<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 12, 1996.
REGISTRATION NO. 333-4274
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3 TO
FORM S-3
(FORMERLY FORM S-1)
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
KEYCORP STUDENT LOAN TRUST 1996-A
(Issuer of the Notes and the Certificates)
------------------------
KEY BANK USA, NATIONAL ASSOCIATION
(Originator of the Trust described herein)
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
UNITED STATES 6021 34-1804148
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------------
KEYCENTER
127 PUBLIC SQUARE
CLEVELAND, OHIO 44114
(216) 689-3000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------------------
FORREST F. STANLEY
GENERAL COUNSEL AND SECRETARY
KEY BANK USA, NATIONAL ASSOCIATION
KEYCENTER
127 PUBLIC SQUARE
CLEVELAND, OHIO 44114
(216) 689-3000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
COPIES TO:
Robert J. Gilker, Esq.
Jones, Day, Reavis & Pogue
1900 Huntington Center
Columbus, Ohio 43215
Reed D. Auerbach, Esq.
Stroock & Stroock & Lavan
7 Hanover Square
New York, New York 10004
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
/ /_____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ________________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
THIS REGISTRATION STATEMENT CONTAINS (I) A PROSPECTUS RELATING TO A PUBLIC
OFFERING BY KEYCORP STUDENT LOAN TRUST 1996-A (THE "TRUST") OF $
AGGREGATE PRINCIPAL AMOUNT OF FLOATING RATE CLASS A-1 ASSET BACKED NOTES,
$ AGGREGATE PRINCIPAL AMOUNT OF FLOATING RATE CLASS A-2 ASSET BACKED
NOTES AND $ AGGREGATE PRINCIPAL AMOUNT OF FLOATING RATE ASSET BACKED
CERTIFICATES (COLLECTIVELY, THE "SECURITIES"); AND (II) CERTAIN PAGES OF A
SECOND PROSPECTUS TO BE USED IN CONNECTION WITH OFFERS AND SALES RELATING TO
MARKET-MAKING TRANSACTIONS IN THE SECURITIES BY AN AFFILIATE OF THE REGISTRANT.
THE PROSPECTUS RELATING TO THE SECURITIES FOLLOWS IMMEDIATELY AFTER THIS
EXPLANATORY NOTES. FOLLOWING SUCH PROSPECTUS ARE ALTERNATE PAGES OF THE
MARKET-MAKING PROSPECTUS RELATING TO THE SECURITIES. ALL OTHER PAGES OF THE
PUBLIC OFFERING PROSPECTUS FOR THE SECURITIES ARE ALSO TO BE USED FOR THE
MARKET-MAKING PROSPECTUS.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 12, 1996
KEYCORP STUDENT LOAN TRUST 1996-A
$ Floating Rate Class A-1 Asset Backed Notes
$ Floating Rate Class A-2 Asset Backed Notes
$ Floating Rate Asset Backed Certificates
------------------
KEY BANK USA, NATIONAL ASSOCIATION
Seller
------------------
The KeyCorp Student Loan Trust 1996-A (the "Trust") will issue $
aggregate principal amount of Floating Rate Class A-1 Asset Backed Notes (the
"Class A-1 Notes"), $ aggregate principal amount of Floating Rate
Class A-2 Asset Backed Notes (the "Class A-2 Notes" and, with the Class
A-1 Notes, the "Notes"), and $ aggregate principal amount of
Floating Rate Asset Backed Certificates (the "Certificates"; and
together with the Notes, the "Securities"). The assets of the Trust
will include a pool of law school, medical school, dental school,
graduate business school, and other graduate school student loans
purchased by The First National Bank of Chicago, as eligible
lender trustee on behalf of the Trust (the "Eligible Lender
Trustee"), from Key Bank USA, National Association (the
"Seller") (such loans, together with any Additional Student
Loans purchased from the Seller from time to time by the
Eligible Lender Trustee on behalf of the Trust, 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 Negative
Carry Account and the Pre-Funding Account). The Notes
will be collateralized by the assets of the Trust.
The interests of the Certificateholders in the
assets of the Trust will be subordinated to
payments of interest and principal due on the
Notes to the extent described herein. Funds on
deposit in the Pre-Funding Account will be
used from time to time during the Funding
Period to purchase Additional Student Loans
and to make certain other additional
fundings with respect to the Financed
Student Loans.
------------------
The Securities will be available for purchase in denominations of $1,000 and
integral multiples thereof in book-entry form only. Interest on and principal
of the Securities will be payable quarterly on or about the twenty-seventh
day of each November, February, May and August, commencing November 27,
1996 (each, a "Distribution Date"); provided, that no distributions in
respect of principal of the Class A-2 Notes will be payable until the
Class A-1 Notes are paid in full, and no distribution in respect of
principal of the Certificates will be payable until the Class A-2
Notes are paid in full. Interest will accrue, subject to certain
limitations described herein, for each quarterly interest period
on each class of Securities at a per annum rate equal to the
T-Bill Rate (determined as described herein) plus the Margin.
The Margin will be % for the Class A-1 Notes, % for the
Class A-2 Notes and % for the Certificates. The final
maturity date for the Class A-1 Notes will be the
Distribution Date, the final maturity date
for the Class A-2 Notes will be the
Distribution Date and the final maturity date for the
Certificates will be the Distribution
Date.
(Continued on following page)
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS"
BEGINNING ON PAGE 19.
------------------
THE CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN, AND THE NOTES REPRESENT
OBLIGATIONS OF, THE TRUST ONLY AND DO NOT REPRESENT INTERESTS IN OR
OBLIGATIONS OF THE SELLER, THE SERVICER OR ANY AFFILIATE THEREOF.
NEITHER THE CERTIFICATES NOR THE NOTES ARE GUARANTEED OR INSURED
BY ANY GOVERNMENTAL AGENCY.
------------------
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>
UNDERWRITING
PRICE TO THE DISCOUNTS PROCEEDS TO THE
PUBLIC AND COMMISSIONS(1) SELLER(2)
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Per Class A-1 Note...................................... % % %
Per Class A-2 Note...................................... % % %
Per Certificate......................................... % % %
Total...................................................
<FN>
(1) The underwriting discount only applies to aggregate principal amount of the
Notes and aggregate principal amount of the Certificates that are offered by
the Underwriters. See "Underwriting."
(2) Before deducting expenses, estimated to be $ .
------------------
</TABLE>
The Notes and the Certificates are offered by the several Underwriters
when, as and if issued by the Trust, delivered to and accepted by the
Underwriters and subject to their right to reject orders in whole or in part. It
is expected that delivery of the Notes and the Certificates in book-entry form
will be made through the facilities of The Depository Trust Company on the Same
Day Funds Settlement System and, in the case of the Notes, also Cedel Bank,
societe anonyme and the Euroclear System on or about , 1996.
CS FIRST BOSTON KEY CAPITAL MARKETS, INC.
The date of this Prospectus is , 1996.
<PAGE> 4
(Continued from preceding page)
However, payment in full of the Notes and the Certificates could occur earlier
than such final maturity dates as described herein. In addition, the Notes and
the Certificates will be repaid (i) on any Distribution Date on which the
Seller exercises its option to purchase the Financed Student Loans,
exercisable when the aggregate principal balance of the Financed Student
Loans is reduced to 5% or less of the Initial Pool Balance and (ii) upon
the sale of any Financed Student Loans remaining in the Trust as of the
end of the month preceding the Distribution Date
pursuant to the auction procedures described herein.
On the date of issuance of the Securities, the aggregate principal balance of
the Initial Financed Student Loans as of September 1, 1996 will be
approximately $ and the aggregate amount on deposit in the Pre-Funding
Account will be $ . Approximately $ (the "Subsequent Pool Pre-Funded
Amount") of the amount on deposit in the Pre-Funding Account will be set
aside to purchase on or prior to November 22, 1996 (the "Special
Determination Date") Student Loans from a pool of Student Loans
currently owned by the Seller (the "Subsequent Pool") having as of
September 1, 1996 the characteristics described herein. If as of the
Special Determination Date (i) the Subsequent Pool Pre-Funded Amount
has not been reduced to zero and (ii) the total amount remaining in
the Pre-Funding Account as of such date exceeds $ , then the
remaining Subsequent Pool Pre-Funded Amount will be distributed
on the first Distribution Date to Noteholders and
Certificateholders as a prepayment of principal on a pro rata
basis as described herein. The Seller intends to sell all or
substantially all of the Student Loans in the Subsequent Pool
to the Trust on or prior to the Special Determination Date
thereby avoiding any such prepayment of the Securities.
The Pennsylvania Higher Education Assistance Agency, an agency of the
Commonwealth of Pennsylvania ("PHEAA"), will service all the Financed Student
Loans. The Financed Student Loans will include loans guaranteed by PHEAA
or American Student Assistance Guarantor, a non-profit corporation,
and reinsured by the United States Department of Education (the
"Department") and loans privately guaranteed by The Education
Resources Institute, Inc., a non-profit corporation, and not
reinsured by the Department.
Neither the Notes nor the Certificates will be listed on any national securities
exchange. CS First Boston Corporation intends to, and Key Capital Markets,
Inc. may, make a secondary market in the Notes and the Certificates but
neither has any obligation to do so. There can be no assurance that a
secondary market for the Notes or the Certificates will develop or,
if it does develop, that it will continue.
------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AND THE
CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
The Seller, as originator of the Trust, 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
Securities 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, New York, New York
10048; and 500 West Madison Street, 14th Floor, Chicago, Illinois 60661, and
copies of all or any part thereof may be obtained from the Public Reference
Branch of the Commission upon the payment of certain fees prescribed by the
Commission. In addition, the Registration Statement may be accessed
electronically at the Commission's site on the World Wide Web located at
http://www.sec.gov.
