated thereunder by the
Department and/or the Guarantors, the
"Higher Education Act"), the borrower is
not required to make payments on his or
her Financed Student Loan. With respect to
such Financed Student Loans constituting
Stafford Loans, the Department will make
all interest payments during the related
Deferral Phase. For all other Financed
Student Loans (other than certain PLUS
Loans), interest will not be paid during
the related Deferral Phase but, instead,
will accrue and be capitalized and added
to the principal balance of such Financed
Student Loan. The Trust will consist of
Financed Student Loans that are in the
Deferral Phase as well as Financed Student
Loans for which the related borrower is
currently required to make payments of
principal and interest (the "Repayment
Phase"). See "The Financed Student Loan
Pool--Distribution of Financed Student
Loans by Borrower Payment Status."
The "Pool Balance" at any time represents
the aggregate principal balance of the
Financed Student Loans at the end of the
preceding Collection Period (including
accrued interest thereon for such
Collection Period to the extent such
interest will be capitalized), after
giving effect to the following, without
duplication: (i) all payments in respect
of principal received by the Trust during
such Collection Period from or on behalf
of borrowers and Guarantors and, with
respect to certain payments on the
Financed Student Loans, the Department
(collectively, "Obligors"), (ii) the
principal portion of all Purchase Amounts
received by the Trust for such Collection
Period from the Transferor or the Master
Servicer and (iii) any Exchanged Financed
Student Loans conveyed to the Trust and
any Financed Student Loans conveyed by the
Trust in exchange for such Exchanged
Financed Student Loan, during such
Collection Period, as described above.
"Collection Period" means, initially, the
period beginning June 7, 1997 and ending
on June 30, 1997, and thereafter, the
Collection Period means the calendar month
immediately following the end of the
previous Collection Period.
B. Collection Account; Note
Distribution Account;
Certificate Distribution
Account; and Expense
Account.................... The Master Servicer will be required to
remit all collections received with
respect to the Financed Student Loans for
which it is acting as primary servicer
(other than Financed Student Loans that
have been repurchased by the Transferor
pursuant to the Transfer and Servicing
Agreement)
14
<PAGE> 15
(i) within two Business Days after it has
received an aggregate of $30,000 during
any Collection Period and (ii) on the last
Business Day of each month, all other
collections received during such month to
an account in the name of the Indenture
Trustee (the "Collection Account"). The
Master Servicer shall cause each other
Servicer to remit to the Collection
Account, no less frequently than weekly,
all collections received with respect to
the Financed Student Loans for which such
other Servicer is acting as primary
servicer. A "Business Day" is any day
other than a Saturday, a Sunday or a day
on which national banking associations or
banking institutions or trust companies in
New York, New York are authorized or
obligated by law to be closed. The
Eligible Lender Trustee will be required
to remit Interest Subsidy Payments and
Special Allowance Payments it receives
within two Business Days of receipt
thereof to the Collection Account. See
"Description of the Transfer and Servicing
Agreements--Payments on Financed Student
Loans."
Five Business Days prior to each
Distribution Date (each, a "Determination
Date"), the Administrator will advise the
Indenture Trustee in writing of the
applicable Noteholders' Interest
Distribution Amount, the Noteholders'
Principal Distribution Amount and all
amounts payable to the holders of the
Certificates (the "Certificateholders") on
the related Distribution Date. Further, on
each Determination Date relating to a
Quarterly Distribution Date the
Administrator will advise the Indenture
Trustee in writing of the estimated fees
payable to the Master Servicer, the
Administrator, the Indenture Trustee and
the Eligible Lender Trustee (the
"Servicing Fee," "Administration Fee,"
"Indenture Trustee Fee" and "Eligible
Lender Trustee Fee," respectively, and,
collectively, the "Transaction Fees") for
the three succeeding Collection Periods.
On each Quarterly Distribution Date, the
Indenture Trustee will transfer from the
Collection Account, in the following
priority and from the Available Funds for
the three Collection Periods immediately
preceding the month of such Quarterly
Distribution Date and any Counterparty
Swap Payments received with respect to
such Quarterly Distribution Date (or (x)
with respect to the first Quarterly
Distribution Date, from the Closing Date
through and including the Collection
Period immediately preceding such
Quarterly Distribution Date, (y) with
respect to clause (i) (A) below, the
Indenture Trustee will transfer on the
25th day of each month (or if such day is
not a Business Day, the next succeeding
Business Day) from the Available Funds for
the Collection Period immediately
preceding such day, the amount described
in (i)(A) below, and (z) with respect to
clauses (ii) and (iii) below, on each
Distribution Date relating to the Class
A-1 Notes, the Indenture Trustee will
transfer the required amounts from the
Available Funds for
15
<PAGE> 16
the Collection Period immediately
preceding the month of each such
Distribution Date: (i) to a separate
account held with and in the name of the
Indenture Trustee (the "Expense Account"),
(A) an amount equal to the Consolidation
Loan Fees with respect to the Collection
Period most recently ended and any overdue
Consolidation Loan Fees from prior
Collection Periods, and (B) an amount up
to the estimated Transaction Fees for the
three immediately succeeding Collection
Periods and all overdue Transaction Fees
from prior Collection Periods (plus (or
minus) the difference (or excess) of the
actual Transaction Fees for the three
immediately preceding Collection Periods
and the Transaction Fees deposited into
the Expense Account on the preceding
Quarterly Distribution Date), (ii) to a
separate account held with and in the name
of the Indenture Trustee for the benefit
of the Noteholders (the "Note Distribution
Account"), an amount up to the sum of the
Noteholders' Interest Distribution Amount
and the Trust Swap Payment, (iii) to the
Note Distribution Account, an amount up to
the Noteholders' Principal Distribution
Amount, (iv) to a supplemental account
held with and in the name of the Eligible
Lender Trustee for the benefit of the
Certificateholders (the "Certificate
Distribution Account"), an amount up to
the Certificateholders' Interest
Distribution Amount, and (v) after the
Notes have been paid in full, to the
Certificateholder Distribution Account, an
amount up to the Certificateholders'
Principal Distribution Amount.
On each Quarterly Distribution Date (and
with respect to clause (i) below on the
25th day of each month, or if such day is
not a Business Day, the next succeeding
Business Day), following the transfer to
the Expense Account described in the
preceding paragraph, the Indenture Trustee
will distribute from the Expense Account
(in addition to any amounts transferred
from the Reserve Account as described
herein) the following amounts in the
following order of priority: (i) to the
Department, the Consolidation Loan Fees
for the immediately preceding Collection
Period, together with any overdue
Consolidation Loan Fees for any prior
Collection Periods, (ii) to the Master
Servicer, the estimated Servicing Fee for
the three immediately succeeding
Collection Periods and all overdue
Servicing Fees, (iii) to the
Administrator, the estimated
Administration Fee for the three
immediately succeeding Collection Periods
and all overdue Administration Fees, (iv)
to the Indenture Trustee, the estimated
Indenture Trustee Fee for the three
immediately succeeding Collection Periods
and all overdue Indenture Trustee Fees and
(v) to the Eligible Lender Trustee, the
estimated Eligible Lender Trustee Fee for
the three immediately succeeding
Collection Periods and all overdue
Eligible Lender Trustee Fees.
On each Distribution Date, following the
transfer to the Note Distribution Account,
the Indenture Trustee will dis-
16
<PAGE> 17
tribute to the Noteholders as of the
related Record Date and to each
Counterparty the amounts transferred to
the Note Distribution Account as set forth
above (in addition to any amounts
transferred from the Reserve Account and
the Monthly Advance Account and any Parity
Percentage Payments transferred from the
Collection Account, each as described
below) in the following order of priority:
(i) first, to each Class of Class A
Noteholders and each Counterparty, the
Class A Noteholders' Interest Distribution
Amount and the Trust Swap Payment,
respectively (pro rata based upon the
portion thereof allocable to each such
Class and each such Counterparty);
(ii) second, to the Class B Noteholders,
the Class B Noteholders' Interest
Distribution Amount:
(iii) third, to the Class A-1 Noteholders,
the Noteholders' Principal Distribution
Amount until the principal balance of the
Class A-1 Notes has been reduced to zero;
(iv) fourth, to the Fixed Rate Notes, the
Noteholders' Principal Distribution Amount
in the following order:
(A) after the principal balance of
the Class A-1 Notes has been reduced
to zero, commencing with (but no
earlier than) the Distribution Date
occurring in October, 1998, to the
Class A-2 Noteholders, the remaining
Noteholders' Principal Distribution
Amount until the principal balance of
the Class A-2 Notes equals the
percentage of the Original Amount for
such Class set forth for such
Distribution Date on the Scheduled
Principal Balance Table;
(B) after the principal balance of
the Class A-2 Notes has been reduced
to zero, commencing with (but not
earlier than) the Distribution Date
occurring in October 1999, to the
Class A-3 Noteholders, the remaining
Noteholders' Principal Distribution
Amount until the principal balance of
the Class A-3 Notes equals the
percentage of the Original Amount for
such Class set forth for such
Distribution Date on the Scheduled
Principal Balance Table;
(C) after the principal balance of
the Class A-3 Notes has been reduced
to zero, commencing with (but not
earlier than) the Distribution Date
occurring in October 2000, to the
Class A-4 Noteholders, the remaining
Noteholders' Principal Distribution
Amount until the principal balance of
the Class A-4 Notes equals the
percentage of the Original Amount for
such Class set forth for such
Distribution Date on the Scheduled
Principal Balance Table;
(D) after the principal balance of
the Class A-4 Notes has been reduced
to zero, commencing with (but not
earlier than) the Distribution Date
occurring in October 2001, to the
Class A-5 Noteholders, the
17
<PAGE> 18
remaining Noteholders' Principal
Distribution Amount until the
principal balance of the Class A-5
Notes equals the percentage of the
Original Amount for such Class set
forth for such Distribution Date on
the Scheduled Principal Balance Table;
(E) after the principal balance of
the Class A-5 Notes has been reduced
to zero, commencing with (but not
earlier than) the Distribution Date
occurring in October 2002, to the
Class A-6 Noteholders, the remaining
Noteholders' Principal Distribution
Amount until the principal balance of
the Class A-6 Notes equals the
percentage of the Original Amount for
such Class set forth for such
Distribution Date on the Scheduled
Principal Balance Table; and
(F) after the principal balance of
the Class A-6 Notes has been reduced
to zero, commencing with (but not
earlier than) the Distribution Date
occurring in October 2003, to the
Class A-7 Noteholders, the remaining
Noteholders' Principal Distribution
Amount until the principal balance of
the Class A-7 Notes equals the
percentage of the Original Amount for
such Class set forth for such
Distribution Date on the Scheduled
Principal Balance Table;
(v) fifth, after the principal balance of
each Class of Fixed Rate Notes equals the
percentage of the Original Amount for the
respective Class that is set forth for
such Distribution Date on the Scheduled
Principal Balance Table (regardless of
whether the principal balance of any Class
of Fixed Rate Notes has been reduced to
zero) to the Class A-8 Noteholders, the
remaining Noteholders' Principal
Distribution Amount until the principal
balance of the Class A-8 Notes has been
reduced to zero;
(vi) sixth, after the principal balance of
the Class A-8 Notes has been reduced to
zero and after the principal balance of
each Class of Fixed Rate Notes equals the
percentage of the Original Amount for the
respective Class that is set forth for
such Distribution Date on the Scheduled
Principal Balance Table (regardless of
whether the principal balance of any Class
of Fixed Rate Notes has been reduced to
zero), to the Class A-9 Noteholders, the
remaining Noteholders' Principal
Distribution Amount until the principal
balance of the Class A-9 Notes has been
reduced to zero; and
(vii) seventh, after the principal balance
of each Class of Class A Notes has been
reduced to zero, to the Class B
Noteholders, the remaining Noteholders'
Principal Distribution Amount until the
principal balance of the Class B Notes has
been reduced to zero.
On each Quarterly Distribution Date (or
with respect to clause (ii) below, on each
Distribution Date relating to the Class
A-1 Notes), after making all required
transfers to the Expense Account, the Note
Distribution Account and, if
18
<PAGE> 19
applicable, the Certificate Distribution
Account the Indenture Trustee will
transfer any amounts remaining in the
Collection Account (other than amounts
representing payments received during such
month) in the following order of priority:
(i) to the Reserve Account, the amount, if
any, necessary to increase the balance
thereof to the Specified Reserve Account
Balance, (ii) to the Note Distribution
Account the amount, if any, which when
applied as a payment of principal on such
Distribution Date to the Class of Notes
then receiving payments of principal, is
necessary for the Parity Percentage to
equal 102.5% on such Distribution Date
(the amount so transferred to the Note
Distribution Account is the "Parity
Percentage Payment") and (iii) to the Note
Distribution Account, the amount of any
outstanding Noteholders' Interest
Carryover. Any amounts remaining in the
Collection Account after such transfers on
a Quarterly Distribution Date (other than
amounts representing payments received
during such current month) will be
distributed first, to the Counterparties,
the amount of any termination payments, if
any, owed by the Trust under the Swap
Agreements (the "Swap Termination
Payments"), and second, after such Swap
Termination Payments have been paid in
full, to the Transferor.
No Class of Fixed Rate Notes will receive
as a payment of principal on any
Distribution Date more than the amount
needed to reduce its respective principal
balance to the percentage of the Original
Amount set forth for such Class for such
Distribution Date on the Scheduled
Principal Balance Table. Therefore, on any
Distribution Date the portion, if any, of
the Noteholders' Principal Distribution
Amount remaining after the outstanding
principal balance of each Class of Fixed
Rate Notes has been reduced to such amount
and the principal balance of the Class A-8
Notes and the Class A-9 Notes has been
paid in full will remain on deposit in the
Note Distribution Account and applied as
payments of principal on the Fixed Rate
Notes on future Distribution Dates in
accordance with the priorities described
above. The Class B Notes will receive no
payments of principal so long as any Class
A Notes are outstanding.
Notwithstanding the foregoing, if (x) on
any Distribution Date following all
distributions to be made on such
Distribution Date, the principal amount of
the Class A Notes would exceed the sum of
the Pool Balance at the end of the
immediately preceding Collection Period
plus the aggregate balance on deposit in
the Trust Accounts on such Distribution
Date following such distributions, or (y)
an Event of Default has occurred with
respect to payment of the Notes or the
Trust Swap Payment, after paying
Transaction Fees, overdue Transaction
Fees, Consolidation Loan Fees and overdue
Consolidation Loan Fees, distributions
will be made in the following priority:
(i) first, to each Class of Class A
Noteholders and the Counterparties, the
Noteholders' Inter-
19
<PAGE> 20
est Distribution Amount applicable to each
such Class and the Trust Swap Payment,
respectively, pro rata based upon the
portion thereof allocable to each such
Class and the Counterparties; (ii) second,
in the case of clause (x) above, to the
Class A Noteholders, the Noteholders'
Principal Distribution Amount, in the
order and priority set forth above in
clauses third through sixth, inclusive, of
the third preceding paragraph, or in the
case of clause (y) above, to each Class of
Class A Noteholders, the Noteholders'
Principal Distribution Amount applicable
to such Distribution Date, pro rata based
upon the principal balance of each Class
of Class A Notes until the principal
balance of each Class of Class A Notes has
been paid in full; (iii) third, to the
Class B Noteholders, the Noteholders'
Interest Distribution Amount applicable to
the Class B Notes; (iv) fourth, after the
principal balance of each of the Class A
Notes has been paid in full, to the Class
B Noteholders, the Noteholders' Principal
Distribution Amount until the principal
balance of the Class B Notes has been paid
in full; (v) fifth, to the Class A-8
Noteholders and the Class A-9 Noteholders,
the Noteholders' Interest Carryover
applicable to the respective Class of
Class A Notes, pro rata based upon the
portion thereof allocable to each such
Class; (vi) sixth, to the Class B
Noteholders, the Noteholders' Interest
Carryover applicable to the Class B Notes;
(vii) seventh, to Counterparties, any Swap
Termination Payments, (viii) eighth, to
the Certificateholders, the
Certificateholders' Interest Distribution
Amount; and (ix) ninth, to the
Certificateholders, the
Certificateholders' Principal Distribution
Amount.
All principal payments of Notes of any
Class shall be made pro rata within that
Class. In connection with each principal
payment of Notes of any Class, the
Indenture Trustee shall compute the
Principal Factor for that Class. The
"Principal Factor" shall be a seven-digit
decimal indicating the principal balance
of each Note of a Class as of a
Distribution Date (after giving effect to
any payments made on that date) as a
fraction of the original principal amount
of such Note. The principal balance of any
Note can be determined by multiplying the
original principal amount of such Note by
the Principal Factor applicable to that
class of Notes.
C. Reserve Account............ Pursuant to the Transfer and Servicing
Agreement, an account in the name of the
Indenture Trustee (the "Reserve Account")
will be established with and maintained by
the Indenture Trustee and will be an asset
of the Trust. On the Closing Date, the
Transferor will make an initial deposit
into the Reserve Account of cash or
Eligible Investments (as defined in
"Description of the Transfer and Servicing
Agreements--Accounts") equal to
$10,300,000 (the "Reserve Account
Deposit"). The Reserve Account Deposit
will be augmented on each Distribution
Date by the deposit into the Reserve
Account of any Available Funds remaining
after
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making all prior distributions on such
date. See "Description of the Transfer and
Servicing Agreements--Distributions."
Amounts, if any, on deposit in the Reserve
Account will be available on each
Distribution Date to cover any shortfalls
in payments of the Transaction Fees, the
Consolidation Loan Fees, the Noteholders'
Interest Distribution Amount and the Trust
Swap Payment for such applicable
Distribution Date for which Available
Funds are insufficient to make such
payments and distributions. Additionally,
on the Final Maturity Date for a Class of
Notes, amounts in the Reserve Account will
be available to reduce the principal
balance of such Class of Notes to zero to
the extent that Available Funds are
insufficient to make such payment.
Amounts, if any, in the Reserve Account on
any Distribution Date (after giving effect
to all distributions to be made or
allocated on such Distribution Date) in
excess of the then applicable Specified
Reserve Account Balance generally will be
distributed to the Transferor. The
"Specified Reserve Account Balance" with
respect to any Distribution Date will
equal the greater of (i) 1.00% of the sum
of the outstanding principal balance of
the Notes and the Certificates on such
Distribution Date, after giving effect to
all payments to be made on such date, or
(ii) $1,000,000; provided, however, that
such balance shall not exceed the sum of
the aggregate outstanding principal amount
of the Notes and the Certificate Balance.
See "Description of the Transfer and
Servicing Agreements--Credit
Enhancement--Reserve Account."
The funding and maintenance of the Reserve
Account is intended to enhance the
likelihood of timely payment to the
Noteholders of the Noteholders'
Distribution Amount. In certain
circumstances, however, the Reserve
Account could be depleted and shortfalls
in distributions to the Noteholders could
result.
D. Eligible Investments....... Pursuant to the Transfer and Servicing
Agreement, funds on deposit in the Trust
Accounts will be invested in "Eligible
Investments." See "Description of the
Transfer and Servicing
Agreements--Accounts."
E. Transfer and Servicing
Agreement.................. Under the Transfer and Servicing
Agreement, the Transferor will contribute
the Initial Financed Student Loans to the
Trust on the Closing Date, and may
contribute the Exchanged Financed Student
Loans to the Trust during the Exchange
Period. The Eligible Lender Trustee will
hold legal title to all Financed Student
Loans contributed to the Trust. In
addition, the Master Servicer will be
responsible for servicing, managing,
maintaining custody of and making
collections on the Financed Student Loans.
The obligations of the Transferor and the
Master Servicer under the Transfer and
Servicing Agreement include the following:
The Transferor and the Master Servicer
will be obligated to purchase any Financed
Student Loan if the interests of the
Noteholders or the Certificateholders
therein are materially
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adversely affected by a breach of any
representation, warranty or covenant
(including the Master Servicer's covenant
to service all the Financed Student Loans
in accordance with applicable laws,
restrictions and guidelines) made by the
Transferor or the Master Servicer, as the
case may be, with respect to the Financed
Student Loan, if the breach has not been
cured within 90 days following the
discovery by or notice to the Transferor
or the Master Servicer, as the case may
be, of the breach (it being understood
that any such breach that does not
adversely affect any Guarantor's
obligation to guarantee payment of such
Financed Student Loan will not be
considered to have a material adverse
effect for this purpose). In addition, the
Transferor or the Master Servicer, as the
case may be, will be obligated to
reimburse the Trust for any accrued
interest amounts not guaranteed by a
Guarantor due to, or any lost Interest
Subsidy Payments or Special Allowance
Payments as a result of, a breach of the
Transferor's representations and
warranties or the Master Servicer's
covenants, as the case may be; provided,
however, that such reimbursements shall
not exceed the amount that would have been
paid if not for such breach.
Pursuant to the Transfer and Servicing
Agreement, the Master Servicer will be
responsible for, among other things,
preparing and filing with the Department
and the Guarantors all appropriate claims
forms and other documents and filings on
behalf of the Eligible Lender Trustee in
order to claim the Interest Subsidy
Payments and Special Allowance Payments
from the Department and the Guarantee
Payments from the Guarantors, in respect
of the Financed Student Loans entitled
thereto and preparing and providing
periodic and annual statements to the
Eligible Lender Trustee and the Indenture
Trustee with respect to distributions to
Noteholders and Certificateholders.
The Certificates................ Pursuant to the Trust Agreement, the Trust
has issued its Series 1997-1 Certificates
in the aggregate principal amount of
$1,000 and the Trust may, from time to
time, issue one or more additional series
of Certificates pursuant to a supplement
to the Trust Agreement. The Certificates
represent undivided beneficial interests
in the Trust. See "Formation of the
Trust."
The rights of Certificateholders in the
assets of the Trust to receive payments of
principal and interest will be fully
subordinated to the rights of the
Noteholders. See "Description of the
Transfer and Servicing Agreements--Credit
Enhancement--Subordination of the
Certificates."
Monthly Advances................ If the Master Servicer has applied for a
Guarantee Payment from a Guarantor or an
Interest Subsidy Payment or a Special
Allowance Payment from the Department, and
the Master Servicer has not received the
related payment prior to the end of the
Collection Period immediately preceding
the Distribution Date on which such amount
would be
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<PAGE> 23
required to be distributed as a payment of
interest, the Master Servicer may, no
later than the Determination Date relating
to such Distribution Date, deposit into an
account in the name of the Indenture
Trustee (the "Monthly Advance Account") an
amount up to the amount of such payments
applied for but not received (such
deposits by the Master Servicer are
referred to herein as "Monthly Advances").
Monthly Advances will be distributed to
the Noteholders or Certificateholders on
the upcoming Distribution Date. Monthly
Advances are recoverable by the Master
Servicer (i) first, from the source for
which such Monthly Advance was made and
(ii) second, from collections received
generally on or with respect to the
Financed Student Loans. The Master
Servicer will have no obligation, legal or
otherwise, to make any Monthly Advance,
and the making of or decision to make a
particular Monthly Advance will not create
any obligation on the Master Servicer,
legal or otherwise, to make any future
Monthly Advances.
Auction of Trust Assets......... Any Financed Student Loans remaining in
the Trust as of May 1, 2007 will be
offered for sale by the Indenture Trustee
on or prior to the July 2007 Distribution
Date. The Transferor, its affiliates and
unrelated third parties may offer bids to
purchase such Financed Student Loans on or
prior to such Distribution Date. If at
least two bids are received, the Indenture
Trustee will accept the highest bid equal
to or in excess of the greater of (x) the
aggregate Purchase Amounts of such
Financed Student Loans as of the end of
the Collection Period immediately
preceding such Distribution Date or (y) an
amount that would be sufficient to (i)
reduce the outstanding principal amount of
the Notes on such Distribution Date to
zero and (ii) pay to Noteholders the
Noteholders' Interest Distribution amount
payable on such Distribution Date and pay
to the Counterparties any Trust Swap
Payments payable on such Distribution Date
(the "Minimum Purchase Price"). If at
least two bids are not received or the
highest bid is not equal to or in excess
of the Minimum Purchase Price, the
Indenture Trustee will not consummate such
sale. The proceeds of any such sale will
be used to redeem any outstanding Notes on
such Distribution Date and pay any Trust
Swap Payment. If the sale is not
consummated in accordance with the
foregoing, the Indenture Trustee may, but
shall not be under any obligation to,
solicit bids for sale of the Financed
Student Loans on future Distribution Dates
upon terms similar to those described
above. No assurance can be given as to
whether the Indenture Trustee will be
successful in soliciting acceptable bids
to purchase the Financed Student Loans on
either the July, 2007 Distribution Date or
any subsequent Distribution Date. There
will be no continuing liability on the
part of the Trust or the Noteholders to
the purchaser of the Financed Student
Loans in connection with such auction
sale. See "Descrip-
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tion of the Transfer and Servicing
Agreements-- Termination".
Optional Purchase............... The Transferor may repurchase all
remaining Financed Student Loans, and thus
effect the early retirement of the Notes
and the Certificates, on any Distribution
Date on or after the Distribution Date on
which (i) the Pool Balance is equal to 5%
or less of the Initial Pool Balance and
(ii) the outstanding aggregate principal
amount of the Fixed Rate Notes has been
reduced to zero, at a price equal to, for
each Financed Student Loan, the
outstanding principal balance of such
Financed Student Loan as of the end of the
preceding Collection Period, together with
all accrued interest thereon and certain
unamortized premiums, if any. Without the
prior written consent of Moody's, the
Transferor may not effect any purchase of
the remaining Financed Student Loans as
long as the rating of the Transferor's
long-term debt obligations is less than
"Baa3" by Moody's, unless the Eligible
Lender Trustee and the Indenture Trustee
shall have received an opinion of counsel
to the effect that such purchase would not
constitute a fraudulent conveyance. See
"Description of the Transfer and Servicing
Agreements--Termination." The "Initial
Pool Balance" will equal approximately
$1,013,726,000.
Tax Considerations.............. In the opinion of special Federal tax
counsel for the Trust, the Notes will be
characterized as debt for Federal income
tax purposes.
In the opinion of special Federal tax
counsel for the Trust, for Federal income
tax purposes the Trust will not be
characterized as an association (or
publicly traded partnership) taxable as a
corporation.
See "Federal Tax Consequences" for
additional information concerning the
application of Federal laws with respect
to the Notes and the Trust.
ERISA Considerations............ The Notes are eligible for purchase by or
on behalf of employee benefit plans,
retirement arrangements, individual
retirement accounts and Keogh Plans,
subject to the considerations discussed
under "ERISA Considerations."
Registration of Notes........... The Notes will be represented by global
certificates registered in the name of
Cede, as nominee of DTC or another
nominee. The Noteholders will not be
entitled to receive definitive
certificates representing such Holders'
interests, except in certain
circumstances. See "Description of the
Notes--Book-Entry Registration."
Rating of the Securities........ It is a condition to the issuance and sale
of the Class A-1 Notes that they be rated
"A-1+" by Standard & Poor's Ratings
Services, a division of The McGraw-Hill
Companies ("Standard & Poor's"), "P-1" by
Moody's Investors Service, Inc.
("Moody's"), and F-1+ by Fitch Investors
Service, LP ("Fitch"). It is a condition
of the issuance of each of the Class A-2
Notes, the Class A-3 Notes, the Class A-4
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<PAGE> 25
Notes, the Class A-5 Notes, the Class A-6
Notes, the Class A-7 Notes, the Class A-8
Notes and the Class A-9 Notes that they be
rated "AAA" by Standard & Poor's and Fitch
and "Aaa" by Moody's, and it is a
condition to the issuance and sale of each
of the Class B Notes that they be rated at
least "A" by Standard & Poor's and Fitch
and at least "A2" by Moody's. Each of
Standard & Poor's, Fitch and Moody's is
also referred to herein as a "Rating
Agency" and collectively as the "Rating
Agencies." A securities rating is not a
recommendation to buy, sell or hold
securities and may be subject to revision
or withdrawal at any time by the assigning
rating agency. The Rating Agencies do not
evaluate, and the ratings of the Notes do
not address, the likelihood of prepayments
on the Notes or the likelihood of payment
of the Noteholders' Interest Carryover.
See "Risk Factors--Risk of Change of
Ratings on the Notes."
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<PAGE> 26
RISK FACTORS
Prospective purchasers of the Notes should consider carefully the following
discussion of certain risk factors associated with an investment in the Notes.
Risk That Failure to Comply with Student Loan Origination and Servicing
Procedures for Financed Student Loans May Result in the Department's Refusal to
Make Certain Payments to Guarantors and the Eligible Lender Trustee and the
Guarantors' Refusal to Make Guarantee Payments to the Eligible Lender
Trustee. The failure by the Transferor or the other originators to follow
procedures relating to the origination of Financed Student Loans or of the
Servicers to follow certain servicing procedures for the Financed Student Loans,
as described below, may result in the Department's refusal to make reinsurance
payments to the Guarantors or to make Interest Subsidy Payments and Special
Allowance Payments to the Eligible Lender Trustee with respect to the Financed
Student Loans, or may also result in the Guarantors' inability or refusal to
honor their obligations to make payments under the Guarantee Agreements
("Guarantee Payments"). Loss of any such Guarantee Payments, Interest Subsidy
Payments or Special Allowance Payments with respect to the Financed Student
Loans could adversely affect the amount of Available Funds for any Collection
Period and the Trust's ability to pay principal and interest on the Notes. The
Higher Education Act, including the implementing regulations thereunder,
requires lenders and their assignees making and servicing Federal Loans, and
guarantors guaranteeing Federal Loans, to follow specified procedures, including
due diligence procedures, to ensure that the Federal Loans are properly made and
disbursed to, and repaid on a timely basis by or on behalf of, borrowers.
Certain of those procedures, which are specifically set forth in the Higher
Education Act, are summarized herein. See "The Student Loan Financing Business"
and "Description of the Transfer and Servicing Agreements--Servicing
Procedures." Generally, these procedures require that completed loan
applications be processed, a determination of whether an applicant is an
eligible borrower attending an eligible institution under the Higher Education
Act be made, the borrower's responsibilities under the loan be explained to him
or her, the promissory note evidencing the loan be executed by the borrower and
then that the loan proceeds be disbursed in a specified manner by the lender.
After the loan is made, the lender must establish repayment terms with the
borrower, properly administer deferrals and forbearances and credit the borrower
for payments made. If a borrower becomes delinquent in repaying a loan, a lender
must perform certain collection procedures (primarily telephone calls and demand
letters) which vary depending upon the length of time a loan is delinquent. The
Master Servicer has agreed pursuant to the Transfer and Servicing Agreement to
perform (or provide for third party servicers to perform) servicing and
collection procedures on behalf of the Trust.
Risk of Inability of Transferor and Master Servicer to Honor their
Obligations to Repurchase Financed Student Loans. Under certain circumstances,
pursuant to the Transfer and Servicing Agreement, the Transferor is obligated to
purchase, or the Master Servicer is obligated to purchase, any Financed Student
Loan if a breach of the representations, warranties or covenants of the
Transferor or the Master Servicer, as the case may be, with respect to such
Financed Student Loan has a material adverse effect on the interests of the
Noteholders or the Certificateholders therein and such breach is not cured
within any applicable cure period (it being understood that any such breach that
does not affect any Guarantor's obligation to guarantee payment of such Financed
Student Loans will not be considered to have such a material adverse effect). In
addition, under certain circumstances pursuant to the Transfer and Servicing
Agreement, the Transferor or the Master Servicer, as the case may be, is
obligated to reimburse the Trust for any accrued interest amounts not guaranteed
by a Guarantor due to, or any lost Interest Subsidy Payments or Special
Allowance Payments as a result of, a breach of the Transferor's representations
and warranties or the Master Servicer's covenants, as the case may be, with
respect to a Financed Student Loan. If the Transferor is obligated to purchase a
Financed Student Loan as a result of the Transferor's or a third party's failure
to originate such Financed Student Loan in compliance with the Higher Education
Act, it will reimburse the Trust for the remaining principal balance of such
Financed Student Loan and any accrued but unpaid interest thereon. If the Master
Servicer is obligated to purchase a Financed Student Loan as a result of a
failure to service such Financed Student Loan in accordance with the Higher
Education Act and the applicable Guarantee Agreement, as the case may be, it
will reimburse the Trust for the remaining principal balance of such Financed
Student Loan and any accrued but unpaid interest thereon. See "Description of
the Transfer and Servicing Agreements--Conveyance of
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<PAGE> 27
Financed Student Loans; Representations and Warranties" and "--Servicer
Covenants." There can be no assurance, however, that the Transferor or the
Master Servicer will have the financial resources to do so. The failure of the
Transferor to so purchase or the Master Servicer to so purchase a Financed
Student Loan would constitute a breach of the Transfer and Servicing Agreement,
enforceable by the Eligible Lender Trustee on behalf of the Trust or by the
Indenture Trustee on behalf of the Noteholders, but would not constitute an
Event of Default under the Indenture or permit the exercise of remedies
thereunder.
Risk of Offset by Guarantors or the Department Against Federal Benefit
Payments Due to Shared Lender Identification Number. Due to Department policy
limiting the granting of new lender identification numbers, the Eligible Lender
Trustee will be allowed under the Trust Agreement to permit trusts (other than
the Trust) established by the Transferor in the future to securitize other
Student Loans to use the Department lender identification number applicable to
the Trust. In that event, the billings submitted to the Department for Interest
Subsidy and Special Allowance Payments on loans in the Trust would be
consolidated with the billings for such payments for Student Loans in such other
trusts using the same lender identification number and payments on such billings
would be made by the Department to the Eligible Lender Trustee in lump sum form.
Such lump sum payments would then be allocated by the Eligible Lender Trustee
among the various trusts using the same lender identification number.
In addition, the sharing of the lender identification number by the Trust
with such other trusts may result in the receipt of claim payments by guarantors
in lump sum form. In that event, such payments would be allocated by the
Eligible Lender Trustee among the trusts in a manner similar to the allocation
process for Interest Subsidy and Special Allowance Payments.
The Department regards the Eligible Lender Trustee as the party primarily
responsible to the Department for any liabilities owed to the Department or
guarantors resulting from the Eligible Lender Trustee's activities in the
Federal Loan Program. As a result, if the Department or a guarantor were to
determine that the Eligible Lender Trustee owes a liability to the Department or
a guarantor on any Financed Student Loan for which the Eligible Lender Trustee
is or was legal titleholder, including loans held in the Trust or other trusts,
the Department or guarantor might seek to collect that liability by offset
against payments due the Eligible Lender Trustee under the Trust. In the event
that the Department or a guarantor determines such a liability exists in
connection with a trust using the shared lender identification number, the
Department or a guarantor would be likely to collect that liability by
offsetting against amounts due the Eligible Lender Trustee under the shared
lender identification number, including amounts owed in connection with the
Trust. Such offsetting of payments due to the Eligible Lender Trustee with
respect to the Trust could adversely affect the amount of Available Funds for
any Collection Period and the Trust's ability to pay interest and principal on
the Notes.
In addition, other trusts using the shared lender identification number may
in a given quarter incur origination fees that exceed the Interest Subsidy and
Special Allowance Payments payable by the Department on the loans in such other
trusts, resulting in the payment from the Department received by the Eligible
Lender Trustee under such shared lender identification number for that quarter
equaling an amount that is less than the amount owed by the Department on the
loans in the Trust for that quarter.
The Trust Agreement for the Trust and the trust agreement for other trusts
established by the Transferor which share the lender identification number to be
used by the Trust (such Trust and such other trusts, collectively, the
"Transferor Trusts") may require a Transferor Trust (including the Trust) to
indemnify the other Transferor Trusts for a shortfall or an offset by the
Department or a guarantor arising from the Financed Student Loans held by the
Eligible Lender Trustee on such Transferor Trust's behalf. To the extent that
the Trust is required to indemnify other Transferor Trusts with respect to an
offset by the Department or a Guarantor arising from Financed Student Loans held
by the Eligible Lender Trustee for the Trust, such indemnification obligation
could adversely affect the amount of Available Funds for any Collection Period
and the Trust's ability to pay principal and interest on the Notes. Also, to the
extent that the Trust may be entitled to indemnification with respect to an
offset by the Department or a Guarantor arising from Financed Student Loans held
by the Eligible Lender Trustee for a Transferor Trust other than the Trust,
there can be no assurance that the amount of funds available to the Trust with
respect to such right of indemnification may be
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<PAGE> 28
adequate to compensate the Trust and Noteholders for any previous reduction in
the Available Funds for a Collection Period.
Risk Resulting From Limited Liquidity of the Notes. The Notes will not be
listed on any national security exchange. While Smith Barney Inc. intends to,
and PNC Capital Markets, Inc. may, make a secondary market for the Notes, they
are not obligated to do so. There can be no assurance that a secondary market
for the Notes will develop or, if a secondary market does develop, that it will
provide Noteholders with liquidity of investment or that it will continue for
the life of the Notes. As a result, investors must be prepared to bear the risk
of holding the Notes for as long as the Notes are outstanding.
Risk Resulting from Principal Balance of Notes Exceeding Initial Pool
Balance of the Financed Student Loans. On the Closing Date, the aggregate
initial principal amount of the Notes will be greater than the Initial Pool
Balance of the Financed Student Loans as of the Cut-off Date. As a result, if an
Event of Default should occur under the Indenture or an Insolvency Event should
occur and the Financed Student Loans were liquidated at a time when the
outstanding principal amount of the Notes exceeded the sum of the Pool Balance
and the amounts in the other Trust Accounts, such Financed Student Loans would
likely have to be liquidated at a premium for the Class B Noteholders and, in
some circumstances, the Class A Noteholders, not to suffer a loss. Because the
actual rate and timing of any accelerated payments of principal, if any, will
depend on a number of factors, including the rate and timing of the payments on
the Financed Student Loans, there can be no assurance of the actual rate or
timing of such accelerated payments of principal or when the aggregate principal
amount of the Notes will be equal to or less than the sum of the Pool Balance
and the amounts in the other Trust Accounts.
Risk of Reduction in Amounts Paid on the Notes Resulting From Variability
of Actual Cash Flows; Risk of Reduction in Amounts Paid on the Notes From
Inability of Guarantors to Make Guarantee Payments. Amounts received with
respect to the Financed Student Loans for a particular Collection Period may
vary in both timing and amount from the payments actually due on the Financed
Student Loans as of such Collection Period for a variety of economic, social and
other factors, including both individual factors such as additional periods of
deferral or forbearance prior to or after a borrower's commencement of
repayment, and general factors, such as a general economic downturn which could
increase the amount of defaulted Financed Student Loans. Failures by borrowers
to pay timely the principal and interest on the Financed Student Loans will
affect the amount of Available Funds, which may reduce the amount of principal
and interest paid to the Noteholders. In addition, failures by borrowers of
Student Loans generally to pay timely the principal and interest due on such
Student Loans could obligate the Guarantors to make payments thereon, which
could adversely affect the solvency of the Guarantors and their ability to meet
their guarantee obligations (including with respect to the Financed Student
Loans).
Risk of Inability of Indenture Trustee to Liquidate Financed Student
Loans. If an Event of Default occurs under the Indenture, subject to certain
conditions, the Indenture Trustee is authorized, with the consent of the
Noteholders holding 66 2/3% of the outstanding principal balance of the Notes,
to sell the Financed Student Loans. There can be no assurance, however, that the
Indenture Trustee will be able to find a purchaser for the Financed Student
Loans in a timely manner or that the market value of such Financed Student Loans
would, at any time, be equal to the aggregate outstanding principal amount of
the Notes and accrued interest thereon. If the net proceeds of any such sale,
together with amounts then on deposit in the Reserve Account, do not exceed the
aggregate outstanding principal amount of Notes and accrued interest thereon,
the Noteholders will suffer a loss. In addition, the amount of principal
required to be distributed to Noteholders under the Indenture is generally
limited to amounts available to be so distributed. Therefore, the failure to pay
principal on the Notes may not result in the occurrence of an Event of Default
until the Final Maturity Date of the Notes. See "Description of the Transfer and
Servicing Agreements--Credit Enhancement."
Risk That Financial Status of Guarantors Will Affect Their Ability to Make
Guarantee Payments. The Higher Education Act requires all Financed Student Loans
to be unsecured. As a result, the only security for payment of the Financed
Student Loans are the Guarantee Agreements between the Eligible Lender Trustee
and the Guarantors. A deterioration in the financial status of the Guarantors
and their ability to honor
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<PAGE> 29
guarantee claims with respect to the Financed Student Loans could result in a
delay in making or a failure to make Guarantee Payments to the Eligible Lender
Trustee. Loss of any such Guarantee Payments could adversely affect the amount
of Available Funds for any Collection Period and the Trust's ability to pay
principal and interest on the Notes. One of the primary causes of a possible
deterioration in a Guarantor's financial status is directly related to the
amount and percentage of defaulting Financed Student Loans guaranteed by a
Guarantor. Moreover, to the extent that the Department pays reimbursement claims
submitted by a Guarantor for any fiscal year exceeding certain specified levels,
the Department's obligation to reimburse the Guarantor for losses will be
reduced on a sliding scale from 100% (98% for loans made on or after October 1,
1993) to a minimum of 80% (78% for loans made on or after October 1, 1993),
except that death, disability, bankruptcy, closed school and false certification
claims are reimbursed 100% by the Department.
The effect of the above factors, including the effect on a Guarantor's
ability to meet its guarantee obligations with respect to the Financed Student
Loans or the Trust's ability to pay principal and interest with respect to the
Notes, is impossible to predict. Pursuant to the 1992 Amendments, under Section
432(o) of the Higher Education Act, if the Department has determined that a
Guarantor of a Federal Loan is unable to meet its insurance obligations, the
loan holder may submit claims directly to the Department and the Department is
required to pay the full Guarantee Payment due with respect thereto in
accordance with guarantee claim processing standards no more stringent than
those applied by the Guarantor of such Federal Loans. However, the Department's
obligation to pay guarantee claims directly in this fashion is contingent upon
the Department making the determination referred to above. There can be no
assurance that the Department would ever make such a determination with respect
to a Guarantor or, if such a determination was made, whether such determination
or the ultimate payment of such guarantee claims would be made in a timely
manner.
Risk That Changes in Law Could Adversely Affect the Federal Family
Education Loan Program and the Financed Student Loans. Changes in the Higher
Education Act or other relevant federal or state laws, rules and regulations and
the programs implemented thereunder may adversely impact the programs described
herein and the loans made thereunder, including the Financed Student Loans and
the Guarantors. Such changes could result in a reduction of the Trust's ability
to pay principal and interest on the Notes, including as a result of a reduction
in the ability of the Guarantors to make Guaranty Payments to the Eligible
Lender Trustee with respect to the Financed Student Loans. Thus, there can be no
assurance that the Higher Education Act or such other relevant federal or state
laws, rules and regulations and the programs implemented thereunder will not be
amended or modified in the future in a manner that will adversely impact the
programs described herein and the loans made thereunder, including the Financed
Student Loans, or the Guarantors. In addition, existing legislation and future
measures to reduce the federal budget deficit may adversely affect the amount
and nature of federal financial assistance available with respect to these
programs. In recent years, federal budget legislation has provided for the
recovery of certain funds held by guarantee agencies in order to achieve
reductions in federal spending. There can be no assurance that future federal
budget legislation or administrative actions will not adversely affect
expenditures by the Department, or the financial condition of the Guarantors.
Under the Omnibus Budget Reconciliation Act of 1993, Congress made a number
of changes that may adversely affect the financial condition of the Guarantors
of Federal Loans, including reducing to 98% the maximum percentage of Guarantee
Payments the Department will reimburse for loans first disbursed on or after
October 1, 1993, reducing substantially the premiums and default collections
that Guarantors of Federal Loans are entitled to receive and/or retain and
giving the Department broad powers over Guarantors of Federal Loans and their
reserves. These powers include the authority to require a Guarantor of Federal
Loans to return all reserve funds to the Department if the Department determines
such action is necessary to ensure an orderly termination of such Guarantor, to
serve the best interests of the Federal Loan Programs or to ensure the proper
maintenance of such Guarantor's funds or assets. The Department is also now
authorized to direct a Guarantor of Federal Loans to return a portion of its
reserve funds which the Department determines is unnecessary to pay the program
expenses and contingent liabilities of such Guarantor and/or to cease any
activities involving the use of such Guarantor's reserve funds or assets which
the Department determines is a
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misapplication or otherwise improper. The Department may also terminate the
reinsurance agreement of a Guarantor of Federal Loans if the Department
determines that such action is necessary to protect the federal fiscal interest
or to ensure an orderly transition to full implementation of direct federal
lending. In such event, however, the Department is required to assume the
functions of such Guarantor as described herein under the heading "The Financed
Student Loan Pool--Insurance of Student Loans; Guarantors of Federal Loans."
These various changes create a significant risk that the resources available to
the Guarantors of Federal Loans to meet their guarantee obligations will be
significantly reduced.
In addition, this legislation greatly expands the loan volume under the
direct lending program by the Department (the "Federal Direct Student Loan
Program") to a target of approximately 60% of student loan demand in academic
year 1998-1999, which could result in increasing reductions in the volume of
loans made under the Federal Loan Programs. As the Federal Direct Student Loan
Program expands, the Servicers may experience increased costs due to reduced
economies of scale to the extent the volume of new loans serviced by the
Servicers is reduced. Such cost increases could affect the ability of the
Servicers to satisfy their obligations to service the Financed Student Loans.
Such volume reductions could further reduce revenues received by the Guarantors
of Federal Loans available to pay claims on defaulted Federal Loans.
Finally, the level of competition currently in existence in the secondary
market for loans made under the Federal Loan Programs could be reduced,
resulting in fewer potential buyers of the Federal Loans and lower prices
available in the secondary market for those loans. Further, the Department is
implementing a direct consolidation loan program. To the extent that borrowers
of Financed Student Loans elect to consolidate their Student Loans with Financed
Student Loans under such direct consolidation loan program, the Noteholders will
receive as a prepayment of principal the aggregate principal amount of such
Financed Student Loan. See "The Financed Student Loan Pool--Maturity and
Prepayment Assumptions."
Proposed federal budget legislation being considered by Congress could
modify many of the provisions of the Higher Education Act and could result in
reductions in reserves of the Guarantors. Until final legislation is adopted,
the impact on the Financed Student Loans, if any, is impossible to determine.
During the 105th session of the United States Congress, the reauthorization of
the Higher Education Act is expected to be considered. The potential impacts on
the Financed Student Loans resulting from the reauthorization process, if any,
cannot be determined at this time.
Risk of Loss to Noteholders of Class B Notes Resulting From Subordination
of the Class B Notes. The rights of the Class B Noteholders to receive payments
of interest and principal will be subordinated to those of the Class A
Noteholders as described herein. If amounts otherwise allocable to the Class B
Notes are used to fund payments on the Class A Notes, distributions with respect
to the Class B Notes may be delayed or reduced. Notwithstanding the foregoing,
distributions to the Class B Noteholders of amounts representing the Class B
Noteholders' Interest Distribution Amount will not be subordinated to the
payment of any Noteholders' Interest Carryover that may exist from time to time.
See "Description of the Transfer and Servicing Agreements--Distributions" and
"--Credit Enhancement--Subordination of the Class B Notes."
Risk Resulting From Limited Assets of the Trust. The Trust does not have,
nor is it permitted to have, any significant assets or sources of funds other
than the Financed Student Loans (and the related Guarantee Agreements to the
extent assigned to the Trust by the Transferor ("Assigned Rights")), the
Collection Account, the Note Distribution Account, the Reserve Account and the
Monthly Advance Account. The Notes represent obligations solely of the Trust and
its assets, and will not be insured or guaranteed by the Transferor, the Master
Servicer, the Guarantors, the Eligible Lender Trustee, any of their affiliates
or the Department. Consequently, holders of the Notes must rely for repayment
upon proceeds realized upon the sale of, or payments with respect to, the
Financed Student Loans and, if and to the extent available under the
circumstances described herein, amounts on deposit in the Reserve Account.
Amounts to be deposited in the Reserve Account are limited in amount and will be
reduced, subject to a specified minimum, as the Pool Balance is reduced. If the
Reserve Account is exhausted, the Trust will depend solely on payments with
respect to the Financed Student Loans to make payments on the Notes. See
"Description of the Transfer and Servicing Agreements--Distributions" and
"--Credit Enhancement."
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Reinvestment Risk to Noteholders From Prepayments of LIBOR Rate
Notes. Financed Student Loans may be prepaid by borrowers at any time. (For this
purpose the term "prepayments" includes prepayments in full or in part
(including pursuant to Consolidation Loans or Serial Loans) and liquidations due
to default (including receipt of Guarantee Payments).) To the extent such
prepayments result in a prepayment of the LIBOR Rate Notes prior to their
expected Final Maturity Dates, the holders of the LIBOR Rate Notes may not be
able to reinvest such funds at the same yield as the yield on the LIBOR Rate
Notes. The rate of payment on the Financed Student Loans cannot be predicted,
and any reinvestment risks resulting from a faster or slower incidence of
prepayment of Financed Student Loans will be borne entirely by the holders of
the LIBOR Rate Notes. The effect of such prepayments will be to increase the
rate of payment on the Class A-1 Notes and, therefore, increase the reinvestment
risk with respect to the Class A-1 Notes. After the Class A-1 Notes have been
paid in full, the entire amount of such prepayments that are not required to be
applied on each Distribution Date as part of the Noteholders' Principal
Distribution Amount to reduce the outstanding principal balance of the Class of
Fixed Rate Notes then receiving payments of principal to the required amount for
such Class, will be applied to the payment of the principal balance of the Class
A-8 Notes until they are paid in full, and then to the Class A-9 Notes,
regardless of whether any other Class of Fixed Rate Notes is still outstanding.
See "Description of the Transfer and Servicing Agreements--Distributions". As a
result, the reinvestment risk resulting from such prepayments will be borne
entirely by the holders of the Class A-8 Notes, and after the principal balance
of the Class A-8 Notes has been paid in full by the holders of the Class A-9
Notes. The rate of prepayments on the Financed Student Loans may be influenced
by a variety of economic, social and other factors affecting borrowers,
including interest rates, the availability of alternative financing and the
general job market for graduates of institutions of higher education. In
addition, under certain circumstances, the Transferor will be obligated to
purchase, or the Master Servicer will be obligated to purchase, Financed Student
Loans from the Trust pursuant to the Transfer and Servicing Agreement as a
result of breaches of its representations, warranties or covenants. See
"Description of the Transfer and Servicing Agreements--Conveyance of Financed
Student Loans; Representations and Warranties" and "--Master Servicer
Covenants." Moreover, to the extent borrowers of Financed Student Loans elect to
borrow money through Consolidation Loans with respect to such Financed Student
Loans from the Transferor or from another lender, or to the extent the Trust
sells a Financed Student Loan to serialize the ownership of such Financed
Student Loan and other loans to the same borrower (each, a "Serial Loan"), the
Noteholders will receive as a prepayment of principal the aggregate principal
amount of such Financed Student Loans. The effect of such prepayments may be
mitigated during the Exchange Period if the Transferor makes such Consolidation
Loans or Serial Loans and elects to transfer such Consolidation Loans or Serial
Loans, as applicable, to the Eligible Lender Trustee on behalf of the Trust. See
"Description of Transfer and Servicing Agreements--Exchange Period and Exchanged
Finance Student Loans". There can be no assurance that borrowers with Financed
Student Loans will not seek to obtain Consolidation Loans with respect to such
Financed Student Loans or when Serial Loans will be sold and no assurance that
if such loans are obtained from or sold to, the Transferor, that the Transferor
will elect to exchange them into the Trust as Exchanged Financed Student Loans
during the Exchange Period. In addition there is no assurance that the
Transferor rather than another lender will make any particular Consolidation
Loan with respect to borrowers with Financed Student Loans during the Exchange
Period. See "The Student Loan Financing Business" and "The Financed Student Loan
Pool--Maturity and Prepayment Assumptions."
Risk That Average Life of Notes May Be Lengthened As a Result of Extension
of Payments on the Financed Student Loans. Scheduled payments with respect to,
and maturities of, the Financed Student Loans may be extended, including
pursuant to the applicable Deferral Phase certain other grace periods authorized
by the Higher Education Act ("Grace Periods") and, under certain circumstances,
periods of forbearance ("Forbearance Periods") or as a result of the conveyance
of Exchanged Financed Student Loans to the Eligible Lender Trustee on behalf of
the Trust during the Exchange Period, as described herein, which may lengthen
the remaining term of the Financed Student Loans and the average life of the
Notes. See "The Student Loan Financing Business" and "The Financed Student Loan
Pool--Maturity and Prepayment Assumptions." See also "Description of the
Transfer and Servicing Agreements--Insolvency Event" regarding the sale of the
Financed Student Loans if a Transferor Insolvency Event occurs and
"--Termination"
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regarding the Transferor's option to purchase the Financed Student Loans and the
auction of the Financed Student Loans on or after the July 2007 Distribution
Date.
Any Financed Student Loans remaining in the Trust as of the end of May 1,
2007 will be offered for sale by the Indenture Trustee on or prior to the July
2007 Distribution Date. If acceptable bids to purchase such Financed Student
Loans on such Distribution Date are received, as described herein, the proceeds
of the sale will be applied on such Distribution Date to redeem any outstanding
Notes on such date. In addition, if acceptable bids to purchase such Financed
Student Loans on such Distribution Date are not received, the sale of such
Financed Student Loans may occur on a subsequent Distribution Date, as described
herein, in which case the proceeds thereof will be applied on such date to
redeem any outstanding Notes. No assurance can be given as to whether the
Indenture Trustee will be successful in soliciting acceptable bids to purchase
the Financed Student Loans on the July 2007 Distribution Date or any subsequent
Distribution Date. See "Description of the Transfer and Servicing
Agreements--Termination."
Risk Resulting From Differences between Classes of Notes with Respect to
Receipt of Payments on the Financed Student Loans. The Classes of Notes
receiving principal earlier bear relatively greater risk than each Class
receiving principal later of (i) principal repayments with respect to the
Financed Student Loans (whether as a result of voluntary prepayments,
Consolidation Loans not transferred to the Eligible Lender Trustee as Exchanged
Financed Student Loans or liquidations due to default or breach), or (ii)
Financed Student Loans being sold by the Trust. Thus, the holders of the Class
A-1 Notes bear the greatest risk of such principal prepayments, with the holders
of the Class A-8 Notes and Class A-9 Notes bearing the next most significant
risk of such principal prepayments. On the other hand, holders of Notes
receiving principal later would bear a greater risk of loss of principal than do
holders of Notes receiving principal earlier in the event of a shortfall in
Available Funds and amounts on deposit in the Reserve Account.
Risk That Interest Rate on Financed Student Loans May Be Insufficient to
Cover Interest on LIBOR Rate Notes at the Class Interest Rate Due to Rate-Index
Difference. The interest rate for the LIBOR Rate Notes will be based generally
on One-Month LIBOR. The Financed Student Loans, however, generally bear interest
at an effective rate (taking into account any Special Allowance Payments) equal
to the average bond equivalent rates of weekly auctions of 91-day Treasury bills
for each quarter (the "91-day Treasury Bill Rate") (or, in certain
circumstances, 52-week Treasury bills) plus margins specified for such Financed
Student Loans under "The Student Loan Financing Business." As a result, if in
respect of any Distribution Date, there does not exist a positive spread between
(a) the Net Loan Rate and (b) the interest rate on each Class of LIBOR Rate
Notes, the interest rate on such Class of LIBOR Rate Notes for such Distribution
Date will be the Net Loan Rate. See "Description of the Notes--The
Notes--Distributions of Interest." Any Noteholders' Interest Carryover arising
as a result of the applicable interest rate for any Class of Notes, being
determined on the basis of the Net Loan Rate will be paid on the following
Distribution Date or on any succeeding Distribution Date to the extent funds are
allocated and available therefor after making all required prior distributions
and deposits with respect to such date. Payment of such amounts, however, will
not be covered by amounts on deposit in the Reserve Account (other than amounts
in excess of the Specified Reserve Account Balance). See "Description of
Transfer and Servicing Agreements--Distributions."
Insolvency Risk of Transferor. The Transferor intends that the transfer of
the Financed Student Loans by it to the Eligible Lender Trustee on behalf of the
Trust under the Transfer and Servicing Agreement constitutes a valid
contribution and assignment of such Financed Student Loans. However, a court
could treat the transfer of the Financed Student Loans to the Eligible Lender
Trustee as an assignment of collateral as security for the benefit of the Trust.
If the transfer of the Financed Student Loans to the Eligible Lender Trustee is
deemed to create a security interest therein, a tax or government lien on
property of the Transferor arising before the Financed Student Loans came into
existence may have priority over the Eligible Lender Trustee's interest in such
Financed Student Loans and, if the Federal Deposit Insurance Corporation (the
"FDIC") were appointed receiver or conservator of the Transferor, the FDIC's
administrative expenses may also have priority over the Eligible Lender
Trustee's interest in such Financed Student Loans. In the event that the
Transferor becomes insolvent, the Federal Deposit Insurance Act ("FDIA"), as
amended by the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), sets forth certain powers which the FDIC could exercise if it
were appointed as receiver or conservator of the Transferor.
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Subject to clarification by FDIC regulations or interpretations, it would appear
from the positions taken by the FDIC that the FDIC, in its capacity as a
receiver or conservator for the Transferor, would not interfere with the timely
transfer to the Trust of collections with respect to the Financed Student Loans.
To the extent that the transfer of the Financed Student Loans is deemed to
create a security interest, and that interest was validly perfected before the
Transferor's insolvency and was not taken in contemplation of insolvency or with
the intent to hinder, delay or defraud the Transferor or its creditors, based
upon opinions and statements of policy issued by the general counsel of the FDIC
addressing the enforceability against the FDIC, as conservator or receiver for a
depository institution, of a security interest in collateral granted by such
depository institution, such security interest should not be subject to
avoidance and payments to the Trust with respect to the Financed Student Loans
should not be subject to recovery by the FDIC as receiver or conservator of the
Transferor. If, however, the FDIC were to assert a contrary position, certain
provisions of the FDIA which, at the request of the FDIC, have been applied in
recent lawsuits to avoid security interests in collateral granted by depository
institutions, would permit the FDIC to avoid such security interest, thereby
resulting in possible delays and reductions in payments on the Notes. In
addition, if the FDIC were to require the Indenture Trustee or the Eligible
Lender Trustee to establish its right to such payments by submitting to and
completing the administrative claims procedure under the FDIA, as amended by the
FIRREA, delays in payments on the Notes and possible reductions in the amount of
those payments could occur. See "Legal Aspects of the Financed Student Loans."
Risk Resulting From Changes in Repayment Terms of Financed Student Loans
Pursuant to Incentive Programs. The Transferor currently makes available and may
hereafter make available certain incentive programs to borrowers. See "The
Financed Student Loan Pool--Incentive Programs". Under these programs, the
Transferor retains the option to terminate or change the terms of the incentives
with respect to any or all of the borrower's loans, including loans originated
prior to the termination or change which have been assigned to the Trust. It
cannot be predicted with certainty which borrowers will qualify or decide to
participate in these programs. The effect of these incentive programs may be to
reduce the yield on the Financed Student Loans.
Risk of Change of Ratings on the Notes. It is a condition to the issuance
and sale of each Class of Notes that such Classes receive the respective ratings
from each of the Rating Agencies described in "Rating." A rating is not a
recommendation to purchase, hold or sell the Notes, inasmuch as such rating does
not comment as to market price or suitability for a particular investor. The
ratings of the Notes address the likelihood of the ultimate payment of principal
of and interest on the Notes pursuant to their terms. However, the Rating
Agencies do not evaluate, and the ratings of the Notes do not address, the
likelihood of prepayments on the Notes or the likelihood of payment of any
Noteholders' Interest Carryover. There can be no assurance that a rating will
remain for any given period of time or that a rating will not be lowered or
withdrawn entirely by a Rating Agency if in its judgment circumstances in the
future so warrant.
Risk That a Default By a Counterparty Under the Swap Agreements May Result
in the Trust's Inability to Make Payments on the Notes. The Financed Student
Loans generally bear interest at a floating rate of interest, while the Fixed
Rate Notes bear interest at a fixed rate of interest. The Trust will enter into
separate Swap Agreements with respect to each Class of Fixed Rate Notes as a
hedge against the fixed rate with respect to such Fixed Rate Class exceeding the
floating rate index on the Financed Student Loans. If the fixed rate being paid
by a Counterparty under its Swap Agreement is greater than the Variable Swap
Rate payable by the Trust, a default by such Swap Counterparty will affect the
Trust's ability to make principal and interest payments on the Notes, which
could result in a loss to the holders of the Class B Notes, and thereafter to
the holders of the Class A Notes, to the extent that amounts on deposit in the
Reserve Account are not sufficient to cover the shortfall resulting from the
default by such Counterparty.
Effect of Book-Entry Registration. The Notes will each be initially
represented by one or more certificates registered in the name of Cede, the
nominee for DTC, and will not be registered in the names of the holders of such
Notes or their nominees. Because of this, unless and until Definitive Notes are
issued, holders of the Notes will not be recognized by the Indenture Trustee or
the Eligible Lender Trustee as "Noteholders" (as such terms are used in the
Indenture). Hence, until Definitive Notes are issued, holders of the Notes will
only be able to exercise the rights of Noteholders indirectly through DTC and
its participating organizations. See "Description of the Notes--Book-Entry
Registration" and "--Definitive Notes."
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FORMATION OF THE TRUST
THE TRUST
PNC Student Loan Trust I is a statutory business trust that was formed on
March 27, 1997, under the laws of the State of Delaware for the transactions
described in this Prospectus. The Trust will not engage in any activity other
than (i) acquiring, holding, selling and managing the Financed Student Loans and
the other assets of the Trust and proceeds therefrom, (ii) issuing one or more
classes of its certificates and notes, (iii) making payments thereon and (iv)
engaging in other activities that are necessary, suitable or convenient to
accomplish the foregoing or are incidental thereto or connected therewith. For
so long as the Transferor is a Certificateholder, the Trust's activities will be
limited to activities that are part of, or incidental to, the business of
banking as well.
The Trust was initially capitalized with equity equal to $1,000 on the date
of its formation, representing the initial principal balance of the Certificates
issued on such date. Approximately 4.9% of such Certificates were sold to the
Transferor and the remaining Certificates were offered for sale in transactions
exempt from the registration requirements of the Securities Act. On such date,
the Trust also issued its Series 1997-1 notes, which will be repaid in full
immediately prior to the issuance of the Notes. The equity of the Trust,
together with the proceeds from the sale of the Notes, will be used by the
Eligible Lender Trustee in connection with its acquisition, on behalf of the
Trust, of the Initial Financed Student Loans from the Transferor pursuant to the
Transfer and Servicing Agreement. A portion of the net proceeds received from
the transfer of the Initial Financed Student Loans will be used by the
Transferor to make a Reserve Account Deposit in the amount of $10,300,000. Upon
the consummation of such transaction, the property of the Trust will consist of
(a) the pool of Financed Student Loans, legal title to which is held by the
Eligible Lender Trustee on behalf of the Trust, (b) all funds collected in
respect thereof after the applicable cut-off date or Subsequent Cut-off Date,
(c) all moneys and investments on deposit in the Collection Account, the
Certificate Distribution Account, the Note Distribution Account, the Expense
Account, the Monthly Advance Account and the Reserve Account, and (d) all the
Trust's rights under the Swap Agreements. The Notes will be collateralized by
the property of the Trust. The Collection Account, the Note Distribution
Account, the Expense Account, the Reserve Account and the Monthly Advance
Account will be maintained with and in the name of the Indenture Trustee. The
Certificate Distribution Account will be maintained with and in the name of the
Eligible Lender Trustee. To facilitate servicing and to minimize administrative
burden and expense, either the Master Servicer or the related Servicer will be
appointed custodian of the promissory notes representing the Financed Student
Loans by the Eligible Lender Trustee.
The Trust's principal offices are in Chicago, Illinois, in care of The
First National Bank of Chicago, as Eligible Lender Trustee, at the address
listed below.
ELIGIBLE LENDER TRUSTEE
The First National Bank of Chicago, the Eligible Lender Trustee for the
Trust under the Trust Agreement, is a national banking association organized
under the laws of the United States with its chief executive office in Chicago,
Illinois. The office of the Eligible Lender Trustee for purposes of
administering the Trust is located at One First National Plaza, Chicago,
Illinois 60670. The Eligible Lender Trustee will acquire on behalf of the Trust
legal title to all the Financed Student Loans acquired pursuant to the Transfer
and Servicing Agreement. The Eligible Lender Trustee on behalf of the Trust will
enter into a Guarantee Agreement with each of the Guarantors with respect to
such Financed Student Loans. The Eligible Lender Trustee qualifies as an
eligible lender and owner of all Financed Student Loans for all purposes under
the Higher Education Act and the Guarantee Agreements. Failure of the Financed
Student Loans to be owned by an eligible lender would result in the loss of
Guarantee Payments, with respect to such Financed Student Loans. See "The
Financed Student Loan Pool--Insurance of Student Loans; Guarantors of Student
Loans."
The Transferor or its affiliates maintain from time to time other banking
relationships with The First National Bank of Chicago, the Eligible Lender
Trustee, and its affiliates.
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USE OF PROCEEDS
The net proceeds from the sale of the Notes will be paid to the Transferor
on the Closing Date as consideration for the Initial Financed Student Loans
being conveyed on such date. The Transferor will use such proceeds to make the
initial Reserve Account Deposit, deposits into certain other Trust Accounts and
for general corporate purposes.
THE TRANSFEROR
The Transferor is a national banking association that offers a wide range
of domestic and international commercial banking, retail banking and trust and
asset management services to its customers. The Transferor and its predecessors
have been originating Student Loans since the enactment of the Higher Education
Act.
The Transferor's business is subject to examination and regulation by
federal banking authorities. Its primary federal bank regulatory authority is
the Office of the Comptroller of the Currency. The principal executive offices
of the Transferor are located at One PNC Plaza, 249 Fifth Avenue, Pittsburgh,
Pennsylvania 15222-2707. Its telephone number is (412) 762-1553.
The Transferor is a wholly owned indirect subsidiary of PNC Bank Corp. (the
"Holding Company" and together with its subsidiaries, the "Corporation"), a bank
holding company organized under the laws of the Commonwealth of Pennsylvania and
registered under the Bank Holding Company Act of 1956, as amended. The Holding
Company was incorporated in 1983 with the consolidation of Pittsburgh National
Corporation and Provident National Corporation. Since 1983, the Corporation has
diversified its geographical presence and product capabilities through strategic
bank and non-bank acquisitions and the formation of various nonbanking
subsidiaries. The Corporation operates banking subsidiaries in Pennsylvania,
Delaware, Florida, Indiana, Kentucky, Massachusetts, New Jersey and Ohio and
conducts certain non-banking operations throughout the United States. The
Corporation's major businesses include consumer banking, corporate banking, real
estate banking, mortgage banking and asset management.
THE NOTES ARE NEITHER OBLIGATIONS OF NOR GUARANTEED BY THE HOLDING COMPANY
OR ANY OF THE HOLDING COMPANY'S SUBSIDIARIES (INCLUDING THE TRANSFEROR).
THE SERVICERS
PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY
PHEAA is a body corporate and politic constituting a public corporation and
government instrumentality created pursuant to an act of the Pennsylvania
Legislature. PHEAA has approximately 2,300 employees. PHEAA's headquarters is
located in Harrisburg, Pennsylvania, with six regional offices located
throughout Pennsylvania and additional offices located in California, Delaware
and West Virginia.
Under its enabling legislation, PHEAA is authorized to issue bonds or
notes, with the approval of the Governor of the Commonwealth of Pennsylvania for
the purpose of purchasing, making, or guaranteeing loans to students or parents,
or to lending institutions or post secondary institutions to make student or
parent loans. PHEAA's enabling legislation also authorizes PHEAA to undertake
the origination of loans and the servicing of loans made by PHEAA and others.
As of March 31, 1997 PHEAA has outstanding debt and/or credit facilities
(under which the entire aggregate amount of funds available had not been drawn)
in the amount (including amounts drawn or available under such credit
facilities) of approximately $2.2 billion. As of March 31, 1997, PHEAA owned
approximately $1.6 billion outstanding principal amounts of student loans
financed with the proceeds of its long-term debt, and had funds available for
acquisition of student loans in the amount of approximately $465 million.
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PHEAA has been guaranteeing student loans since 1964. PHEAA has guaranteed
a total of approximately $16.5 billion principal amount of Stafford Loans and
approximately $1.6 billion principal amount of PLUS Loans and SLS Loans under
the Higher Education Act. In addition to guaranteeing loans under the Higher
Education Act, PHEAA also operates certain guarantee programs for which its
receives no federal reinsurance. PHEAA has outstanding guarantee obligations of
such loans in the amount of approximately $42 million as of March 31, 1997.
PHEAA's two principal servicing products are its full servicing operation
(in which it performs all student loan servicing functions on behalf of its
customers) and its remote servicing operation (in which it provides only data
processing services to its customers that have their own servicing operations).
As of March 31, 1997 PHEAA was servicing under its full service program
approximately 1.3 million student loan accounts representing approximately $11.1
billion outstanding principal amounts for more than 320 customers and under its
remote servicing operation, approximately 700,000 student loans representing
approximately $3.5 billion outstanding principal amounts for four customers.
Pursuant to a sub-servicing agreement, PHEAA has agreed to service, and
perform all other related tasks with respect to certain of the Financed Student
Loans. PHEAA is required to perform all services and duties customary to the
servicing of such Financed Student Loans in compliance with all applicable
standards and procedures. See "Description of the Transfer and Servicing
Agreements--Servicing Procedures."
The above information relating to PHEAA has been obtained from PHEAA and
the Transferor has not conducted any independent verification of such
information. PHEAA has agreed that it will provide a copy of its most recent
audited financial statements to Noteholders upon receipt of a written request
directed to Mr. Tim Guenther, Chief Financial Officer(-)Financial Management,
1200 North Seventh Street, Harrisburg, Pennsylvania 17102.
AFSA DATA CORPORATION
AFSA Data Corporation ("AFSA") is a for-profit corporation and wholly owned
subsidiary of Fleet Holding Corporation, a subsidiary of Fleet National Bank,
which in turn is a wholly-owned subsidiary of Fleet Financial Group of Boston,
Massachusetts, a diversified financial services company. AFSA services 4.7
million accounts nationwide and is the largest third-party student loan servicer
in the United States, with over $23 billion in loans serviced. AFSA has its
principal office in Long Beach, California and Regional Processing Centers in
Utica, New York and Lombard, Illinois. AFSA has approximately 1,350 employees.
AFSA's principal office is located at 2277 E. 220th Street, Long Beach,
California 90810-1690.
Pursuant to a sub-servicing agreement, AFSA has agreed to service, and
perform all other related tasks with respect to, certain of Financed Student
Loans. AFSA is required to perform all services and duties customary to the
servicing of such Financed Student Loans in compliance with all applicable
standards and procedures. See "Description of the Transfer and Servicing
Agreements--Servicing Procedures."
The above information relating to AFSA has been obtained from AFSA and the
Transferor has not conducted any independent verification of such information.
AFSA has agreed that it will provide a copy of its most recent audited financial
statements to Noteholders upon receipt of a written request directed to Mr.
Steve Allen, Vice President and Controller, AFSA Data Corporation, 2277 E. 220th
Street, Long Beach, California 90810-1690.
USA GROUP LOAN SERVICES, INC.
USA Group Loan Services, Inc. ("USAG"), formerly known as Education Loan
Servicing Center, Inc., is a private, non-profit, non-stock membership
corporation which was organized in 1982 under the General Corporation Law of the
State of Delaware. USAG is an affiliate of USA Group, Inc., a non-profit
corporation which is also affiliated with USA Funds, a student loan guarantor
and one of the USAG's guaranty agencies. As of March 31, 1997, USAG provided
loan servicing for in excess of 3,034,900 student and parent loans with
outstanding balances of over $10.81 billion for approximately 150 different
lenders and secondary market corporations. USAG's principal office is located in
Indianapolis, Indiana, where it currently has nearly 800
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full-time employees. USAG is located at 30 S. Meridian Street, Indianapolis,
Indiana, 46206, telephone number (317) 849-6510.
Pursuant to a sub-servicing agreement, USAG has agreed to service, and
perform all other related tasks with respect to certain of the Financed Student
Loans. USAG is required to perform all services and duties customary to the
servicing of such Financed Student Loans in compliance with all applicable
standards and procedures. See "Description of the Transfer and Servicing
Agreements--Servicing Procedures."
The above information relating to USAG has been obtained from USAG and the
Transferor has not conducted any independent verification of such information.
USAG has agreed that it will provide a copy of its most recent audited financial
statements to Noteholders upon receipt of a written request directed to Ms.
Laurie Blackburn, Vice President--Marketing and Contract Administration, USA
Group Loan Services, Inc, 30 S. Meridian Street, Indianapolis, Indiana, 46206.