REPORTS TO SECURITYHOLDERS
Unless and until Definitive Notes or Definitive Certificates are issued,
quarterly and annual unaudited reports containing information concerning the
Financed Student Loans will be prepared by 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 and the Certificates but will
not be sent to any beneficial holder of the Securities. Such reports will not
constitute financial statements prepared in accordance with generally accepted
accounting principles. See "Description of the Securities--Book-Entry
Registration" and "-- Reports to Securityholders". The Trust will file with the
Commission such periodic reports as are required
2
<PAGE> 5
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 and Certificates shall be deemed to be incorporated by
reference into this Prospectus and to be 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 Key Bank USA, National Association, Education Resources,
5000 Tiedeman Road, Brooklyn, Ohio 44144, Attention: Trust Administrator,
KeyCorp Student Loan Trust 1996-A. Telephone requests for such copies should be
directed to the Administrator at (800) 523-7248.
3
<PAGE> 6
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus. Certain capitalized
terms used in this Prospectus are defined elsewhere herein on the pages
indicated in the "Index of Principal Terms".
Issuer..................... KeyCorp Student Loan Trust 1996-A (the "Trust").
Securities Offered......... Floating Rate Class A-1 Asset Backed Notes (the
"Class A-1 Notes") in an aggregate principal
amount of $ , Floating Rate Class A-2 Asset
Backed Notes (the "Class A-2 Notes" and, with the
Class A-1 Notes, the "Notes") in an aggregate
principal amount of $ and Floating Rate Asset
Backed Certificates (the "Certificates" and,
together with the Notes, the "Securities") in an
aggregate principal amount of $ . The
Securities will be available for purchase in
denominations of $1,000 and integral multiples
thereof in book-entry form only. Persons
acquiring beneficial ownership interests in the
Notes will hold their interests in the Notes
through The Depository Trust Company ("DTC") in
the United States or Cedel Bank, societe anonyme
("Cedel") or the Euroclear System ("Euroclear")
in Europe and persons acquiring beneficial
ownership interests in the Certificates will hold
their interests in the Certificates through DTC.
See "Description of the Securities -- Book-Entry
Registration". Securityholders will not be
entitled to receive a Definitive Security, except
in the event that Definitive Securities are
issued in the limited circumstances described
herein. See "Description of the Securities --
Definitive Securities".
Seller..................... Key Bank USA, National Association, a national
banking association (the "Seller").
Servicer................... Pennsylvania Higher Education Assistance Agency, an
agency of the Commonwealth of Pennsylvania (the
"Servicer" or "PHEAA").
Eligible Lender Trustee.... The First National Bank of Chicago, as trustee (the
"Eligible Lender Trustee") under the Trust
Agreement dated as of August , 1996 (as
amended and supplemented from time to time, the
"Trust Agreement") between the Seller and the
Eligible Lender Trustee pursuant to which the
Eligible Lender Trustee acts as holder of legal
title to the Financed Student Loans on behalf of
the Trust. See "Formation of the
Trust -- Eligible Lender Trustee".
Indenture Trustee.......... Bankers Trust Company (the "Indenture Trustee"), as
trustee under the Indenture to be dated as of
September 1, 1996 (as amended and supplemented
from time to time, the "Indenture") between the
Trust and the Indenture Trustee.
Administrator.............. Key Bank USA, National Association, as
administrator (the "Administrator") on behalf of
the Trust pursuant to an Administration Agreement
to be entered into (as amended and supplemented
from time to time, the "Administration
Agreement"), among the Administrator, the Trust
and the Indenture Trustee.
Transaction Overview....... The Trust will issue the Notes pursuant to the
Indenture. The Notes will be secured by the
assets of the Trust which will include (i) a pool
of student loans purchased by the Eligible Lender
Trustee on behalf of the Trust from the Seller on
or prior to the date of issuance of the
Securities (the "Closing Date") together with
additional student loans purchased by the
Eligible Lender Trustee on behalf of the Trust
from
4
<PAGE> 7
the Seller from funds deposited in a Pre-Funding
Account (collectively, the "Financed Student
Loans"), (ii) collections and other payments with
respect to the Financed Student Loans and (iii)
monies on deposit in certain trust accounts to be
established (including the Collection Account,
the Reserve Account, the Negative Carry Account
and the Pre-Funding Account). See "-- Assets of
Trust" below. Pursuant to the Trust Agreement,
the Trust will issue the Certificates. The
interests of the Certificateholders in the assets
of the Trust will be subordinated to payments of
interest and principal due on the Notes to the
extent described under "Description of the
Transfer and Servicing Agreements -- Credit
Enhancement -- Subordination of the
Certificates." Set forth below is a summary of
the material payment terms of the Securities.
A. Distribution Dates...... Interest on and principal of each class of
Securities will be payable quarterly on or about
the twenty-seventh day of each November,
February, May and August, commencing November
27, 1996 (each, a "Distribution Date"); provided,
however, that except as described below under
" -- Mandatory Redemption of Notes and
Certificates," no distributions in respect of
principal of the Class A-2 Notes will be made
until the Class A-1 Notes have been paid in full,
and no distributions in respect of principal of
the Certificates will be made until the Class A-2
Notes have been paid in full.
B. Record Date............. Payments in respect of the Securities will be
payable to holders of record as of the business
day preceding each Distribution Date.
C. Interest................ Interest will accrue with respect to each Interest
Period on each class of Securities at a per annum
rate equal to the lesser of (i) the daily
weighted average of the T-Bill Rates within such
Interest Period (determined as described under
"Description of the Securities -- Determination
of the T-Bill Rates") plus the Margin and (ii)
the Student Loan Rate (determined as described
under "Description of the Securities -- The
Notes"). The "Margin" will be % for the
Class A-1 Notes, % for the Class A-2 Notes
and % for the Certificates. Interest will be
calculated on the basis of the actual number of
days elapsed in each Interest Period divided by
365 (or 366 in the case of a leap year).
"Interest Period" means the period from the
Closing Date, or from the most recent
Distribution Date on which interest has been
paid, to but excluding the following Distribution
Date.
The T-Bill Rate will generally be adjusted weekly
on the calendar day following each auction of
direct obligations of the United States with a
maturity of 13 weeks ("91-day Treasury Bills") to
equal the weighted average per annum discount
rate (expressed on a bond equivalent basis and
applied on a daily basis) of the 91-day Treasury
Bills sold at such auction. Notwithstanding the
foregoing, (i) the T-Bill Rate in effect from the
first day of the Interest Period, including the
initial Interest Period, through the day of the
first 91-day Treasury Bill auction on or after
the first day of each Interest Period will be
based on the results of the most recent 91-day
Treasury Bill auction prior to such day and (ii)
the T-Bill Rate will be subject to a lock-in
period of six business days preceding each
Distribution Date, during which the T-Bill Rate
will remain in effect from the first day of such
period until
5
<PAGE> 8
the end of the Interest Period related to such
Distribution Date. See "Description of the
Securities -- Determination of the T-Bill Rates."
To the extent that the Student Loan Rate for any
such Interest Period exceeds the rate for such
class of Securities calculated on the basis of
the daily weighted average of the T-Bill Rates
within such Interest Period as described above
plus the applicable Margin, the amount of such
excess (together with the unpaid portion of any
such excess from prior Distribution Dates and
interest accrued thereon at the daily weighted
average of the T-Bill Rates within such Interest
Period as described above plus the applicable
Margin for such class of Securities) will be paid
on such Distribution Date or any subsequent
Distribution Date on a subordinated basis to the
extent funds are allocated and available therefor
after making all required prior allocations and
distributions on such Distribution Dates, as
described under "Description of the Transfer and
Servicing Agreements -- Distributions." The
payment of such amounts due to Certificateholders
on any Distribution Date (such amount, the
"Certificateholders' Interest Index Carryover")
is further subordinated to the payment of such
amounts due to the Noteholders on any
Distribution Date (such amount, the "Noteholders'
Interest Index Carryover"). To the extent funds
are available therefor, the Certificateholders'
Interest Index Carryover may be paid prior to the
time that the Notes are paid in full. The ratings
on the Securities do not address the likelihood
of payment of any Noteholders' Interest Index
Carryover or Certificateholders' Interest Index
Carryover.
The "Student Loan Rate" for any Interest Period
is defined under "Description of the
Securities -- The Notes -- Distributions of
Interest." The Student Loan Rate for any Interest
Period is a rate calculated generally on the
basis of collections on the Financed Student
Loans available or expected to be available to
pay interest on the Securities after payment of
certain expenses of the Trust for such Interest
Period.
D. Principal............... Principal of the Notes will be payable on each
Distribution Date, first to the principal balance
of the Class A-1 Notes until such principal
balance is reduced to zero and then to the
principal balance of the Class A-2 Notes until
such principal balance is reduced to zero.
Principal of the Certificates will be payable on
each Distribution Date on and after the Class A-2
Notes have been paid in full. The amount of
principal payable on any Distribution Date
generally will be equal to the amount of
principal paid, or in certain cases due to be
paid, with respect to the Financed Student Loans
(including any realized losses thereon to the
extent covered by excess interest collections and
amounts on deposit in the Reserve Account). See
"Description of the Transfer and Servicing
Agreements -- Distributions." In addition, under
certain limited circumstances, accelerated
principal payments may be made in respect of the
Notes (or once the Notes are paid in full, in
respect of the Certificates) from certain amounts
available therefor in the Reserve and Pre-Funding
Accounts as described under "Description of the
Transfer and Servicing Agreements -- Additional
Fundings" and "-- Credit Enhancement -- Reserve
Account."