THE STUDENT LOAN FINANCING BUSINESS
GENERAL
The Student Loans to be contributed by the Transferor to the Eligible
Lender Trustee on behalf of the Trust pursuant to the Transfer and Servicing
Agreement will be selected from Student Loans originated or purchased by the
Transferor and made to students enrolled in or recently graduated from
accredited institutions of higher education within the meaning of the Higher
Education Act. The proceeds of these loans are used by students to finance a
portion of the costs of school. Each of the Financed Student Loans will be
guaranteed by private, non-profit corporations or state agencies, and are and
will be reinsured by the United States Department of Education (the
"Department") and subject to the limitations described in this Prospectus.
Payment of principal and interest with respect to the Financed Student
Loans is guaranteed against default, death, bankruptcy, disability, school
closure or false certification by the school with respect to the applicable
borrower by a Guarantor pursuant to a guarantee agreement between the applicable
Guarantor and the Eligible Lender Trustee (such agreements, each as amended or
supplemented from time to time, the "Guarantee Agreements"). Each Guarantor of
Financed Student Loans is entitled, subject to certain conditions, to be
reimbursed for 98% (or 100% for loans made prior to October 1, 1993) and all
loans filed as nondefault claims of all Federal Guarantee Payments it makes by
the Department pursuant to a program of federal reinsurance under the Higher
Education Act. In addition, the Eligible Lender Trustee, as a holder of the
Financed Student Loans on behalf of the Trust, is entitled to receive from the
Department certain Interest Subsidy Payments and Special Allowance Payments with
respect to certain of such Financed Student Loans as described herein. See
"--The Federal Loan Program" and "The Financed Student Loan Pool--Insurance of
Student Loans; Guarantors of Student Loans."
Legal title to all the Financed Student Loans that comprise assets of the
Trust will be held by the Eligible Lender Trustee, as trustee on behalf of the
Trust. See "Formation of the Trust--Eligible Lender Trustee."
The description and summaries of the Higher Education Act, the Federal Loan
Programs, the Guarantee Agreements and the other statutes, regulations and
documents referred to in this Prospectus do not purport to be comprehensive, and
are qualified in their entirety by reference to each such statute, regulation or
document. There can be no assurance that future amendments or modifications will
not materially change any of the terms or provisions of the programs described
in this Prospectus or of the statutes and regulations implementing these
programs. See "Risk Factors--Risk That Changes in Law Could Adversely Affect the
Federal Family Education Loan Program and the Financed Student Loans."
THE FEDERAL LOAN PROGRAM
General. The Transferor's loan program for Federal Loans (the "Program")
provides educational financing to students (or their parents) enrolled in or
recently graduated from accredited institutions of higher education. The
Transferor has been originating loans under the Program since the enactment of
the Higher
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Education Act and had, as of March 31, 1997, Student Loan assets under
management in an aggregate principal amount of approximately $1.8 billion. The
Program consists of certain Federal Loans, each of which is guaranteed by a
Guarantor and reinsured by the Department. As described below, Federal Loans
include "Stafford Loans," "SLS Loans," "PLUS Loans," "Unsubsidized Stafford
Loans" and "Consolidation Loans"
Eligibility. To be eligible to obtain a loan under the Program, a student
must, among other things, (i)(a) be enrolled in, or be admitted for enrollment
in, a school that is an accredited and licensed State or nonprofit institution
of higher education and be enrolled in, or enroll in, an eligible undergraduate
or graduate degree or certificate program, be attending at least half-time and
be making satisfactory progress toward the completion of such program according
to the standards of the school, or (b) be enrolled in, or admitted for
enrollment in, an eligible degree or certificate program at an accredited and
licensed Proprietary School (i.e., a privately owned school offering
post-secondary education and operating on a for profit basis), (ii) be a U.S.
citizen, U.S. national or eligible noncitizen, (iii) not have borrowed, together
with the loan being requested, more than the applicable annual and aggregate
limits specified from time to time under the Program, (iv) meet the applicable
"needs" requirements and agree to notify promptly the holder of the loan of any
address change and (v) not be in default on any Federal education loan or owe a
refund on a Federal educational grant (each such student, an "Eligible
Student").
Origination Process. The Higher Education Act specifies rules regarding
loan origination practices, which lenders must comply with in order for their
loans to be guaranteed and to be eligible to receive Federal assistance. Lenders
are prohibited from offering points, premiums, payments or other inducements,
directly or indirectly, to any educational institution, guarantee agency or
individual in order to secure loan applications, and no lender may conduct
unsolicited mailings of student loan applications to students who have not
previously received student loans from that lender.
With respect to all Federal Loans made under the Program (other than
Consolidation Loans discussed below), the Transferor or its agent receives from
a borrower an application for a Federal Loan (which includes an executed
promissory note). The Transferor reviews or causes to be reviewed each
application to confirm its completeness, to confirm that the applicant is an
Eligible Student and that such loan complies with certain other conditions of
the Program. The Transferor forwards or causes to be forwarded a copy of each
application (or electronically transmits the data from such application) that
satisfies the foregoing reviews to the respective Guarantor, who reviews such
application to determine that such application satisfies all applicable
conditions, including the foregoing, for the loan to be eligible to receive
Guarantee Payments, subject to compliance with the terms of the respective
Guarantee Agreements, including the proper servicing of the loan. Upon approval
of an application by both the Transferor and the respective Guarantor and
receipt of evidence from such Guarantor that the applicable loan is guaranteed,
the Transferor causes the proceeds of such loan to be disbursed in one or more
installments. For each loan that is made, the Transferor forwards or causes to
be forwarded the completed loan application and executed promissory note to the
Master Servicer, which serves as custodian for such materials.
With respect to borrower inquiries concerning Consolidation Loans, the
applicable Servicer will contact the borrower and prepare and send to the
borrower an application (which includes a promissory note) for a Consolidation
Loan for the borrower's review and signature. Although the borrower is permitted
to choose any lender from whom he or she currently has federally guaranteed
education loans (including undergraduate loans) to make such Consolidation Loan,
borrowers typically express no preference as to the identity of the lender. In
that event, the Servicer will choose a lender based on various considerations,
which may include the lender that has the highest balance of the loans to be
consolidated or, if there is no such lender, the lender that has made the most
recent loan to the borrower to be consolidated. Pursuant to the Program, the
applicable Servicer will be required to obtain certifications from the lenders
of the loans to be consolidated and to review the loan application and the
certifications to confirm that the borrower is eligible for a Consolidation
Loan. Upon approval of an application for a Consolidation Loan, the applicable
lender will cause the proceeds of such Consolidation Loan to be disbursed to
each lender of the loans being consolidated in amounts sufficient to retire each
of such loans. For each Consolidation Loan that is made by the Transferor, the
Servicer will retain the completed loan application and executed promissory note
as custodian.
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Servicing and Collections Process. The Higher Education Act, the Federal
Loan Program and the applicable Guarantee Agreements require the holder of
Federal Loans to cause specified procedures, including due diligence procedures
and the taking of specific steps at specific intervals, to be performed with
respect to the servicing of the Federal Loans that are designed to ensure that
such Federal Loans are repaid on a timely basis by or on behalf of borrowers.
The Master Servicer will perform such procedures and has agreed, pursuant to the
Transfer and Servicing Agreement, to perform, or cause to be performed,
specified and detailed servicing and collection procedures with respect to the
Financed Student Loans on behalf of the Trust. Such procedures generally include
periodic attempts to contact any delinquent borrower by telephone and by mail,
commencing with a written notice at the tenth day of delinquency and including
multiple written notices and telephone calls to the borrower thereafter at
specified times during any such delinquency. All telephone calls and letters are
automatically registered, and a synopsis of each call or the mailing of each
letter is noted in the Master Servicer's loan file for the borrower. The Master
Servicer is also required to perform, or cause to be performed, skip tracing
procedures on delinquent borrowers whose current location is unknown, including
contacting such borrowers' schools and references. Failure to comply with the
established procedures could adversely affect the ability of the Eligible Lender
Trustee, as holder of legal title to the Financed Student Loans on behalf of the
Trust, to realize the benefits of any Guarantee Agreement or to receive the
benefits of Federal assistance from the Department with respect thereto. Failure
to comply with certain of the established procedures with respect to a Federal
Loan may also result in the denial of coverage under a Guarantee Agreement for
certain accrued interest amounts, in circumstances where such failure has not
caused the loss of the guarantee of the principal of such Federal Loan. See
"Risk Factors--Risk That Failure to Comply with Loan Origination and Servicing
Procedures for Financed Student Loans May Result in the Department's Refusal to
Make Certain Payments to Guarantors and the Eligible Lender Trustee and the
Guarantor's Refusal to Make Guarantee Payments to the Eligible Lender Trustee."
At prescribed times prior to submitting a claim for payment under a
Guarantee Agreement for a delinquent Financed Student Loan, the Master Servicer
is required to notify the applicable Guarantor of the existence of such
delinquency. These requests notify the Guarantors of seriously delinquent
accounts and allow the Guarantors to make additional attempts to collect on such
loans prior to the filing of claims. If a loan is delinquent for 180 days, the
Master Servicer is required to file a default claim with the respective
Guarantor. Failure to file a claim within 240 days of delinquency may result in
denial of the guarantee claim with respect to such Financial Student Loan, and
failure to file within 210 days may result in a reduction in the accrued
interest included in the claim payment. The failure by the Master Servicer to
file a guarantee claim in a timely fashion would constitute a breach of its
covenants and create an obligation of the Master Servicer to purchase the
applicable Federal Loan. See "Description of the Transfer and Servicing
Agreements--Master Servicer Covenants."
TYPES OF FEDERAL LOANS UNDER THE PROGRAM
General. The following descriptions of the Stafford Student Loan Program,
the Unsubsidized Stafford Loan Program, the Supplemental Loans for Students
Program, the Parental Loans for Undergraduate Students Program and the
Consolidation Loan Program as authorized under the Higher Education Act are
qualified in their entirety by reference to the Higher Education Act. Since its
original enactment in 1965, the Higher Education Act has been amended and
reauthorized several times, including by the Higher Education Amendments of 1992
(the "1992 Amendments"), the Student Loan Reform Act of 1993 (the "1993
Amendments") and the Higher Education Technical Amendments Act of 1993 (the
"1993 Technical Amendments"). The 1992 Amendments extended the principal
provisions of the Federal Loan Programs through October 1, 1998 (or, in the case
of borrowers who have received Federal Loans prior to that date, September 30,
2002).
Also, effective for student loans first disbursed after October 1, 1993,
lenders will be assessed an up-front, user/origination fee equal to .5% of the
principal amount of the student loan.
There can be no assurance that the Higher Education Act or other relevant
federal or state laws, rules and regulations and the programs implemented
thereunder will not be amended or modified in the future in a manner that will
adversely impact the programs described in this Prospectus and the Federal Loans
made
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thereunder, or the Guarantors. In addition, existing legislation and future
measures to reduce the federal budget deficit may adversely affect the amount
and nature of federal financial assistance available with respect to these
programs. In recent years, federal budget legislation has provided for the
recovery of certain funds held by guarantee agencies in order to achieve
reductions in federal spending. There can be no assurance that future federal
budget legislation or administrative actions will not adversely affect
expenditures by the Department or the financial condition of the Guarantors.
Stafford Loans. "Stafford Loans" are loans made by eligible lenders in
accordance with the Higher Education Act to Eligible Students, based on
financial need, to finance a portion of the costs of attending an eligible
institution of higher education or a vocational school. The Higher Education Act
limits the amount of Stafford Loans that may be made to a student in any given
academic year and the amount of Stafford Loans that a student may have
outstanding in the aggregate and specifies certain payment terms, including the
interest rates that may be charged on Stafford Loans. Holders of Stafford Loans
complying with these limitations and the other conditions specified in the
Higher Education Act will be entitled to the benefits of: (i) a guarantee of the
payment of principal and interest with respect to such Stafford Loans by a
guarantee agency, which guarantee will be supported by federal reinsurance of
all or most of such guaranteed amounts as described herein; (ii) federal
interest subsidy payments equal to the interest payable on such Stafford Loans
prior to the time the borrower begins repayment of such Stafford Loans and
during any applicable Deferral Periods, together with interest on any such
amounts not paid by the Department when due ("Interest Subsidy Payments"), and
(iii) federal special allowance payments, together with interest on any such
amounts not paid by the Department when due ("Special Allowance Payments"),
during the term of such Stafford Loans in varying amounts to ensure that
interest payable by the borrowers on such Stafford Loans, together with these
payments, approximates current market interest rates (such federal reinsurance
obligations, together with those obligations referred to in clauses (ii) and
(iii) above, being collectively referred to herein as "Federal Assistance").
(1) Eligibility Requirements. Subject to the annual and aggregate limits on
the amount of Stafford Loans that a student can borrow discussed below, Stafford
Loans are available to eligible students in amounts not exceeding their unmet
need for financing as determined in accordance with the provisions of the Higher
Education Act.
In addition to complying with the borrower's eligibility requirements set
forth above under the caption "--The Federal Loan Program," each Stafford Loan
(i) must be unsecured, (ii) must provide for deferral of the obligation of the
borrower to make (x) interest payments for as long as the Department makes
Interest Subsidy Payments and (y) principal payments so long as the borrower
remains an Eligible Student and thereafter during any applicable Grace Periods,
Deferral Periods or Forbearance Periods and (iii) must provide for repayment
over a period generally not to exceed 10 years (excluding any Deferral Periods
or Forbearance Periods) from the date repayment commences.
(2) Loan Limits. In order to qualify for Federal Assistance under the
Stafford Federal Student Loan Program, the Higher Education Act imposes an
annual limit on the amount of Stafford Loans and other Federal Loans that may be
made to any single student and an aggregate limit on the amount of such Federal
Loans such student may have outstanding. Under the 1992 Amendments, the annual
Stafford limit for first year students is $2,625 (except that lower limits apply
to certain short-term courses of study), increasing to $3,500 for second year
students, $5,500 for third and fourth year students, and $8,500 for graduate and
professional students. The aggregate limit is $23,000 for undergraduates and
$65,500 for graduate and professional students.
(3) Interest. Stafford Loans made to students with respect to periods of
enrollment in school commencing prior to July 1, 1988 (or thereafter to students
who had Federal Loans outstanding on such date), bear interest at either 7%, 8%
or 9% per annum, depending on the date of issuance and the interest rate
applicable to such student's outstanding Federal Loans. For the time periods
applicable to the Financed Student Loans, Stafford Loans made on or after July
l, 1988, to students with no outstanding Federal Loans on the date such Stafford
Loan is made ("new borrowers"), bear interest at rates of 8% per annum from
disbursement through four years after repayment commences and 10% per annum
thereafter, subject to a provision requiring annual
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discharge of principal or rebate to the borrower to the extent that, for each
quarter, the interest due at the 10% rate (or, for Stafford Loans to such
borrowers which are first disbursed after July 23, 1992, the interest rate then
applicable thereto) exceeds the interest that would be payable at a rate per
annum equal to the sum of the 91-day Treasury Bill Rate plus 3.25% (or, for
Stafford Loans to such borrowers which are first disbursed after July 23, 1992,
and from the date of disbursement, 3.10%). Notwithstanding the foregoing, no
such discharge of principal or rebate to a borrower will be payable if such
borrower is more than 30 days delinquent in making payments on such Stafford
Loan. However, under the 1993 Technical Amendments, by January 1, 1995 lenders
had to convert all loans subject to this provision to a variable rate equal to
the 91-day Treasury Bill Rate plus 3.25% or, in the case of a loan made to a
borrower with outstanding Federal Loans under the Federal Loan Programs after
October 1, 1993, the 91-day Treasury Bill Rate plus 3.1%. The converted loans
will not thereafter be subject to the rebate requirements described above.
A Stafford Loan made on or after October 1, 1992 to a student with no
outstanding Federal Loans on the date such Stafford Loan is made, bears interest
at a variable rate, based on the 91-day Treasury Bills Rate plus 3.10% or 9%,
whichever is less. A Stafford Loan made on or after October 1, 1992, to a
student with prior outstanding Federal Loans on the date such Stafford Loan is
made, bears interest at a variable rate, equal to the 91-day Treasury Bill Rate
plus 3.10%, with a maximum rate ranging from 7% to 10% based upon the borrower's
outstanding loans and how long the new Stafford Loan has been in repayment.
Stafford Loans first disbursed on or after July 1, 1995 and prior to July 1,
1998 bear interest at a rate equal to the 91-day Treasury Bill Rate plus 2.50%
while the borrowers are in in-school, grace, or deferment status, and at a rate
equal to the 91-day Treasury Bill Rate plus 3.10% during periods in which the
loan does not qualify for Interest Subsidy Payments. Stafford Loans made on or
after July 1, 1998 will bear interest at a rate equal to the bond equivalent
rate of U.S Treasury securities with a comparable maturity plus 1.0% with a
8.25% cap.
Interest is payable on each Stafford Loan monthly in arrears until the
principal amount thereof is paid in full. However, prior to the date the
borrower begins repaying the principal of such Stafford Loan and during any
applicable Deferral Period or Grace Period, the borrower has no obligation to
make interest payments. Instead, the Department makes quarterly Interest Subsidy
Payments to the holder of the Stafford Loan on behalf of the borrower during
such periods, in amounts equal to the accrued and unpaid interest for the
previous quarter with respect to such Stafford Loan. During a Forbearance
Period, the Department will not make any Interest Subsidy Payments; instead, at
the borrower's option, interest on each Stafford Loan may be paid currently or
accrue and be capitalized and added to the outstanding principal balance of such
Stafford Loan at the end of such Forbearance Period. See "--(6) Interest Subsidy
Payments."
(4) Repayment. No principal and/or interest payments with respect to a
Stafford Loan are required to be made during the time a borrower remains an
Eligible Student and during the existence of an applicable Grace Period,
Deferral Period or Forbearance Period. In general, a borrower must repay each
Stafford Loan in monthly installments over a period generally not to exceed 10
years (excluding any Deferral Period or Forbearance Period) after commencement
of repayment. Any borrower may voluntarily prepay without premium or penalty any
Federal Loan and in connection therewith may waive any Grace Period or Deferral
Period. The Higher Education Act presently requires a minimum annual principal
and interest payment with respect to a Stafford Loan of $600 in the aggregate
(but in no event less than accrued interest), unless the borrower and the lender
agree to a lesser amount. The 1992 Amendments adopted several provisions that
affect loan repayment terms. These include, among others, provisions to grant
new borrowers with respect to loans for which the first disbursement is on or
after July 1, 1993, the right to choose a graduated or income-sensitive
repayment schedule.
(5) Grace Periods, Deferral Periods, Forbearance Periods. Borrowers of
Stafford Loans must generally commence repaying the loans following a period of
(a) not less than 9 months nor more than 12 months (with respect to loans for
which the applicable interest rate is 7% per annum) and (b) not more than 6
months (with respect to loans for which the applicable interest rate is in
excess of 7% per annum and for loans to first time borrowers on or after July 1,
1988) (a "Grace Period") after the borrower ceases to be an Eligible Student.
However, subject to certain conditions, no principal repayments need be made
with respect to Stafford Loans during periods when the borrower has returned to
an eligible educational institution on at least a half-time basis or is pursuing
studies pursuant to an approved graduate fellowship program and during certain
other
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periods (varying from six months to three years) when the borrower has joined
the military or certain volunteer organizations (for all loans made after July
1, 1993, or loans made after such date to borrowers with loans already
outstanding on such date), for periods when the borrower is unable to secure
employment (up to three years) or for periods during which the borrower is
experiencing economic hardship (for loans made after July 1, 1993, to borrowers
with no outstanding loans on such date) (each a "Deferral Period"). The lender
may also allow, in accordance with standards and guidelines approved by the
applicable guarantor and the Department, periods of forbearance during which the
borrower may defer principal and/or interest payments because of temporary
financial hardship (a "Forbearance Period").
(6) Interest Subsidy Payments. Interest Subsidy Payments are payments made
quarterly to the holder of a qualifying Stafford Loan by the Department with
respect to those Stafford Loans as to which the applicable conditions of the
Higher Education Act have been satisfied, in an amount equal to the accrued and
unpaid interest on the outstanding principal amount of each Stafford Loan for
such quarter, commencing from the date such Stafford Loan is made until the end
of the applicable Grace Period after the borrower ceases to be an eligible
student and during any applicable Deferral Period. The Department will not make
Interest Subsidy Payments during any Forbearance Period. The Higher Education
Act provides that the holder of such a qualifying Stafford Loan has a
contractual right, as against the United States, to receive Interest Subsidy
Payments from the Department (including the right to receive interest on any
Interest Subsidy Payments not timely paid). Receipt of Interest Subsidy Payments
is conditioned on compliance with the requirements of the Higher Education Act,
including satisfaction of certain need-based criteria (and the delivery of
sufficient information by the borrower and the lender to the Department to
confirm the foregoing) and continued eligibility of the Stafford Loan for
federal reinsurance. Such eligibility may be lost, however, if the loans are not
originated and serviced, or are not held by an eligible lender, in accordance
with the requirements of the Higher Education Act and the applicable guarantee
agreements. See "--(1) Eligibility Requirements"; "Risk Factors--Risk That
Failure to Comply With Student Loan Origination and Servicing Procedures for
Financed Student Loans May Result in the Department's Refusal to Make Certain
Payments to Guarantors and Eligible Lender Trustee and the Guarantors Refusal to
Make Guarantee Payments to Eligible Lender Trustee"; "Formation of the
Trust--Eligible Lender Trustee" and "Description of the Transfer and Servicing
Agreements--Servicing Procedures." The Transferor expects that each of the
Stafford Loans that are part of the pool of Financed Student Loans will be
eligible to receive Interest Subsidy Payments.
(7) Special Allowance Payments. The Higher Education Act requires, subject
to certain conditions, the Department to make quarterly Special Allowance
Payments to holders of qualifying Federal Loans (including Stafford Loans) in an
amount equal to a specified percentage of the average outstanding principal
amount of each such Federal Loan during each quarter.
The percentage or rate used to determine the Special Allowance Payments for
a particular loan varies based on a number of factors, including when the loan
was disbursed and the period of enrollment with respect to which it was made.
Generally, the Special Allowance Payment with respect to a loan such as any
Federal Loan for a quarter will be equal to the excess, if any, of (i) the
amount of interest that would be payable on such loan at a rate per annum equal
to the 91-day Treasury Bill Rate plus 3.10% (3.25% for loans first disbursed
before October 1, 1992 and 2.50% while the borrower is in school, grace or
deferment status for loans made on or after July 1, 1995) over (ii) the stated
amount of interest payable on such loan.
The Higher Education Act provides that a holder of a qualifying loan who is
entitled to receive Special Allowance Payments has a contractual right against
the United States to receive those Special Allowance Payments (including the
right to receive interest on any Special Allowance Payments not timely paid).
Receipt of Special Allowance Payments, however, is conditioned on compliance
with the requirements of the Higher Education Act, including satisfaction of
certain need-based criteria (and the delivery of sufficient information by the
borrower and the lender to the Department to confirm the foregoing) and
continued eligibility for federal reinsurance. Such eligibility may be lost,
however, if the loans are not originated and serviced, or are not held by an
eligible lender, in accordance with the requirements of the Higher Education Act
and the applicable guarantee agreement. See "--(1) Eligibility Requirements";
"Risk Factors--Risk That Failure to Comply with Student Loan Origination and
Servicing Procedures for Financed Student Loans May Result in Department's
Refusal to Make Certain Payments to Guarantors and the Eligible Lender
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Trustee and the Guarantors' Refusal to Make Guarantee Payments to the Eligible
Lender Trustee"; "Formation of the Trust--Eligible Lender Trustee" and
"Description of the Transfer and Servicing Agreements--Servicing Procedures."
The Transferor expects that each of the Stafford Loans that are part of the pool
of Financed Student Loans will be eligible to receive Special Allowance
Payments, if any are payable from time to time.
Interest Subsidy Payments and Special Allowance Payments are generally
received within 45 to 60 days after submission to the Department of the
applicable claims forms for any given calendar quarter, although there can be no
assurance that such payments will in fact be received from the Department within
that period. See "Risk Factors--Risk of Reduction in Amounts Paid on the Notes
Resulting From Variability of Actual Cash Flows; Risk of Reduction in Amounts
Paid on the Notes From Inability of Guarantors to Make Guarantee Payments" and
"--Risk of Inability of Indenture Trustee to Liquidate Financed Student Loans."
The Master Servicer has agreed to prepare and file with the Department all such
claims forms and any other required documents or filings on behalf of the
Eligible Lender Trustee as owner of the Financed Student Loans on behalf of the
Trust. The Master Servicer has also agreed to assist the Eligible Lender Trustee
in monitoring, pursuing and obtaining such Interest Subsidy Payments and Special
Allowance Payments, if any, with respect to such Federal Loans. The Eligible
Lender Trustee will be required to remit to the Indenture Trustee, for deposit
in the Collection Account, Interest Subsidy Payments and Special Allowance
Payments it receives with respect to the Federal Loans within two Business Days
of receipt thereof.
Unsubsidized Stafford Loans. The Federal Loans also may include Stafford
Loans that do not qualify for Interest Subsidy Payments but otherwise qualify
for all other forms of Federal Assistance ("Unsubsidized Stafford Loans"). These
loans are identical to Stafford Loans in all material respects, except that
interest accruing thereon during periods when the borrower is in school or in a
Deferral Period or Grace Period is either paid periodically by the borrower
during such periods or added periodically to the principal balance of the loan
by the holder thereof. A borrower qualifies for an Unsubsidized Stafford Loan
if, and to the extent that, the borrower's need for a Stafford Loan, as
calculated pursuant to the Higher Education Act, is less than the maximum
Stafford Loan authorized by statute due to the borrower's expected family
contribution as calculated thereunder. As discussed below, no SLS Loans may be
made on or after July 1, 1994. As a result of this change, on July 1, 1994, the
maximum amount a single borrower may receive under the Unsubsidized Stafford
Loan program was increased by the amount such borrower could formerly have
obtained under the SLS Program.
SLS Loans. In addition to the Stafford Student Loan Program, the Higher
Education Act provides a separate program to facilitate additional loans to
graduate and professional students and independent undergraduate students. This
program is referred to as the "Supplemental Loans for Students Program" (the
"SLS Program"). The basic framework and principal provisions of the Stafford
Student Loan Program as described above are similar in many respects to those
that are applicable to loans under the SLS Program ("SLS Loans"). In particular,
SLS Loans are subject to similar eligibility requirements and, provided that
such requirements are satisfied, are entitled to the same guarantee and federal
reinsurance arrangements. SLS Loans differ significantly from Stafford Loans,
however, in the context of the Interest Subsidy Payments and Special Allowance
Payments discussed above.
The annual and aggregate limitations that are applicable to SLS Loans are
as follows: SLS Loans to a single borrower cannot exceed $4,000 per academic
year for first year and second year students, increasing to $5,000 for third
year and fourth year students, and to $10,000 for graduate and professional
students, with aggregate limits of $23,000 for undergraduate students ($20,000
for loans first disbursed on or before July 1, 1993) and $73,000 for graduate
and professional students (exclusive of any capitalized interest) at any one
time outstanding. SLS Loans are also limited, generally, to the cost of
attendance minus other financial aid for which the borrower is eligible. A
determination of a borrower's eligibility for the Stafford Student Loan Program,
among other programs, is a condition to the making of an SLS Loan.
As specified by the Higher Education Act, the applicable interest rate for
an SLS Loan depends upon the date of issuance of the loan and the period of
enrollment for which the loan is made. The interest rate per annum for SLS Loans
made and disbursed on or after July 1, 1987 is fixed each July 1 for each
succeeding
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12-month period at a rate equal to the sum of (i) the bond equivalent rate of
52-week Treasury bills auctioned at the final auction held prior to the
preceding June 1 and (ii) 3.10% (3.25% for loans first disbursed before October
1, 1992), with a maximum rate of 11% per annum (12% for loans first disbursed
before October 1, 1992).
Although holders of SLS Loans are not entitled to receive Interest Subsidy
Payments with respect thereto, interest on such SLS Loans accrues from the date
each such SLS Loan is made and may either be paid currently by a borrower or may
be capitalized and added to the outstanding principal amount of such SLS Loan at
the time the borrower begins repayment. SLS Loans are eligible for Special
Allowance Payments only if and to the extent that the interest rate for such SLS
Loans calculated based on the 52-week Treasury bill rate referred to above would
exceed the applicable per annum maximum interest rate. Because the basis for
determining the amount, if any, of Special Allowance Payments due to lenders is
based on the 91-day Treasury Bill Rate while the interest rate for SLS Loans is
based on the 52-week Treasury bill rate (which may differ from the 91-day
Treasury Bill Rate), there can be no assurance that any Special Allowance
Payments will be due and payable with respect to SLS Loans even though such SLS
Loans are deemed to be eligible therefor. See "--(7) Special Allowance
Payments."
A borrower of an SLS Loan is required to begin repayment of the principal
of such SLS Loan within 60 days after the date the last installment of such SLS
Loan is advanced, subject to deferral so long as such borrower remains an
Eligible Student or as a result of any applicable Deferral Period or Forbearance
Period. In addition, any borrower of an SLS Loan made and advanced after July
23, 1992, who also has Stafford Loans outstanding may defer commencing repayment
of such SLS Loan for the Grace Period applicable to such Stafford Loans.
Pursuant to the Omnibus Budget Reconciliation Act of 1993, no SLS Loans may be
made on or after July 1, 1994.
PLUS Loans. The Higher Education Act authorizes Parental Loans for
Undergraduate Students ("PLUS Loans") to be made to parents of eligible
dependent undergraduate students. The basic provisions applicable to PLUS Loans
are similar to those of Stafford Loans with respect to the involvement of
guaranty agencies and the Department in providing guarantees and federal
reinsurance on the loans. However, PLUS Loans differ significantly from Stafford
Loans, particularly because Interest Subsidy Payments are not available and in
some instances Special Allowance Payments are more restricted.
Pursuant to the 1992 Amendments, with respect to PLUS Loans originated
after July 1, 1993, there are no annual loan limits for PLUS Loans. PLUS Loans,
however, are limited by a formula whereby the amount borrowed annually, when
combined with the student's other loans and grants for that year, may not exceed
the student's estimated educational costs. The 1992 Amendments prohibit
origination of PLUS Loans to borrowers determined, pursuant to regulations of
the Department, to have adverse credit histories for loans with first
disbursement on or after July 1, 1993.
The interest rates on a PLUS Loan depend upon the date of issuance of the
loan and the period of enrollment for which the loan is to apply. PLUS Loans
disbursed or refinanced on or after July 1, 1987 bear interest at a variable
rate which is in effect from each July 1 through June 30, which is determined on
the June 1 preceding the commencement of the interest rate period, and which is
equal to the bond equivalent rate of 52-week Treasury bills auctioned at the
final auction held prior to such June 1 plus 3.10% (3.25% for PLUS Loans
disbursed before October 1, 1992), except that such rate cannot exceed 10% (or
12% for PLUS Loans disbursed before October 1, 1992). The 1993 Amendments reduce
this interest rate ceiling to 9% for PLUS Loans made to new borrowers on or
after July 1, 1994. PLUS Loans made on or after July 1, 1998 are to bear a rate
equal to the bond equivalent rate of the U.S. Treasury security with a
comparable maturity, as established by the Department, plus 2.1% (not to exceed
9%).
Lenders are required to charge a 5% origination fee, payable to the
Department, to any borrower of a PLUS Loan made on or after October 1, 1992,
except that such fee is 3% for PLUS Loans first disbursed on or after July 1,
1994.
Repayment of the principal of PLUS Loans is required to commence no later
than 60 days after the date of final disbursement of such loan, subject to
certain deferment provisions. A parent borrower may defer
44
<PAGE> 45
principal payments for periods during which the borrower has a dependent student
for whom the parent borrowed a PLUS Loan, if such student is engaged in a
qualifying educational program, graduate fellowship program or rehabilitation
training program and the PLUS Loan was originated before July 1, 1993; a parent
borrower of a PLUS Loan made thereafter may defer principal payments only if
such parent borrower is engaged in a qualifying educational program, graduate
fellowship program or rehabilitation training program.
Interest Subsidy Payments are not available with respect to PLUS Loans.
However, the capitalization of interest is allowed during deferral periods.
Thus, the borrower and lender may agree either to capitalize interest or to have
the borrower make the interest payments during an authorized period. The annual
loan limits are not violated by any decision to capitalize interest.
PLUS Loans are eligible for Special Allowance Payments only if and to the
extent that the interest rate for such PLUS Loans calculated based on the
52-week Treasury bill rate referred to above would exceed the applicable per
annum maximum interest rate. Because the basis for determining the amount, if
any, of Special Allowance Payments due to lenders is based on the 91-day
Treasury Bill Rate while the interest rate for PLUS Loans is based on the
52-week Treasury bill rate (which may differ from the 91-day Treasury Bill
Rate), there can be no assurance that any Special Allowance Payments will be due
and payable with respect to PLUS Loans even though such PLUS Loans are deemed to
be eligible therefor. See "-- (7) Special Allowance Payments".
Consolidation Loans. The Higher Education Act established a program to
facilitate the ability of eligible borrowers of Stafford Loans, SLS Loans and
PLUS Loans (each an "Underlying Federal Loan") to consolidate such Federal
Loans, together with such borrowers' other education loans that are made or
guaranteed by the federal government, into a single loan (a "Consolidation
Loan"). Subject to the satisfaction of certain conditions set forth in the
Higher Education Act, including limitations on the timing and payment of
principal and interest with respect to Consolidation Loans and a requirement
that the proceeds of Consolidation Loans are to be used to repay the respective
Underlying Federal Loans (and any other loans consolidated thereunder) of any
borrower, each holder of a Consolidation Loan will be entitled to the same
guarantee and federal reinsurance arrangements as are available on Stafford
Loans, SLS Loans and PLUS Loans. Consolidation Loans, like Stafford Loans, are
also eligible for Interest Subsidy Payments and Special Allowance Payments;
however, for Consolidation Loan applications received by lenders on or after
August 10, 1993, the Department will no longer make Interest Subsidy Payments on
Consolidation Loans other than those loans which consolidate only subsidized
Stafford Loans. Under this program, an eligible borrower of Consolidation Loans
means a borrower who has begun repaying, who is in a grace period preceding
repayment of, or who is a delinquent or defaulted borrower who will, through
such loan consolidation, recommence repayment of such Underlying Federal Loans.
A married couple, each of whom has outstanding Underlying Federal Loans, may
apply for and obtain a single Consolidation Loan so long as both individuals
agree to be held jointly and severally liable on such Consolidation Loan.
Under this program, a lender may make a Consolidation Loan to an eligible
borrower at the request of the borrower if the lender holds an outstanding
Underlying Federal Loan of the borrower or the borrower certifies that he or she
has been unable to obtain a Consolidation Loan from any of the holders of the
outstanding Underlying Federal Loans of the borrower. The lender making any
Consolidation Loan will pay the amount thereof to the various lenders of the
respective Underlying Federal Loans and other loans being consolidated thereby.
The Trust may be affected by Consolidation Loans in the following way. The
Trust may own Underlying Federal Loans with respect to which an institution
other than the Transferor, or the Department pursuant to the Federal Direct
Student Loan Program, makes the Consolidation Loan, in which case such
Underlying Federal Loans will be prepaid in full and such prepayment amount will
constitute Available Funds for the applicable Collection Period. See
"Description of the Transfer and Servicing Agreements--Distributions."
In accordance with the Higher Education Act, Consolidation Loans may bear
interest at a rate per annum equal to the weighted average of the interest rates
on the Underlying Federal Loans (rounded up to the nearest whole percent). In
general, a borrower must repay each Consolidation Loan in scheduled monthly
installments over a period of not more than 10 to 30 years (excluding any
Deferral Period and any
45
<PAGE> 46
Forbearance Period), depending on the original principal amount of such
Consolidation Loan. The repayment schedules for Consolidation Loans will not
exceed: 12 years for loans greater than or equal to $7,500, but less than
$10,000; 15 years for loans greater than or equal to $10,000, but less than
$20,000; 20 years for loans greater than or equal to $20,000, but less than
$40,000; 25 years for loans greater than or equal to $40,000, but less than
$60,000; and not more than 30 years for loans in excess of $60,000. Effective
July 1, 1994, Consolidation Loans for less than $7,500 will have a repayment
schedule of not more than 10 years. Borrowers may voluntarily prepay all or a
portion of any Consolidation Loan without premium or penalty. Repayment of a
Consolidation Loan must commence within 60 days after all holders of Underlying
Federal Loans have discharged the liability of the borrower thereon; provided,
however, that such repayment obligation is deferred for as long as the borrower
remains an Eligible Student and during any applicable Deferral Phase and
Forbearance Phase.