E. Maturity Dates.......... The outstanding principal amount of the Class A-1
Notes and Class A-2 Notes and the Certificates is
payable in full on the Class A-1 Final
6
<PAGE> 9
Maturity Date. The Class A-2 Final Maturity Date
and Certificate Final Maturity Date,
respectively. The "Class A-1 Final Maturity Date"
is the Distribution Date. The
"Class A-2 Final Maturity Date" is the
Distribution Date, and the
"Certificate Final Maturity Date" is the
Distribution Date. Although the
maturity of many of the Financed Student Loans
will extend well beyond such maturity dates, the
actual maturity of one or both classes of Notes
and/or the Certificates could occur sooner than
such dates as a result of a variety of factors,
including as a result of prepayments on the
Financed Student Loans, accelerated payments of
principal in respect of the Securities from
amounts on deposit in the Reserve Account as
described under "-- Assets of the
Trust -- Reserve Account," the exercise by the
Seller 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 (as defined under "-- Assets of the
Trust -- Collection Account -- Distributions from
the Collection Account"), or the sale of the
Financed Student Loans pursuant to an auction of
the Financed Student Loans following the
Distribution Date as described
below under "-- Auction of Trust Assets." See
"The Financed Student Loan Pool -- Maturity and
Prepayment Assumptions."
F. Mandatory Redemption of
Notes and
Certificates............ On the Closing Date approximately $ (the
"Subsequent Pool Pre-Funded Amount") will be
allocated to the Subsequent Pool Pre-Funding
Subaccount of the Pre-Funding Account and will be
available solely to purchase education loans to
law school, medical school, dental school,
graduate business school and other graduate
school students ("Student Loans") from a pool of
Student Loans currently owned by the Seller (the
"Subsequent Pool") having as of September 1, 1996
(the "Statistical Cutoff Date") the
characteristics described under "The Financed
Student Loan Pool".
If as of November 22, 1996 (the "Special
Determination Date"), the Subsequent Pool
Pre-Funded Amount has not been reduced to zero,
then the remaining Subsequent Pool Pre-Funded
Amount will be distributed on the first
Distribution Date to redeem each class of Notes
and prepay the Certificates on a pro rata basis,
based on the initial principal amount of each
class of Notes and the principal balance of the
Certificates. See "Description of the Transfer
and Servicing Agreements -- Additional Fundings."
G. Mandatory Redemption of
Notes................... A partial redemption of the Class A-1 Notes and, if
the Class A-1 Notes are paid in full, the Class
A-2 Notes, will occur on the Distribution Date on
or immediately following the last day of the
Funding Period to the extent of the amount
remaining on deposit in the Pre-Funding Account
on such Distribution Date.
The "Funding Period" means the period from the
Closing Date until the first to occur of (i) an
Event of Default occurring under the Indenture, a
Servicer Default occurring under the Sale and
Servicing Agreement or an Administrator Default
occurring under the Sale and Servicing Agreement
or the Administration Agreement, (ii) certain
events of insolvency with respect to the Seller
or (iii) the last day of the Collection Period
preceding the Distribution Date.
7
<PAGE> 10
Risk Factors............... Prospective investors should consider the risks
associated with any investment in the Securities.
See "Risk Factors."
The Trust.................. The Trust was established under the laws of New
York by the Trust Agreement. The activities of
the Trust and the Eligible Lender Trustee will be
limited by the terms of the Trust Agreement to
acquiring, owning and managing the Financed
Student Loans and the other assets of the Trust
as described herein, issuing the Securities,
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 Student
Loans and will include rights to receive payments
made with respect to such Financed Student Loans
and the proceeds thereof. On or prior to the
Closing Date, the Seller will sell Student Loans
(such Student Loans, the "Initial Financed
Student Loans") having an aggregate principal
balance (calculated as described herein) of
approximately $ as of the
Statistical Cutoff Date, to the Eligible Lender
Trustee on behalf of the Trust pursuant to a Sale
and Servicing Agreement to be dated as September
1, 1996 (as amended and supplemented from time to
time, the "Sale and Servicing Agreement"), among
the Seller, the Servicer, the Administrator, the
Trust and the Eligible Lender Trustee. On or
prior to the Special Determination Date, the
Seller intends to sell all of the additional
Student Loans constituting the Subsequent Pool,
and the Trust, subject to certain limitations
described herein, will be obligated to purchase
solely from the Subsequent Pool Pre-Funded Amount
such Student Loans, having an aggregate principal
balance (calculated as described herein) of
$ as of the Statistical Cutoff Date.
Student Loans sold to the Trust from the
Subsequent Pool are referred to herein as the
"Subsequent Financed Student Loans."
Although the Seller intends to sell all of the
Student Loans constituting the Subsequent Pool to
the Trust on or prior to the Special
Determination Date, any Student Loan in respect
of which a claim is made on a Guarantor following
the Statistical Cutoff Date and prior to the date
such Student Loan is to be transferred to the
Trust will not be eligible for transfer to the
Trust. Nevertheless, the Seller expects to reduce
the amount on deposit in the Pre-Funding Account
to $ or less by the Special Determination
Date primarily through the sale to the Trust of
the Student Loans from the Subsequent Pool. In
addition, during the Funding Period, the Seller
may sell certain other additional Student Loans
not constituting part of the Subsequent Pool (the
"Other Student Loans") consisting of Student
Loans to borrowers with Student Loans then owned
by the Trust. The Trust will purchase, subject to
certain limitations described herein, such Other
Student Loans from funds on deposit in the
Pre-Funding Account and allocated to the Other
Additional Funding Subaccount. On the Closing
Date, the amount on deposit in the Other
Additional Funding Subaccount will be
approximately $ (the "Other Additional Pre-
Funded Amount"). The Subsequent Financed Student
Loans and the Other Student Loans are
collectively referred to herein as the
"Additional Student Loans."
8
<PAGE> 11
The Financed Student Loans were or will be
originated by the Seller or an affiliate of the
Seller in connection with The Access Group(SM)
Loan Programs and include (i) Student Loans
("Financed Federal Loans") that are guaranteed as
to the payment of principal and interest by PHEAA
or the Massachusetts Higher Education Assistance
Corporation now doing business as American
Student Assistance Guarantor, a Massachusetts
non-profit corporation ("ASA" and, together with
PHEAA in its capacity as a guarantor, the
"Federal Guarantors"), and are reinsured by the
United States Department of Education (the
"Department") and (ii) Student Loans ("Financed
Private Loans") that are guaranteed as to the
payment of principal and interest by The
Education Resources Institute, Inc., a
Massachusetts non-profit corporation ("TERI" and,
together with the Federal Guarantors, the
"Guarantors"), and are not reinsured by the
Department or any other governmental entity. The
Initial Financed Student Loans and the Student
Loans in the Subsequent Pool have been, and the
other Additional Student Loans will be, selected
from the Student Loans owned by the Seller based
on the criteria specified in the Sale and
Servicing Agreement and described herein. The
Financed Federal Loans include certain Additional
Student Loans to be made under the Federal
Consolidation Loan Programs. The Financed Private
Loans may also include certain Additional Student
Loans to be made under the Private Consolidation
Loan Programs. Financed Federal Loans made on or
after October 1, 1993 are 98% guaranteed by the
applicable Federal Guarantor, and reinsured
against default by the Department up to a maximum
of 98% of Guarantee Payments. All references
herein to the guarantee and reinsurance coverage
with respect to the Financed Student Loans should
be understood to mean such 98% guarantee and 98%
maximum reinsurance coverage, respectively, with
respect to Financed Federal Loans made on or
after October 1, 1993.
Certain incentive programs currently or hereafter
made available by the Seller to borrowers under
The Access Group(SM) Loan Program may also be
made available by the Servicer to borrowers with
Financed Student Loans. Any such incentive
program that effectively reduces borrower
payments on Financed Student Loans and is not
required by the Higher Education Act will be
applicable to the Financed Student Loans only if
and to the extent that the Servicer receives
payment from the Seller in an amount sufficient
to offset such effective yield reductions. See
"The Student Loan Financing Business -- The
Access Group(SM) Loan Programs -- Incentive
Programs".
As of the Statistical Cutoff Date, the weighted
average interest rate per annum with respect to
the Initial Financed Student Loans (the "Initial
Financed Student Loans") was approximately %
(based on the applicable interest rates as of the
Statistical Cutoff Date), the weighted average
remaining term to maturity (exclusive of any
future deferral or forbearance periods and
assuming expected graduation dates and typical
grace periods) of the Initial Financed Student
Loans was approximately months and the
weighted average original term to maturity
(exclusive of any future deferral or forbearance
periods) of the Initial Financed Student Loans
was approximately months. As of the
Statistical Cutoff Date, approximately
9
<PAGE> 12
% of the outstanding principal balance of the
Initial Financed Student Loans consisted of
Financed Federal Loans (of which approximately
% are guaranteed by PHEAA and approximately
% are guaranteed by ASA) and approximately
% consisted of Financed Private Loans (all
of which are guaranteed by TERI).
As of the Statistical Cutoff Date, the weighted
average interest rate per annum with respect to
the Student Loans in the Subsequent Pool was
approximately % (based on the applicable
interest rates as of the Statistical Cutoff
Date), the weighted average remaining term to
maturity (exclusive of any future deferral or
forbearance periods and assuming expected
graduation dates and typical grace periods) of
such Student Loans was approximately months
and their weighted average original term to
maturity (exclusive of any future deferral or
forbearance periods) was approximately
months. As of the Statistical Cutoff Date,
approximately % of the outstanding principal
balance of the Student Loans in the Subsequent
Pool consisted of Financed Federal Loans (of
which approximately % are guaranteed by
PHEAA and approximately % are guaranteed by
ASA) and approximately % consisted of
Financed Private Loans (all of which are
guaranteed by TERI).
The statistical information presented in this
Prospectus with respect to the Subsequent Pool is
based on the Student Loans in the Subsequent Pool
as of the Statistical Cutoff Date. While the
statistical distribution of the final
characteristics of the Student Loans in the
Subsequent Pool when transferred to the Trust
will vary somewhat from the statistical
information presented in this Prospectus, the
Seller does not anticipate that the
characteristics of such Student Loans will vary
materially from such statistical information as
of the Statistical Cutoff Date.