The 1993 Amendments made a number of changes to the Consolidation Loan
Program, including requiring holders of Consolidation Loans made on or after
October 1, 1993, to pay to the Department a monthly fee equal to 1.05% per annum
of the outstanding principal amount of the Consolidation Loan.
The Federal Direct Consolidation Loan Program provides borrowers with the
opportunity to consolidate outstanding student loans at interest rates below,
and income contingent repayment terms that some borrowers may find preferable
to, those that would be available from the Transferor on a Consolidation Loan
originated by the Transferor under the Federal Loan Program. The availability of
such lower rate, income contingent loans may decrease the likelihood that the
Transferor would be the originator of a Consolidation Loan with respect to
borrowers with Federal Loans, as well as increase the likelihood that a Federal
Loan in a Trust will be prepaid through the issuance of a Federal Direct
Consolidation Loan.
Proposed federal budget legislation being considered by Congress could
modify many of the provisions of the Higher Education Act. Until final
legislation is adopted, the impact on the Financed Student Loans, if any, is
impossible to determine. See "Risk Factors--Risk That Changes in Law Could
Adversely Affect Federal Family Education Loan Program and the Financed Student
Loans."
46
<PAGE> 47
THE FINANCED STUDENT LOAN POOL
The Initial Financed Student Loans were, and the Exchanged Financed Student
Loans will be, selected from the Transferor's portfolio of Federal Loans by
several criteria, including the following: each Financed Student Loan (i) was or
will be originated in the United States or its territories or possessions under
and in accordance with the Federal Loan Program to or on behalf of a student who
has graduated or is expected to graduate from an accredited institution of
higher education within the meaning of the Higher Education Act, (ii) contains
terms in accordance with those required by the Program, the Guarantee Agreements
and other applicable requirements and (iii) is not more than 90 days past due as
of its cut-off date set forth in the Transfer and Servicing Agreement or, in the
case of an Exchanged Financed Student Loan, as of the subsequent cut-off date
set forth in the related Transfer Agreement (each, a "Subsequent Cut-Off Date").
No selection procedures believed by the Transferor to be adverse to the
Noteholders will be used in selecting the Financed Student Loans.
However, except for the criteria described above and under "Description of
the Transfer and Servicing Agreements--Exchange Period and Exchanged Financed
Student Loans", there will be no required characteristics of the Exchanged
Financed Student Loans and no limitations on the amount of Exchanged Financed
Student Loans that may be included in the Trust. Therefore, following the
transfer of Exchanged Financed Student Loans to the Eligible Lender Trustee on
behalf of the Trust, the aggregate characteristics of the entire pool of
Financed Student Loans, including the composition of the Financed Student Loans
and of the borrowers thereof, the distribution by interest rate and the
distribution by principal balance described in the following tables, will vary
from those of the Initial Financed Student Loans as of the Cut-Off Date.
Each of the Financed Student Loans provides for the amortization of the
outstanding principal balance of such Financed Student Loan over a series of
regular payments. Each regular payment consists of an installment of interest
which is calculated on the basis of the outstanding principal balance of such
Financed Student Loan multiplied by the applicable interest rate and further
multiplied by the period elapsed (as a fraction of a calendar year) since the
preceding payment of interest was made. As payments are received in respect of
such Financed Student Loan, the amount received is applied first to outstanding
late fees, if any, then to interest accrued to the date of payment and the
balance is applied to reduce the unpaid principal balance. Accordingly, if a
borrower pays a regular installment before its scheduled due date, the portion
of the payment allocable to interest for the period since the preceding payment
was made will be less than it would have been had the payment been made as
scheduled, and the portion of the payment applied to reduce the unpaid principal
balance will be correspondingly greater. Conversely, if a borrower pays a
monthly installment after its scheduled due date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be greater than it would have been had the payment been made as scheduled, and
the portion of the payment applied to reduce the unpaid principal balance will
be correspondingly less. In either case, subject to any applicable Deferral
Periods or Forbearance Periods, the borrower pays a regular installment until
the final scheduled payment date, at which time the amount of the final
installment is increased or decreased as necessary to repay the then outstanding
principal balance of such Financed Student Loan.
Set forth below in the following tables is a description of certain
additional characteristics of the Initial Financed Student Loans as of the
Cut-Off Date. Such characteristics are based on a preliminary pool of Initial
Financed Student Loans with an outstanding principal balance as of the Cut-off
Date of $982,839,748. The Transferor expects that additional Initial Financed
Student Loans that were not contained in the preliminary pool and having an
outstanding principal balance as of the Cut-off Date of approximately
$17,100,000 will be added to the final pool of Initial Financed Student Loans
delivered to the Eligible Lender Trustee on the Closing Date. While the
statistical distribution of the characteristics for the final pool of Initial
Financed Student Loans will vary somewhat from the statistical distribution of
such characteristics for the preliminary pool presented below, the Transferor
does not believe that the characteristics of the final pool will differ
materially.
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<PAGE> 48
COMPOSITION OF THE INITIAL FINANCED STUDENT LOANS AS OF THE CUT-OFF DATE
<TABLE>
<S> <C>
Aggregate Outstanding Principal Balance........................................ $982,839,748
Number of Borrowers............................................................ 165,551
Average Outstanding Principal Balance Per Borrower............................. $ 5,937
Number of Loans................................................................ 606,478
Average Outstanding Principal Balance Per Loan................................. $ 1,621
Weighted Average Annual Interest Rate.......................................... 8.30%
Weighted Average Annual Effective Rate......................................... 8.30%
Weighted Average Remaining Term (months) (does not include the months remaining
for the in-school, grace, deferment or forbearance periods).................. 115
Weighted Average Remaining Term (months) (including the months remaining for
the in-school, grace, deferment or forbearance periods)...................... 117
</TABLE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY LOAN TYPE
<TABLE>
<CAPTION>
PERCENT OF
LOANS BY
NUMBER OF OUTSTANDING OUTSTANDING
LOAN TYPES LOANS BALANCE BALANCE
- ---------- --------- ------------ -----------
<S> <C> <C> <C>
Consolidated........................................... 14,829 $185,125,849 18.84%
PLUS................................................... 46,696 109,799,105 11.17
SLS.................................................... 11,678 24,256,274 2.47
Stafford--Subsidized................................... 462,574 561,470,890 57.12
Stafford--Unsubsidized................................. 70,701 102,187,630 10.40
------- ------------ ------
Total................................................ 606,478 $982,839,748 100.00%
======= ============ ======
</TABLE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY INTEREST RATE
<TABLE>
<CAPTION>
PERCENT OF
LOANS BY
NUMBER OF OUTSTANDING OUTSTANDING
INTEREST RATE LOANS BALANCE BALANCE
- ------------- --------- ------------ -----------
<S> <C> <C> <C>
Less than 7.50%........................................ 15,934 $ 22,808,668 2.32%
7.50% to 8.49%......................................... 499,274 668,002,086 67.97
8.50% to 9.49%......................................... 89,885 284,834,593 28.98
9.50% to greater....................................... 1,385 7,194,401 0.73
------- ------------ ------
Total................................................ 606,478 $982,839,748 100.00%
======= ============ ======
</TABLE>
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<PAGE> 49
COMPOSITION OF THE INITIAL FINANCED STUDENT LOANS AS OF THE CUT-OFF DATE
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY OUTSTANDING BALANCE
<TABLE>
<CAPTION>
PERCENT OF
LOANS BY
NUMBER OF OUTSTANDING OUTSTANDING
OUTSTANDING BALANCE BORROWERS BALANCE BALANCE
- ------------------- ---------- ------------ -----------
<S> <C> <C> <C>
Less than $1,000....................................... 15,493 $ 9,276,597 0.94%
$1,000-$1,999.......................................... 22,670 34,081,485 3.47
$2,000-$2,999.......................................... 27,254 68,257,160 6.94
$3,000-$3,999.......................................... 19,277 67,205,440 6.84
$4,000-$4,999.......................................... 14,692 65,829,237 6.70
$5,000-$5,999.......................................... 13,116 71,546,873 7.28
$6,000-$6,999.......................................... 8,639 55,752,866 5.67
$7,000-$7,999.......................................... 6,773 50,678,462 5.16
$8,000-$8,999.......................................... 5,703 48,416,210 4.93
$9,000-$9,999.......................................... 4,708 44,652,410 4.54
$10,000-$10,999........................................ 4,104 43,020,909 4.38
$11,000-$11,999........................................ 3,455 39,624,113 4.03
$12,000-$12,999........................................ 2,686 33,528,067 3.41
$13,000-$13,999........................................ 2,320 31,294,195 3.18
$14,000-$14,999........................................ 2,242 32,448,531 3.30
$15,000 or greater..................................... 12,418 287,227,193 29.23
------- ------------ ------
Total.................................................. 165,551 $982,839,748 100.00%
======= ============ ======
</TABLE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY BORROWER PAYMENT STATUS
<TABLE>
<CAPTION>
PERCENT OF
LOANS BY
NUMBER OF OUTSTANDING OUTSTANDING
BORROWER PAYMENT STATUS LOANS BALANCE BALANCE
- ----------------------- --------- ------------ -----------
<S> <C> <C> <C>
Claim.................................................. 0 $ 0 0.00%
Deferment.............................................. 57,282 99,867,107 10.16
Forbearance............................................ 40,906 91,445,881 9.30
Grace.................................................. 28,534 46,480,689 4.73
In School.............................................. 44,300 72,852,542 7.41
Repayment.............................................. 435,456 672,193,529 68.40
------- ------------ ------
Total................................................ 606,478 $982,839,748 100.00%
======= ============ ======
</TABLE>
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<PAGE> 50
COMPOSITION OF THE INITIAL FINANCED STUDENT LOANS AS OF THE CUT-OFF DATE
GEOGRAPHIC DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
<TABLE>
<CAPTION>
PERCENT OF
LOANS BY
NUMBER OF OUTSTANDING OUTSTANDING
LOCATION (1) LOANS BALANCE BALANCE
- ------------ --------- ------------ -----------
<S> <C> <C> <C>
California............................................. 12,369 $ 23,110,500 2.35%
Florida................................................ 11,954 21,358,337 2.17
Georgia................................................ 23,207 27,252,497 2.77
Indiana................................................ 10,272 21,592,787 2.20
Kentucky............................................... 73,139 110,830,416 11.28
New Jersey............................................. 39,686 64,139,955 6.53
New York............................................... 14,271 29,137,849 2.96
Ohio................................................... 34,892 51,037,321 5.19
Pennsylvania........................................... 288,983 446,236,221 45.40
Others (2)............................................. 97,705 188,143,865 19.15
------- ------------ ------
TOTAL.................................................. 606,478 $982,839,748 100.00%
======= ============ ======
</TABLE>
- ---------
(1) Based on the permanent billing addresses of the borrowers of the Initial
Financed Student Loans shown on the Servicer's records.
(2) Consist of locations that include 41 other states, the District of Columbia,
various other U.S. territories, possessions and commonwealths, foreign
countries, overseas military establishments, and unknown locations, none of
the aggregate principal balance of the Student Loans relating to which
exceed 2.00% of the Initial Pool Balance.
Approximately 45.40% and 11.28% of the Initial Financed Student Loans were
originated to borrowers with permanent billing addresses in Pennsylvania and
Kentucky, respectively. To the extent such states experience adverse economic or
other conditions to a greater degree than other areas of the country, the
ability of such borrowers to repay their Financed Student Loans may be impacted
to a larger extent than if such borrowers were dispersed more geographically.
The Transferor is not aware of any material adverse conditions that are unique
to such states.
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY DATE OF DISBURSEMENT
<TABLE>
<CAPTION>
PERCENT OF
LOANS BY
NUMBER OF OUTSTANDING OUTSTANDING
DISBURSEMENT DATE LOANS BALANCE BALANCE
- ----------------- --------- ------------ -----------
<S> <C> <C> <C>
Pre-October 1, 1993.................................... 349,795 $436,354,129 44.40%
October 1, 1993 and thereafter......................... 256,683 546,485,619 55.60
------- ------------ ------
Total................................................ 606,478 $982,839,748 100.00%
======= ============ ======
</TABLE>
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<PAGE> 51
COMPOSITION OF THE INITIAL FINANCED STUDENT LOANS AS OF THE CUT-OFF DATE
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY GUARANTOR
<TABLE>
<CAPTION>
PERCENT OF
LOANS BY
NUMBER OF OUTSTANDING OUTSTANDING
GUARANTORS LOANS BALANCE BALANCE
- ---------- --------- ------------ -----------
<S> <C> <C> <C>
Georgia Higher Education Assistance Corporation........ 23,105 $ 20,976,042 2.13%
Great Lakes Higher Education Corporation............... 28,010 32,604,414 3.32
Kentucky Higher Education Assistance Authority......... 82,966 120,936,061 12.30
New Jersey Higher Education Assistance Authority....... 38,469 47,905,354 4.87
Pennsylvania Higher Education Assistance Authority..... 405,826 680,563,165 69.24
United Student Aid Funds............................... 18,821 66,772,900 6.79
Other.................................................. 9,281 13,081,812 1.35
------- ------------ ------
Total................................................ 606,478 $982,839,748 100.00%
======= ============ ======
</TABLE>
INCENTIVE PROGRAMS
The Transferor currently makes available and may hereafter make available
certain incentive programs to borrowers. As of the Cut-off Date, Financed
Student Loans in the aggregate principal amount of approximately $35 million are
subject to the PNC Bank Preferred Payment Program (the "PP Program").
The PP Program applies to all Stafford Loans and Unsubsidized Stafford
Loans with a first disbursement made by the Transferor on or after July 1, 1996
("PP Loans"). Under the PP Program, if the borrower makes the first 48
consecutive monthly payments of a PP Loan on time, the applicable interest rate
on such PP Loan is reduced by 2%.
MATURITY AND PREPAYMENT ASSUMPTIONS
The rate of payment of principal of the LIBOR Rate Notes and the yield on
the LIBOR Rate Notes will be affected by (i) prepayments of the Financed Student
Loans that may occur as described below, (ii) the sale by the Trust of Financed
Student Loans and (iii) Parity Percentage Payments. All the Financed Student
Loans are prepayable in whole or in part by the borrowers at any time (including
by means of Consolidation Loans as discussed below) and may be prepaid as a
result of a borrower default, death, disability or bankruptcy and subsequent
liquidation or collection of Guarantee Payments with respect thereto. The rate
of such prepayments cannot be predicted and may be influenced by a variety of
economic, social and other factors, including those described below. In general,
the rate of prepayments may tend to increase to the extent that alternative
financing becomes available at prevailing interest rates which fall
significantly below the interest rates applicable to the Financed Student Loans.
However, because many of the Financed Student Loans bear interest at a rate that
either actually or effectively is floating, it is impossible to determine
whether changes in prevailing interest rates will be similar to or vary from
changes in the interest rates on the Financed Student Loans. To the extent
borrowers of Financed Student Loans elect to borrow Consolidation Loans that are
not transferred to the Eligible Lender Trustee as Exchanged Financed Student
Loans or the proceeds of such Consolidation Loans are not used to make Issuer
Consolidation Payments, or the Trust sells Serial Loans, such Financed Student
Loans will be prepaid. See "The Student Loan Financing Business--Types of
Federal Loans Under the Program--Consolidation Loans." In addition, the
Transferor is obligated to purchase any Financed Student Loan pursuant to the
Transfer and Servicing Agreement as a result of a breach of any of its
representations and warranties, and the Master Servicer is obligated to purchase
any Financed Student Loan pursuant to the Transfer and Servicing Agreement as a
result of a breach of certain covenants with respect to such Financed Student
Loan, in each case where such breach materially and adversely affects the
interests of the Certificateholders or the Noteholders in that Financed Student
Loan and is not cured within the applicable cure period (it being understood
that any such breach that does not affect any Guarantor's obligation to
guarantee payment of such Financed Student Loan will not be considered to have a
material adverse effect for this purpose). See "Description of the Transfer and
Servicing Agreements--
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<PAGE> 52
Conveyance of Financed Student Loans; Representations and Warranties" and
"--Master Servicer Covenants." See also "Description of the Transfer and
Servicing Agreements--Termination" regarding the Transferor's option to purchase
the Financed Student Loans when the aggregate Pool Balance is less than or equal
to 5% of the Initial Pool Balance and the outstanding principal amount of the
Fixed Rate Notes has been reduced to zero and "--Insolvency Event" regarding the
sale of Financed Student Loans if a Transferor Insolvency Event occurs.
Scheduled payments with respect to, and maturities of, the Financed Student
Loans may be extended, including pursuant to Grace Periods, Deferral Periods
and, under certain circumstances, Forbearance Periods. The rate of payment of
principal of the LIBOR Rate Notes and the yield on the LIBOR Rate Notes may also
be affected by the rate of defaults resulting in losses on Financed Student
Loans, by the severity of those losses and by the timing of those losses, which
may affect the ability of the Guarantors to make Guarantee Payments with respect
thereto.
The rate of prepayment on the Financed Student Loans cannot be predicted,
and any reinvestment risks resulting from a faster or slower incidence of
prepayment of Financed Student Loans or a faster or slower incidence of sales by
the Trust will be borne entirely by the LIBOR Rate Noteholders. Such
reinvestment risks may include the risk that interest rates and the relevant
spreads above particular interest rate bases are lower at the time LIBOR Rate
Noteholders receive payments from the Trust than such interest rates and such
spreads would otherwise have been had such prepayments not been made or had such
prepayments been made at a different time.
INSURANCE OF STUDENT LOANS; GUARANTORS OF FEDERAL LOANS
General. Each Financed Student Loan is required to be guaranteed as to
principal and interest by a Guarantor and reinsured by the Department under the
Higher Education Act and must be eligible for Special Allowance Payments and,
with respect to each Financed Student Loan that is not an SLS Loan, PLUS Loan or
Unsubsidized Stafford Loan, Interest Subsidy Payments paid by the Department.
Federal Reinsurance. Under the Higher Education Act, each Guarantor is
reimbursed by the Department pursuant to certain agreements between the
Department and such Guarantor for amounts paid under its Guarantee Agreement.
The amount of reimbursement by the Department for Federal Loans for each fiscal
year commencing October 1 varies for each Guarantor depending on the annual
claims rate for that Guarantor (i.e., the dollar amount of reimbursement claims
filed by that Guarantor during that fiscal year as a percentage of the
outstanding aggregate principal amount at the end of the preceding fiscal year
of those Federal Loans it guarantees whose borrowers were repaying such Federal
Loans at the end of the preceding fiscal year) as follows:
<TABLE>
<CAPTION>
CLAIMS RATE REIMBURSEMENT TO GUARANTOR BY THE
OF GUARANTOR DEPARTMENT OF EDUCATION
------------ -----------------------
<S> <C>
0% to and including 5%........ 98% (100% for loans disbursed before October 1, 1993)
Greater than 5% to and
including 9%................ 88% (90% for loans disbursed before October 1, 1993)
Greater than 9%............... 78% (80% for loans disbursed before October 1, 1993)
</TABLE>
The claims experience for any Guarantor is not accumulated from year to
year for purposes of this test but is determined solely on the basis of claims
filed in any one federal fiscal year. The Higher Education Act provides that the
obligation of the Department to reimburse each such Guarantor as described above
is, subject to compliance with the Higher Education Act, supported by the full
faith and credit of the United States and that Guarantors are deemed to have a
contractual right against the United States to receive reinsurance in accordance
with its provisions.
Under the 1993 Amendments, Congress made a number of changes that may
adversely affect the financial condition of the Guarantors, including reducing
to 98% the maximum percentage of Guarantee Payments the Department will
reimburse for loans first disbursed on or after October 1, 1993, reducing
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<PAGE> 53
substantially the premiums and default collections that Guarantors are entitled
to receive and/or retain and giving the Department broad powers over Guarantors
and their reserves. The 1993 Amendments also reduced Guarantors' default
collection retention rate from 30% to 27%, reduced the maximum insurance premium
charged by a Guarantor from 3% to 1% and authorized the Secretary to terminate a
Guarantor's reinsurance agreement if the Secretary determines such action is
necessary to protect federal fiscal interests or ensure an orderly transition to
full implementation of the Federal Direct Student Loan Program. The
Administrative Cost Allowance ("ACA") was eliminated; however, legislative
history and recent Department actions suggest that Congress intended that
Guarantors will continue to receive a substantial ACA. For Stafford Loans
disbursed on or after July 1, 1995, the Lender yield on student loans during in
school, grace and deferment periods is reduced from the 91-day Treasury Bill
Rate plus 3.1% to the 91-day Treasury Bill Rate plus 2.5% (not to exceed 8.25%,
before giving effect to any applicable Special Allowance Payments). Lenders will
also be required to pay a 1.05% annual fee to the Secretary on the principal
plus accrued but unpaid interest of all Consolidation Loans made on or after
October 1, 1993 and such loans bear interest at the 91-day Treasury Bill Rate
plus 3.1% with no floor applicable. Also, effective for student loans first
disbursed after October 1, 1993, lenders will be assessed an up-front,
user/origination fee equal to .5% of the principal amount of the student loan.
The Department's powers over Guarantors include the authority to require a
Guarantor to return all reserve funds to the Department if the Department
determines such action is necessary to ensure an orderly termination of the
Guarantor, to serve the best interests of the Federal Loan Programs or to ensure
the proper maintenance of such Guarantor's funds or assets. The Department is
also now authorized to direct a Guarantor to return a portion of its reserve
funds which the Department determines is unnecessary to pay the program expenses
and contingent liabilities of the Guarantor and/or to cease any activities
involving the use of the Guarantor's reserve funds or assets which the
Department determines is a misapplication or otherwise improper. Subject to the
requirements described in the following paragraphs, the Department may also
terminate a Guarantor's reinsurance agreement if the Department determines that
such action is necessary to protect the federal fiscal interest or to ensure an
orderly transition to full implementation of direct federal lending. These
various changes create a significant risk that the resources available to the
Guarantors to meet their guarantee obligations will be significantly reduced. In
addition, this legislation greatly expands the Federal Direct Student Loan
Program volume to a target of approximately 60% of student loan demand in
academic year 1998-1999, which could result in increasing reductions in the
volume of loans made under the Program. Such changes could have an adverse
effect on the financial condition of the Guarantors and on the ability of a
Guarantor to satisfy its obligations under its Guarantee Agreement with respect
to the Federal Loans. See "Risk Factors--Risk That Changes in Law Could
Adversely Affect the Federal Family Education Loan Program and the Financed
Student Loans."
In issuing guarantees with respect to Federal Loans, each Guarantor is
required by the Higher Education Act to review loan applications to verify the
completion of required information and to make a determination that the
applicant has not borrowed amounts in excess of any applicable annual and
aggregate limits imposed by the Higher Education Act.
Pursuant to the 1992 Amendments, each Guarantor is required to maintain a
current minimum reserve level of at least 0.5% of the aggregate principal amount
of all outstanding Federal Loans guaranteed by such Guarantor for the fiscal
year that begins in 1993, with such minimum increasing to 0.7% and 0.9% for
fiscal years beginning in 1994 and 1995, respectively, and 1.1% for fiscal years
beginning on or after January 1, 1996. Annually, the Department will collect
information from each Guarantor to determine the amount of such Guarantor's
reserves and other information regarding its solvency. If a Guarantor's current
reserve level falls below the required minimum for any two consecutive years,
that Guarantor's annual claims rate exceeds 9% or the Department determines that
a Guarantor's administrative or financial condition jeopardizes that Guarantor's
continued ability to perform its responsibilities, then that Guarantor must
submit and implement a management plan acceptable to the Department. The 1992
Amendments also provide that under certain circumstances the Department is
authorized, on terms and conditions satisfactory to the Department, but is not
obligated, to terminate its reimbursement agreement with any Guarantor. In that
event, however, the Department is required to assume the functions of such
Guarantor and in connection therewith is authorized to do one or more of the
following: to assume the guarantee obligations of, to assign to other guarantors
the guarantee obligations of, or to make advances to, a Guarantor in order to
assist such Guarantor in meeting its
53
<PAGE> 54
immediate cash needs and to ensure uninterrupted payment of default claims to
lenders or to take any other action the Department deems necessary to ensure the
continued availability of student loans and the full honoring of guarantee
claims thereunder. In addition, the 1992 Amendments provide that if the
Department determines that a Guarantor is unable to meet its guarantee
obligations, holders of Federal Loans covered thereby may submit guarantee
claims directly to the Department until such time as such guarantee obligations
are transferred to a new guarantor capable of meeting such obligations or until
a successor guarantor assumes such obligations. There can be no assurance,
however, that the Department would under any given circumstances assume such
obligation to ensure satisfaction of a guarantee obligation by exercising its
right to terminate a reimbursement agreement with a Guarantor or by making a
determination that such Guarantor is unable to meet its guarantee obligations.
Amounts received or receivable from the Department for reimbursement for
claims paid are subject to periodic audit and adjustment by the Department. Any
disallowed claims, including amounts already collected, may constitute a
liability of the respective Guarantor.
Guarantors for the Financed Student Loans. The Higher Education Act
requires every state to designate a guarantee agency, either by establishing its
own or by designating another guarantee agency. A Guarantor who has been
designated by a particular state is obligated to guarantee loans for students
who reside or attend school in such state and must agree to provide loans to any
such students who are otherwise unable to obtain a loan from any other lender.
Guarantee agencies may guarantee a loan made to any eligible borrower and are
generally not limited to guaranteeing loans for students attending institutions
in their particular state or region or for their residents attending schools in
another state or region. The Eligible Lender Trustee has entered, or will enter,
into a Guarantee Agreement with each Guarantor guaranteeing the Finance Student
Loans acquired, or to be acquired, by the Trust.
Pursuant to its respective Guarantee Agreement, each Guarantor guarantees
payment of 98% (except that such guarantee against defaults will be 100% of
principal and accrued interest for loans first disbursed prior to October 1,
1993) of the principal (including any interest capitalized from time to time)
and accrued interest for each Federal Loan guaranteed by it as to which any one
of the following events has occurred:
(a) failure by the borrower thereof to make monthly principal or
interest payments on such Federal Loan when due, provided such failure continues
for a period of 180 days;
(b) any filing by or against the borrower thereof of a petition in
bankruptcy pursuant to any chapter of the Federal bankruptcy code, as amended;
(c) the death of the borrower thereof; or
(d) the total and permanent disability of the borrower thereof to work
and earn money or attend school, as certified by a qualified physician.
When these conditions are satisfied, the Higher Education Act requires the
Guarantor generally to pay the claim within 90 days of its submission by the
lender. The obligations of the Guarantors pursuant to their respective Guarantee
Agreements are obligations solely of the applicable Guarantor, and are not
supported by the full faith and credit of any state government.
Each Guarantor's guarantee obligations with respect to any Financed Student
Loan are conditioned upon the satisfaction of all the conditions set forth in
the applicable Guarantee Agreement. These conditions include, but are not
limited to, the following: (i) the origination and servicing of such Financed
Student Loan being performed in accordance with the Program, the Higher
Education Act and other applicable requirements, (ii) the timely payment to the
applicable Guarantor of the guarantee fee payable with respect to such Financed
Student Loan, (iii) the timely submission to the applicable Guarantor of all
required preclaim delinquency status notifications and of the claim with respect
to such Financed Student Loan and (iv) the transfer and endorsement of the
promissory note evidencing such Financed Student Loan to the applicable
Guarantor upon and in connection with making a claim to receive Guarantee
Payments thereon. Failure to comply with any of the applicable conditions,
including the foregoing, may result in the refusal of the applicable Guarantor
to honor its Guarantee Agreement with respect to such Financed Student Loan, in
the
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<PAGE> 55
denial of guarantee coverage with respect to certain accrued interest amounts
with respect thereto or in the loss of certain Interest Subsidy Payments and
Special Allowance Payments with respect thereto. Under the Transfer and
Servicing Agreement, such failure to comply would constitute a breach of the
Master Servicer's covenants or the Transferor's representations and warranties,
as the case may be, and would create an obligation of the Transferor or the
Master Servicer, as the case may be, to repurchase or purchase such Financed
Student Loan or to reimburse the Trust for such non-guaranteed interest amounts
or such lost Interest Subsidy Payments and Special Allowance Payments with
respect thereto. See "Description of the Transfer and Servicing
Agreements--Conveyance of Financed Student Loans; Representations and
Warranties" and "--Master Servicer Covenants."
GUARANTORS FOR THE FEDERAL LOANS
The Financed Student Loans are guaranteed to the extent described herein as
to the payment of principal and interest by the California Student Aid
Commission, an agency of the State of California, the Florida Department of
Education, an agency of the State of Florida, the Georgia Higher Education
Assistance Corporation, a public non-profit corporation, Great Lakes Higher
Education Corporation, a public non-profit corporation, the Illinois Student
Assistance Commission, an agency of the State of Illinois, KHEAA, the Michigan
Higher Education Assistance Authority, an autonomous agency of the Michigan
Department of the Treasury, the New Jersey Higher Education Assistance
Authority, an agency of the State of New Jersey, the New Mexico Student Loan
Guarantee Corporation, a New Mexico non-profit corporation, PHEAA and USAF,
which are in each case reinsured to the extent described herein by the
Department.
Set forth below is certain historical information with respect to each
Guarantor of the Financed Student Loans that is expected to guaranty 5% or more
of the Financed Student Loans as of the Cut-off Date. Except as otherwise
indicated below, the information regarding each Guarantor has been obtained from
the Department of Education's Federal Fiscal Year 1993 Loan Programs Data Book
(a "DOE Data Book"). No independent verification has been or will be made by the
Transferor of such information.
Guarantee Volume. The following table sets forth the approximate aggregate
principal amount of federally reinsured education loans that have first become
committed to be guaranteed by each of the Guarantors and by all guarantors of
Federal Loans in each of the five Federal Fiscal Years 1992 through 1996.*
<TABLE>
<CAPTION>
STAFFORD, UNSUBSIDIZED STAFFORD, SLS, PLUS AND
CONSOLIDATED LOANS GUARANTEED
-----------------------------------------------
FEDERAL
FISCAL ALL
DOLLARS IN MILLIONS
YEAR KHEAA PHEAA USAF GUARANTORS
- ------- ------ -------- -------- ----------
<S> <C> <C> <C> <C>
1992 $126.6 $1,410.2 $3,372.1 $16,114.0
1993 160.9 1,707.0 4,087.7 19,356.1
1994 234.2 1,977.1 5,474.2 **
1995 244.2 2,221.4 6,326.3 **
1996 283.8 2,149.9 6,935.6 **
</TABLE>
- ---------
* The information set forth in the table above has been obtained from the
Federal Fiscal Year 1993 DOE Data Book (with respect to fiscal years 1992 and
1993) and from the Department (with respect to fiscal years 1994, 1995 and
1996).
** Not available.
Reserve Ratio. Each Guarantor's reserve ratio is determined by dividing its
cumulative cash reserves by the original principal amount of the outstanding
loans it has agreed to guarantee. The term "cumulative cash reserves" refers to
cash reserves plus (i) sources of funds (including insurance premiums, state
appropriations, federal advances, federal reinsurance payments, administrative
cost allowances, collections on claims paid and investment earnings) minus (ii)
uses of funds (including claims paid to lenders, operating expenses, lender
fees, the Department's share of collections on claims paid, returned advances
and reinsurance fees). The "original principal amount of outstanding loans"
consists of the original principal amount of loans guaranteed
55
<PAGE> 56
by such Guarantor minus (i) the original principal amount of loans canceled,
claims paid, loans paid in full and loan guarantees transferred from such
Guarantor to other guarantors, plus (ii) the original principal amount of loan
guarantees transferred to such Guarantor from other guarantors. The following
table sets forth each Guarantor's cumulative cash reserves and their
corresponding reserve ratios and the national average reserve ratio for all
guarantors for the five Federal Fiscal Years 1992 through 1996:*
<TABLE>
<CAPTION>
KHEAA PHEAA USAF
---------------------- ---------------------- ---------------------- NATIONAL
FEDERAL CUMULATIVE CUMULATIVE CUMULATIVE AVERAGE
FISCAL CASH RESERVE CASH RESERVE CASH RESERVE RESERVE
YEAR RESERVES** RATIO RESERVES** RATIO RESERVES** RATIO RATIO
- ------- ---------- ------- ---------- ------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1992 $ 12.6 1.9% $162.6 2.1% $100.1 1.0% 1.4%
1993 19.4 2.6 113.4 1.3 169.9 1.3 1.7
1994 23.2 2.6 133.6 1.4 215.8 1.2 1.4
1995 25.0 2.0 166.3 1.5 377.9 1.5 1.6
1996 *** *** 210.6 1.7 423.9 1.5 1.6
</TABLE>
- ---------
* The information set forth in the table above has been obtained from the
Federal Fiscal Year 1993 DOE Data Book (with respect to fiscal years 1992
and 1993) and from the Department (with respect to fiscal years 1994, 1995
and 1996). The cash reserves and the reserve ratio increased substantially
between Federal Fiscal Years 1992 and 1993. As described in the Federal
Fiscal Year 1993 DOE Data Book, this difference was caused, in part, because
default costs were decreasing, while insurance premiums, administrative
costs allowances and investment income were increasing. According to the
Department, available cash reserves may not always be an accurate barometer
of a guarantor's financial health.
** Dollars in millions.
*** Not available.
Recovery Rates. A Guarantor's recovery rate, which provides a measure of
the effectiveness of the collection efforts against defaulting borrowers after
the guarantee claim has been satisfied, is determined by dividing the amount
recovered from borrowers by such Guarantor by the aggregate amount of default
claims paid by such Guarantor during the applicable Federal Fiscal Year with
respect to borrowers. The table below sets forth the recovery rates for each
Guarantor and the national average recovery rates for all guarantors with
respect to Stafford Loans (the only type of Student Loan for which the DOE Data
Book discloses recovery rates) for the five Federal Fiscal Years 1992 through
1996:*
<TABLE>
<CAPTION>
FEDERAL RECOVERY RATE
FISCAL -------------------------- NATIONAL
YEAR KHEAA PHEAA USAF AVERAGE
- ------- ----- ------ ----- -------
<S> <C> <C> <C> <C>
1992 44.0 % 46.5 % 28.1 % 35.1%
1993 50.7 49.5 30.7 38.1
1994 54.0 52.90 29.28 39.38
1995 54.6 53.29 34.90 40.67
1996 46.3 55.03 39.21 43.20**
</TABLE>
- ---------
* The information set forth in the table above has been obtained from the
Department.
** 1996 national average does not include all guarantor data, as all guarantors
have not been processed.
Loan Loss Reserve. The DOE Data Book does not disclose whether any
Guarantor has established a segregated loan loss reserve with respect to its
student loan guarantee obligations. Accordingly, to the extent that a Guarantor
has not established such a segregated loan loss reserve, in the event that a
Guarantor receives less than full reimbursement of its guarantee obligations
from the Department, the Guarantor would be forced to look to its existing
assets to satisfy any such guarantee obligations not so reimbursed.
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<PAGE> 57
Claims Rate. The following table sets forth the claims rate of each
Guarantor and the national average for all guarantors of Federal Loans for the
last five Federal Fiscal Years 1992 through 1996:*
<TABLE>
<CAPTION>
FEDERAL CLAIMS RATE
FISCAL -------------------------- NATIONAL
YEAR KHEAA PHEAA USAF AVERAGE
- ------- ----- ------ ----- -------
<S> <C> <C> <C> <C>
1992 3.6% 2.8 % 5.00% 4.15%
1993 4.0% 2.3 7.30 3.83
1994 4.2% 2.2 4.99 3.44
1995 4.3% 1.97 4.69 3.21
1996 4.3% 1.58 4.65 3.25
</TABLE>
- ---------
* The information set forth in the table above has been obtained from the
Department.
For Federal Fiscal Years 1993, USAF experienced a claims rate of 7.30%. For such
Federal Fiscal Year, the claims of USAF were not fully reimbursed by the
Department. No assurance can be made that any of the Guarantors will receive
full reimbursement for reinsurance claims (or the full 98% maximum reimbursement
for loans first disbursed on or after October 1, 1993).