"Collection Period" means each period of three
calender months from and including the date next
following the end of the preceding Collection
Period (or, with respect to the first Collection
Period, the period beginning on the Statistical
Cutoff Date and ending on October 31, 1996).
"Pool Balance" is defined under "Description of
the Transfer and Servicing
Agreements--Distributions". The Pool Balance at
any time generally 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 upon commencement of
repayment and for which a corresponding
Additional Funding will be made on the related
Transfer Date), after giving effect to all
payments received by the Trust during such
Collection Period allocable to principal and all
losses realized on Financed Student Loans
liquidated during such Collection Period.
B. Pre-Funding Account.... During the Funding Period, an account will be
maintained in the name of the Indenture Trustee
(the "Pre-Funding Account"). On the Closing Date,
approximately $ (the "Pre-Funded Amount")
of the net proceeds from the sale of the
Securities will be deposited in the Pre-Funding
Account. During the Funding Period the Pre-Funded
Amount will be reduced from time to time by the
amount thereof used
10
<PAGE> 13
to make Additional Fundings in accordance with
the Sale and Servicing Agreement. Additional
Fundings will generally consist of (i) payments
to purchase from the Seller, under certain
circumstances, Student Loans from the Subsequent
Pool on or prior to the Special Determination
Date, (ii) payments to cover collections of
interest on certain of the Financed Student Loans
to the extent such interest is not paid currently
but is capitalized and added to the principal
balance of such Financed Student Loans and (iii)
payments to purchase from the Seller under
certain circumstances Other Student Loans.
On the Closing Date, for administrative
convenience, a portion of the Pre-Funded Amount
in an amount equal to the Subsequent Pool Pre-
Funded Amount will be allocated to an
administrative subaccount of the Pre-Funding
Account (the "Subsequent Pool Pre-Funding
Subaccount") and a portion of the Pre-Funded
Amount equal to the Other Additional Pre-Funded
Amount will be allocated to an administrative
subaccount of the Pre-Funding Account (the "Other
Additional Funding Subaccount"). The Subsequent
Pool Pre-Funded Amount may only be used by the
Trust on or prior to the Special Determination
Date to purchase from the Seller Student Loans
constituting all or part of the Subsequent Pool.
The Subsequent Pool Pre-Funded Amount will be
reduced on the date Student Loans from the
Subsequent Pool are transferred to the Trust by
the aggregate amount of the Purchase Price of
each such Student Loan. The "Purchase Price" of
any Financed Student Loan will be (i) in the case
of any Initial Financed Student Loan or any
Student Loan in the Subsequent Pool, an amount
equal to % of the aggregate principal balance
of such Initial Financed Student Loan or Student
Loan in the Subsequent Pool as of the Cutoff Date
or Subsequent Cutoff Date, respectively, and (ii)
in the case of any Other Student Loan, 100% of
the aggregate principal balance thereof as of its
Subsequent Cutoff Date. The Other Additional
Pre-Funded Amount may be used to make Additional
Fundings other than the purchase of Student Loans
from the Subsequent Pool.
To the extent amounts are on deposit in the
Subsequent Pool Pre-Funding Subaccount and the
Other Additional Fund Subaccount during the
Funding Period, they will be invested in Eligible
Investments. "Eligible Investments" are generally
limited to short term U.S. government backed
securities, certain highly rated commercial paper
and money market funds and other investments
acceptable to the Rating Agencies as being
consistent with the rating of the Notes.
Although the Seller intends to sell all of the
Student Loans constituting the Subsequent Pool no
later than the Special Determination Date, if on
or prior to such date the Subsequent Pool
Pre-Funded Amount has not been reduced to zero,
then the remaining Subsequent Pool Pre-Funded
Amount will be distributed on the first
Distribution Date to redeem each class of Notes
and prepay the Certificates on a pro rata basis,
based on the initial principal amount of each
class of Notes and the principal balance of the
Certificates. In addition, the Seller expects
that the amount of Additional Fundings will
approximate 100% of the Pre-Funded Amount by the
last day of the Collection Period preceding the
Distribution Date. Any
Pre-Funded
11
<PAGE> 14
Amount remaining at the end of the Funding Period
will be distributed as a payment of principal to
holders of Class A-1 Notes, until they are paid
in full, and then to holders of Class A-2 Notes.
The Pre-Funded Amount at any time will equal the
sum of the then current Subsequent Pool
Pre-Funded Amount and Other Additional Pre-Funded
Amount. See "Description of the Transfer and
Servicing Agreements -- Additional Fundings".
C. Collection Account..... The Administrator will establish in the name of the
Indenture Trustee one or more accounts (the
"Collection Account") into which all collections
in respect of the Financed Student Loans will be
required to be deposited.
1. Deposits into Collection Account. Pursuant
to the Sale and Servicing Agreement, an account
in the name of the Indenture Trustee (the
"Collection Account") will be established and
maintained by the Administrator and will be an
asset of the Trust. Except under certain
conditions described herein, the Servicer will be
required to remit all collections received with
respect to the Financed Student Loans within two
business days of receipt thereof to the
Collection Account. Except under certain
conditions described herein, the Eligible Lender
Trustee will be required to remit Interest
Subsidy Payments and Special Allowance Payments
(each as defined under "The Student Loan
Financing Business -- Federal Loans Under the
Program") it receives with respect to the
Financed Federal Loans within two business days
of receipt thereof to the Collection Account. If,
however, such conditions are satisfied as
described herein, such collections received by
the Servicer and the Eligible Lender Trustee will
be remitted to the Administrator, who will not be
required to deposit such amounts into the
Collection Account generally until on or before
the business day preceding each Distribution
Date. See "Description of the Transfer and
Servicing Agreements -- Payments on Financed
Student Loans".
2. Distributions from the Collection
Account. Pursuant to the Sale and Servicing
Agreement, the Administrator will instruct the
Indenture Trustee to withdraw funds on deposit in
the Collection Account and to apply such funds on
or about the twenty-seventh day of each month
(the "Monthly Servicing Payment Date") to the
payment of the Servicing Fee (as defined under
"-- Transfer and Servicing Agreements" below) to
the Servicer, and on each Distribution Date to
the following (in the priority indicated): (i)
the Servicing Fee and all overdue Servicing Fees
to the Servicer; (ii) the quarterly fee payable
to the Administrator and all overdue
administration fees to the Administrator; (iii)
interest due to the Noteholders and all overdue
interest (other than the Noteholders' Interest
Index Carryover) as described above under "--
Transaction Overview -- Interest"; (iv) principal
payable to the Noteholders as described above
under "-- Transaction Overview -- Principal"; (v)
interest due to the Certificateholders and all
overdue interest (other than the
Certificateholders' Interest Index Carryover) as
described above under "-- Transaction Overview --
Interest"; (vi) on each Distribution Date on and
after which the Notes are paid in full, principal
distributable to the Certificateholders as
described above under "-- Transaction Overview
12
<PAGE> 15
-- Principal"; to the Certificateholders; (vii)
the amount, if any, necessary to be deposited in
the Reserve Account to reinstate the balance
thereof to the Specified Reserve Account Balance;
(viii) if the Overcollateralization Amount is
greater than the Specified Overcollateralization
Amount, the aggregate unpaid amount of the Excess
Servicing Fee (as defined under "-- Transfer and
Servicing Agreements" below), if any, to the
Servicer; (ix) if the Overcollateralization
Amount is greater than the Specified
Overcollateralization Amount, the aggregate
unpaid amount of Noteholders' Interest Index
Carryover, if any, to the Noteholders; (x) if the
Overcollateralization Amount is greater than the
Specified Overcollateralization Amount, the
aggregate unpaid amount of Certificateholders'
Interest Index Carryover, if any, to the
Certificateholders; and (xi) any remaining
amounts after application of clauses (i) through
(x) above to the Reserve Account. See
"Description of Transfer and Servicing Agreements
-- Distributions -- Distributions from Collection
Account." On the Closing Date, the aggregate
initial principal amount of the Notes and the
principal balance of the Certificates is %
of the sum of the aggregate principal balance of
the Initial Financed Student Loans as of the
Statistical Cutoff Date and the Pre-Funded Amount
as of the Closing Date. Noteholders and
Certificateholders will have to rely on
accelerated payments of principal, if any, from
amounts on deposit in the Reserve Account and
available therefor as described below to create
an Overcollateralization Amount and to cause it
to exceed the Specified Overcollateralization
Amount before any amounts will be available for
the payment of any Noteholders' Interest Index
Carryover or Certificateholders' Interest Index
Carryover.
The "Specified Reserve Account Balance" with
respect to any Distribution Date generally will
be equal to the greater of (i) % of the Pool
Balance as of the close of business on the last
day of the related Collection Period and (ii)
% of the Initial Pool Balance; provided,
however, that such balance will be subject to
adjustment in certain circumstances described
herein and in no event will such balance exceed
the sum of the outstanding principal amount of
the Notes and the outstanding principal balance
of the Certificates. The "Initial Pool Balance"
will equal (i) $ plus (ii) the aggregate
increase in the Pool Balance during the Funding
Period occurring as a result of the purchase of
Student Loans in the Subsequent Pool by the
Trust. The "Specified Overcollateralization
Amount" with respect to any Distribution Date
will be equal to the excess of the Specified
Credit Enhancement Amount over the Specified
Reserve Account Balance. The "Specified Credit
Enhancement Amount" with respect to any
Distribution Date generally will be equal to the
greater of (i) % of the Pool Balance as of the
close of business on the last day of the related
Collection Period and (ii) % of the Initial Pool
Balance. "Overcollateralization Amount" for any
Distribution Date means the excess of (i) the sum
of the Pool Balance and the Pre-Funded Amount
over (ii) the outstanding principal amount of the
Notes and the outstanding principal balance of
the Certificates as of the preceding Distribution
Date (after giving effect to any distribution of
principal on such date). See "Description of the
Transfer and Servicing Agreements -- Credit
Enhancement -- Reserve Account".
13
<PAGE> 16
D. Negative Carry
Account.................... Pursuant to the Sale and Servicing Agreement, an
account in the name of the Indenture Trustee (the
"Negative Carry Account") will be established and
maintained by the Administrator as an asset of
the Trust. The Seller will make an initial
deposit into the Negative Carry Account on the
Closing Date of cash or certain Eligible
Investments equal to $ (the "Negative
Carry Account Initial Deposit"). On the first
Distribution Date, the Servicer will instruct the
Indenture Trustee to withdraw from the Negative
Carry Account and deposit into the Collection
Account an amount equal to the Negative Carry
Amount for each month of the first Collection
Period. The "Negative Carry Amount" for each
month will be calculated by the Servicer as the
difference (if positive) between (i) the product
of (a) one-twelfth of the sum of (1) the current
weighted average of the Note Interest Rates (as
defined under "Description of the
Securities -- The Notes") and the Certificate
Interest Rate (as defined under "Description of
the Securities -- The Certificates") and (2)
0.41% (i.e. the base Servicing Fee) and (b) the
Subsequent Pool Pre-Funded Amount as of the last
day of such month minus (ii) the investment
earnings on the Subsequent Pool Pre-Funded Amount
during such month.
On each date Student Loans in the Subsequent Pool
are transferred to the Trust, following each such
transfer amounts on deposit in the Negative Carry
Account in excess of the Required Negative Carry
Account Balance (as defined under "Description of
the Transfer and Servicing Agreements -- Credit
Enhancement") will be released to the Seller and
all amounts remaining on deposit in the Negative
Carry Account on the first Distribution Date
after any transfer to the Collection Account will
be released to the Seller.
E. Reserve Account........ Pursuant to the Sale and Servicing Agreement, an
account in the name of the Indenture Trustee (the
"Reserve Account") will be established and
maintained by the Administrator and will be an
asset of the Trust. The Seller will make an
initial deposit into the Reserve Account on the
Closing Date of cash or certain eligible
investments equal to $ (the "Reserve
Account Initial Deposit"). On the Closing Date,
the Reserve Amount Initial Deposit will equal the
Specified Reserve Account Balance. The Reserve
Account Initial Deposit will be augmented on each
Distribution Date by the deposit into the Reserve
Account of certain amounts available therefor
remaining after making all prior distributions on
such date. See "Description of the Transfer and
Servicing Agreements -- Distributions". The
Reserve Account Initial Deposit will also be
augmented on each date that a Student Loan in the
Subsequent Pool is transferred by the Seller to
the Trust by a transfer from the Pre-Funding
Account of a portion of the Purchase Price
payable to the Seller in respect of such Student
Loan in an amount equal to % of the
aggregate principal balance of such Student Loan.
Amounts on deposit in the Reserve Account will be
available on each Monthly Servicing Payment Date
to cover any shortfalls in payments of the
Servicing Fee, and on each Distribution Date to
cover any shortfalls in payments of the Servicing
Fee, the Administration Fee, amounts payable in
respect of the Notes and the Certificates (other
14
<PAGE> 17
than the Noteholders' Interest Index Carryover
and the Certificateholders' Interest Index
Carryover) for such Distribution Date for which
funds otherwise available therefor for such
Distribution Date are insufficient to make such
payments and distributions. Amounts on deposit in
the Reserve Account (other than amounts in excess
of the Specified Reserve Account Balance provided
the Overcollateralization Amount is greater than
the Specified Overcollateralization Amount) will
not be available to cover any unpaid Excess
Servicing Fee, Noteholders' Interest Index
Carryover or Certificateholders' Interest Index
Carryover.
Amounts in the Reserve Account on any
Distribution Date (after giving effect to all
distributions to be made on such Distribution
Date) in excess of the Specified Reserve Account
Balance for such Distribution Date will generally
be released to the Seller after the payment of
any unpaid Excess Servicing Fee, Noteholders'
Interest Index Carryover and Certificateholders'
Interest Index Carryover. Notwithstanding the
foregoing, (i) on each Distribution Date on which
the Overcollateralization Amount is less than the
Specified Overcollateralization Amount and (ii)
in the event the Financed Student Loans are not
sold pursuant to the auction process described
under "Description of the Transfer and Servicing
Agreements -- Termination", with respect to any
Distribution Date occurring on or after the
Distribution Date on which
the Pool Balance is equal to 10% or less of the
Initial Pool Balance, in each case if the amount
on deposit in the Reserve Account is greater than
the Specified Reserve Account Balance, such
excess will generally be distributed as
accelerated payments of principal. See
"Description of Transfer and Servicing Agreements
-- Credit Enhancement -- Reserve Account."
On the Closing Date, the Specified
Overcollateralization Amount will exceed the
Overcollateralization Amount by $ . Because
the Reserve Account Initial Deposit on the
Closing Date will equal the Specified Reserve
Account Balance on the initial Distribution Date,
to the extent amounts on deposit in the Reserve
Account are not necessary to cover the shortfalls
described in the second preceding paragraph, it
is expected that initially amounts will be
available to make accelerated payments of
principal of the Notes, thus reducing the amount
by which the outstanding principal of the Notes
and the principal balance of the Certificates
exceeds the sum of the aggregate principal
balance of the Financed Student Loans and the
Pre-Funded Amount. The actual rate and timing of
any accelerated payments of principal will depend
on a number of factors, including the rate and
timing of the payments on the Financed Student
Loans. Consequently, 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 and principal
balance of the Certificates will equal or exceed
the sum of the Pool Balance and the Pre-Funded
Amount. See "Risk Factors -- Principal Balance of
Securities Exceeds Aggregate Principal Balance of
Initial Financed Student Loans and Pre-Funded
Amount."
The funding and maintenance of the Reserve
Account is intended to enhance the likelihood of
timely payment of the amounts payable in
15
<PAGE> 18
respect of the Notes and the Certificates (other
than the Noteholders' Interest Index Carryover
and the Certificateholders' Interest Index
Carryover). In certain circumstances, however,
the Reserve Account could be depleted and
shortfalls in distributions to the Noteholders or
the Certificateholders could result.
F. Transfer and Servicing
Agreements............. Under the Sale and Servicing Agreement, the Seller
will sell the Financed Student Loans to the
Trust, with the Eligible Lender Trustee holding
legal title thereto. In addition, the Servicer
will agree with the Trust to be responsible for
servicing, managing, maintaining custody of and
making collections on the Financed Student Loans.
The obligations of the Seller and the Servicer
under the Sale and Servicing Agreement include
the following:
The Seller will be obligated to repurchase, and
the Servicer will be obligated to purchase, any
Financed Student Loan if the interests of the
Noteholders or the Certificateholders therein are
materially adversely affected by a breach of any
representation, warranty or covenant (including
the Servicer's covenant to service all the
Financed Student Loans in accordance with, and to
otherwise comply with, applicable laws,
restrictions and guidelines) made by the Seller
or the Servicer, as the case may be, with respect
to the Financed Student Loan, if the breach has
not been cured following the discovery by or
notice to the Seller or the Servicer, as the case
may be, of the breach (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). In addition, the Seller or the
Servicer, as the case may be, will be obligated
to reimburse the Trust with respect to a Financed
Federal Loan for any accrued interest amounts not
guaranteed by a Federal Guarantor due to, or any
lost Interest Subsidy Payments or Special
Allowance Payments as a result of, a breach of
the Seller's representations and warranties or
the Servicer's covenants, as the case may be,
with respect to such Financed Federal Loan.
The Servicer will receive, subject to the
limitations set forth in the following paragraph,
a monthly fee (the "Servicing Fee") payable on
each Monthly Servicing Payment Date equal to the
sum of (i) 0.41% per annum of the Pool Balance as
of the last day of the preceding calendar month
and (ii) certain one-time fixed fees for each
Financed Student Loan for which a forbearance
period was granted or renewed or for which a
guarantee claim was filed, in each case subject
to certain adjustments, together with other
administrative fees and similar charges. The
Servicing Fee will be payable out of funds
available therefor and amounts on deposit in the
Reserve Account on each Monthly Servicing Payment
Date, commencing October 27, 1996.
Notwithstanding the foregoing, in the event that
the fee payable to the Servicer as described
above for any Monthly Servicing Payment Date
would exceed % per annum of the Pool Balance
as of the last day of the preceding calendar
month (the "Capped Amount"), then the "Servicing
Fee" for such Monthly Servicing Payment Date will
instead be the Capped Amount for such date. The
remaining amount in excess of such Servicing Fee,
together with any such excess amounts from prior
Monthly Servicing Payment Dates that remain
16
<PAGE> 19
unpaid (the "Excess Servicing Fee"), will be
payable to the Servicer on each succeeding
Distribution Date out of funds available therefor
after payment on such Distribution Date of the
Servicing Fee, the Administration Fee, amounts
payable in respect of the Notes and the
Certificates (other than the Noteholders'
Interest Index Carryover and the
Certificateholders' Interest Index Carryover) and
the amount, if any, necessary to be deposited in
the Reserve Account to reinstate the balance
thereof to the Specified Reserve Account Balance,
but only if the Overcollateralization Amount is
greater than the Specified Overcollateralization
Amount.
Pursuant to the Sale and Servicing Agreement and
the Administration Agreement, the Administrator
will agree with the Trust to be responsible for,
among other things, preparing and filing with the
Department 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 in respect of the Financed
Federal Loans entitled thereto and preparing and
providing monthly, quarterly and annual
statements to the Eligible Lender Trustee and the
Indenture Trustee with respect to distributions
to Noteholders and Certificateholders.