Recovery Rate and Claims Rate Trends. The most recent national default rate
reported by the Department was 10.7% for Federal Fiscal Year 1994. Additionally,
the national average of the claims rate for Guarantors, as shown in the Claims
Rate table above, has generally trended downward for the five Federal Fiscal
Years presented. Consequently, the repayment behavior of student loan obligors
has, generally, shown a trend toward improvement over the past four years as
shown in the accompanying Claims Rate and Recovery Rate tables. PHEAA's recovery
rate has exceeded the national average recovery rate in each of the five Federal
Fiscal Years shown in the Recovery Rate table above, and PHEAA's claims rate has
been lower than the national average claims rate in each of the five Federal
Fiscal Years shown in the Claims Rate table above. The trends in KHEAA's and
USAF's recovery rates and claims rates have been steady during the five years
shown in the accompanying tables. Management of PHEAA, KHEAA and USAF have all
indicated to the Transferor that they are currently unaware of any trends or
conditions which would cause their respective claims rate to exceed 5% and
thereby result in less than maximum reimbursement for reinsurance claims to the
Department. Notwithstanding the above, no assurance can be made that any such
trends will continue or not deteriorate, and that any Guarantor will receive
full reimbursement for reinsurance claims (or the full 98% maximum reimbursement
for loans first disbursed on or after October 1, 1993).
DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued pursuant to the terms of the Indenture, which has
been filed as an exhibit to the Registration Statement of which this Prospectus
is a part. The following summary describes the material terms of the Notes and
the Indenture. The summary does not purport to be complete and is qualified in
its entirety by reference to the provisions of the Notes, the Indenture and the
Terms Supplement, which provisions are incorporated by reference herein.
The Notes will initially be represented by one or more Notes registered in
the name of the nominee of DTC (together with any successor depository selected
by the Administrator, the "Depository") except as set forth below. The Notes
will be available for purchase in denominations of $50,000 and integral
multiples of $1,000 in excess thereof in book-entry form only. The Trust has
been informed by DTC that DTC's nominee will be Cede. Accordingly, Cede is
expected to be the holder of record of the Notes. Unless and until Definitive
Notes are issued under the limited circumstances described herein, no Noteholder
will be entitled to receive a physical certificate representing a Note. All
references herein to actions by Noteholders refer to actions taken by DTC upon
instructions from its participating organizations (the "Participants") and all
references herein to distributions, notices, reports and statements to
Noteholders refer to distributions, notices, reports and statements to DTC or
Cede, as the registered holder of the Notes, for distribution to Noteholders in
accordance with DTC's procedures with respect thereto. See "--Book-Entry
Registration" and "Definitive Notes."
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<PAGE> 58
THE NOTES
Distributions of Interest. Interest will accrue during each Interest Period
on the principal balance of each Class of Notes at a rate per annum equal to the
related Class Interest Rate (calculated as provided below) and will be payable
quarterly (or in the case of the Class A-1 Notes, monthly) on each Distribution
Date to the Noteholders of the related Record Date. Interest distributions due
on any Class of Notes for any Distribution Date but not distributed on such
Distribution Date will be due on the next Distribution Date increased by an
amount equal to interest on such amount at the applicable Class Interest Rate
for the period from the Distribution Date for which such interest was first due
until the Distribution Date such interest is paid. Interest payments on the
Notes will generally be funded from Available Funds, Monthly Advances and
amounts, if any, on deposit in the Reserve Account remaining after the deposit
of the Transaction Fees and Consolidation Loan Fees in the Expense Account.
Interest will be paid pro rata to the holders of each such Class of Notes
outstanding. See "Description of the Transfer and Servicing
Agreements--Distributions" and "--Credit Enhancement."
Except as otherwise described in the following paragraph, the Class
Interest Rate for each Interest Period for each Class of Notes will equal (i) in
the case of the Class A-1 Notes as of the LIBOR Determination Date for such
Interest Period minus the applicable Margin for such Class, and in the case of
the remaining LIBOR Rate Notes, One-Month LIBOR as of the LIBOR Determination
Date for such Interest Period plus the applicable Margin for such Class and (ii)
in the case of the Class A-2 Notes, the Class A-3 Notes, the Class A-4 Notes,
the Class A-5 Notes, the Class A-6 Notes and the Class A-7 Notes, 6.138% per
annum, 6.314% per annum, 6.446% per annum, 6.530% per annum, 6.572% per annum
and 6.728% per annum, respectively. See "--The Notes--Distributions of
Interest." The "Margin" will be 0.06% for the Class A-1 Notes, 0.11% for the
Class A-8 Notes, 0.18% for the Class A-9 Notes and 0.30% for the Class B Notes.
Interest on each Class of LIBOR Rate Notes will be calculated on the basis of
the actual number of days elapsed in each Interest Period divided by 360, and
interest on each class of Fixed Rate Notes will be calculated on the basis of a
year consisting of 12 months of 30 days each.
Notwithstanding the foregoing, if the Class Interest Rate with respect to
any Class of LIBOR Rate Notes, other than the Class A-1 Notes, for any Interest
Period is greater than the Net Loan Rate, then such Class Interest Rate for such
Interest Period will be the Net Loan Rate. However, in no event will the Class
Interest Rate for any Class of LIBOR Rate Notes, other than the Class A-1 Notes,
exceed 18.0% per annum. See "--The Notes--Distributions of Interest."
Noteholders' Interest Carryover. If the Class Interest Rate for any Class
of LIBOR Rate Notes (other than the Class A-1 Notes) for any Interest Period is
based on the Net Loan Rate, the excess of (a) the amount of interest on such
Class of Notes that would have accrued in respect of the related Interest Period
had interest been calculated based on the applicable Class Interest Rate
(without giving effect to the Net Loan Rate) over (b) the amount of interest
such Class of Notes actually accrued in respect of such Interest Period based on
the Net Loan Rate (such excess, together with the unpaid portion of any such
excess from prior Interest Periods (and interest accrued thereon calculated
based on One-Month LIBOR) is referred to as the "Noteholders' Interest
Carryover") will be paid on the dates and in the priority as described herein
under "Description of the Transfer and Servicing Agreements--Distributions."
Distributions of Principal. Principal of the Notes will be payable
quarterly (or in the case of the Class A-1 Notes, monthly), on each Distribution
Date, generally in the order of priority described in "The Transfer and
Servicing Agreements--Distributions." Principal payments on a Class of Notes
will generally be derived from Available Funds remaining after the Indenture
Trustee has deposited in the Expense Account the Transaction Fees, the
Consolidation Loan Fees, overdue Transaction Fees and overdue Consolidation Loan
Fees and deposited in the Note Distribution Account the Noteholders' Interest
Distribution Amount and the Trust Swap Payment. Additionally, until the Parity
Percentage equals 102.5%, amounts otherwise required to be distributed to the
Transferor will be applied as additional principal payments. See "Description of
the Transfer and Servicing Agreements--Distributions" and "--Credit
Enhancement." If such sources are insufficient to pay the Noteholders' Principal
Distribution Amount for such Note Distribution Date, such shortfall will be
added to the principal payable to the Noteholders on subsequent Note
Distribution Dates and
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<PAGE> 59
(except with respect to the Final Maturity Date of a Class of Notes) such
shortfall will not constitute an Event of Default. Additionally, on the Final
Maturity Date for a Class of Notes amounts in the Reserve Account will be
available to reduce the principal balance of such Class of Notes to zero to the
extent Available Funds are insufficient to make such payment. Notwithstanding
the foregoing, if an Event of Default has occurred with respect to payment of
the Notes, principal will be paid to each Class of Class A Notes pro rata, based
upon the outstanding principal amount of each Class of Class A Notes. See
"Description of the Transfer and Servicing Agreements--Distributions."
The aggregate outstanding principal amount of each Class of Notes will be
payable in full on the Distribution Date identified in the Summary of Terms
under "Final Maturity Date" (the "Final Maturity Date"). The actual date on
which the aggregate outstanding principal and accrued interest of any Class of
Notes are paid may be earlier than its respective Final Maturity Date, based on
a variety of factors, including those described above under "Risk
Factors--Reinvestment Risk to Noteholders from Prepayments of LIBOR Rate Notes"
and "The Financed Student Loan Pool--Maturity and Prepayment Assumptions."
DETERMINATION OF LIBOR
Pursuant to the Transfer and Servicing Agreement, the Master Servicer will
determine One-Month LIBOR for purposes of calculating the interest due on the
LIBOR Rate Notes and the Noteholders' Interest Carryover for each given Interest
Period on the second Business Day prior to the commencement of each Interest
Period (each, a "LIBOR Determination Date"). For purposes of calculating
One-Month LIBOR, a Business Day is any day on which banks in London and New York
City are open for the transaction of business. Interest due for any Interest
Period will be determined based on the actual number of days in such Interest
Period over a 360-day year.
"One-Month LIBOR" means the London interbank offered rate for deposits in
U.S. dollars having a maturity of one month commencing on the related LIBOR
Determination Date (the "Index Maturity") which appears on Telerate Page 3750 as
of 11:00 a.m., London time, on such LIBOR Determination Date. If such rate does
not appear on Telerate Page 3750, the rate for that day will be determined on
the basis of the rates at which deposits in U.S. dollars, having the Index
Maturity and in a principal amount of not less than U.S. $1,000,000, are offered
at approximately 11:00 a.m., London time, on such LIBOR Determination Date to
prime banks in the London interbank market by the Reference Banks. The Master
Servicer will request the principal London office of each of such Reference
Banks to provide a quotation of its rate. If at least two such quotations are
provided, the rate for that day will be the arithmetic mean of the quotations.
If fewer than two quotations are provided, the rate for that day will be the
arithmetic mean of the rates quoted by major banks in New York City, selected by
the Master Servicer, at approximately 11:00 a.m., New York City time, on such
LIBOR Determination Date for loans in the U.S. dollars to leading European banks
having the Index Maturity and in a principal amount equal to an amount of not
less than U.S. $1,000,000; provided that if the banks selected as aforesaid are
not quoting as mentioned in this sentence, One-Month LIBOR in effect for the
applicable LIBOR Reset Period will be One-Month LIBOR in effect for the previous
LIBOR Reset Period.
"Telerate Page 3750" means the display page so designated on the Dow Jones
Telerate Service (or such other page as may replace that page on that service
for the purpose of displaying comparable rates or prices).
"Reference Bank" means a leading bank (i) engaged in transactions in
Eurodollar deposits in the international Eurocurrency market, (ii) not
controlling, controlled by or under common control with the Administrator or the
Transferor and (iii) having an established place of business in London.
THE INDENTURE
Modification of the Indenture. With the consent of the holders of a
majority of the aggregate principal amount of Notes then outstanding (or, with
respect to any change affecting only certain Series of Notes, the holders of a
majority of the aggregate principal amount of Notes of such Series), the
Indenture Trustee and the Trust may execute a supplemental indenture to add
provisions to, or change in any manner or eliminate any provisions of, the
Indenture with respect to the Notes, or to modify (except as provided below) in
any manner the rights of the Noteholders; provided, however, that, so long as a
Swap Agreement is in effect, no
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<PAGE> 60
change adversely affecting the rights of the Counterparty may be made without
the consent of such Counterparty (so long as such Counterparty is not in default
under such Swap Agreement).
Without the consent of the holder of each outstanding Note affected
thereby, however, no supplemental indenture will (i) change the date of payment
of any installment of principal of or interest on any Note or reduce the
principal amount thereof or the interest rate thereon, change the provisions of
the Indenture relating to the application of collections on, or the proceeds of
the sale of, the assets of the Trust to payment of principal of or interest on
the Notes, or change any place of payment where, or the coin or currency in
which, any Note or any interest thereon is payable, (ii) impair the right to
institute suit for the enforcement of certain provisions of the Indenture
regarding payment, (iii) reduce the percentage of the aggregate amount of the
outstanding Notes of any series of Notes (each such series, a "Series") the
consent of the holders of which is required for any such supplemental indenture
or the consent of the holders of which is required for any waiver of compliance
with certain provisions of the Indenture or certain defaults thereunder and
their consequences as provided for in the Indenture, (iv) modify or alter
certain provisions of the Indenture regarding the determination of Notes that
are considered "outstanding" for consent, waivers and other matters, (v) reduce
the percentage of the aggregate outstanding amount of the Notes the consent of
the holders of which is required to direct the Eligible Lender Trustee on behalf
of the Trust to sell or liquidate the Financed Student Loans, (vi) decrease the
percentage of the aggregate principal amount of the Notes required to amend the
sections of the Indenture which specify the applicable percentage of aggregate
principal amount of the Notes necessary to amend the Indenture or certain other
related agreements, (vii) modify any of the provisions of the Indenture in such
manner as to affect the calculation of the amount of any payment of interest on
any Note or (viii) permit the creation of any lien ranking prior to or on a
parity with the lien of the Indenture with respect to any of the collateral for
the Notes or, except as otherwise permitted or contemplated in the Indenture,
terminate the lien of the Indenture on any such collateral or deprive the holder
of any Note of the security afforded by the lien of the Indenture; provided,
however, that, so long as the Swap Agreements are in effect, no change adversely
affecting the rights of any Counterparty may be made without the consent of such
Counterparty (so long as such Counterparty is not in default under its Swap
Agreement).
The Trust and the Indenture Trustee may also enter into supplemental
indentures, but without obtaining the consent of Noteholders or the
Counterparties, for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the Indenture or modifying in any
manner the rights of Noteholders or the Counterparties so long as such action
will not, in the opinion of counsel satisfactory to the Indenture Trustee,
materially and adversely affect the interest of any Noteholder or the
Counterparties.
Events of Default; Rights Upon Event of Default. An "Event of Default" with
respect to the Notes is defined in the Indenture as consisting of the following
(except as described in the remaining sentences of this paragraph): (i) a
default for five business days or more in the payment of any interest on any
Note or any Trust Swap Payment after the same becomes due and payable; (ii) a
default for five business days in the payment of principal of any Note when the
same becomes due and payable; (iii) a default in the observance or performance
of any covenant or agreement of the Trust made in the Indenture or the Transfer
and Servicing Agreement and the continuation of any such default for a period of
30 days after notice thereof is given to the Trust by the Indenture Trustee or
to the Trust and the Indenture Trustee by the holders of at least 25% in
aggregate principal amount of the Notes then outstanding; (iv) any
representation or warranty made by the Trust in the Indenture or in any
certificate delivered pursuant thereto or in connection therewith having been
incorrect in a material respect as of the time made, and such breach not having
been cured within 30 days after notice thereof is given to the Trust by the
Indenture Trustee or to the Trust and the Indenture Trustee by the holders of at
least 25% in aggregate principal amount of the Notes then outstanding; or (v)
certain events of bankruptcy, insolvency, receivership or liquidation of the
Trust. However, the amount of principal required to be distributed to
Noteholders on any Distribution Date is limited to the amount of Available Funds
after payment of the Transaction Fees, overdue Transaction Fees, the
Consolidation Loan Fees, overdue Consolidation Loan Fees, the Noteholders'
Interest Distribution Amount and the Trust Swap Payment. Additionally, on the
Final Maturity Date for a Class of Notes amounts in the Reserve Account will be
available to reduce the principal balance of such Class of Notes to zero to the
extent Available Funds are insufficient to make such payment. ANY SUCH PRINCIPAL
SHORTFALLS ON ANY DISTRIBUTION DATE WILL BE CARRIED OVER AS A NOTEHOLDERS'
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PRINCIPAL CARRYOVER SHORTFALL TO BE PAID ON SUCCEEDING DISTRIBUTION DATES.
THEREFORE, THE FAILURE TO PAY PRINCIPAL ON ANY CLASS OF NOTES MAY NOT RESULT IN
THE OCCURRENCE OF AN EVENT OF DEFAULT UNTIL THE FINAL MATURITY DATE OF SUCH
CLASS OF NOTES. IN ADDITION, THE FAILURE TO PAY THE AGGREGATE AMOUNT OF
NOTEHOLDERS' INTEREST CARRYOVER AS A RESULT OF INSUFFICIENT AVAILABLE FUNDS WILL
NOT RESULT IN THE OCCURRENCE OF AN EVENT OF DEFAULT.
If an Event of Default should occur and be continuing with respect to any
Series of Notes, the Indenture Trustee or holders of a majority in aggregate
principal amount of the Notes then outstanding may declare all outstanding Notes
to be immediately due and payable, by notice to the Trust or notice to the
Indenture Trustee if given by the Noteholders. Such declaration may be rescinded
by the holders of a majority in aggregate principal amount of the Notes then
outstanding at any time prior to the entry of judgment in a court of competent
jurisdiction for the payment of such amount if (i) the Trust has paid to the
Indenture Trustee a sum equal to all amounts then due with respect to the Notes
(without giving effect to such acceleration) and due to the Indenture Trustee
and (ii) all Events of Default (other than nonpayment of amounts due solely as a
result of such acceleration) have been cured or waived.
If the Notes have been declared to be due and payable following an Event of
Default with respect thereto, the Indenture Trustee may, in its discretion,
require the Eligible Lender Trustee to sell the Financed Student Loans or elect
to have the Eligible Lender Trustee maintain possession of the Financed Student
Loans and continue to apply collections with respect to such Financed Student
Loans as if there had been no declaration of acceleration. In addition, the
Indenture Trustee is prohibited from directing the Eligible Lender Trustee to
sell the Financed Student Loans following an Event of Default, other than a
default for five days or more in the payment of any principal or a default for
five days or more in the payment of any interest on any Note or any Trust Swap
Payment, unless (i) the holders of 100% of the aggregate amount of the Notes
outstanding consent to such sale, (ii) the proceeds of such sale are sufficient
to pay in full the principal of and the accrued interest on the Notes and any
Trust Swap Payments outstanding at the date of such sale or (iii) the Indenture
Trustee determines that the collections on the Financed Student Loans and other
assets of the Trust would not be sufficient on an ongoing basis to make all
payments on the Notes and any Trust Swap Payments as such payments would have
become due if such obligations had not been declared due and payable, and the
Indenture Trustee obtains the consent of the holders of 66 2/3% of the aggregate
principal amount of the Notes then outstanding and if the Swap Agreement is in
effect, each Counterparty (so long as such Counterparty is not in default under
the Swap Agreement).
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, if an Event of Default should occur and be continuing with
respect to the Notes, the Indenture Trustee will be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of Notes, if the Indenture Trustee reasonably
believes it will not be adequately indemnified against the costs, expenses and
liabilities which might be incurred by it in complying with such request.
Subject to such provisions for indemnification and certain limitations contained
in the Indenture, the holders of a majority in aggregate principal amount of the
outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding or any remedy available to the Indenture Trustee and
the holders of a majority in aggregate principal amount of the Notes then
outstanding, may, in certain cases, waive any default with respect thereto,
except a default in the payment of principal or interest or a default in respect
of a covenant or provision of the Indenture that cannot be modified without the
waiver or consent of all the holders of the outstanding Notes.
No holder of any Note will have the right to institute any proceeding with
respect to the Indenture, unless (i) such holder previously has given to the
Indenture Trustee written notice of a continuing Event of Default, (ii) the
holders of not less than 25% in principal amount of the outstanding Notes have
requested in writing that the Indenture Trustee institute such proceeding in its
own name as Indenture Trustee, (iii) such holder or holders have offered the
Indenture Trustee reasonable indemnity, (iv) the Indenture Trustee has for 60
days after notice failed to institute such proceeding and (v) no direction
inconsistent with such written request has been given to the Indenture Trustee
during such 60-day period by the holders of a majority in aggregate principal
amount of the outstanding Notes.
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In addition, the Indenture Trustee and the Noteholders will covenant that
they will not, prior to the date which is one year and a day after the
termination of the Indenture, institute against the Trust any bankruptcy,
reorganization or other proceeding under any Federal or state bankruptcy or
similar law in connection with any obligations relating to the Notes, the
Indenture or Related Documents (as defined below).
If an Event of Default should occur, payment of the Notes could occur later
than their respective Final Maturity Dates.
Certain Covenants. The Trust may not consolidate with or merge into any
other entity, unless (i) the entity formed by or surviving such consolidation or
merger is organized under the laws of the United States, or any state, and such
entity expressly assumes the Trust's obligation to make due and punctual
payments upon the Notes and the performance or observance of every agreement and
covenant of the Trust under the Indenture and any supplemental indenture, (ii)
no Event of Default has occurred and is continuing immediately after such merger
or consolidation, (iii) the Trust has received an opinion of counsel to the
effect that such consolidation or merger would have no material adverse federal
or Illinois or Delaware state tax consequence to the Trust or to any
Certificateholder or Noteholder, (iv) any action as is necessary to maintain the
lien and security interest created by the Indenture shall have been taken and
(v) the Trust shall have delivered to the Indenture Trustee an officer's
certificate of the Trust and an opinion of counsel each stating that such
consolidation or merger and any supplemental indenture relating thereto comply
with the terms of the Indenture and that all conditions precedent provided for
in the Indenture to such transaction have been complied with (including any
Exchange Act filings) in all material respects.
Except as otherwise permitted by the Indenture, the Transfer and Servicing
Agreement and related documents (the "Related Documents"), the Trust may not
convey or transfer all or substantially all its properties or assets, including
the assets securing the Notes, unless for the most part the conditions specified
in (i) through (v) above with respect to a permitted merger or consolidation are
met, plus the acquiror must agree (a) that all right, title and interest in the
property and assets so conveyed or transferred are subordinate to the rights of
the Noteholders and the Swap Counterparties, (b) to indemnify the Trust (unless
otherwise provided in the supplemental indenture) and (c) to make all filings
with the Commission required by the Exchange Act in connection with the Notes.
The Trust will not, among other things, (i) except as expressly permitted
by the Related Documents, sell, transfer, exchange or otherwise dispose of any
of the assets of the Trust, (ii) claim any credit on or make any deduction from
the principal and interest payable in respect of any Notes (other than amounts
withheld under the Code or applicable state law) or assert any claim against any
present or former holder of Notes because of the payment of taxes levied or
assessed upon the Trust, (iii) except as contemplated by the Related Documents,
dissolve or liquidate in whole or in part, (iv) permit the validity or
effectiveness of the Indenture or any supplemental indenture to be impaired, or
permit the lien of the Indenture and any supplemental indenture to be amended,
hypothecated, subordinated, terminated or discharged, or permit any person to be
released from any covenants or obligations with respect to any Notes under the
Indenture except as may be expressly permitted thereby, (v) permit any lien,
charge, excise, claim, security interest, mortgage or other encumbrance (other
than the lien of the Indenture and any supplemental indenture) to be created on
or extend to or otherwise arise upon or burden the assets of the Trust or any
part thereof, or any interest therein or the proceeds thereof (other than
certain tax and other liens arising by operation of law, except as expressly
permitted by the Related Documents) or (vi) permit the lien of the Indenture and
any supplemental indenture not to constitute a valid first priority (other than
with respect to such tax or other lien) security interest in the assets securing
the Notes and the Swap Agreement.
The Trust may not engage in any activity other than financing, purchasing,
owning, selling, servicing and managing the Financed Student Loans and
activities incidental thereto.
The Trust will not issue, incur, assume or guarantee or otherwise become
liable for any indebtedness other than the Notes or otherwise in accordance with
the Related Documents.
Annual Compliance Statement and Other Notices. The Administrator, on behalf
of the Trust will be required to file annually, commencing in 1998, with the
Indenture Trustee a written statement as to the
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fulfillment of its obligations under the Indenture. The Trust is required to
give the Indenture Trustee written notice of each Event of Default among other
notices. The Indenture Trustee will notify Noteholders and the Swap Counterparty
of known defaults under the Indenture within 90 days after their occurrence.
Satisfaction and Discharge of Indenture. The Indenture will be discharged
with respect to the collateral securing the Notes and the Swap Agreement upon
the delivery to the Indenture Trustee for cancellation of all the Notes or, with
certain limitations, upon deposit with the Indenture Trustee of funds sufficient
for the payment in full of all the Notes and all unpaid Trust Swap Payments.
The Indenture Trustee. Bankers Trust Company, a New York banking
corporation, will be the Indenture Trustee under the Indenture.
Bankers Trust Company, the Indenture Trustee, may serve from time to time
as trustee under indentures or trust agreements with the Transferor or its
affiliates relating to other issues of their securities. In addition, the
Transferor or its affiliates may have other banking relationships with Bankers
Trust Company and its affiliates.
BOOK-ENTRY REGISTRATION
Noteholders may hold their certificates through DTC (in the United States)
or Cedel or Euroclear (in Europe) if they are participants of such systems, or
indirectly through organizations that are participants in such systems.
Cede, as nominee for DTC, will hold the global Notes. Cedel and Euroclear
will hold omnibus positions on behalf of the Cedel Participants and the
Euroclear Participants, respectively, through customers' securities accounts in
Cedel's and Euroclear's names on the books of their respective depositories
(collectively, the "Depositories") which in turn will hold such positions in
customers' securities accounts in the Depositories' names on the books of DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC holds securities for its Participants ("DTC Participants") and
facilitates the clearance and settlement among DTC Participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic book-entry changes in DTC Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. DTC Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Indirect access to the DTC system
is also available to others such as securities brokers and dealers, banks, and
trust companies that clear through or maintain a custodial relationship with a
DTC Participant, either directly or indirectly ("Indirect Participants"). The
rules applicable to DTC and its DTC Participants are on file with the
Commission.
Transfers between DTC Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
the ordinary way in accordance with their applicable rules and operating
procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depository; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depository to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Cedel Participants and Euroclear
Participants may not deliver instructions directly to the Depositories.
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Because of time-zone differences, credits of securities in Cedel or
Euroclear as a result of a transaction with a DTC Participant will be made
during the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant Cedel
Participant or Euroclear Participant on such business day. Cash received in
Cedel or Euroclear as a result of sales of securities by or through a Cedel
Participant or a Euroclear Participant to a DTC Participant will be received
with value on the DTC settlement date but will be available in the relevant
Cedel or Euroclear cash account only as of the business day following settlement
in DTC.
Purchases of Notes under the DTC system must be made by or through DTC
Participants, which will receive a credit for the Notes on DTC's records. The
ownership interest of each actual owner of a Note (a "Note Owner") is in turn to
be recorded on the DTC Participants' and Indirect Participants' records. Note
Owners will not receive written confirmation from DTC of their purchase, but
Note Owners are expected to receive written confirmations providing details of
the transaction, as well as periodic statements of their holdings, from the DTC
Participant or Indirect Participant through which the Note Owner entered into
the transaction. Transfers of ownership interests in the Notes are to be
accomplished by entries made on the books of DTC Participants acting on behalf
of Note Owners. Note Owners will not receive certificates representing their
ownership interest in Notes, except in the event that use of the book-entry
system for the Notes is discontinued.
To facilitate subsequent transfers, all Notes deposited by DTC Participants
with DTC are registered in the name of DTC's nominee, Cede & Co. The deposit of
Notes with DTC and their registration in the name of Cede & Co. effects no
change in beneficial ownership. DTC has no knowledge of the actual Note Owners
of the Notes; DTC's records reflect only the identity of the DTC Participants to
whose accounts such Notes are credited, which may or may not be the Note Owners.
The DTC Participants will remain responsible for keeping account of their
holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to DTC Participants,
by DTC Participants to Indirect Participants, and by DTC Participants and
Indirect Participants to Note Owners will be governed by arrangements among
them, subject to any statutory or regulatory requirements as may be in effect
from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to Notes.
Under its usual procedures, DTC mails an omnibus proxy to the issuer as soon as
possible after the record date, which assigns Cede & Co.'s consenting or voting
rights to those DTC Participants to whose accounts the Notes are credited on the
record date (identified in a listing attached thereto).
Principal and interest payments on the Notes will be made to DTC. DTC's
practice is to credit DTC Participants' accounts on the applicable Distribution
Date in accordance with their respective holdings shown on DTC's records unless
DTC has reason to believe that it will not receive payment on such Distribution
Date. Payments by DTC Participants to Note Owners will be governed by standing
instructions and customary practices, as is the case with securities held for
the accounts of customers in bearer form or registered in "street name" and will
be the responsibility of such DTC Participant and not of DTC, the Indenture
Trustee or the Transferor, subject to any statutory or regulatory requirements
as may be in effect from time to time. Payment of principal and interest to DTC
is the responsibility of the Indenture Trustee, disbursement of such payments to
DTC Participants shall be the responsibility of DTC, and disbursement of such
payments to Note Owners shall be the responsibility of DTC Participants and
Indirect Participants.
DTC may discontinue providing its services as securities depository with
respect to the Notes at any time by giving reasonable notice to the Transferor
or the Indenture Trustee. Under such circumstances, in the event that a
successor securities depository is not obtained, Definitive Notes are required
to be printed and delivered. The Transferor may decide to discontinue use of the
system of book-entry transfers through DTC (or a successor securities
depository). In that event, Definitive Notes will be delivered to Noteholders.
See "--Definitive Notes."
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Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 32
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations and may include the underwriters of any Series of Notes. Indirect
access to Cedel is also available to others, such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Cedel Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in any of 32
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in 25 countries generally similar to the
arrangements for cross-market transfers with DTC described above. The Euroclear
System is operated by Morgan Guaranty Trust Company of New York, Brussels,
Belgium office (the "Euroclear Operator" or "Euroclear"), under contract with
Euroclear Clearance System, Societe Cooperative, a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative Board establishes policy for the Euroclear System. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries and may include the
underwriters of any Series of Notes. Indirect access to the Euroclear System is
also available to other firms that maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System (collectively, the "Terms
and Conditions"). The Terms and Conditions govern transfers of securities and
cash within the Euroclear System, withdrawal of securities and cash from the
Euroclear System, and receipts of payments with respect to securities in the
Euroclear System. All securities in the Euroclear System are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and Conditions
only on behalf of Euroclear Participants and has no record of or relationship
with persons holding through Euroclear Participants.
Distributions with respect to Notes held through Cedel or Euroclear will be
credited to the cash accounts of Cedel Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by its Depository. Such distributions will be subject to tax reporting
in accordance with relevant United States tax laws and regulations. See "Federal
Tax Consequences." Cedel or the Euroclear Operator, as the case may be, will
take any other action permitted to be taken by a Noteholder under the Agreement
on behalf of a Cedel Participant or Euroclear Participant only in accordance
with its relevant rules and procedures and subject to its Depository's ability
to effect such actions on its behalf through DTC.
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Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Notes among participants of DTC, Cedel and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time.
DEFINITIVE NOTES
Notes will be issued in fully registered, certificated form (the
"Definitive Notes") to Note Owners or their nominees rather than to DTC or its
nominee, only if (i) the Administrator advises the Indenture Trustee for such
Series in writing that DTC is no longer willing or able to discharge properly
its responsibilities as Depository with respect to such Series of Notes, and the
Administrator is unable to locate a qualified successor, (ii) the Administrator,
at its option, advises the Trustee in writing that it elects to terminate the
book-entry system through DTC or (iii) after the occurrence of an Event of
Default, Master Servicer Default or Administrator Default Noteholders
representing not less than 50% of the outstanding principal balance of the Notes
advise the Indenture Trustee and DTC through DTC Participants in writing that
the continuation of a book-entry system through DTC (or a successor thereto) is
no longer in the best interest of the Noteholders.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will cause DTC to notify all DTC
Participants of the availability through DTC of Definitive Notes. Upon surrender
by DTC of the definitive certificate representing the Notes and instructions for
registration, the Indenture Trustee will issue the Notes as Definitive Notes,
and thereafter the Indenture Trustee will recognize the holders of such
Definitive Notes as holders under the Indenture ("Holders").
Distribution of principal and interest on the Notes will be made by the
Indenture Trustee directly to Holders of Definitive Notes in accordance with the
procedures set forth herein and in the Agreement. Interest payments and any
principal payments on each Distribution Date will be made to Holders in whose
names the Definitive Notes were registered at the close of business on the
related Record Date. The final payment on any Note (whether Definitive Notes or
the Notes registered in the name of Cede representing the Notes), will be made
only upon presentation and surrender of such Note at the office or agency
specified in the notice of final distribution to Noteholders. The Indenture
Trustee will provide such notice to registered Noteholders prior to the
Distribution Date on which it expects such final distributions to occur.
Definitive Notes will be transferable and exchangeable at the offices of
the transfer agent and registrar for the Notes, which shall initially be the
Indenture Trustee. No service charges will be imposed for any registration of
transfer or exchange, but the Transfer Agent and Registrar may require payment
of a sum sufficient to cover any tax or other governmental charge imposed in
connection therewith.
LIST OF NOTEHOLDERS
A Noteholder may, by written request to the Indenture Trustee, obtain
access to the list of all Noteholders maintained by the Indenture Trustee for
the purpose of communicating with other Noteholders with respect to their rights
under the Indenture or the Notes. The Indenture Trustee may elect not to afford
the requesting Noteholders access to the list of Noteholders if it agrees to
mail the desired communication or proxy, on behalf and at the expense of the
requesting Noteholders, to all Noteholders.
REPORTS TO NOTEHOLDERS
On each Distribution Date, the Indenture Trustee will provide to the
applicable Noteholders of record as of the related Record Date, a statement
setting forth substantially the same information as is required to be provided
on the report provided to the Indenture Trustee and the Trust described under
"Description of Transfer and Servicing Agreements--Statements to Indenture
Trustee."
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of the Indenture, the Indenture
Trustee will mail to each person who at any time during such calendar year was a
Noteholder and received any payment thereon, a statement containing certain
information for the purposes of such Noteholder's preparation of federal income
tax returns. See "Federal Tax Consequences."
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DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
GENERAL
The following is a summary of the material terms of the Transfer and
Servicing Agreement, pursuant to which the Eligible Lender Trustee on behalf of
the Trust will obtain, the Master Servicer will service and the Administrator
will perform certain administrative functions with respect to the Financed
Students Loans; the Administration Agreement, pursuant to which the
Administrator will undertake certain other administrative duties with respect to
the Trust and the Financed Student Loans; and the Trust Agreement, pursuant to
which the Trust has been created and the Certificates have been issued
(collectively, the "Transfer and Servicing Agreements"). The summary does not
purport to be complete and is qualified in its entirety by reference to the
provisions of the Transfer and Servicing Agreements. Each of such Transfer and
Servicing Agreements will be substantially in the form filed as an exhibit to
the Registration Statement of which this Prospectus is a part.
CONVEYANCE OF INITIAL FINANCED STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
On the Closing Date, the Transferor will contribute and assign to the
Eligible Lender Trustee on behalf of the Trust, without recourse, its entire
interest in the Initial Financed Student Loans described in the Transfer and
Servicing Agreement, all collections received and to be received with respect
thereto for the period after the Cut-off Date and all the Assigned Rights
pursuant to the Transfer and Servicing Agreement. Each Financed Student Loan
will be identified in schedules appearing as an exhibit to the Transfer and
Servicing Agreement. The Eligible Lender Trustee will, concurrently with such
contribution and assignment, execute, authenticate and deliver the Notes, which
will be authenticated by the Indenture Trustee.
In the Transfer and Servicing Agreement, the Transferor will make certain
representations and warranties with respect to the Financed Student Loans to the
Trust for the benefit of the Certificateholders, the Noteholders, including,
among other things, that (i) each Financed Student Loan, at the time of transfer
to the Trust, is free and clear of all security interests, liens, charges and
encumbrances and no offsets, defenses or counterclaims have been asserted or, to
the Transferor's knowledge, threatened; (ii) the information provided with
respect to the Financed Student Loans is true and correct as of the Cut-off
Date, (or in the case of an Exchanged Financed Student Loan, as of its
Subsequent Cut-off Date); and (iii) each Financed Student Loan, at the time it
was originated, complied and, at the Closing Date, (or in the case of an
Exchanged Financial Student Loan, as of its Subsequent Cut-off Date), complies
in all material respects with applicable federal and state laws (including,
without limitation, the Higher Education Act, consumer credit, truth-in-lending,
equal credit opportunity and disclosure laws) and applicable restrictions
imposed by the Program or under any Guarantee Agreement.
Following the discovery by or notice to the Transferor of a breach of any
such representation or warranty with respect to any Financed Student Loan that
materially and adversely affects the interests of the Certificateholders or the
Noteholders in such Financed Student Loan (it being understood that any such
breach that does not affect any Guarantor's obligation to guarantee payment of
such Financed Student Loan will not be considered to have such a material
adverse effect), the Transferor will, unless such breach is cured within 90
days, purchase such Financed Student Loan from the Eligible Lender Trustee, as
of the first day following the end of such 90-day period that is the last day of
a Collection Period, at a price equal to the applicable Purchase Amount (as
defined below). In addition, the Transferor will reimburse the Trust for any
accrued interest amounts that a Guarantor refuses to pay pursuant to its
Guarantee Agreement, or for any Interest Subsidy Payments and Special Allowance
Payments that are lost or that must be repaid to the Department, with respect to
a Financed Student Loan as a result of a breach of any such representation or
warranty by the Transferor. The purchase and reimbursement obligations of the
Transferor will constitute, together with the right to receive certain amounts
from the Reserve Account, the sole remedy available to or on behalf of the
Trust, the Certificateholders or the Noteholders for any such uncured breach.