Auction of Trust Assets.... Any Financed Student Loans remaining in the Trust
as of the end of the Collection Period
immediately preceding the
Distribution Date will be offered for sale by the
Indenture Trustee. KeyCorp, its affiliates (other
than the Seller), The Access Group(SM), PHEAA and
unrelated third parties may offer bids to
purchase such Financed Student Loans on such
Distribution Date. If at least two bids are
received, the Indenture Trustee will solicit and
resolicit new bids from all participating bidders
until only one bid remains or the remaining
bidders decline to resubmit bids. The Indenture
Trustee will accept the highest of such remaining
bids if it is equal to or in excess of an amount
(the "Minimum Purchase Amount") equal to the
greater of (i) the Auction Purchase Amount (ii)
the fair market value of such Financed Student
Loans as of the end of the Collection Period
immediately preceding such Distribution Date and
(iii) the aggregate unpaid principal amount of
the Notes and principal balance of the
Certificates in each case plus accrued and unpaid
interest thereon payable on such Distribution
Date. If at least two bids are not received or
the highest bid after the resolicitation process
is completed is not equal to or in excess of the
Minimum Purchase Amount, the Indenture Trustee
will not consummate such sale. The net proceeds
of any such sale will be used to redeem any
outstanding Notes and to retire any outstanding
Certificates on such Distribution Date.
If the sale is not consummated in accordance with
the procedures described above, 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. In the event the Financed Student Loans
are not sold in accordance with the foregoing, on
each subsequent Distribution Date on which the
Pool Balance is equal to 10% or less of the
Initial Pool Balance, certain cash available to
be released from the Reserve Account will be
distributed as accelerated payments of principal.
No assurance can be given as to whether the
Indenture Trustee will be
17
<PAGE> 20
successful in soliciting acceptable bids to
purchase the Financed Student Loans on either the
Distribution Date or any
subsequent Distribution Date.
"Auction Purchase Amount" with respect to the
Financed Student Loans means the aggregate unpaid
principal balance owed by the applicable
borrowers thereon plus accrued interest thereon
to the date of purchase less the amount on
deposit in the Reserve Account as of such date.
See "Description of the Transfer and Servicing
Agreements -- Termination" herein.
Optional Purchase.......... The Seller may repurchase all remaining Financed
Student Loans, and thus effect the early
retirement of the Certificates, on any
Distribution Date on or after which the Pool
Balance is equal to 5% or less of the Initial
Pool Balance. See "Description of the Transfer
and Servicing Agreements -- Termination".
Tax Considerations......... In the opinion of special tax counsel for the
Trust, the Notes will be characterized as debt
for federal and Pennsylvania state income tax
purposes, although there is no specific authority
with respect to the characterization for federal
or Pennsylvania income tax purposes of securities
having the same terms as the Notes.
In the opinion of special 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. The Certificateholders will agree to
treat the Trust as a partnership in which they
are partners. In the opinion of special tax
counsel for the Trust, the same characterizations
would apply for Pennsylvania state income tax
purposes as for federal income tax purposes.
See "Material Tax Consequences" for additional
information concerning the application of federal
and Pennsylvania state tax laws with respect to
the Notes and the Certificates.
ERISA Considerations....... Subject to the considerations discussed under
"ERISA Considerations -- The Notes", the Notes
can be acquired by employee benefit plans and
individual retirement accounts.
The Certificates may not be acquired by an
employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as
amended ("ERISA"), by an individual retirement
account, or by any other entity that is deemed to
hold assets of an employee benefit plan. See
"ERISA Considerations -- The Certificates".
Rating of the Securities... It is a condition to the issuance and sale of the
Notes and the Certificates that each class of
Notes be rated in the highest investment rating
category and that the Certificates be rated in
one of the three highest investment rating
categories by at least three nationally
recognized rating agencies. A 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.
18
<PAGE> 21
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information contained in this Prospectus before purchasing the
Securities offered hereby.
Limited Liquidity of Securities. The Securities will not be listed on any
national securities exchange. There is currently no secondary market for the
Securities. CS First Boston Corporation currently intends to, and Key Capital
Markets, Inc. may, make a market in the Securities, but neither has any
obligation to do so. There can be no assurance that a secondary market will
develop or, if a secondary market does develop, that it will provide the
Securityholders with liquidity of investment or that it will continue for the
life of the Securities.
Limited Assets of Trust. The Trust does not have, nor is it permitted or
expected to have, any significant assets or sources of funds other than the
Financed Student Loans (and the related Guarantee Agreements and other relevant
rights under certain collateral agreements with respect to the Financed Private
Loans to the extent assigned to the Trust by the Seller ("Assigned Rights")),
the Collection Account, the Pre-Funding Account, the Escrow Account (as defined
under "The Student Loan Financing Business -- Federal Loans Under the
Program"), the Negative Carry Account and the Reserve Account. The Notes
represent obligations solely of the Trust, and the Certificates represent
interests solely in the Trust and its assets, and neither the Notes nor the
Certificates will be insured or guaranteed by the Seller, the Servicer, the
Guarantors, the Eligible Lender Trustee or the Department. Consequently, holders
of the Notes and the Certificates must rely for repayment upon 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 Pre-Funding
Account, the Escrow Account, the Negative Carry Account and the Reserve Account.
The Pre-Funding Account and the Escrow Account will only be available during the
Funding Period to cover obligations of the Trust relating to Additional Fundings
and neither is intended to cover losses on the Financed Student Loans.
Similarly, 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. In addition, funds in the Reserve Account will first be made available
to cover shortfalls in distributions of interest and principal on the Notes. 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 and
distributions on the Certificates. See "Description of the Transfer and
Servicing Agreements -- Distributions" and "-- Credit Enhancement".
Principal Balance of Securities Exceeds Aggregate Principal Balance of
Initial Financed Student Loans and Pre-Funded Amount. On the Closing Date, the
aggregate initial principal amount of the Notes and the principal balance of the
Certificates is % of the sum of the aggregate principal balance of the Initial
Financed Student Loans as of the Statistical Cutoff Date and the Pre-Funded
Amount as of the Closing Date. In addition, each Student Loan in the Subsequent
Pool will be purchased by the Trust for an amount equal to % of the
principal balance thereof as of the related Subsequent Cutoff Date. Because the
actual rate and timing of any accelerated payments of principal from the Reserve
Account as described under "Description of the Transfer and Servicing Agreements
- -- Credit Enhancement" below 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 and principal balance of the
Certificates will be equal to or less than the sum of the Pool Balance, the
Pre-Funded Amount and the amount of the Reserve Fund. 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 and the Certificates exceeded the sum of the Pool
Balance, the Pre-Funded Amount and the amount of the Reserve Fund and Negative
Carry Account, such Financed Student Loans would likely have to be liquidated at
a premium for Certificateholders and, in some circumstances, Noteholders not to
suffer a loss. Moreover, Noteholders and Certificateholders will have to rely on
accelerated payments of principal, if any, from amounts on deposit in the
Reserve Account and available therefor to create an Overcollateralization Amount
and to cause it to exceed the Specified Overcollateralization for the payment of
any Noteholders' Interest Index Carryover or Certificateholders' Interest Index
Carryover.
19
<PAGE> 22
Subordination of Certificates to Notes. The interests of
Certificateholders in the assets of the Trust will be subordinated to payments
of principal and interest due on the Notes. Consequently, any portion of funds
or amounts on deposit in the Reserve Account that would otherwise be
distributable to the Certificateholders may be applied to cover any principal
and interest remaining due on the Notes after application of amounts otherwise
available to make such payments. If amounts otherwise allocable to the
Certificates are used to fund payments of principal and interest on the Notes,
distributions with respect to the Certificates may be delayed or reduced.
Notwithstanding the foregoing, distributions to Certificateholders of the amount
of interest (other than any Certificateholders' Index Carryover) and principal
payable thereon on any Distribution Date will not be subordinated to the payment
of any Noteholders' Interest Index Carryover that may exist from time to time.
The Certificateholders bear directly the credit and other risks associated with
an undivided interest in the Trust. See "Description of the Securities -- The
Certificates -- Subordination of the Certificates", "Description of the Transfer
and Servicing Agreements -- Distributions" and "-- Credit Enhancement --
Subordination of the Certificates".
Lack of Repayment History with Respect to Student Loans Under The Access
Group(SM) Loan Program. Because the Seller began making Student Loans under the
Law Access Loan Program with respect to the 1990-1991 school year and only began
making Students Loans under certain of the other Access Group(SM) Loan Programs
initially with respect to the 1993-1994 school year, the age of the portfolio of
Student Loans made by the Seller is fairly recent, and, more importantly, only a
small fraction of such Student Loans are in repayment status. For example, while
five years have elapsed since the end of the 1990-1991 school year, many of the
law school borrowers of Student Loans made by the Seller for that year, at least
in the case of the Federal Loans, would not have begun repaying such loans until
at least six months after graduation from law school. A significant number of
law school borrowers for each of the 1990-1991 and 1991-1992 school years were
first and second year law school students, who would not have graduated until
one or two years after such loan was made and would likely only recently have
begun repayment of such loans. As the Seller's Student Loans made under the
other Access Group(SM) Loan Programs have been made to students who have not yet
graduated from their respective educational programs, and thus have not yet
entered repayment status, such Student Loans have no repayment history. Initial
Financed Student Loans made under such other Access Group(SM) Loan Programs
constitute % of the Initial Financed Student Loans (based on the outstanding
principal balance of such Initial Financed Student Loans as of the Statistical
Cutoff Date) and Student Loans made under such other Access Group Loan Programs
constitute % of the Student Loans in the Subsequent Pool (based on the
outstanding principal balance of the Student Loans in the Subsequent Pool as of
the Statistical Cutoff Date). Consequently, the repayment experience with
respect to such Student Loans is insufficient to provide reliable predictive
information based on the historical repayment performance of the Seller's
student loan portfolio. The Seller has historically sold a significant portion
of Student Loans made by it. Of those Student Loans retained by the Seller, as
of , only approximately $ million aggregate principal
amount ( %) of the Student Loans owned by the Seller under The Access
Group(SM) Loan Program were in repayment status. Less than % of the Initial
Financed Student Loans were in repayment status as of the statistical Cutoff
Date and less than % of the Student Loans in the Subsequent Pool were in
repayment status as of such date. See "The Financed Student Loan
Pool -- Distribution by Borrower Payment Status as of the Statistical Cutoff
Date". Consequently, the Seller does not have sufficient or reliable information
regarding the repayment experience of the Student Loans made by the Seller under
The Access Group(SM) Loan Program. Moreover, this Prospectus contains certain
information with respect to the Guarantors (such as claims rates) which is based
at least in part on this limited repayment history. See "The Financed Student
Loan Pool -- Insurance of Student Loans; Guarantors of Student Loans". There can
be no assurance, however, particularly in light of the relatively recent nature
of the portfolio of Student Loans made by the Seller under The Access Group(SM)
Loan Program, that the repayment performance actually experienced with respect
to the Financed Student Loans will be in any manner comparable to such
historical experience of the Guarantors.
Borrower Default Risk on Certain Federal Loans. Under the Omnibus Budget
Reconciliation Act of 1993, Federal Loans first disbursed on or after October 1,
1993, are 98% insured by Federal Guarantors. As a result, to the extent a
borrower of such a Federal Loan defaults, the Trust will experience a loss of 2%
of
20
<PAGE> 23
outstanding principal and accrued interest on each such Federal Loan. A
defaulted loan will be fully assigned to the applicable Federal Guarantor in
exchange for a guarantee payment on the 98% guaranteed portion and the Trust may
have no right thereafter to pursue the borrower for the 2% unguaranteed portion.
Federal Loans continue to be 100% guaranteed in the event of death, disability
or bankruptcy of the borrower regardless of disbursement date.
Dependence on Guarantors as Security for Financed Student Loans. The
Higher Education Act and The Access Group(SM) Loan Program require all Financed
Student Loans to be unsecured. As a result, the only security for payment of the
Financed Student Loans are the guaranties provided under 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 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. 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). Moreover, to the extent
that the Department pays reimbursement claims submitted by a Federal Guarantor
in respect of defaulting Student Loans for any fiscal year exceeding certain
specified levels, the Department's obligation to reimburse the Federal 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).
Pursuant to the 1992 Amendments, under Section 432(o) of the Higher
Education Act if the Department has determined that a Federal Guarantor 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 such Federal
Guarantor. 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 Federal 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.
TERI, as a Guarantor of Private Loans, is not entitled to any federal
reinsurance or assistance from the Department. Although TERI maintains a loan
loss reserve intended to absorb losses arising from its guarantee commitments,
there can be no assurance that the amount of such reserve will be sufficient to
cover the obligations of TERI over the term of the Financed Private Loans. Based
upon the Rating Agencies' assessment of TERI's financial position, reserves and
potential claims against it, the Seller has structured the Trust and the
Securities assuming that TERI will not have the financial resources to satisfy
all its obligations under its Guarantee Agreement with respect to the Financed
Private Loans throughout the term of such loans. There can be no assurance that
TERI or any other Guarantor will have the financial resources to make all
Guarantee Payments to the Eligible Lender Trustee that may arise from time to
time. The inability of any Guarantor to meet its guarantee obligations could
reduce the amount of principal and interest paid to the holders of the
Securities. See "The Financed Student Loan Pool -- Insurance of Student Loans;
Guarantors of Student Loans".
Risk of Loss of Federal Guarantor and Department Payments for Failure to
Comply with Loan Origination and Servicing Procedures for Federal Loans. The
Higher Education Act, including the implementing regulations thereunder,
requires lenders and their assignees making and servicing Student Loans that are
reinsured by the Department ("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". The Servicer has
agreed pursuant to the Sale and Servicing Agreement to perform servicing and
collection procedures on behalf of the Trust in accordance with the Higher
Education Act and the rules and regulations
21
<PAGE> 24
promulgated thereunder. However, failure to follow these procedures or failure
of the Seller to follow procedures relating to the origination of any Financed
Federal Loans may result in the Department's refusal to make reinsurance
payments to the Federal Guarantors or to make Interest Subsidy Payments and
Special Allowance Payments to the Eligible Lender Trustee with respect to such
Financed Federal Loans or in the Federal Guarantors' refusal to honor their
agreements with the Eligible Lender Trustee to, inter alia, guarantee the
payment of such Financed Federal Loans (each such agreement, a "Guarantee
Agreement"). Failure of the Federal Guarantors to receive reinsurance payments
from the Department could adversely affect the Federal Guarantors' ability or
legal obligation to make payments under the Guarantee Agreements ("Guarantee
Payments") to the Eligible Lender Trustee. Loss of any such Guarantee Payments,
Interest Subsidy Payments or Special Allowance Payments could adversely affect
the Trust's ability to pay principal and interest on the Notes and the
Certificates.
Under certain circumstances, pursuant to the Sale and Servicing Agreement,
the Seller is obligated to repurchase, or the Servicer is obligated to purchase,
any Financed Federal Loan, if a breach of the representations, warranties or
covenants of the Seller or the Servicer, as the case may be, with respect to
such Financed Federal 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
Federal Loans will not be considered to have such a material adverse effect). In
addition, under certain circumstances pursuant to the Sale and Servicing
Agreement, the Seller or the Servicer, as the case may be, is obligated to
reimburse the Trust with respect to a Financed Federal Loan for any accrued
interest amounts not guaranteed by a Federal Guarantor due to, or any lost
Interest Subsidy Payments and Special Allowance Payments as a result of, a
breach of the Seller's representations and warranties or the Servicer's
covenants, as the case may be, with respect to such Financed Federal Loan. See
"Description of the Transfer and Servicing Agreements -- Sale of Financed
Student Loans; Representations and Warranties" and "-- Servicer Covenants".
There can be no assurance, however, that the Seller or the Servicer will have
the financial resources to do so. The failure of the Seller to so repurchase or
the Servicer to so purchase a Financed Student Loan would constitute a breach of
the Sale 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 Loss of Private Guarantor Payments for Failure to Comply with Loan
Origination and Servicing Procedures for Private Loans. The Access Group(SM)
Loan Program prescribes rules and procedures applicable to originating and
servicing Student Loans not reinsured by the Department or any other
governmental agencies ("Private Loans"), which procedures are analogous to those
of Federal Loans. Failure to make or service properly a Private Loan in
accordance with those procedures could adversely affect the Eligible Lender
Trustee's ability to obtain Guarantee Payments from TERI. Loss of such Guarantee
Payments could adversely affect the Trust's ability to pay principal and
interest on the Notes and the Certificates. As described above for Financed
Federal Loans, under certain circumstances pursuant to the Sale and Servicing
Agreement, the Seller is obligated to repurchase, or the Servicer is obligated
to purchase, a Financed Private Loan. See "Description of the Transfer and
Servicing Agreements -- Sale of Financed Student Loans; Representations and
Warranties" and "-- Servicer Covenants". There can be no assurance, however,
that the Seller or the Servicer will have the financial resources to do so.
Changes in Legislation May Adversely Affect Financed Student Loans and
Guarantors. 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
Student Loans made thereunder, including the Financed Student Loans, or the
Guarantors. In addition, existing legislation and future measures to reduce the
federal budget deficit or for other purposes 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, however, that future federal budget
legislation or administrative
22
<PAGE> 25
actions will not adversely affect expenditures by the Department or the
financial condition of the Federal Guarantors.
Under the Omnibus Budget Reconciliation Act of 1993, Congress made a number
of changes that may adversely affect the financial condition of the Federal
Guarantors, as such changes reduce certain financial benefits previously enjoyed
by Federal Guarantors and give the Department broad powers over Federal
Guarantors and their reserves. See "The Student Loan Financing
Business -- Federal Loans Under the Program" for a more detailed description of
the impact of such legislation on Federal Guarantors. The changes create a
significant risk that the resources available to the Federal Guarantors to meet
their guarantee obligations will be significantly reduced. In addition, this
legislation greatly expands the loan volume under the direct lending program of
the Department (the "Federal Direct Student Loan Program") to a minimum 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
Programs. Under the Federal Direct Student Loan Program, the Department directly
originates and holds student loans without the involvement of private lenders.
As the Federal Direct Student Loan Program expands, the Servicer may experience
increased costs due to reduced economies of scale or other adverse effects on
its business to the extent the volume of loans serviced by the Servicer is
reduced. Such reductions or effects could occur as a result of reductions in the
volume of new loans made under the Federal Programs or the consolidation of
existing loans under the Federal Direct Student Loan Program. Such cost
increases could affect the ability of the Servicer to satisfy its obligations to
service the Financed Student Loans or to purchase Financed Student Loans in the
event of certain breaches of its covenants. See "Description of the Transfer and
Servicing Agreements -- Servicer Covenants". Such volume reductions could
further reduce revenues received by the Federal Guarantors available to pay
claims on defaulted Financed Federal Loans. Finally, the level of competition
currently in existence in the secondary market for loans made under the Federal
Programs could be reduced, resulting in fewer potential buyers of the Financed
Federal Loans and lower prices available in the secondary market for those
loans.
Congress may consider amendments to the Higher Education Act to achieve
budget savings in connection with budget reconciliation legislation this year.
While it is unclear what changes will be included in the final legislation (if
any), it is possible that reductions in the lender's yield on Federal Family
Education Loan Program ("FFELP") loans and a decrease in the percentage of such
loans covered by guarantee will be enacted. It is anticipated that the
applicability of such changes would be limited to loans made on or after the
date of enactment. Accordingly, it is anticipated that such changes would only
affect Federal Consolidation Loans and Federally guaranteed Serial Loans (each
as defined under "The Student Loan Financing Business -- Federal Loans Under the
Program") purchased by the Trust.