The Transferor's purchase and reimbursement obligations are contractual
obligations pursuant to the Transfer and Servicing Agreement that may be
enforced against the Transferor, but the breach of which will not constitute an
Event of Default.
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"Purchase Amount" means, as to any Financed Student Loan on any date of
determination, the amount required to prepay in full the outstanding principal
balance of such Financed Student Loan as of the last day of the most recently
completed Collection Period, including all accrued but unpaid interest thereon
(including interest to be capitalized) through the last day of the Collection
Period in which such Financed Student Loan is being purchased.
EXCHANGE PERIOD AND EXCHANGED FINANCED STUDENT LOANS
During the period (the "Exchange Period") from the Closing Date until June
30, 2002, if a borrower on a Financed Student Loan who is also a borrower under
one or more Student Loans (whether or not all such loans are in the Trust)
elects to consolidate such loans with the proceeds of a Consolidation Loan to be
made by the Transferor, the Eligible Lender Trustee, at the option of the
Transferor and subject to certain conditions, will be obligated to transfer to
the Transferor the Financed Student Loans being consolidated by the Transferor
in exchange for the related Consolidation Loan to be made by the Transferor
(each an "Exchanged Consolidation Loan" and collectively, the "Exchanged
Consolidation Loans"). In addition, during the Exchange Period, the Eligible
Lender Trustee, at the option of the Transferor and subject to certain
conditions, will be obligated to exchange with the Transferor existing Financed
Student Loans owned by the Trust for one or more Federal Loans owned by the
Transferor that are serial (i.e. made to the same borrower under the same loan
program and guaranteed by the same Guarantor) to an existing Financed Student
Loan owned by the Trust (each such loan exchanged into the Trust, an "Exchanged
Serial Loan" and together with the Exchanged Consolidation Loans, the "Exchanged
Financed Student Loans") provided that each Exchanged Serial Loan meets certain
criteria including that (i) the Exchanged Serial Loan was originated under the
same loan program as the Financed Student Loan for which it is being exchanged
and entitles the holder thereof to receive interest based on the same interest
rate index as the Financed Student Loan for which it is being exchanged, (ii)
the Exchanged Serial Loan will not, at any level of such interest rate index,
have an interest rate that is less than the Financed Student Loan for which it
is being exchanged and (iii) the average principal balance per borrower of the
Exchanged Serial Loans being transferred into the Trust on each Exchange Date
and the existing Financed Student Loans to which they are serial is within 10%
(plus or minus) of the average principal balance per borrower of the Financed
Student Loans being transferred to the Transferor on such Exchange Date and the
existing Federal Loans owned by the Transferor to which they are serial, if any.
In addition, if on any date (each, an "Exchange Date") that any Exchanged
Financed Student Loans are being exchanged into the Trust, the outstanding
principal balance as of the related Subsequent Cut-off Date of all the Exchanged
Financed Student Loans being exchanged into the Trust on such Exchange Date is
less than the outstanding principal balance of all the Financed Student Loans
for which they are being exchanged plus any Issuer Consolidation Payments being
made on such Exchange Date, an amount (an "Adjustment Payment") equal to such
difference will be required to be deposited by the Transferor into the
Collection Account on such Exchange Date.
If on any Exchange Date the aggregate outstanding principal balance as of
the related Subsequent Cut-off Date of all the Exchanged Financed Student Loans
that are Consolidation Loans being exchanged into the Trust on such Exchange
Date is greater than the outstanding principal balance of all the Financed
Student Loans for which they are being exchanged, an amount up to the amount of
such excess (the "Issuer Consolidation Payments") will be remitted to the
Transferor from Consolidation Prepayments on deposit in the Collection Account.
"Consolidation Prepayments" means, for any Exchange Date, the amount of
principal then on deposit in the Collection Account representing payments
received as a result of Financed Student Loans being repaid with the proceeds of
Consolidation Loans (provided, however, if an Exchange Date occurs during the
month of a Distribution Date, Consolidation Prepayments will not include amounts
received during the month of such Distribution Date).
An acquisition of Exchanged Financed Student Loans will be prohibited at
any time that an Event of Default under the Indenture, a Master Servicer Default
under the Transfer and Servicing Agreement or an Administration Default under
the Administration Agreement, is continuing.
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The Exchanged Financed Student Loans are not expected to have any
materially adverse impact on the overall performance of the Trust. To the extent
there are Exchanged Financed Student Loans, the adverse effect of certain
prepayments of Financed Student Loans may be mitigated. See "The Financed
Student Pool--Maturity and Prepayment Assumptions" and "Risk
Factors--Reinvestment Risk to Noteholders from Prepayments of LIBOR Rate Notes."
ACCOUNTS
The Indenture Trustee will establish and maintain the Collection Account,
the Note Distribution Account, the Expense Account, the Reserve Account and the
Monthly Advance Account. The Eligible Lender Trustee will establish and maintain
the Certificate Distribution Account and the Certificate Monthly Advance Account
in the name of the Eligible Lender Trustee on behalf of the Certificateholders.
The foregoing accounts are referred to collectively as the "Trust Accounts" in
the name of the Indenture Trustee on behalf of the Noteholders and the
Certificateholders.
Funds in the Trust Accounts will be invested as provided in the Transfer
and Servicing Agreement in Eligible Investments. "Eligible Investments" are
generally limited to investments acceptable to the Rating Agencies as being
consistent with the rating of the Notes. For so long as the Transferor is a
Certificateholder, all investments of the Trust will be required to be made in
investments permissible for a national bank. Eligible Investments are also
limited to obligations or securities that mature not later than the Business Day
immediately preceding the day on which funds in the applicable Trust Account may
be required to be withdrawn. If the amount required to be withdrawn from the
Reserve Account to cover shortfalls in the amount of Available Funds exceeds the
amount of cash in the Reserve Account, a temporary shortfall in the amounts
distributed to the Noteholders could result. This could, in turn, increase the
average life of the Notes. Investment earnings on funds deposited in the Trust
Accounts, net of losses and investment expenses (collectively, "Investment
Earnings"), will be deposited in the Collection Account and will be treated as
collections of interest on the Financed Student Loans.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in such account, so long as any of the
securities of such depository institution have a credit rating from each Rating
Agency in one of its generic rating categories which signifies investment grade.
An "Eligible Institution" is generally a depository institution organized under
the federal or any state banking laws whose deposits are insured by the Federal
Deposit Insurance Corporation and whose unsecured long-term debt obligations or
short-term debt ratings are acceptable to Standard & Poor's, Moody's and Fitch.
SERVICING PROCEDURES
Pursuant to the Transfer and Servicing Agreement, the Master Servicer has
agreed to service, and perform all other related tasks with respect to, all the
Financed Student Loans acquired from time to time. The Master Servicer is
required pursuant to the Transfer and Servicing Agreement to perform all
services and duties customary to the servicing of Financed Student Loans
(including all collection practices), and to do so with reasonable care and in
compliance with all standards and procedures provided for in the Higher
Education Act, the Guarantee Agreements, and all other applicable federal and
state laws.
Without limiting the foregoing, the duties of the Master Servicer under the
Transfer and Servicing Agreement include, but are not limited to, the following:
collecting and depositing into the Collection Account all payments with respect
to the Financed Student Loans, including claiming and obtaining any Guarantee
Payments with respect thereto and with respect to Interest Subsidy Payments and
Special Allowance Payments, responding to inquiries from borrowers on the
Financed Student Loans, investigating delinquencies and sending out statements,
payment coupons and tax reporting information to borrowers. In addition, the
Master Servicer will keep ongoing records with respect to such Financed Student
Loans and collections thereon and will furnish monthly and annual statements to
the Administrator with respect to such information,
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in accordance with the customary standards and as otherwise required in the
Transfer and Servicing Agreement.
The Master Servicer may enter into sub-servicing agreements with
sub-servicers pursuant to which some or all of the Financed Student Loans may be
serviced on behalf of the Master Servicer. No such sub-servicing arrangement
will relieve the Master Servicer of its duties and obligations under the
Transfer and Servicing Agreement.
PAYMENTS ON FINANCED STUDENT LOANS
The Master Servicer will deposit all payments on Financed Student Loans for
which it is acting as primary servicer (from whatever source) and all proceeds
of such Financed Student Loans collected by it during each Collection Period
into the Collection Account (i) within one Business Day after it has received an
aggregate of $30,000 during any month and (ii) on the last Business Day of each
month, all other collections received during such month. The Master Servicer
shall cause each other Servicer to deposit in the Collection Account, no less
frequently than weekly, all payments on Financed Student Loans for which such
other Servicer is acting as primary servicer (from whatever source) and all
proceeds of such Financed Student Loans collected by it during each Collection
Period.
MASTER SERVICER COVENANTS
In the Transfer and Servicing Agreement, the Master Servicer covenants
that: (a) it will duly satisfy or cause to be duly satisfied all obligations on
its part to be fulfilled under or in connection with the Financed Student Loans,
maintain in effect all qualifications required in order to service the Financed
Student Loans and comply in all material respects with all requirements of law
in connection with servicing the Financed Student Loans, the failure to comply
with which would have a materially adverse effect on the Certificateholders or
the Noteholders; (b) it will not permit any rescission or cancellation of a
Financed Student Loan except as ordered by a court of competent jurisdiction or
other government authority or as otherwise consented to by the Eligible Lender
Trustee and the Indenture Trustee; (c) it will do nothing to impair the rights
of the Certificateholders and the Noteholders in the Financed Student Loans; and
(d) it will not reschedule, revise, defer or otherwise compromise with respect
to payments due on any Financed Student Loan except pursuant to any applicable
deferral or forbearance periods or otherwise in accordance with its guidelines
with respect to the servicing of the Financed Student Loans (notwithstanding the
foregoing, the Master Servicer may, in its sole discretion, without having to
obtain the consent or approval of any other party, waive amounts owing under a
Financed Student Loan up to and including $50.00); provided, however, that the
Master Servicer may not agree to any decrease of the interest rate on, or the
principal amount payable with respect to, any Financed Student Loan except as
otherwise permitted by the Higher Education Act or any Guarantee Agreement.
Under the terms of the Transfer and Servicing Agreement, if the Master
Servicer discovers, or receives written notice, that any covenant of the Master
Servicer set forth above has not been complied with in all material respects and
such noncompliance has not been cured within 90 days thereafter and has a
materially adverse effect on the interest of the Certificateholders or the
Noteholders in any Financed Student Loan (it being understood that any such
breach that does not affect any Guarantor's obligation to guarantee payment of
such Financed Student Loan will not be considered to have such a material
adverse effect), unless such breach is cured, the Master Servicer will purchase
such Financed Student Loan as of the first day following the end of such 90-day
period that is the last day of a Collection Period. In that event, the Master
Servicer will be obligated to deposit into the Collection Account an amount
equal to the Purchase Amount of such Financed Student Loan and the Trust's
interest in any such purchased Financed Student Loan will be automatically
assigned to the Master Servicer. Notwithstanding the above, if the Master
Servicer is obligated to purchase a Financed Student Loan as a result of a
failure to service such Financed Student Loan in accordance with the Higher
Education Act and the applicable Guarantee Agreement, the Purchase Amount will
not exceed the amount the related Guarantor would be obligated to pay if not for
such breach. In addition, the Master Servicer will reimburse the Trust for any
accrued interest amounts that a Guarantor refuses to pay pursuant to its
Guarantee Agreement, or for any Interest Subsidy Payments and Special Allowance
Payments
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that are lost or that must be repaid to the Department with respect to a
Financed Student Loan as a result of a breach of any such covenant of the Master
Servicer; provided, however, that such reimbursements shall not exceed the
amount the Guarantor would have paid if not for such breach.
SERVICING COMPENSATION
The Master Servicer will be entitled to receive the Servicing Fee. The
Servicing Fee will be payable quarterly in advance, out of Available Funds and
amounts on deposit in the Reserve Account, on each Quarterly Distribution Date
(or in the case of the initial Servicing Fee, on the Closing Date) based on the
Administrator's good faith estimate of the Servicing Fee that will accrue during
the three Collection Periods immediately succeeding such Quarterly Distribution
Date (or in the case of the initial Servicing Fee, the three Collection Periods
immediately succeeding the Closing Date) plus (or minus) the difference (or
excess) of the actual Servicing Fee accrued for the three Collection Periods
immediately preceding such Quarterly Distribution Date.
The Servicing Fee will compensate the Master Servicer and each other
Servicer for performing the functions of a thirdparty servicer of student loans
as an agent for their beneficial owner, including collecting and posting all
payments, responding to inquiries of borrowers on the Financed Student Loans,
investigating delinquencies, pursuing, filing and collecting any Guarantee
Payments, accounting for collections and furnishing monthly and annual
statements to the Administrator. The Servicing Fee also will reimburse the
Master Servicer for certain taxes, accounting fees, outside auditor fees, data
processing costs and other costs incurred in connection with administering the
Financed Student Loans.
DISTRIBUTIONS
Deposits to Collection Account. On or before the 15th day of each month,
the Administrator will provide the Indenture Trustee and the Eligible Lender
Trustee a report setting forth by component the Available Funds for the
immediately preceding Collection Period.
For purposes hereof, the term "Available Funds" means the excess of (A)
sum, without duplication, of the following amounts with respect to the related
Collection Period: (i) all collections received by the Master Servicer or any
Servicer on the Financed Student Loans (including any Guarantee Payments
received with respect to the Financed Student Loans during such Collection
Period); (ii) any payments, including without limitation Interest Subsidy
Payments and Special Allowance Payments received by the Eligible Lender Trustee
during such Collection Period with respect to the Financed Student Loans; (iii)
all proceeds from any sales of Financed Student Loans by the Trust during such
Collection Period; (iv) any payments of or with respect to interest received by
the Master Servicer or a Servicer during such Collection Period with respect to
a Financed Student Loan for which a Realized Loss was previously allocated; (v)
the aggregate Purchase Amounts received for those Financed Student Loans
purchased by the Transferor or purchased by the Master Servicer under an
obligation which arose during the related Collection Period; (vi) the aggregate
amounts, if any, received from the Transferor or the Master Servicer as
reimbursement of non-guaranteed interest amounts, or lost Interest Subsidiary
Payments and Special Allowance Payments with respect to the Financed Student
Loans pursuant to the Transfer and Servicing Agreement; (vii) all Adjustment
Payments, if any, received from the Transferor during such Collection Period;
and (viii) Investment Earnings for such Collection Period over (B) the Issuer
Consolidation Payments for such Collection Period; provided, however, that
Available Funds will exclude all payments and proceeds of any Financed Student
Loans the Purchase Amount of which has been included in Available Funds for a
prior Collection Period (which payments and proceeds shall be paid to the
Transferor), and amounts used to reimburse the Master Servicer for Monthly
Advances pursuant to the terms of the Transfer and Servicing Agreement. For any
Distribution Date, the term Available Funds also includes any Counterparty Swap
Payments received with respect to such Distribution Date.
Distributions from Collection Account. On each Determination Date, the
Administrator will advise the Indenture Trustee and the Eligible Lender Trustee
in writing of the applicable Noteholders' Interest Distribution Amount and
Certificateholders' Interest Distribution Amount. Additionally, on each
Determina-
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tion Date the Administrator will advise the Indenture Trustee and the Eligible
Lender Trustee in writing of the applicable Noteholders' Principal Distribution
Amount (or, after all the Notes have been paid in full, the Certificateholders'
Principal Distribution Amount). Further, on each Determination Date relating to
a Quarterly Distribution Date the Administrator will advise the Indenture
Trustee in writing of the estimated Servicing Fee, Administration Fee, Indenture
Trustee Fee, and Eligible Lender Trustee Fee (collectively, the "Transaction
Fees") payable for the three succeeding Collection Periods.
On each Quarterly Distribution Date, the Indenture Trustee will transfer
from the Collection Account, in the following priority and from Available Funds
for the three Collection Periods immediately preceding the month of such
Quarterly Distribution Date (or (x) with respect to the first Quarterly
Distribution Date, from the Closing Date through and including the Collection
Period immediately preceding such Quarterly Distribution Date, (y) with respect
to clause (i)(A) below, the Indenture Trustee will transfer on the 25th day of
each month (or if such day is not a Business Day, on the next succeeding
Business Day) from Available Funds for the Collection Period immediately
preceding such day, the amount described in clause (i)(A) below, and (z) with
respect to clauses (ii) and (iii) below, on each Distribution Date relating to
the Class A-1 Notes, the Indenture Trustee will transfer the required amounts
from the Available Funds for the Collection Period immediately preceding the
month of each such Distribution Date): (i) to the Expense Account (A) an amount
equal to the Consolidation Loan Fees with respect to the Collection Period most
recently ended and all overdue Consolidation Loan Fees from prior Collection
Periods, and (B) an amount up to the estimated Transaction Fees for the three
immediately succeeding Collection Periods and all overdue Transaction Fees from
prior Collection Periods (plus (or minus) the difference (or excess) of the
actual Transaction Fees for the three immediately preceding Collection Periods
and the Transaction Fees deposited into the Expense Account on the preceding
Quarterly Distribution Date), (ii) to a separate account held with and in the
name of the Indenture Trustee for the benefit of the Noteholders (the "Note
Distribution Account"), an amount up to the sum of the Noteholders' Interest
Distribution Amount and the Trust Swap Payment, (iii) to the Note Distribution
Account, an amount up to the Noteholders' Principal Distribution Amount, (iv) to
a supplemental account held with and in the name of the Eligible Lender Trustee
for the benefit of the Certificateholders (the "Certificate Distribution
Account"), an amount up to the Certificateholders' Interest Distribution Amount,
and (v) after the Notes have been paid in full, to the Certificateholder
Distribution Account, an amount up to the Certificateholders' Principal
Distribution Amount.
On each Quarterly Distribution Date (and with respect to clause (i) below
on the 25th day of each month, or if such day is not a Business Day, the next
succeeding Business Day) following the transfer to the Expense Account described
in the preceding paragraph, the Indenture Trustee will distribute from the
Expense Account (in addition to any amounts transferred from the Reserve Account
as described herein) the following amounts in the following order of priority;
(i) to the Department, the Consolidation Loan Fees for the immediately preceding
Collection Period together with any overdue Consolidation Loan Fees for any
prior Collection Periods, (ii) to the Master Servicer, the estimated Servicing
Fee for the three immediately succeeding Collection Periods and all overdue
Servicing Fees, (iii) to the Administrator, the estimated Administration Fee for
the three immediately succeeding Collection Periods and all overdue
Administration Fees, (iv) to the Indenture Trustee, the estimated Indenture
Trustee Fee for the three immediately succeeding Collection Periods and all
overdue Indenture Trustee Fees, and (v) to the Eligible Lender Trustee, the
estimated Eligible Lender Trustee Fee for the three immediately succeeding
Collection Periods and all overdue Eligible Lender Trustee Fees.
On each Distribution Date, following the transfer to the Note Distribution
Account, the Indenture Trustee will distribute to the Noteholders as of the
related Record Date and to each Counterparty the amounts transferred to the Note
Distribution Account as set forth above (in addition to any amounts transferred
from the Reserve Account and the Monthly Advance Account and any Parity
Percentage Payments transferred from the Collection Account, each as described
below) in the following order of priority:
(i) first, to each Class of Class A Noteholders and each Counterparty,
the Class A Noteholders' Interest Distribution Amount and the Trust Swap
Payment, respectively (pro rata based upon the portion thereof allocable to
each such Class and each such Counterparty);
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(ii) second, to the Class B Noteholders, the Class B Noteholders'
Interest Distribution Amount:
(iii) third, to the Class A-1 Noteholders, the Noteholders' Principal
Distribution Amount until the Outstanding Amount of the Class A-1 Notes has
been paid in full;
(iv) fourth, to the Fixed Rate Notes, the Noteholders' Principal
Distribution Amount in the following order:
(A) after the principal balance of the Class A-1 Notes has been
reduced to zero, commencing with (but no earlier than) the Distribution
Date occurring in October, 1998, to the Class A-2 Noteholders, the
remaining Noteholders' Principal Distribution Amount until the principal
balance of the Class A-2 Notes equals the percentage of the Original
Amount for such Class set forth for such Distribution Date on the
Scheduled Principal Balance Table;
(B) after the principal balance of the Class A-2 Notes has been
reduced to zero, commencing with (but not earlier than) the Distribution
Date occurring in October 1999, to the Class A-3 Noteholders, the
remaining Noteholders' Principal Distribution Amount until the principal
balance of the Class A-3 Notes equals the percentage of the Original
Amount for such Class set forth for such Distribution Date on the
Scheduled Principal Balance Table;
(C) after the principal balance of the Class A-3 Notes has been
reduced to zero, commencing with (but not earlier than) the Distribution
Date occurring in October 2000, to the Class A-4 Noteholders, the
remaining Noteholders' Principal Distribution Amount until the principal
balance of the Class A-4 Notes equals the percentage of the Original
Amount for such Class set forth for such Distribution Date on the
Scheduled Principal Balance Table;
(D) after the principal balance of the Class A-4 Notes has been
reduced to zero, commencing with (but not earlier than) the Distribution
Date occurring in October 2001, to the Class A-5 Noteholders, the
remaining Noteholders' Principal Distribution Amount until the principal
balance of the Class A-5 Notes equals the percentage of the Original
Amount for such Class set forth for such Distribution Date on the
Scheduled Principal Balance Table;
(E) after the principal balance of the Class A-5 Notes has been
reduced to zero, commencing with (but not earlier than) the Distribution
Date occurring in October 2002, to the Class A-6 Noteholders, the
remaining Noteholders' Principal Distribution Amount until the principal
balance of the Class A-6 Notes equals the percentage of the Original
Amount for such Class set forth for such Distribution Date on the
Scheduled Principal Balance Table; and
(F) after the principal balance of the Class A-6 Notes has been
reduced to zero, commencing with (but not earlier than) the Distribution
Date occurring in October 2003, to the Class A-7 Noteholders, the
remaining Noteholders' Principal Distribution Amount until the principal
balance of the Class A-7 Notes equals the percentage of the Original
Amount for such Class set forth for such Distribution Date on the
Scheduled Principal Balance Table;
(v) fifth, after the principal balance of each Class of Fixed Rate
Notes equals the percentage of the Original Amount for the respective Class
that is set forth for such Distribution Date on the Scheduled Principal
Balance Table (regardless of whether the principal balance of any Class of
Fixed Rate Notes has been reduced to zero) to the Class A-8 Noteholders,
the remaining Noteholders' Principal Distribution Amount until the
principal balance of the Class A-8 Notes has been reduced to zero;
(vi) sixth, after the principal balance of the Class A-8 Notes has
been reduced to zero and after the principal balance of each Class of Fixed
Rate Notes equals the percentage of the Original Amount for the respective
Class that is set forth for such Distribution Date on the Scheduled
Principal Balance Table (regardless of whether the principal balance of any
Class of Fixed Rate Notes has been reduced to zero), to the Class A-9
Noteholders, the remaining Noteholders' Principal Distribution Amount until
the principal balance of the Class A-9 Notes has been reduced to zero; and
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(vii) seventh, after the principal balance of each Class of Class A
Notes has been reduced to zero, to the Class B Noteholders, the remaining
Noteholders' Principal Distribution Amount until the principal balance of
the Class B Notes has been reduced to zero.
On each Quarterly Distribution Date (or with respect to clause (ii) below,
on each Distribution Date relating to the Class A-1 Notes), after making all
required transfers to the Expense Account, the Note Distribution Account and, if
applicable, the Certificate Distribution Account, the Indenture Trustee will
transfer any amounts remaining in the Collection Account (other than amounts
representing payments received during such month) in the following order of
priority: (i) to the Reserve Account, the amount, if any, necessary to increase
the balance thereof to the Specified Reserve Account Balance, (ii) to the Note
Distribution Account, the amount, if any, which when applied as a payment of
principal on such Distribution Date to the Class of Notes then receiving
payments of principal, is necessary for the Parity Percentage to equal 102.5% on
such Distribution Date (the amount so transferred to the Note Distribution
Account is the "Parity Percentage Payment") and (iii) to the Note Distribution
Account, the amount of any outstanding Noteholders' Interest Carryover. Any
amounts remaining in the Collection Account after such transfers on a Quarterly
Distribution Date (other than amounts representing payments received during such
current month) will be distributed first, to the Counterparties, the amount of
any Swap Termination Payments, and second, after such Swap Termination Payments
have been paid in full, to the Transferor.
No Class of Fixed Rate Notes will receive as a payment of principal on any
Distribution Date more than the amount needed to reduce its respective principal
balance to the percentage of the Original Amount set forth for such Class on the
Scheduled Principal Balance Table. Therefore, on any Distribution Date the
portion, if any, of the Noteholders Principal Distribution Amount remaining
after the principal balance of each Class of Fixed Rate Notes has been reduced
to such amount and the principal balance of the Class A-8 Notes and the Class
A-9 Notes has been paid in full will remain on deposit in the Note Distribution
Account and applied as payments of principal on the Fixed Rate Notes on future
Distribution Dates. The Class B Notes will receive no payments of principal so
long as any Class A Notes are outstanding.
Notwithstanding the foregoing, if (x) on any Distribution Date following
all distributions to be made on such Distribution Date, the principal amount of
the Class A Notes would exceed the sum of the Pool Balance at the end of the
immediately preceding Collection Period plus the aggregate balance on deposit in
the Trust Accounts on such Distribution Date following such distributions, or
(y) an Event of Default has occurred with respect to payment of the Notes or the
Trust Swap Payment, after paying Transaction Fees, overdue Transaction Fees,
Consolidation Loan Fees and overdue Consolidation Loan Fees, distributions will
be made in the following priority: (i) first, to each Class of Class A
Noteholders and the Counterparties, the Noteholders' Interest Distribution
Amount applicable to each such Class and the Trust Swap Payment, respectively,
pro rata based upon the portion thereof allocable to each such Class and the
Counterparties; (ii) second, in the case of clause (x) above, to the Class A
Noteholders, the Noteholders' Principal Distribution Amount in the order and
priority set forth above in clauses third through sixth, inclusive, or in the
case of clause (y) above, to each Class of Class A Noteholders, the Noteholders'
Principal Distribution Amount applicable to such Distribution Date, pro rata
based upon the principal balance of each Class of Class A Notes until the
principal balance of each Class of Class A Notes has been paid in full; (iii)
third, to the Class B Noteholders, the Noteholders' Interest Distribution Amount
applicable to the Class B Notes; (iv) fourth, after the principal balance of
each of the Class A Notes has been paid in full, to the Class B Noteholders, the
Noteholders' Principal Distribution Amount until the principal balance of the
Class B Notes has been paid in full; (v) fifth, to the Class A-8 Noteholders and
the Class A-9 Noteholders, the Noteholders' Interest Carryover applicable to the
respective Class of Class A Notes, pro rata based upon the portion thereof
allocable to each such Class; (vi) sixth, to the Class B Noteholders, the
Noteholders' Interest Carryover applicable to the Class B Notes; (vii) seventh,
to the Counterparties, any Swap Termination Payments; (viii) eighth, to the
Certificateholders, the Certificateholders' Interest Distribution Amount; and
(ix) ninth, to the Certificateholders, the Certificateholders' Principal
Distribution Amount.
All principal payments of Notes of any Class shall be made pro rata within
that Class. In connection with each principal payment of Notes of any Class, the
Administrator shall compute the Principal Factor for that Class. The "Principal
Factor" shall be a number, carried to a seven-digit decimal, indicating the
principal
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balance of each Note of a Class as of a Distribution Date (after giving effect
to any payments made on that date) as a fraction of the original principal
amount of such Note. The Principal Factor for each Class of Notes shall be
initially 1.0000000 and will thereafter decline to reflect the reduction in the
principal balance of the Notes of that Class after any payment of principal. The
principal balance of any Note can be determined by multiplying the original
principal amount of such Note by the Principal Factor applicable to that Class
of Notes.
"Certificate Balance" equals the original principal balance of each Class
of Certificates issued reduced by all amounts allocable to principal previously
distributed to Certificateholders.
"Certificateholders' Distribution Amount" means, as to any Class of
Certificates, with respect to any Distribution Date, the Certificateholders'
Interest Distribution Amount for such Distribution Date plus, for each
Distribution Date on and after which the Notes have been paid in full, the
Certificateholders' Principal Distribution Amount for such Distribution Date.
"Certificateholders' Interest Carryover Shortfall" means, as to any Class
of Certificates, with respect to any Distribution Date, the excess, if any, of
(i) the sum of the related Certificateholders' Interest Distribution Amount on
the preceding Distribution Date and any outstanding Certificateholders' Interest
Carryover Shortfall on such preceding Distribution Date over (ii) the amount of
interest actually distributed to the Certificateholders of such Class on such
preceding Distribution Date, plus interest on the amount of such excess interest
due to the Certificateholders of such Class, to the extent permitted by law, at
the related Certificate Rate from such preceding Distribution Date to the
current Distribution Date.
"Certificateholders' Interest Distribution Amount" means, as to any Class
of Certificates, with respect to any Distribution Date relating to such
Certificates, the sum of (i) the amount of interest accrued at One-Month LIBOR
plus 1.50% per annum for each related Interest Period since the last
Distribution Date (or, in the case of the first Distribution Date, the Closing
Date) on the outstanding principal amount of such Certificates on the
immediately preceding Distribution Date, after giving effect to all
distributions of principal to Certificateholders of such Class on such
Distribution Date (or, in the case of the first Distribution Date, on the
Closing Date) and (ii) the Certificateholders' Interest Carryover Shortfall
relating to such Certificates for such Distribution Date.
"Certificateholders' Principal Carryover Shortfall" means, as of the close
of any Distribution Date relating to a class of Certificates on or after which
the Notes have been paid in full, the excess, if any, of (i) the sum of the
Certificateholders' Principal Distribution Amount on such Distribution Date and
any outstanding Certificateholders' Principal Carryover Shortfall for the
preceding Distribution Date over (ii) the amount of principal actually
distributed to the Certificateholders on such Distribution Date.
"Certificateholders' Principal Distribution Amount" means, on each
Distribution Date occurring after the principal balance of each Class of Notes
has been paid in full, the sum of (i) the Principal Distribution Amount for the
three Collection Periods preceding such Distribution Date, and (ii) the
Certificateholders' Principal Carryover Shortfall as of the close of the
preceding Distribution Date; provided, however, that the Certificateholders'
Principal Distribution Amount will in no event exceed the outstanding principal
balance of the applicable class of Certificates. Further, on the first
Distribution Date occurring on or after the Distribution Date on which the
principal balance of the last outstanding Class of Notes is paid in full, the
Certificateholders' Principal Distribution Amount also will include the excess,
if any, of the amount of principal available to be distributed on such
Distribution Date over the amount of principal paid on the Notes on such date.
"Consolidation Loan Fees" means, as to any Collection Period, an amount
accrued during such Collection Period equal to 1.05% per annum of the average
outstanding principal balance of the Consolidation Loans owned by the Trust
during such Collection Period.
"Counterparty Swap Payment" means, as to the Swap Agreements, with respect
to any Quarterly Distribution Date, the excess, if any, of (i) the aggregate of
the amounts accrued during the three Interest Periods immediately preceding such
Quarterly Distribution Date (or, in the case of the first Quarterly Distribution
Date, since the Closing Date) on the Notional Amounts of the Swap Agreements at
the fixed
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rates set forth therein (calculated on the basis of a year consisting of 12
months of 30 days each) over (ii) the amount payable under the Swap Agreement on
such Quarterly Distribution Date by the Trust to the Swap Counterparties.
"Noteholders' Distribution Amount" means, as to any Class of Notes, with
respect to any Distribution Date, the sum of the related Noteholders' Interest
Distribution Amount and the Noteholders' Principal Distribution Amount for such
Distribution Date.
"Noteholders' Interest Carryover Shortfall" means, as to any Class of
Notes, with respect to any Distribution Date, the excess of (i) the sum of the
related Noteholders' Interest Distribution Amount on the preceding Distribution
Date and any Noteholders' Interest Carryover Shortfall on such preceding
Distribution Date over (ii) the amount of interest actually allocated to such
Noteholders on such preceding Distribution Date, plus interest on the amount of
such excess interest due to the Noteholders, to the extent permitted by law, at
the related Class Interest Rate from such preceding Distribution Date to the
current Distribution Date.
"Noteholders' Interest Distribution Amount" means, as to any Class of
Notes, with respect to any Distribution Date, the sum of (i) the amount of
interest accrued at the respective Class Interest Rate for each Interest Period
since the last Distribution Date for such Class of Notes (or, in the case of the
first Distribution Date, the Closing Date) on the outstanding principal balance
of such Class of Notes on the immediately preceding Distribution Date after
giving effect to all principal distributions to holders of Notes of such Class
on such date (or, in the case of the first Distribution Date, on the Closing
Date) and (ii) the Noteholders' Interest Carryover Shortfall for such Class for
such Distribution Date; provided, however, that the Noteholders' Interest
Distribution Amount will not include any Noteholders' Interest Carryover.
"Noteholders' Principal Carryover Shortfall" means, as of the close of any
Distribution Date, the excess of (i) the sum of the Noteholders' Principal
Distribution Amount on such Distribution Date and any outstanding Noteholders'
Principal Carryover Shortfall for the preceding Distribution Date over (ii) the
amount of principal actually allocated to the Noteholders on such Distribution
Date.
"Noteholders' Principal Distribution Amount" means, as to any Distribution
Date, the sum of (i) the Principal Distribution Amount for the three Collection
Periods (or with respect to the Class A-1 Notes, the one Collection Period)
immediately preceding the month of such Distribution Date, (ii) any Parity
Percentage Payments to be made on such Distribution Date, (iii) the Noteholders'
Principal Carryover Shortfall as of the close of the preceding Distribution Date
and (iv) the amount, if any, remaining on deposit in the Note Distribution
Account following the preceding Distribution Date; provided, however, that the
Noteholders' Principal Distribution Amount allocable to a Class of Notes will
not exceed the outstanding principal balance of such Class of Notes. In
addition, with respect to each Class of Notes, on the related Final Maturity
Date the Noteholders' Principal Distribution Amount will include the amount
required to reduce the outstanding principal balance of such Notes to zero.
"Principal Distribution Amount" means, with respect to any Collection
Period, the excess of (A) the sum of the following amounts: (i) that portion of
all collections received by the Master Servicer or any Servicer on the Financed
Student Loans that is allocable to principal (including the portion of any
Guarantee Payments received that is allocable to principal of the Financed
Student Loans); (ii) the portion of the proceeds allocable to principal from the
sale of Financed Student Loans by the Trust during such Collection Period; (iii)
all Realized Losses incurred during such Collection Period; (iv) to the extent
attributable to principal, the Purchase Amount received with respect to each
Financed Student Loan purchased by the Transferor or purchased by the Master
Servicer or under an obligation which arose during the related Collection Period
and (v) the Adjustment Payments, if any, received from the Transferor during
such Collection Period; over (B) the Issuer Consolidation Payments for such
Collection Period; provided, however, that the Principal Distribution Amount
will exclude all payments and proceeds of any Financed Student Loans, the
Purchase Amount of which has been included in Available Funds for a prior
Collection Period.
"Trust Swap Payment" means, as to the Swap Agreements, with respect to any
Quarterly Distribution Date, the excess, if any, of (i) the aggregate amounts
accrued on the Notional Amounts of the Swap Agreements during the three Interest
Periods immediately preceding such Quarterly Distribution Date (or, in
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the case of the first Quarterly Distribution Date, since the Closing Date) at
the Variable Swap Rate (calculated on the basis of the actual number of days
elapsed in each such Interest Period divided by 365 or 366, as applicable,) over
(ii) the amount payable under the Swap Agreements on such Quarterly Distribution
Date by the Counterparties to the Trust.
With respect to each Financed Student Loan submitted to a Guarantor for a
Guarantee Payment, a "Realized Loss" means the excess, if any, of (i) the unpaid
principal balance of such Financed Student Loan on the date it was first
submitted to a Guarantor for a Guarantee Payment over (ii) all amounts received
on or with respect to principal on such Financed Student Loan up through the
earlier to occur of (A) the date a related Guarantee Payment is made or (B) the
last day of the Collection Period occurring 12 months after the date the claim
for such Guarantee Payment is first denied.
MONTHLY ADVANCES
If the Master Servicer has applied for a Guarantee Payment from a Guarantor
or an Interest Subsidy Payment or a Special Allowance Payment from the
Department, and the Master Servicer has not received the related payment prior
to the end of the Collection Period immediately preceding the Distribution Date
on which such amount would be required to be distributed as a payment of
interest, the Master Servicer may, no later than the Determination Date relating
to such Distribution Date, deposit into the Monthly Advance Account an amount up
to the amount of such payments applied for but not received (such deposits by
the Master Servicer are referred to herein as "Monthly Advances"). On each
related Distribution Date, the Indenture Trustee will distribute from the
Monthly Advance Account to the Noteholders the Monthly Advance for such
Distribution Date. Such Monthly Advances are recoverable by the Master Servicer
(i) first, from the source for which such Monthly Advance was made and (ii)
second, from payments received generally on or with respect to the Financed
Student Loans. The Master Servicer will have no obligation, legal or otherwise,
to make any Monthly Advance, and a determination by the Master Servicer to make
a Monthly Advance will not create any obligation of the Master Servicer, legal
or otherwise, to make any future Monthly Advances.
CREDIT ENHANCEMENT
Reserve Account. Pursuant to the Transfer and Servicing Agreement, the
Reserve Account will be created and on or prior to the Closing Date and the
Transferor will deposit to the Reserve Account cash or Eligible Investments in
an amount equal to the Reserve Account Deposit. The initial Reserve Account
Deposit is $10.3 million. The Reserve Account will be augmented on each
Distribution Date by deposit therein of the amount, if any, necessary to
reinstate the balance of the Reserve Account to the Specified Reserve Account
Balance from the amount of Available Funds remaining after making all prior
distributions on such date as described above under the heading
"--Distributions--Distributions from the Collection Account". Also, if amounts
were transferred from the Reserve Account to cover a Realized Loss on a Financed
Student Loan, any subsequent payments of principal received on or with respect
to such Financed Student Loan will be deposited into the Reserve Account. As
described below, subject to certain limitations, amounts on deposit in the
Reserve Account will be released to the Transferor to the extent that the amount
on deposit in the Reserve Account exceeds the Specified Reserve Account Balance.
If the amount, if any, on deposit in the Reserve Account on any
Distribution Date (after giving effect to all deposits or withdrawals therefrom
on such Distribution Date) is greater than the Specified Reserve Account
Balance, subject to certain limitations, the Administrator will instruct the
Indenture Trustee to distribute the amount of the excess, after payment of any
unpaid Noteholders' Interest Carryover or to purchase Financed Student Loans for
which there has been an uncured breach of certain representations and
warranties, to the Transferor. Upon any distribution to the Transferor of
amounts from the Reserve Account, the Noteholders will not have any rights in,
or claims to, such amounts.
The Reserve Account is intended to enhance the likelihood of timely receipt
by the Noteholders of the full amount of interest due them, the ultimate receipt
by the Noteholders of the full amount of principal and to decrease the
likelihood that the Noteholders will experience losses. In certain
circumstances, however, the
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Reserve Account could be depleted. If the amount required to be withdrawn from
the Reserve Account to cover shortfalls in the amount of Available Funds exceeds
the amount of cash in the Reserve Account, a temporary shortfall in the amount
of principal and interest distributed to the Noteholders could result. This
could, in turn, increase the average life of the Notes. Moreover, amounts on
deposit in the Reserve Account (other than amounts in excess of the Specified
Reserve Account Balance) will not be available to cover any aggregate unpaid
Noteholders' Interest Carryover.
Subordination of the Class B Notes. The rights of the holders of the Class
B Notes to receive distributions with respect to interest and principal will be
subordinated to such rights of the holders of the Class A Notes to the extent
described herein. This subordination is intended to enhance the likelihood of
regular receipt by holders of the Class A Notes of the full amount of the
Noteholders' Interest Distribution Amount and, after distribution of the Class B
Interest Distribution Amount, the Noteholders' Principal Distribution Amount.
See "--Distributions".
Subordination of the Certificates. The rights of Certificateholders to
receive distributions of interest and principal will be subordinated to such
rights of the holders of the Notes to the extent described herein.
SWAP AGREEMENTS
Pursuant to the Transfer and Servicing Agreements, on the Closing Date the
Trust will enter into separate Swap Agreements with respect to each Class of
Fixed Rate Notes with a Counterparty, pursuant to which the Trust will be
obligated to pay such Counterparty on each Quarterly Distribution Date an amount
accrued on the Notional Amount of such Swap Agreement during the three Interest
Periods immediately preceding such Quarterly Distribution Date (or in the case
of the first Quarterly Distribution Date, since the Closing Date) at the
Variable Swap Rate, and the Counterparty under such Swap Agreement will be
obligated to pay the Trust on such Quarterly Distribution Date an amount accrued
during such Interest Periods on the Notional Amount of such Swap Agreement at a
fixed rate. The payment obligations of the Trust and the Counterparties to each
other will be netted on each Quarterly Distribution Date and only the party with
any payment remaining after such netting will be required to remit such amount
to the other. The Trust's obligations to make such payments to the
Counterparties under the Swap Agreements will rank equally without preference
with the Trust's obligations to pay interest on the Class A Notes and will
generally be funded from Available Funds, Monthly Advances and amounts, if any,
on deposit in the Reserve Account remaining after deposit of the Transaction
Fees, overdue Transaction Fees, the Consolidation Loan Fees and overdue
Consolidation Loan Fees in the Expense Account. Any net payments from the
Counterparties to the Trust under the Swap Agreement will be deposited in the
Collection Account and will be included as Available Funds for the related
Quarterly Distribution Date. See "--Distributions." In the event that the
long-term credit rating of any Counterparty is downgraded below "AAA" by
Standard & Poor's or Fitch or "Aa1" by Moody's and the Master Servicer
determines in consultation with any of the Rating Agencies that after giving
effect to such Counterparty's then current ratings, the continuation of such
Counterparty as a swap counterparty under a Swap Agreement will result in the
reduction or withdrawal of the then current rating of any Class of Class A Notes
by such Rating Agency, the Trust shall have the right to direct such
Counterparty to assign and delegate its rights and obligations under its Swap
Agreement to a replacement swap provider acceptable to the Rating Agencies;
provided, however, that no such assignment will be required if within 10
Business Days of such direction, the Counterparty and the Master Servicer
receive written confirmation from such Rating Agency that after giving effect to
such Counterparty's then current rating and any other arrangements satisfactory
to the Rating Agencies, the continuation of such Counterparty as a swap
counterparty under a Swap Agreement will not result in the withdrawal or
reduction of the ratings of any Class of Class A Notes below their current
rating by such Rating Agency.
COUNTERPARTIES UNDER THE SWAP AGREEMENTS
Deutsche Bank AG, New York Branch ("Deutsche Bank"), a member of the
Deutsche Bank Group, currently has a long-term credit rating of "AAA" from
Standard & Poor's and "Aa1" from Moody's. Deutsche Bank will provide, upon
request, without charge to each person to whom this Prospectus is delivered, a
copy of (i) the rating analysis from each of Standard & Poor's and Moody's
evidencing those respective
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long-term credit ratings and (ii) the consolidated financial information of the
Deutsche Bank Group based on International Accounting Standards, which can be
obtained upon written or oral request from Corporate Communications, Deutsche
Bank AG, 31 West 52nd Street, New York, New York 10019, telephone (212)
469-5000.
Morgan Guaranty Trust Company of New York ("Morgan") is a trust company,
incorporated under the laws of the State of New York in 1864. Morgan extends
credit, accepts deposits, arranges financings, and provides a number of other
traditional banking and financial facilities and services. Morgan also provides
worldwide financial and advisory services to its clients in addressing their
corporate finance needs, including those related to international capital
markets. In addition to providing merger and acquisitions, leasing, real estate,
and other advisory services, Morgan also acts as a broker and principal in the
interest rate and currency swap markets.
Morgan buys and sells foreign currencies as principal, engaging in spot,
forward, futures, and options transactions. Morgan executes trades with
counterparties around the world, including commercial and institutional clients.
To complement its international activities and to serve its clients, Morgan
trades precious metals, engaging in spot, forward, futures, and options
transaction as principal.
Morgan currently has a long-term credit rating of "AAA" from Standard &
Poor's and "Aa1" from Moody's.
The principal executive office of Morgan is located at 60 Wall Street, New
York, New York 10260-0060 and its telephone number is (212) 483-2323.
Any person receiving a copy of this Prospectus may obtain, without charge,
upon request, a copy of the most recent quarterly Consolidated Reports of
Condition and Income of Morgan filed with the Board of Governors of the Federal
Reserve System, except for the exhibits to such documents. Written requests
should be mailed to the Office of the Secretary, Morgan Guaranty Trust Company
of New York, 60 Wall Street, New York, New York 10260-0060. Telephone requests
may be directed to (212) 648-3380.
STATEMENTS TO INDENTURE TRUSTEE
On each Determination Date preceding a Distribution Date, the Master
Servicer or the Administrator will provide to the Indenture Trustee (for the
Indenture Trustee to forward on each succeeding Distribution Date to each
Noteholder) a statement which will include the following information with
respect to such Distribution Date or for the preceding Collection Period or
Collection Periods, to the extent applicable:
(i) the Principal Factor for each class of Notes;
(ii) the amount of the distribution allocable to principal of each
class of Notes;
(iii) the amount of the distribution allocable to interest on each
class of Notes and Certificates, together with the interest rates
applicable with respect thereto (indicating, in the case of the LIBOR Rate
Notes, whether such interest rates are based on One-Month LIBOR or on the
Net Loan Rate, with respect to each class of LIBOR Rate Notes, and
specifying what each such interest rate would have been if it had been
calculated using the alternate basis);
(iv) the amount of the distribution, if any, allocable to any
Noteholders' Interest Carryover together with the outstanding amount, if
any, thereof after giving effect to any such distribution;
(v) the Pool Balance as of the close of business on the last day of
each preceding Collection Period since the last Distribution Date;
(vi) the aggregate outstanding principal balance of each class of
Notes as of such Distribution Date, after giving effect to payments
allocated to principal reported under clause (i) above;
(vii) the amount of the Servicing Fee to be allocated to the Master
Servicer, the amount of the Administration Fee to be allocated to the
Administrator, the amount of the Indenture Trustee Fee to be
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allocated to the Indenture Trustee and the amount of the Eligible Lender
Trustee Fee to be allocated to the Eligible Lender Trustee, respectively,
with respect to the upcoming Distribution Date;
(viii) the amount of the aggregate Realized Losses, if any, for each
Collection Period since the last Distribution Date and the aggregate
amount, if any, received (stated separately for interest and principal)
with respect to Financed Student Loans for which Realized Losses were
allocated previously;
(ix) the amount of the distribution attributable to amounts in the
Reserve Account, the amount of any other withdrawals from the Reserve
Account for such Distribution Date, the balance of the Reserve Account on
such Distribution Date, after giving effect to changes therein on such
Distribution Date, the then applicable Parity Percentage and the amount of
the distribution, if any, attributable to Parity Percentage Payments;
(x) the aggregate amount, if any, paid for Financed Student Loans
purchased from the Trust during each preceding Collection Period since the
last Distribution Date;
(xi) during the Exchange Period only, the aggregate Issuer
Consolidation Payments and Adjustment Payments, stated separately, for each
preceding Collection Period since the last Distribution Date (or since the
Closing Date in the case of the first Distribution Date); and
(xii) the number and principal amount of Financed Student Loans, as of
each preceding Collection Period since the last Distribution Date, that are
(i) 30 to 60 days delinquent, (ii) 61 to 90 days delinquent, (iii) 91 to
120 days delinquent, (iv) more than 120 days delinquent and (v) for which
claims have been filed with the appropriate Guarantor and which are
awaiting payment.
EVIDENCE AS TO COMPLIANCE
The Transfer and Servicing Agreement will provide that a firm of
independent public accountants will furnish to the Eligible Lender Trustee and
the Indenture Trustee annually a statement (based on the examination of certain
documents and records and on such accounting and auditing procedures considered
appropriate under the circumstances) as to compliance by the Master Servicer
during the preceding calendar year (or, in the case of the first such
certificate, the period from March 27, 1997 to December 31, 1997) with certain
provisions of the Transfer and Servicing Agreement relating to the servicing of
the Financed Student Loans.
The Transfer and Servicing Agreement will further provide that a firm of
independent public accountants (which may be the same firm referred to in the
immediately preceding paragraph) will furnish to the Eligible Lender Trustee and
the Indenture Trustee annually a statement (based on the examination of certain
documents and records and on such accounting and auditing procedures considered
appropriate under the circumstances) as to compliance by the Administrator
during the preceding calendar year (or, in the case of the first such
certificate, the period from the Closing Date to December 31, 1997) with certain
provisions of the Transfer and Servicing Agreement and the Administration
Agreement relating to the administration of the Trust and the Financed Student
Loans.
The Transfer and Servicing Agreement will also provide for delivery to the
Eligible Lender Trustee and the Indenture Trustee, concurrently with the
delivery of each statement of compliance referred to above, of a certificate
signed by an officer of the Master Servicer or the Administrator, as the case
may be, stating that, to his knowledge, the Master Servicer or the
Administrator, as the case may be, has fulfilled in all material respects all
its obligations under the Transfer and Servicing Agreement and the
Administration Agreement, respectively, throughout the preceding calendar year
(or, in the case of the first such certificate, the period from the Closing Date
to December 31, 1997) or, if there has been a default in the fulfillment of any
such obligation, specifying each such default known to such officer and the
nature and statute thereof. Each of the Master Servicer and the Administrator
has agreed to give the Indenture Trustee and the Eligible Lender Trustee notice
of certain Servicer Defaults and Administrator Defaults, respectively, under the
Transfer and Servicing Agreement.
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Copies of such statements and certificates may be obtained by Noteholders
by a request in writing addressed to the Indenture Trustee at Four Albany
Street, New York, New York, 10006, Attention: Corporate Trust and Agent Group,
Structural Finance; facsimile: (212) 250-6439.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Transfer and Servicing Agreement will provide that the Master Servicer
may not resign from its obligations and duties as Master Servicer thereunder,
except upon determination that the Master Servicer's performance of such duties
is no longer permissible under applicable law or shall violate any final order
of a court or administrative agency with jurisdiction over the Master Servicer
or its properties. No such resignation will become effective until the Indenture
Trustee or a successor servicer has assumed the Master Servicer's servicing
obligations and duties under the Transfer and Servicing Agreement.
The Transfer and Servicing Agreement will further provide that neither the
Transferor, the Master Servicer nor any of its directors, officers, employees or
agents will be under any liability to the Trust, the Noteholders, the
Certificateholders, the Swap Counterparty, the Indenture Trustee or the Eligible
Lender Trustee, except as provided under the Transfer and Servicing Agreement or
the Administration Agreement for taking any action or for refraining from taking
any action pursuant to the Transfer and Servicing Agreement, or for errors in
judgment; provided, however, that neither the Transferor, the Master Servicer
nor any such person will be protected against any liability that would otherwise
be imposed by reason of willful misfeasance, bad faith or negligence in the
performance of their respective duties thereunder. In addition, the Transfer and
Servicing Agreement will provide that the Transferor and the Master Servicer
shall not be under any obligation to appear in, prosecute, or defend any legal
action that is not incidental to its duties in accordance with the Transfer and
Servicing Agreement and that, in its opinion, may cause it to incur any expense
or liability.
The Transfer and Servicing Agreement will provide that the Master Servicer
will be permitted to perform its services thereunder through any of its
affiliates, provided that the Master Servicer shall continue to be responsible
for all performance of such services.
Under the circumstances and subject to conditions specified in the Transfer
and Servicing Agreement, any entity into which the Master Servicer may be merged
or consolidated, or any entity resulting from any merger or consolidation to
which the Master Servicer is a party, or any entity succeeding to the business
of the Master Servicer will be the successor of the Master Servicer under the
Transfer and Servicing Agreement. Successors (other than the Holding Company or
a PNC Subsidiary (as defined below)) must execute an agreement expressly
assuming the Master Servicer's obligations under the Transfer and Servicing
Agreement.
PERMITTED MERGER OF TRANSFEROR, MASTER SERVICER AND ADMINISTRATOR WITH PNC
SUBSIDIARIES
Nothing in the Transfer and Servicing Agreements prohibits or restricts the
merger of PNC Bank, National Association with the Holding Company or certain
subsidiaries of the Holding Company, including without limitation PNC Bank,
Ohio, National Association, PNC Bank, Kentucky, Inc., PNC Bank, Delaware, PNC
Bank, Indiana, Inc., PNC National Bank, PNC Mortgage Bank, N.A. and PNC Bancorp,
Inc. (each a "PNC Subsidiary"), the consolidation of PNC Bank, National
Association and the Holding Company or any PNC Subsidiary, or the sale of all or
substantially all of the assets of PNC Bank, National Association to the Holding
Company or another PNC Subsidiary. In such event, no consent of the Noteholders,
Certificateholders or Counterparties will be required.
MASTER SERVICER DEFAULT; ADMINISTRATOR DEFAULT
"Master Servicer Default" under the Transfer and Servicing Agreement will
consist of: (i) any failure by the Master Servicer to deliver to the Indenture
Trustee for deposit in any of the Trust Accounts any collections, Guarantee
Payments or other amounts received with respect to the Financed Student Loans,
which failure continues unremedied for three Business Days after written notice
from the Indenture Trustee, the Administrator or the Eligible Lender Trustee is
received by the Master Servicer or after discovery by the Master Servicer; (ii)
any failure by the Master Servicer duly to observe or perform in any material
respect any
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other covenant or agreement of the Master Servicer in the Transfer and Servicing
Agreement which failure materially and adversely affects the rights of
Noteholders and Certificateholders and which continues unremedied for 60 days
after the giving of written notice of such failure (A) to the Master Servicer by
the Indenture Trustee, the Eligible Lender Trustee or the Administrator or (B)
to the Master Servicer and to the Indenture Trustee and the Eligible Lender
Trustee by holders of Notes evidencing not less than 25% in principal amount of
the outstanding Notes; (iii) certain events of insolvency, readjustment of debt,
marshaling of assets and liabilities, or similar proceedings with respect to the
Master Servicer and certain actions by the Master Servicer indicating its
insolvency, reorganization pursuant to bankruptcy proceedings or inability to
pay its obligations; and (iv) any limitation, suspension or termination by the
Department of the Master Servicer's eligibility to service Student Loans which
materially and adversely affects the Master Servicer's ability to service
Financed Student Loans.
"Administrator Default" under the Transfer and Servicing Agreement or the
Administration Agreement will consist of (i) any failure by the Administrator to
direct the Indenture Trustee or the Eligible Lender Trustee, as applicable, to
make any required distributions from any of the Trust Accounts, which failure
continues unremedied for three Business Days after written notice from the
Indenture Trustee or the Eligible Lender Trustee is received by the
Administrator or after discovery of such failure by the Administrator; (ii) any
failure by the Administrator duly to observe or perform in any material respect
any other covenant or agreement in the Administration Agreement or the Transfer
and Servicing Agreement which failure materially and adversely affects the
rights of Noteholders, and which continues unremedied for 60 days after the
giving of written notice of such failure (A) to the Administrator, the Indenture
Trustee or the Eligible Lender Trustee or (B) to the Administrator and to the
Indenture Trustee and the Eligible Lender Trustee by holders of Notes evidencing
not less than 25% in principal amount of the outstanding Notes; and (iii)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities, or similar proceedings with respect to the Administrator and
certain actions by the Administrator indicating its insolvency or inability to
pay its obligations.
RIGHTS UPON SERVICER DEFAULT AND ADMINISTRATOR DEFAULT
As long as a Servicer Default under the Transfer and Servicing Agreement or
an Administrator Default under the Transfer and Servicing Agreement or the
Administration Agreement remains unremedied, the Indenture Trustee or holders of
Notes evidencing not less than 25% in principal amount of then outstanding Notes
may terminate all the rights and obligations of the Master Servicer under the
Transfer and Servicing Agreement, or the Administrator under the Transfer and
Servicing Agreement and the Administration Agreement, as the case may be,
whereupon a successor servicer or administrator appointed by the Indenture
Trustee or the Indenture Trustee will succeed to all the responsibilities,
duties and liabilities of the Master Servicer under the Transfer and Servicing
Agreement, or the Administrator under the Transfer and Servicing Agreement and
the Administration Agreement, as the case may be, and will be entitled to
similar compensation arrangements. In the event that a successor Master Servicer
or Administrator, as the case may be, has not been appointed at the time when
the predecessor Master Servicer or Administrator has ceased to act as Master
Servicer or Administrator, then the Indenture Trustee shall automatically be
appointed successor Master Servicer or Administrator. Notwithstanding the above,
the Indenture Trustee shall, if it shall be unwilling or legally unable so to
act, appoint or petition a court of competent jurisdiction to appoint, any
established institution whose regular business shall include the servicing of
student loans, as the successor to the Master Servicer or Administrator, as the
case may be, under this Agreement. In the event that a successor Master Servicer
or Administrator, as the case may be, has not been appointed at the time when
the predecessor Master Servicer or Administrator has ceased to act as Master
Servicer or Administrator, then the Indenture Trustee shall automatically be
appointed as successor Master Servicer or Administrator.
WAIVER OF PAST DEFAULTS
The holders of Notes evidencing at least a majority in principal amount of
the then outstanding Notes may, on behalf of all Noteholders and
Certificateholders, waive any default by the Master Servicer in the performance
of its obligations under the Transfer and Servicing Agreement, or any default by
the Administra-
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tor of its obligations under the Transfer and Servicing Agreement and the
Administration Agreement, as the case may be, and their respective consequences,
except a default in making any required deposits to or payments from any of the
Trust Accounts or giving instructions regarding the same in accordance with the
Transfer and Servicing Agreement. No such waiver will impair the Noteholders' or
the Certificateholders' rights with respect to subsequent defaults.
AMENDMENT
The Transfer and Servicing Agreements may be amended by the parties
thereto, with the consent of the Indenture Trustee, for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of the Transfer and Servicing Agreements or of modifying in any manner the
rights of Noteholders or Certificateholders; provided, however, that no such
amendment may (i) increase or reduce in any manner the amount of, or accelerate
or delay the timing of, collections of payments with respect to the Financed
Student Loans or distributions that are required to be made for the benefit of
the Noteholders, the Certificateholders or the Counterparties or (ii) reduce the
aforesaid percentage of the Notes or Certificates which are required to consent
to any such amendment, without the consent of the holders of all the outstanding
Notes and Certificates and the Counterparties affected thereby.
INSOLVENCY EVENT
If any of certain events of insolvency or receivership, readjustment of
debt, marshaling of assets and liabilities, or similar proceedings with respect
to the Transferor or certain actions by the Transferor indicating its insolvency
or inability to pay its obligations (each, an "Insolvency Event") occurs, the
Financed Student Loans will be liquidated and the Trust will be terminated.
Promptly after the occurrence of any Insolvency Event, notice thereof is
required to be given to Noteholders, Certificateholders and the Counterparties;
provided, however, that any failure to give such required notice will not
prevent or delay termination of the Trust. Upon termination of the Trust, the
Eligible Lender Trustee will direct the Indenture Trustee promptly to sell the
assets of the Trust (other than the Trust Accounts) in a commercially reasonable
manner and on commercially reasonable terms. The proceeds from any such sale,
disposition or liquidation of the Financed Student Loans will be treated as
collections thereon and deposited in the Collection Account. If the proceeds
from the liquidation of the Financed Student Loans and any amounts on deposit in
the Reserve Account are not sufficient to pay the Notes in full, the amount of
principal returned to the Noteholders will be reduced and the Noteholders will
incur a loss.
PAYMENT OF NOTES
Upon the payment in full of all outstanding Notes and the satisfaction and
discharge of the Indenture, the Eligible Lender Trustee will succeed to all the
rights of the Indenture Trustee, and the Certificateholders will succeed to all
the rights of the Noteholders, under the Transfer and Servicing Agreement,
except as otherwise provided therein.
TERMINATION
The obligations of the Master Servicer, the Transferor, the Administrator,
the Eligible Lender Trustee and the Indenture Trustee pursuant to the Transfer
and Servicing Agreements will terminate upon (i) the maturity or other
liquidation of the last Financed Student Loan and the disposition of any amount
received upon liquidation of any remaining Financed Student Loans and (ii) the
payment to the Noteholders, the Certificateholders and the Counterparties of all
amounts required to be paid to them pursuant to the Transfer and Servicing
Agreements. In order to avoid excessive administrative expense, the Transferor
is permitted at its option to repurchase from the Eligible Lender Trustee, as of
the end of any Collection Period immediately preceding a Distribution Date, if
the then outstanding Pool Balance is 5% or less of the Initial Pool Balance and
the outstanding aggregate principal amount of the Fixed Rate Notes has been
reduced to zero, all remaining Financed Student Loans at a price equal to the
aggregate Purchase Amounts thereof as of the end of such Collection Period,
which amounts will be used to retire the Notes and the Certificates concurrently
therewith. Upon termination of the Trust, all right, title and interest in the
Financed Student Loans and other
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funds of the Trust, after giving effect to any final distributions to
Noteholders, Certificateholders and the Counterparties therefrom, will be
conveyed and transferred to the Transferor.
Any Financed Student Loans remaining in the Trust as of the end of May 1,
2007 will be offered for sale by the Indenture Trustee on or prior to the July
2007 Distribution Date. The Transferor, its affiliates and unrelated third
parties may offer bids to purchase such Financed Student Loans on or prior to
such Distribution Date. If at least two bids are received, the Indenture Trustee
will accept the highest bid equal to or in excess of the greater of (x) the
aggregate Purchase Amounts of such Financed Student Loans as of the end of the
Collection Period immediately preceding such Distribution Date or (y) an amount
that would be sufficient to (i) reduce the outstanding principal amount of the
Notes on such Distribution Date to zero and (ii) pay to the Noteholders the
Noteholders' Interest Distribution Amount payable on such Distribution Date and
pay to the Counterparties any Trust Swap Payments payable on such Distribution
Date, if any (the "Minimum Purchase Price"). If at least two bids are not
received or the highest bid is not equal to or in excess of the Minimum Purchase
Price, the Indenture Trustee will not consummate such sale. The proceeds of any
such sale will be used to redeem any outstanding Notes on such Distribution Date
and pay any Trust Swap Payments. If the sale is not consummated in accordance
with the foregoing, the Indenture Trustee may, but shall not be under any
obligation to, solicit bids to purchase the Financed Student Loans on future
Distribution Dates upon terms similar to those described above. No assurance can
be given as to whether the Indenture Trustee will be successful in soliciting
acceptable bids to purchase the Financed Student Loans on either the July, 2007
Distribution Date or any subsequent Distribution Date.
ADMINISTRATOR
PNC Bank, National Association, in its capacity as Administrator, has
entered into the Administration Agreement with the Trust and the Indenture
Trustee, pursuant to which the Administrator will agree, to the extent provided
therein, (i) to direct the Indenture Trustee to make the required distributions
from the Trust Accounts on each Distribution Date, (ii) to prepare (based on the
reports received from the Master Servicer) and provide periodic and annual
statements to the Eligible Lender Trustee and the Indenture Trustee with respect
to distributions to Noteholders and Certificateholders and any related Federal
income tax reporting information and (iii) to provide the notices and to perform
other administrative obligations required by the Indenture and the Trust
Agreement. As compensation for the performance of the Administrator's
obligations under the Administration Agreement and as reimbursement for its
expenses related thereto, the Administrator will be entitled to an
administration fee equal to 0.02% per annum of the outstanding principal amount
of the Notes and Certificates (the "Administration Fee"). Affiliates of the
Administrator may assist it in performing its obligations under the
Administration Agreement.
LEGAL ASPECTS OF THE FINANCED STUDENT LOANS
TRANSFER OF FINANCED STUDENT LOANS
The Transferor intends that the transfer of the Financed Student Loans by
it to the Eligible Lender Trustee on behalf of the Trust will constitute a valid
contribution and assignment of such Financed Student Loans. Notwithstanding the
foregoing, if the transfer of the Financed Student Loans is deemed to be an
assignment of collateral as security for the benefit of the Trust, a security
interest in the Federal Loans created on behalf of the Eligible Lender Trustee
may, pursuant to the provisions of 20 U.S.C. sec.1087-2(d)(3), be perfected by
the filing of notice of such security interest in the manner provided by the
applicable state law version Uniform Commercial Code ("UCC") for perfection of a
security interest in accounts. A financing statement or statements covering the
Financed Student Loans will be filed under the UCC to protect the interest of
the Eligible Lender Trustee in the event the transfer by the Transferor is
deemed to be subject to the UCC.
If the transfer of the Financed Student Loans is deemed to be an assignment
as security for the benefit of the Trust, there are certain limited
circumstances under the UCC in which prior or subsequent transferees of Financed
Student Loans could have an interest in such Financed Student Loans with
priority over the Eligible
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Lender Trustee's interest. A tax or other government lien on property of the
Transferor arising prior to the time a Financed Student Loans came into
existence may also have priority over the interest of the Eligible Lender
Trustee in such Financed Student Loan. Under the Transfer and Servicing
Agreement, however, the Transferor will warrant that it has caused the Financed
Student Loans to be transferred to the Eligible Lender Trustee on behalf of a
Trust free and clear of any lien of any third party. In addition, the Transferor
will covenant that it will not sell, pledge, assign, transfer or grant any lien
on any Financed Student Loan (or any interest therein) other than to the
Eligible Lender Trustee on behalf of a Trust.
Pursuant to the Transfer and Servicing Agreement, either the Master
Servicer or a sub-servicer as custodian on behalf of the Trust will have custody
of the promissory notes evidencing the Financed Student Loans following the
conveyance of the Financed Student Loans to the Eligible Lender Trustee and the
pledge thereof to the Indenture Trustee. Although the accounts of the Transferor
will be marked to indicate the conveyance and the Transferor will cause UCC
financing statements to be filed with the appropriate authorities, the Financed
Student Loans will not be physically segregated in the Master Servicer's or such
sub-servicer's offices. If, through inadvertence or otherwise, any of the
Financed Student Loans were sold to another party, or a security interest
therein were granted to another party, that purchased (or took such security
interest in) any of such Financed Student Loans in the ordinary course of its
business and took possession of such Financed Student Loans, then the purchaser
(or secured party) would acquire an interest in the Financed Student Loans
superior to the interest of the Eligible Lender Trustee and the Indenture
Trustee if the purchaser (or secured party) acquired (or took a security
interest in) the Financed Student Loans for new value and without actual
knowledge of the Eligible Lender Trustee's and the Indenture Trustee's
respective interests. See "Description of the Transfer and Servicing
Agreements--Conveyance of Financed Student Loans; Representations and
Warranties" and "--Servicer Covenants."
CERTAIN MATTERS RELATING TO RECEIVERSHIP
The FDIA, as amended by FIRREA, sets forth certain powers that the FDIC
could exercise if it were appointed as receiver or conservator of the
Transferor.
Subject to clarification by FDIC regulations or interpretations, it would
appear form the positions taken by the FDIC that the FDIC, in its capacity as a
receiver or conservator for the Transferor, would not interfere with the timely
transfer to the Trust of collections with respect to the Financed Student Loans.
To the extent that the transfer of the Financed Student Loans is deemed to
create a security interest, and that interest was validly perfected before the
Transferor's insolvency and was not taken in contemplation of insolvency or with
the intent to hinder, delay or defraud the Transferor or its creditors, based
upon opinions and statements of policy issued by the general counsel of the FDIC
addressing the enforceability against the FDIC, as conservator or receiver for a
depository institution, of a security interest in collateral granted by such
depository institution, such security interest should not be subject to
avoidance and payments to the Trust with respect to the Financed Student Loans
should not be subject to recovery by the FDIC as receiver or conservator of the
Transferor. If, however, the FDIC were to assert a contrary position, certain
provisions of the FDIA which, at the request of the FDIC, have been applied in
recent lawsuits to avoid security interests in collateral granted by depository
institutions, would permit the FDIC to avoid such security interests, thereby
resulting in possible delays and reductions in payments on the Notes. In
addition, if the FDIC were to require the Indenture Trustee or the Eligible
Lender Trustee to establish its rights to such payments by submitting to and
completing the administrative claims procedure under the FDIA, as amended by
FIRREA, delays in payments on the Notes and possible reductions in the amount of
the payments could occur.
CONSUMER PROTECTION LAWS
Numerous Federal and state consumer protection laws and related regulations
impose substantial requirements upon lenders and servicers involved in consumer
finance. Also, some state laws impose finance charge ceilings and other
restrictions on certain consumer transactions and require contract disclosures
in addition to those required under federal law. Many of these requirements are
preempted by the provisions of the Higher Education Act. For a discussion of the
Trust's rights if the Financed Student Loans were not originated or serviced in
compliance in all material respects with applicable laws, See "Description of
the
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Transfer and Servicing Agreements--Conveyance of Financed Student Loans;
Representations and Warranties" and "--Master Servicer Covenants."
LOAN ORIGINATION AND SERVICING PROCEDURES APPLICABLE TO FINANCED STUDENT LOANS
The Higher Education Act, including the implementing regulations thereunder
(in the case of Federal Loans), impose specified requirements, guidelines and
procedures with respect to originating and servicing Student Loans such as the
Financed Student Loans. Generally, those procedures require that completed loan
applications be processed, a determination of whether an applicant is an
eligible borrower under applicable standards (including a review of a financial
need analysis in the case of certain Federal Loans) be made, the borrower's
responsibilities under the loan be explained to him or her, the promissory note
evidencing the loan be executed by the borrower and then that the loan proceeds
be disbursed in a specified manner by the lender. After the loan is made, the
lender must establish repayment terms with the borrower, properly administer
deferrals and forbearance and credit the borrower for payments made thereon. If
a borrower becomes delinquent in repaying a loan, a lender or a servicing agent
must perform certain collection procedures (primarily telephone calls and demand
letters) which vary depending upon the length of time a loan is delinquent. The
Master Servicer has agreed pursuant to the Transfer and Servicing Agreement to
perform collection and servicing procedures on behalf of the Trust. However,
failure to follow these procedures or failure of the Transferor to follow
procedures relating to the origination of any Financed Student Loans could
result in adverse consequences. In the case of any Financed Student Loans, any
such failure could result in the Department's refusal to make reinsurance
payments to the Guarantors or to make Interest Subsidy Payments and Special
Allowance Payments to the Eligible Lender Trustee with respect to such Financed
Student Loans or in the Guarantors' refusal to honor their Guarantee Agreements
with the Eligible Lender Trustee with respect to such Financed Student Loans.
Failure of the Guarantors to receive reinsurance payments from the Department
could adversely affect the Guarantors' ability or legal obligation to make
Guarantee Payments to the Eligible Lender Trustee with respect to such Financed
Student Loans.
Loss of any such Guarantee Payments, Interest Subsidy Payments or Special
Allowance Payments could adversely affect the amount of Available Funds on any
Distribution Date and the Trust's ability to pay principal and interest on the
Notes. Under certain circumstances, pursuant to the Transfer and Servicing
Agreement, the Transferor is obligated to repurchase any Financed Student Loan,
or the Master Servicer is obligated to purchase any Financed Student Loan, if a
breach of the representations, warranties or covenants of the Transferor or the
Master Servicer, as the case may be, with respect to such Financed Student Loan
has a material adverse effect on the interest of the Trust therein and such
breach is not cured within any applicable cure period (it being understood that
any such breach that does not affect any Guarantor's or the Secretary's
obligation to guarantee payment of such Financed Student Loan will not be
considered to have such a material adverse effect). See "Description of the
Transfer and Servicing Agreements--Conveyance of Financed Student Loans;
Representations and Warranties" and "--Master Servicer Covenants." The failure
of the Master Servicer to so purchase a Financed Student Loan would constitute a
breach of the Transfer and Servicing Agreement, enforceable by the Eligible
Lender Trustee on behalf of the Trust or by the Indenture Trustee on behalf of
the Noteholders, but would not constitute an Event of Default under the
Indenture.
FINANCED STUDENT LOANS MAY BE SUBJECT TO DISCHARGE IN BANKRUPTCY
The Financed Federal Loans are generally not dischargeable by a borrower in
bankruptcy pursuant to the Bankruptcy Code, unless (i) such loan first became
due before seven years (exclusive of any applicable suspension of the repayment
period) before the date of the bankruptcy or (ii) excepting such debt from
discharge will impose an undue hardship on the debtor and the debtor's
dependents.
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FEDERAL TAX CONSEQUENCES
Set forth below is a summary of Federal income tax consequences of the
purchase, ownership and disposition of the Notes. Mayer, Brown & Platt, special
Federal tax counsel for the Trust ("Federal Tax Counsel") is of the opinion that
the discussion hereunder fully and fairly discloses all material Federal tax
consequences associated with the purchase, ownership and disposition of the
Notes.
This summary does not deal with all aspects of Federal income taxation
applicable to all categories of holders of the Notes, some of which may be
subject to special rules or special treatment under the Federal income tax laws.
For example, it does not discuss the specific tax treatment of Notes that are
held by insurance companies, banks and certain other financial institutions,
regulated investment companies, individual retirement accounts life insurance
companies, tax-exempt organizations or dealers in securities. Furthermore, this
summary is based upon present provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), the regulations promulgated thereunder, and judicial or
ruling authority, all of which are subject to change, which change may be
retroactive. Moreover, there are no cases or Internal Revenue Service (the
"IRS") rulings on similar transactions involving a trust that issues debt and
equity interests with terms similar to those of the Notes and the Certificates.
As a result, the IRS may disagree with all or part of the discussion below.
This discussion is directed to prospective investors who purchase Notes in
the initial distribution thereof and who hold the Notes as "capital assets"
within the meaning of Section 1221 of the Code. Prospective investors are
advised to consult their own tax advisors with regard to the Federal income tax
consequences of the purchase, ownership and disposition of the Securities, as
well as the tax consequences arising under the laws of any state, foreign
country or other jurisdiction. The Trust has been provided with an opinion of
Federal Tax Counsel regarding certain of the Federal income tax matters
discussed below. An opinion of counsel, however, is not binding on the IRS, and
no ruling on any of the issues discussed below will be sought from the IRS.
FEDERAL TAX CONSEQUENCES WITH RESPECT TO THE NOTES
Tax Characterization of the Notes and the Trust. Federal Tax Counsel is of
the opinion that based on the terms of the Notes and the transactions relating
to the Financed Student Loans as set forth herein, the Notes will be treated as
debt for Federal income tax purposes. There is, however, no specific authority
with respect to the characterization for Federal income tax purposes of
securities having the same terms as the Notes.
Federal Tax Counsel is also of the opinion that based on the applicable
provisions of the Trust Agreement and related documents and the minimum
denomination of the Certificates, the Trust will not be classified as an
association or publicly traded partnership taxable as a corporation for Federal
income tax purposes, and because the Trust has not elected and will not elect
under Treasury Regulation 301.7701-3 to be classified as an association, the
Trust also will not be so classified for Federal income tax purposes. If the IRS
were to successfully characterize the Trust as a corporation for Federal income
tax purposes, the income from the Financed Student Loans (reduced by deductions,
possibly including interest on the Notes) would be subject to Federal income tax
at corporate rates, which would reduce the amounts available to make payments on
the Notes.
If, contrary to the opinion of Federal Tax Counsel, the IRS successfully
asserted that the Notes were not debt for Federal income tax purposes, the Notes
might be treated as equity interests in the Trust. If so, the Trust might be
treated as a publicly traded partnership taxable as a corporation with the
adverse consequences described above (and the taxable corporation would not be
able to deduct interest on the Notes). The remainder of this discussion assumes
that the Notes will be treated as debt and that the Trust will not be treated as
a publicly traded partnership taxable as a corporation.
Interest Income on the Notes. The stated interest on the Notes will be
taxable to a Noteholder as ordinary income when received or accrued in
accordance with such Noteholder's method of tax accounting. It is not
anticipated that the Notes will be issued with "original issue discount" within
the meaning of Section 1273 of the Code ("OID"). A holder who purchases a Note
at a discount that exceeds a statutorily
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defined de minimis amount will be subject to the "market discount" rules of the
Code, and a holder who purchases a Note at a premium will be subject to the
premium amortization rules of the Code.
Sale or Other Disposition. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any OID (if any), market discount and gain
previously included by such Noteholder in income with respect to the Note and
decreased by the amount of bond premium (if any) previously amortized and by the
amount of principal payments previously received by such Noteholder with respect
to such Note. Subject to the rules of the Code concerning market discount on the
Notes, any such gain or loss generally will be capital gain or loss if the note
was held as a capital asset. Capital losses generally may be deducted only to
the extent the Noteholder has capital gains for the taxable year, although under
certain circumstances non-corporate Noteholders can deduct losses in excess of
available capital gains.
Foreign Holders. If interest paid (or accrued) to a Noteholder who is a
nonresident alien, foreign corporation or other non-United States person (a
"foreign person") is not effectively connected with the conduct of a trade or
business within the United States by the foreign person, the interest generally
will be considered "portfolio interest," and generally will not be subject to
United States Federal income tax and withholding tax, if the foreign person (i)
is not actually or constructively a "10 percent shareholder" of the Trust or
Student Holdings (including a holder of 10% of the outstanding Certificates) or
a "controlled foreign corporation" with respect to which the Trust or Student
Holdings is a "related person" within the meaning of the Code and (ii) provides
the person otherwise required to withhold U.S. tax with an appropriate
statement, signed under penalties of perjury, certifying that the beneficial
owner of the Note is a foreign person and providing the foreign person's name
and address. If the information provided in the statement changes, the foreign
person must so inform the person otherwise required to withhold U.S. tax within
30 days of such change. The statement generally must be provided in the year a
payment occurs (prior to such payment) or in either of the two preceding years.
If a Note is held through a securities clearing organization or certain other
financial institutions, the organization or institution may provide a signed
statement to the withholding agent. However, in that case, the signed statement
must be accompanied by a Form W-8 or substitute form provided by the foreign
person that owns the Note. If such interest is not portfolio interest, then it
will be subject to United States Federal income and withholding tax at a rate of
30%, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States Federal income and withholding tax, provided that (i) the gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign individual is not present in the United States for 183 days
or more in the taxable year or does not have a tax home in the United States.
If the interest, gain or income on a Note held by a foreign person is
effectively connected with the conduct of a trade or business in the United
States by the foreign person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement), the
holder generally will be subject to United States Federal income tax on the
interest, gain or income at regular Federal income tax rates. In addition, if
the foreign person is a foreign corporation, it may be subject to a branch
profits tax equal to 30% of its "effectively connected earnings and profits"
within the meaning of the Code for the taxable year, as adjusted for certain
items, unless it qualifies for a lower rate under an applicable tax treaty (as
modified by the branch profits tax rules).
Proposed Treasury regulations, which would be effective with respect to
payments made after December 31, 1997 if adopted in their current form, would
provide alternative certification requirements and means for obtaining the
exemption from federal income and withholding tax.
Information Reporting and Withholding. The Trust will be required to report
annually to the IRS, and to each Noteholder of record, the amount of interest
paid on the Notes (and the amount of interest withheld for Federal income taxes,
if any) for each calendar year, except as to exempt holders (generally, holders
that are corporations, tax-exempt organizations, qualified pension and
profit-sharing trusts, individual retirement
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accounts.). For nonresident aliens who provide certification as to their status
as nonresidents interest paid will be reported on Form 1042-S. However,
withholding will not apply as long as the certification is valid. Generally,
certification must be renewed every three calendar years. Accordingly, each
holder (other than exempt holders who are not subject to the reporting
requirements) will be required to provide, under penalties of perjury, a
certificate containing the holder's name, address, correct Federal taxpayer
identification number and a statement that the holder is not subject to backup
withholding. Should a nonexempt Noteholder fail to provide the required
certification or recertify its foreign status, the Trust will be required to
withhold 31% for U.S. residents or 30% for nonresident aliens of the amount
otherwise payable to the holder, and remit the withheld amount to the IRS as a
credit against the holder's Federal income tax liability.
STATE AND LOCAL TAX CONSEQUENCES
The above discussion does not address the tax treatment of the Trust, the
Notes or the Noteholders under any state or local tax laws. The activities to be
undertaken in servicing and collecting the Financed Student Loans will take
place in a number of states and, therefore, many different tax regimes
potentially apply to different portions of the transactions. Prospective
investors are urged to consult with their tax advisors regarding the state and
local tax treatment of the Trust as well as any state and local tax consequences
of them purchasing, holding and disposing of Notes.
ERISA CONSIDERATIONS
Subject to the following discussion, the Notes may be acquired by pension,
profit-sharing or other employee benefit plans or retirement arrangements, as
well as an individual retirement accounts and Keogh plan (each a "Benefit
Plan"). Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and Section 4975 of the Code prohibit a Benefit Plan from
engaging in certain transactions with persons that are "parties in interest"
under ERISA or "disqualified persons" under the Code with respect to such
Benefit Plan (which may include the Transferor, the Depositor, the
Administrator, the Master Servicer, the Indenture Trustee or the Eligible Lender
Trustee). A violation of these "prohibited transaction" rules may result in an
excise tax or other penalties and liabilities under ERISA and the Code for such
persons or the fiduciaries of the Benefit Plan. In addition, Title I of ERISA
also requires fiduciaries of a Benefit Plan subject to ERISA to make investments
that are prudent, diversified and in accordance with the governing plan
documents.
Certain transactions involving the Trust might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Benefit Plan
that purchased Notes if assets of the Trust were deemed to be assets of the
Benefit Plan. Under a regulation issued by the United States Department of Labor
(the "Regulation"), the assets of the Trust would be treated as plan assets of a
Benefit Plan for the purposes of ERISA and the Code only if the Benefit Plan
acquired an "equity interest" in the Trust and none of the exceptions contained
in the Regulation was applicable. An equity interest is defined under the
Regulation as an interest other than an instrument which is treated as
indebtedness under applicable local law and which has no substantial equity
features. Although there is little guidance on the subject, the Transferor
believes that, at the time of their issuance, the Notes should be treated as
indebtedness of the Trust without substantial equity features for purposes of
the Regulation. This determination is based in part upon the traditional debt
features of the Notes, including the reasonable expectation of purchasers of
Notes that the Notes will be repaid when due, as well as the absence of
conversion rights, warrants and other typical equity features.
However, without regard to whether the Notes are treated as an equity
interest for purposes of the Regulation, the acquisition or holding of Notes by
or on behalf of a Benefit Plan could be considered to give rise to a prohibited
transaction if the Trust, the Transferor, the Depositor, the Administrator, the
Master Servicer, the Indenture Trustee or the Eligible Lender Trustee is or
becomes a party in interest or a disqualified person with respect to such
Benefit Plan or a transfer of a Note occurs between a party in interest or a
disqualified person and a Benefit Plan. Certain exemptions from the prohibited
transaction rules could be applicable to the purchase and holding of Notes by a
Benefit Plan depending on the type and circumstances of the plan fiduciary
making the decision to acquire such Notes. Included among these exemptions are:
89
<PAGE> 90
Prohibited Transaction Class Exemption ("PTCE") 96-23, regarding transactions
effected by "in-house asset managers"; PTCE 95-60, regarding investments by
insurance company general accounts; PTCE 91-38, regarding investments by bank
collective investment funds; PTCE 90-1, regarding investments by insurance
company pooled separate accounts; and PTCE 84-14, regarding transactions
effected by "qualified professional asset managers." By acquiring a Note, each
purchaser will be deemed to represent that either (i) it is not acquiring the
Notes with the assets of a Benefit Plan; or (ii) the acquisition of the Notes
will not give rise to a non-exempt prohibited transaction under Section 406(a)
of ERISA or Section 4975 of the Code.
Employee benefit plans that are governmental plans (as defined in Section
3(32) of ERISA) and certain church plans (as defined in Section 3(33) of ERISA)
are not subject to ERISA requirements, however, governmental plans may be
subject to comparable state law restrictions.
A plan fiduciary considering the purchase of Notes should consult its legal
advisors regarding whether the assets of the Trust would be considered plan
assets, the possibility of exemptive relief from the prohibited transaction
rules and other issues and their potential consequences.
90
<PAGE> 91
UNDERWRITING
Subject to the terms and conditions set forth in an Underwriting Agreement
dated June 20, 1997 (the "Underwriting Agreement"), among the Transferor, Smith
Barney Inc. and PNC Capital Markets, Inc. (the "Underwriters"), the Transferor
has agreed to sell to the Underwriters, and each Underwriter has severally
agreed to purchase from the Transferor, the principal balance of each Class of
Notes set forth below its name on the following chart:
<TABLE>
<CAPTION>
PRINCIPAL BALANCE
------------------------------------------------------
PNC CAPITAL
MARKETS,
CLASS OF NOTES SMITH BARNEY INC. INC. TOTAL
- -------------- ------------------ ------------ --------------
<S> <C> <C> <C>
Class A-1 Notes.............................. $ 45,000,000 $ 45,000,000 $ 90,000,000
Class A-2 Notes.............................. $ 53,500,000 $ 53,500,000 $ 107,000,000
Class A-3 Notes.............................. $ 53,500,000 $ 53,500,000 $ 107,000,000
Class A-4 Notes.............................. $ 51,000,000 $ 51,000,000 $ 102,000,000
Class A-5 Notes.............................. $ 47,000,000 $ 47,000,000 $ 94,000,000
Class A-6 Notes.............................. $ 36,250,000 $ 36,250,000 $ 72,500,000
Class A-7 Notes.............................. $ 60,500,000 $ 60,500,000 $ 121,000,000
Class A-8 Notes.............................. $ 87,500,000 $ 87,500,000 $ 175,000,000
Class A-9 Notes.............................. $ 62,725,000 $ 62,725,000 $ 125,450,000
Class B Notes................................ $ 18,025,000 $ 18,025,000 $ 36,050,000
------------ ------------ --------------
Total........................................ $515,000,000 $515,000,000 $1,030,000,000
============= ============ ==============
</TABLE>
The Transferor has agreed to pay Smith Barney Inc. a structuring fee equal
to $515,000.
In the Underwriting Agreement, the Underwriters have severally agreed,
subject to the terms and conditions set forth therein, to purchase all of the
Notes offered hereby, if any Notes are purchased. In the event of a default by
any Underwriter, the Underwriting Agreement provides that, in certain
circumstances, purchase commitments of the non-defaulting Underwriter may be
increased or purchase commitments of all Underwriters may be terminated. The
Transferor has been advised by the Underwriters that the Underwriters propose
initially to offer the Notes to the public at the public offering price with
respect to each Class set forth on the cover page of this Prospectus. After the
initial public offering, the public offering price may be changed.
The Underwriting Agreement provides that the Transferor will indemnify the
Underwriters against certain liabilities, including liabilities under applicable
securities laws, or contribute to payments the Underwriters may be required to
make in respect thereof.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with the
Regulation M under the Exchange Act. Over-allotment involves syndicate sales in
excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specific maximum. Syndicate covering
transactions involve purchases of the Notes in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Underwriters to reclaim a selling concession from a
syndicate member when the Notes originally sold by such syndicate member are
purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Notes to be higher than it would
otherwise be in the absence of such transactions.
Each Underwriter has represented and agreed that (a) it has not offered or
sold, and will not offer or sell Notes to persons in the United Kingdom except
to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the purposes of
their businesses or otherwise in circumstances which have not resulted, and will
not result in an offer to the public in the United Kingdom within the meaning of
the U.K. Regulations, (b) it has complied and will comply with all applicable
provisions of the Financial Services Act of 1986 of Great Britain with respect
to anything done by it in relation to the Notes in, from or otherwise involving
the United Kingdom and (c) it has only issued or passed on and will only issue
or pass on in the United Kingdom any document in connection with the issue of
the Notes to a
91
<PAGE> 92
person who is of a kind described in Article 11(3) of the Financial Services Act
1986, as amended, (Investment Advertisement) (Exemptions) Order 1996, as
amended, or is a person to whom the document may otherwise lawfully be issued or
passed on.
PNC Capital Markets, Inc., formerly known as PNC Securities Corp, is an
affiliate of the Transferor and a wholly owned indirect subsidiary of the PNC
Bank Corp.
Smith Barney Inc. has provided from time to time, and may provide in the
future, investment or commercial banking services to the Transferor and its
affiliates, for which Smith Barney Inc. or its affiliates have received or will
receive customary fees and commissions. An affiliate of Smith Barney Inc. holds
all the Series 1997-1 notes previously issued by the Trust, which will be paid
in full immediately prior to the issuance of the Notes.
LEGAL MATTERS
Certain legal matters relating to the Transferor, the Master Servicer and
the Administrator will be passed upon by Libby G. Fishman, General
Counsel-Consumer Bank of PNC Bank Corp. Certain legal matters relating to the
validity of the issuance of the Notes will be passed upon for the Trust by
Mayer, Brown & Platt. Mayer, Brown & Platt has performed legal services for the
Transferor and it is expected that it will continue to perform such services in
the future. Certain federal income tax and other matters will be passed upon for
the Trust by Mayer, Brown & Platt. Certain legal matters will be passed upon for
the Underwriters by Stroock & Stroock & Lavan LLP.
FINANCIAL INFORMATION
The Transferor has determined that its financial statements are not
material to the offering made hereby. The Trust will engage in no activities
other than as described herein. Accordingly, no financial statements with
respect to the Trust are included in this Prospectus.
RATING
It is a condition to the issuance and sale of the Class A-1 Notes that they
be rated "A-1+" by Standard & Poor's, "P-1" by Moody's, and "F-1+" by Fitch. It
is a condition to the issuance and sale of the Class A-2, Notes, the Class A-3
Notes, the Class A-4 Notes, the Class A-5 Notes, the Class A-6 Notes, the Class
A-7 Notes, the Class A-8 Notes and the Class A-9 Notes that they each be rated
"AAA" by Standard & Poor's and Fitch and "Aaa" by Moody's. It is a condition to
the issuance of the Class B Notes that they be rated at least "A" by Standard &
Poor's and Fitch and at least "A2" by Moody's. Each of Standard & Poor's,
Moody's and Fitch is also referred to herein as a "Rating Agency" and
collectively, as the "Rating Agencies." A securities rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating agency. The ratings of the Notes
address the likelihood of the ultimate payment of principal of and interest on
the Notes pursuant to their terms. The Rating Agencies do not evaluate, and the
ratings on the Notes do not address, the likelihood of prepayments on the Notes
or the likelihood of payment of the Noteholders' Interest Carryover.
92
<PAGE> 93
INDEX OF PRINCIPAL TERMS
Set forth below is a list of the defined terms used in this Prospectus and
the pages on which the definitions of such terms may be found herein.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ACA........................................................................... 53
Adjustment Payment............................................................ 68
Administration Agreement...................................................... 5
Administration Fee............................................................ 11, 84
Administrator................................................................. 3
Administrator Default......................................................... 82
AFSA.......................................................................... 5, 36
Assigned Rights............................................................... 30
Available Funds............................................................... 71
Benefit Plan.................................................................. 89
Business Day.................................................................. 15
Cede.......................................................................... 3
Cedel......................................................................... 4
Cedel Participants............................................................ 65
Certificate Balance........................................................... 75
Certificate Distribution Account.............................................. 16, 72
Certificateholders............................................................ 15
Certificateholders' Distribution Amount....................................... 75
Certificateholders' Interest Carryover Shortfall.............................. 75
Certificateholders' Interest Distribution Amount.............................. 75
Certificateholders' Principal Carryover Shortfall............................. 75
Certificateholders' Principal Distribution Amount............................. 75
Certificates.................................................................. 5
Class......................................................................... 4
Class A Noteholders........................................................... 4
Class A-1 Noteholders......................................................... 4
Class A-2 Noteholders......................................................... 4
Class A-3 Noteholders......................................................... 4
Class A-4 Noteholders......................................................... 4
Class A-5 Noteholders......................................................... 4
Class A-6 Noteholders......................................................... 4
Class A-7 Noteholders......................................................... 4
Class A-8 Noteholders......................................................... 4
Class A-9 Noteholders......................................................... 4
Class A Notes................................................................. 4
Class A-1 Notes............................................................... 4
Class A-2 Notes............................................................... 4
Class A-3 Notes............................................................... 4
Class A-4 Notes............................................................... 4
Class A-5 Notes............................................................... 4
Class A-6 Notes............................................................... 4
Class A-7 Notes............................................................... 4
Class A-8 Notes............................................................... 4
Class A-9 Notes............................................................... 4
Class B Noteholders........................................................... 4
Class B Notes................................................................. 4
</TABLE>
93
<PAGE> 94
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Class Interest Rate........................................................... 6
Closing Date.................................................................. 11
Code.......................................................................... 87
Collection Account............................................................ 15
Collection Period............................................................. 14
Commission.................................................................... 3
Consolidation Loan............................................................ 45
Consolidation Loan Fees....................................................... 75
Consolidation Prepayments..................................................... 68
Cooperative................................................................... 65
Corporation................................................................... 35
Counterparties................................................................ 8
Counterparty.................................................................. 8
Counterparty Swap Payment..................................................... 75
Cut-off Date.................................................................. 11
Deferral Period............................................................... 42
Deferral Phase................................................................ 14
Definitive Notes.............................................................. 66
Department.................................................................... 12, 37
Depositor..................................................................... 3
Depositories.................................................................. 63
Depository.................................................................... 57
Determination Date............................................................ 15
Deutsche Bank................................................................. 8, 78
Distribution Date............................................................. 2, 6
DOE Data Book................................................................. 55
DTC........................................................................... 3
DTC Participants.............................................................. 63
Effective Interest Rate....................................................... 7
Eligible Deposit Account...................................................... 69
Eligible Institution.......................................................... 69
Eligible Investments.......................................................... 69
Eligible Lender Trustee....................................................... 1, 5
Eligible Lender Trustee Fee................................................... 15
Eligible Student.............................................................. 38
ERISA......................................................................... 89
Euroclear..................................................................... 5, 65
Euroclear Operator............................................................ 65
Euroclear Participants........................................................ 65
Event of Default.............................................................. 60
Exchange Act.................................................................. 3
Exchange Date................................................................. 68
Exchange Period............................................................... 13, 68
Exchanged Consolidation Loan.................................................. 68
Exchanged Consolidation Loans................................................. 68
Exchanged Financed Student Loans.............................................. 11, 68
Exchanged Serial Loan......................................................... 68
Expense Account............................................................... 16
FDIA.......................................................................... 32
</TABLE>
94
<PAGE> 95
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FDIC.......................................................................... 32
Federal Assistance............................................................ 40
Federal Direct Student Loan Program........................................... 30
Federal Loan Program.......................................................... 12
Federal Loans................................................................. 12
Federal Tax Counsel........................................................... 87
Final Maturity Date........................................................... 59
Financed Student Loans........................................................ 1
FIRREA........................................................................ 32
Fitch......................................................................... 24
Fixed Rate Notes.............................................................. 6
Forbearance Period............................................................ 42
Forbearance Periods........................................................... 31
Grace Period.................................................................. 41
Grace Periods................................................................. 31
Guarantee Agreements.......................................................... 37
Guarantee Payments............................................................ 26
Guarantor..................................................................... 12
Guarantors.................................................................... 12
Higher Education Act.......................................................... 14
Holders....................................................................... 66
Holding Company............................................................... 35
Indenture..................................................................... 5
Indenture Trustee............................................................. 5
Indenture Trustee Fee......................................................... 15
Index Maturity................................................................ 59
Indirect Participants......................................................... 63
Initial Financed Student Loans................................................ 11
Initial Pool Balance.......................................................... 11
Insolvency Event.............................................................. 83
Interest Period............................................................... 6
Interest Subsidy Payments..................................................... 40
Investment Earnings........................................................... 69
IRS........................................................................... 87
Issuer Consolidation Payments................................................. 68
KHEAA......................................................................... 12
LIBOR Determination Date...................................................... 59
LIBOR Rate Notes.............................................................. 6
Margin........................................................................ 6, 58
Master Servicer............................................................... 5
Master Servicer Default....................................................... 81
Minimum Purchase Price........................................................ 23, 84
Monthly Advance Account....................................................... 23
Monthly Advances.............................................................. 23, 77
Moody's....................................................................... 24
Morgan........................................................................ 8, 79
Net Loan Rate................................................................. 7
1992 Amendments............................................................... 39
1993 Amendments............................................................... 39
</TABLE>
95
<PAGE> 96
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1993 Technical Amendments..................................................... 39
91-day Treasury Bills......................................................... 8
91-day Treasury Bill Rate..................................................... 32
Note Distribution Account..................................................... 16, 72
Noteholders................................................................... 6
Noteholders' Distribution Amount.............................................. 76
Noteholders' Interest Carryover............................................... 7, 58
Noteholders' Interest Carryover Shortfall..................................... 76
Noteholders' Interest Distribution Amount..................................... 76
Noteholders' Principal Carryover Shortfall.................................... 76
Noteholders' Principal Distribution Amount.................................... 76
Note Owner.................................................................... 64
Notes......................................................................... 1, 4
Notional Amount............................................................... 8
Obligors...................................................................... 14
OID........................................................................... 87
One-Month LIBOR............................................................... 7, 59
Original Amount............................................................... 4
Parity Percentage............................................................. 10
Parity Percentage Payment..................................................... 19, 74
Participants.................................................................. 57
PHEAA......................................................................... 5
PLUS Loans.................................................................... 12, 44
PNC Subsidiary................................................................ 81
Pool Balance.................................................................. 14
PP Loans...................................................................... 51
PP Program.................................................................... 51
Principal Distribution Amount................................................. 76
Principal Factor.............................................................. 20, 74
Program....................................................................... 37
Program Operating Expense Percentage.......................................... 7
PTCE.......................................................................... 90
Purchase Amount............................................................... 68
Quarterly Distribution Date................................................... 5
Rating Agency................................................................. 25
Rating Agencies............................................................... 25
Realized Loss................................................................. 77
Record Date................................................................... 6
Reference Bank................................................................ 59
Registration Statement........................................................ 3
Regulation.................................................................... 89
Related Documents............................................................. 62
Repayment Phase............................................................... 14
Reserve Account............................................................... 20
Reserve Account Deposit....................................................... 20
Reset Date.................................................................... 9
Scheduled Principal Balance Table............................................. 8
Securities Act................................................................ 3
Serial Loan................................................................... 31
</TABLE>
96
<PAGE> 97
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Series........................................................................ 60
Servicer...................................................................... 5
Servicers..................................................................... 5
Servicing Fee................................................................. 10, 15
SLS Loans..................................................................... 12, 43
SLS Program................................................................... 43
Special Allowance Payments.................................................... 40
Specified Reserve Account Balance............................................. 21
Stafford Loans................................................................ 40
Standard & Poor's............................................................. 24
Student Loans................................................................. 11
Subsequent Cut-off Date....................................................... 47
Swap Agreement................................................................ 8
Swap Agreements............................................................... 8
Swap Termination Payments..................................................... 19
T-Bill Rate................................................................... 8
Telerate Page 3750............................................................ 59
Terms and Conditions.......................................................... 65
Terms Supplement.............................................................. 5
Transaction Fees.............................................................. 15, 72
Transfer Agreement............................................................ 13
Transfer and Servicing Agreement.............................................. 5
Transfer and Servicing Agreements............................................. 67
Transferor.................................................................... 1, 5
Transferor Trusts............................................................. 27
Trust......................................................................... 1, 4
Trust Accounts................................................................ 69
Trust Agreement............................................................... 11
Trust Swap Payment............................................................ 76
UCC........................................................................... 84
Underlying Federal Loan....................................................... 45
Underwriters.................................................................. 91
Underwriting Agreement........................................................ 91
Unsubsidized Stafford Loans................................................... 43
U.K. Regulations.............................................................. 2
USAF.......................................................................... 12
USAG.......................................................................... 5, 36
Variable Swap Rate............................................................ 8
</TABLE>
97
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<PAGE> 99
SCHEDULE I
SCHEDULED PRINCIPAL BALANCE TABLE
<TABLE>
<CAPTION>
% OF ORIGINAL AMOUNT
DISTRIBUTION -------------------------------------------------------------------------------------
DATE CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5 CLASS A-6 CLASS A-7
- ----------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
7/25/1997 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
10/25/1997 100.00 100.00 100.00 100.00 100.00 100.00
1/25/1998 100.00 100.00 100.00 100.00 100.00 100.00
4/25/1998 100.00 100.00 100.00 100.00 100.00 100.00
7/25/1998 100.00 100.00 100.00 100.00 100.00 100.00
10/25/1998 73.95 100.00 100.00 100.00 100.00 100.00
1/25/1999 47.42 100.00 100.00 100.00 100.00 100.00
4/25/1999 23.89 100.00 100.00 100.00 100.00 100.00
7/25/1999 0.00 100.00 100.00 100.00 100.00 100.00
10/25/1999 0.00 72.90 100.00 100.00 100.00 100.00
1/25/2000 0.00 48.60 100.00 100.00 100.00 100.00
4/25/2000 0.00 24.30 100.00 100.00 100.00 100.00
7/25/2000 0.00 0.00 100.00 100.00 100.00 100.00
10/25/2000 0.00 0.00 75.00 100.00 100.00 100.00
1/25/2001 0.00 0.00 50.00 100.00 100.00 100.00
4/25/2001 0.00 0.00 25.00 100.00 100.00 100.00
7/25/2001 0.00 0.00 0.00 100.00 100.00 100.00
10/25/2001 0.00 0.00 0.00 73.40 100.00 100.00
1/25/2002 0.00 0.00 0.00 47.34 100.00 100.00
4/25/2002 0.00 0.00 0.00 22.87 100.00 100.00
7/25/2002 0.00 0.00 0.00 0.00 100.00 100.00
10/25/2002 0.00 0.00 0.00 0.00 72.41 100.00
1/25/2003 0.00 0.00 0.00 0.00 46.21 100.00
4/25/2003 0.00 0.00 0.00 0.00 22.07 100.00
7/25/2003 0.00 0.00 0.00 0.00 0.00 100.00
10/25/2003 0.00 0.00 0.00 0.00 0.00 87.60
1/25/2004 0.00 0.00 0.00 0.00 0.00 76.03
4/25/2004 0.00 0.00 0.00 0.00 0.00 65.29
7/25/2004 0.00 0.00 0.00 0.00 0.00 55.37
10/25/2004 0.00 0.00 0.00 0.00 0.00 46.28
1/25/2005 0.00 0.00 0.00 0.00 0.00 38.02
4/25/2005 0.00 0.00 0.00 0.00 0.00 30.17
7/25/2005 0.00 0.00 0.00 0.00 0.00 23.14
10/25/2005 0.00 0.00 0.00 0.00 0.00 16.53
1/25/2006 0.00 0.00 0.00 0.00 0.00 10.33
4/25/2006 0.00 0.00 0.00 0.00 0.00 4.96
7/25/2006 0.00 0.00 0.00 0.00 0.00 0.00
10/25/2006 0.00 0.00 0.00 0.00 0.00 0.00
1/25/2007 0.00 0.00 0.00 0.00 0.00 0.00
4/25/2007 0.00 0.00 0.00 0.00 0.00 0.00
7/25/2007 0.00 0.00 0.00 0.00 0.00 0.00
10/25/2007 0.00 0.00 0.00 0.00 0.00 0.00
</TABLE>
S-1
<PAGE> 100
[This Page Intentionally Left Blank]
<PAGE> 101
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered PNC Student
Loan Trust I Asset Backed Notes (the "Global Securities") to be issued in Series
from time to time (each, a " Series") will be available only in book-entry form.
Investors in the Global Securities may hold such Global Securities through any
of The Depository Trust Company ("DTC"), Cedel or Euroclear. The Global
Securities will be tradeable as home market instruments in both the European and
U.S. domestic markets. Initial settlement and all secondary trades will settle
in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Notes will be effected on a delivery-against-payment basis
through the respective Depositaries of Cedel and Euroclear (in such capacity)
and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to U.S. corporate debt obligations. Investor
securities custody accounts will be credited with their holdings against payment
in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to U.S. corporate
debt obligations in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and Cedel or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel Participant or
A-1
<PAGE> 102
Euroclear Participant at least one business day prior to settlement. Cedel or
Euroclear will instruct the respective Depositary, as the case may be, to
receive the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment date
to and excluding the settlement date. Payment will then be made by the
respective Depositary to the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the Cedel Participant's or Euroclear
Participant's account. The Global Securities credit will appear the next day
(European time) and the cash debit will be back-valued to, and the interest on
the Global Securities will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the Cedel or
Euroclear cash debit will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to pre-position
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective Depositary for the benefit of Cedel Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participant a cross-market transaction will
settle no differently than a trade between two DTC Participants.
Trading between Cedel or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system through the
respective Depositary to a DTC Participant. The seller will send instructions to
Cedel or Euroclear through a Cedel Participant or Euroclear Participant at least
one business day prior to settlement. In these cases, Cedel or Euroclear will
instruct the respective Depositary, as appropriate, to deliver Global Securities
to the DTC Participant's account against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment date
to and excluding the settlement date. The payment will then be reflected in the
account of the Cedel Participant or Euroclear Participant the following day, and
receipt of the cash proceeds in the Cedel Participant's or Euroclear
Participant's account would be back-valued to the value date (which would be the
preceding day, when settlement occurred in New York). Should the Cedel
Participant or Euroclear Participant have a line of credit with its respective
clearing system and elect to be in debit in anticipation of receipt of the sale
proceeds in its account, the back-valuation will extinguish any overdraft
charges incurred over that one-day period. If settlement is not completed on the
intended value (i.e., the trade fails), receipt of the cash proceeds in the
Cedel Participant's or Euroclear Participant's account would instead be valued
as of the actual settlement date. Finally, day traders that use Cedel or
Euroclear and that purchase Global Securities from DTC Participants for delivery
to Cedel Participants or Euroclear Participants should note that these trades
would automatically fail on the sale side unless affirmative action were taken.
At lease three techniques should be readily available to eliminate this
potential problem:
A-2
<PAGE> 103
(i) borrowing through Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(ii) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give the
Global Securities sufficient time to be reflected in their Cedel or
Euroclear account in order to settle the sale side of the trade; or
(iii) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC Participant is
at least one day prior to the value date for the sale to the Cedel
Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Notes that
are non-U.S. Persons can obtain a complete exemption from the withholding tax by
filing a signed Form W-8 (Certificate of Foreign Status). If the information
shown on Form W-8 changes, a new Form W-8 must be filed within 30 days of such
change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are Note Owners residing in a country that
has a tax treaty with the United States can obtain an exemption or reduced tax
rate (depending on the treaty terms) by filing Form 1001 (Ownership, Exemption
or Reduced Rate Note). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by the Note Owner or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Note Owner of a Global
Security or in the case of a Form 1001 or a Form 4224 filer, his agent, files by
submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof or (iii) an estate or trust
the income of which is includible in gross income for United States tax
purposes, regardless of its source. This summary does not deal with all aspects
of U.S. Federal income tax withholding that may be relevant to foreign holders
of the Global Securities. Investors are advised to consult their own tax
advisers for specific tax advice concerning their holding and disposing of the
Global Securities.
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<PAGE> 104
======================================================
NO DEALER, SALESMAN OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRANSFEROR OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE NOTES OFFERED HEREBY NOR AN OFFER OF
SUCH NOTES TO ANY PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER
WOULD BE UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY
THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information................. 3
Reports to Noteholders................ 3
Incorporation of Certain Documents by
Reference........................... 3
Summary of Terms...................... 4
Risk Factors.......................... 26
Formation of the Trust................ 34
Use of Proceeds....................... 35
The Transferor........................ 35
The Servicers......................... 35
The Student Loan Financing Business... 37
The Financed Student Loan Pool........ 47
Description of the Notes.............. 57
Description of the Transfer and
Servicing Agreements................ 67
Legal Aspects of the Financed Student
Loans............................... 84
Federal Tax Consequences.............. 87
State and Local Tax Consequences...... 89
ERISA Considerations.................. 89
Underwriting.......................... 91
Legal Matters......................... 92
Financial Information................. 92
Rating................................ 92
Index of Principal Terms.............. 93
Schedule I--Scheduled Principal
Balance Table....................... S-1
Annex I--Global Clearance, Settlement
and Tax Documentation Procedures.... A-1
</TABLE>
======================================================
$1,030,000,000
PNC STUDENT LOAN TRUST I
STUDENT LOAN
ASSET BACKED NOTES
SERIES 1997-2
$90,000,000
Senior LIBOR Rate Class A-1 Notes
$107,000,000
Senior Fixed Rate Class A-2 Notes
$107,000,000
Senior Fixed Rate Class A-3 Notes
$102,000,000
Senior Fixed Rate Class A-4 Notes
$94,000,000
Senior Fixed Rate Class A-5 Notes
$72,500,000
Senior Fixed Rate Class A-6 Notes
$121,000,000
Senior Fixed Rate Class A-7 Notes
$175,000,000
Senior LIBOR Rate Class A-8 Notes
$125,450,000
Senior LIBOR Rate Class A-9 Notes
$36,050,000
Subordinate LIBOR Rate Class B Notes
------------
PROSPECTUS
------------
SMITH BARNEY INC.
PNC CAPITAL MARKETS, INC.
JUNE 20, 1997
======================================================