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, without the consent of the Certificateholders,
to sell the Financed Student Loans. In that event, each of PHEAA and The Access
Group(SM) will be given the opportunity, upon 30 days' prior notice, to bid to
purchase the Financed Student Loans and, if either is the highest bidder, the
Financed Student Loans must be sold to that entity. 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 PHEAA or The Access Group(SM)
will submit a bid therefor or that the market value of such Financed Student
Loans would, at any time, be equal to the aggregate outstanding principal amount
of the Securities and accrued interest thereon. In addition, in the event of (i)
any sale of the Financed Student Loans on behalf of the Trust prior to the
Certificate Final Maturity Date to any person (other than the Seller, the
Administrator, PHEAA or the Servicer) in which the purchaser elects to deconvert
the Financed Student Loans and not retain PHEAA as Servicer or (ii) any
termination by the Trust of PHEAA as Servicer of the Financed Student Loans,
except for any termination for cause or as a result of any Servicer Default, the
Trust shall pay to PHEAA as a part of the Servicing Fee (not subject to the
Capped Amount) the following deconversion fee, per loan, based on the status of
the loan at the time of deconversion: (a) $ for each in-school Stafford Loan,
in-school deferred SLS Loan, Law Access Loan ("LAL Loan"), Medical Access(SM)
Loan ("MAL Loan"), Dental Access(SM) Loan ("DAL Loan"), Business Access(SM) Loan
("BAL Loan"), Graduate Access(SM) Loan ("GAL Loan"), Bar Examination Loan ("BEL
Loan") and
23
<PAGE> 26
Residency Loan ("REL Loan"), (each as described under "The Student Loan
Financing Business -- Federal Loans Under the Program" and "-- Private Loans
Under the Program"); and (b) $ for each loan of any other status or loan
type. 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 such circumstances, the Certificateholders would not be
entitled to receive any portion of such proceeds. 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 Class A-1 Final Maturity Date, in the case of the
Class A-1 Notes, or the Class A-2 Final Maturity Date, in the case of the Class
A-2 Notes. See "Description of the Transfer and Servicing Agreements -- Credit
Enhancement".
Failure to Comply with Interim Final Third-Party Servicer Regulations May
Adversely Affect Loan Servicing. On November 29, 1994, the Secretary of the
Department of Education published final regulations amending the Student
Assistance General Provisions and FFELP regulations. These regulations, among
other things, establish requirements governing contracts between holders of
Federal Loans and third-party servicers, establish standards of administrative
and financial responsibility for third-party servicers that administer any
aspect of a guarantee agency's or lender's participation in the FFELP, and
establish sanctions for third-party servicers.
Under these regulations, a third-party servicer (such as the Servicer) is
jointly and severally liable with its client lenders for liabilities to the
Department arising from the servicer's violation of applicable requirements. In
addition, if the servicer fails to meet standards of financial responsibility or
administrative capability included in the new regulations, or violates other
FFELP requirements, the new regulations authorize the Department to fine the
servicer and/or limit, suspend, or terminate the servicer's eligibility to
contract to service FFELP loans. The effect of such a limitation or termination
on the servicer's eligibility to service loans already on its system, or to
accept new loans for servicing under existing contracts, is unclear. There can
be no assurance that the Servicer will not be fined or held liable by the
Department for liabilities arising out of its FFELP activities for the Trust or
other client lenders, or that its eligibility will not be limited, suspended, or
terminated in the future. If the Servicer were so fined or held liable, or its
eligibility were limited, suspended, or terminated, its ability to properly
service the Financed Federal Loans and to satisfy its obligation to purchase
loans with respect to which it breaches its representations, warranties or
covenants under the Sale and Servicing Agreement could be adversely affected.
However, in the event of a termination of eligibility, the Sale and Servicing
Agreement provides for the removal of the Servicer and the appointment of a
Substitute Servicer.
Characteristics of the Financed Student Loans Will Vary. Certain
characteristics of the Financed Student Loans will vary from the characteristics
of the Initial Financed Student Loans and the Subsequent Pool Student Loans. The
distribution by weighted average interest rates may vary as a result of
variations in the effective rates of interest applicable to the Financed Student
Loans after each Additional Funding and the original term to maturity and
remaining term to maturity may vary significantly from the actual term to
maturity as a result of the granting of deferral and forbearance periods.
Insolvency Risk of Seller. The Seller intends that the transfer of the
Financed Student Loans by it to the Eligible Lender Trustee on behalf of the
Trust under the Sale and Servicing Agreement constitutes a valid sale 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 Noteholders and the
Certificateholders. 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 Seller 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 Seller,
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
Seller 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
24
<PAGE> 27
the FDIC could exercise if it were appointed as receiver or conservator of the
Seller. 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 Seller, 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
Seller's insolvency and was not taken in contemplation of insolvency or with the
intent to hinder, delay or defraud the Seller 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
Seller. 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 and the
Certificates. 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 FIRREA, delays in payments on the Notes and the Certificates and
possible reductions in the amount of those payments could occur. See "Certain
Legal Aspects of the Financed Student Loans".
In addition, in the event of the occurrence of certain insolvency related
events with respect to the Seller, the Financed Student Loans may be required to
be sold. There can be no assurance, however, that the net sale proceeds will be
sufficient to repay the principal amount of the Notes and the Certificates in
full plus accrued interest thereon. See "Description of Transfer and Servicing
Agreements -- Insolvency Event."
Custodial Risk of Servicer. Pursuant to the Sale and Servicing Agreement,
the Servicer as custodian on behalf of the Trust will have custody of the
promissory notes evidencing the Financed Student Loans following the sale of the
Financed Student Loans to the Eligible Lender Trustee. Although the accounts of
the Seller will be marked to indicate the sale and although the Seller will
cause UCC financing statements to be filed with the appropriate authorities, the
Financed Student Loans will not be physically segregated, stamped or otherwise
marked to indicate that such Financed Student Loans have been sold to the
Eligible Lender Trustee. 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 if the purchaser (or
secured party) acquired such Financial Student Loans without knowledge of the
Eligible Lender Trustee's interest. See "Description of the Transfer and
Servicing Agreements -- Sale of Financed Student Loans; Representations and
Warranties" and "-- Servicer Covenants".
Insolvency Risk of Servicer or Administrator. In the event of a Servicer
Default or an Administrator Default resulting solely from certain events of
insolvency or bankruptcy that may occur with respect to the Servicer or the
Administrator, a court, conservator, receiver or liquidator may have the power
to prevent either the Indenture Trustee or the Noteholders from appointing a
successor Servicer or Administrator, as the case may be, and delays in
collections in respect of the Financed Student Loans may occur. See "Description
of the Transfer and Servicing Agreements -- Rights Upon Servicer Default and
Administrator Default".
Commingling Risk of Consolidation of Federal Benefit Billings and Receipts
with Other Trusts. Due to a recent change in 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 Seller to securitize 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 other trusts using the same lender identification
number and payments on such billings would be made by the
25
<PAGE> 28
Department in lump sum form. Such lump sum payments would then be allocated
among the various trusts using the lender identification number.
In addition, the sharing of the lender identification number by the Trust
with other trusts may result in the receipt of claim payments by guarantors in
lump sum form. In that event, such payments would be allocated 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 FFELP.
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
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 offset against amounts due the Eligible Lender Trustee
under the shared lender identification number, including amounts owed in
connection with the Trust.
In addition, other trusts using the shared lender identification number may
in a given quarter incur Federal 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 consolidated payment from the Department
received by the Eligible Lender Trustee under such lender identification number
for that quarter equalling 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 Seller which share the lender identification number to be
used by the Trust (the Trust and such other trusts, collectively, the "Seller
Trusts") may require a Seller Trust (including the Trust) to indemnify the other
Seller Trusts for a shortfall or an offset by the Department or a guarantor
arising from the Student Loans held by the Eligible Lender Trustee on such
trust's behalf.
Prepayment Risk from Pre-Funded Amount. On the Closing Date, the
Eligible Lender Trustee on behalf of the Trust will own the $
outstanding principal balance of the Initial Financed Student Loans as of the
Statistical Cutoff Date and the $ Pre-Funded Amount on deposit in
the Pre-Funding Account. If as of the Special Determination Date the Subsequent
Pool Pre-Funded Amount has not been reduced to zero, then the remaining
Subsequent Pool Pre-Funded Amount will be distributed on the first Distribution
Date to redeem each class of Notes and prepay the Certificates on a pro rata
basis based on the initial principal amount of each class of Notes and the
principal balance of the Certificates. Although the Seller intends to sell all
of the Student Loans constituting the Subsequent Pool to the Trust on or prior
to the Special Determination Date, because of the potential for a bankruptcy or
death of a borrower subsequent to the Statistical Cutoff Date and other
administrative reasons, the Seller may not be able to sell all such Student
Loans to the Trust. Further, if the sum of (i) the principal amount of eligible
Financed Student Loans originated by the Seller during the Funding Period, net
of the principal amount of the Financed Student Loans sold to the Seller during
the Funding Period in connection with the Seller's making of Consolidation
Loans, and (ii) the amount of interest on the Financed Student Loans capitalized
and not paid currently by or on behalf of the borrowers during the Funding
Period is less than the difference between initial Pre-Funded Amount and the
initial principal balance of the Subsequent Financed Student Loans as of the
related Subsequent Cutoff Date, the Trust will have insufficient opportunities
to make Additional Fundings, thereby resulting in a prepayment of principal to
Noteholders as described in the following paragraph.
To the extent that amounts on deposit in the Pre-Funding Account have not
been fully applied to Additional Fundings by the Trust by the end of the Funding
Period, the Holders of the Class A-1 Notes and, if the Class A-1 Notes are paid
in full, the Holders of the Class A-2 Notes, will receive as a prepayment of
principal an amount equal to the Pre-Funded Amount remaining in the Pre-Funding
Account following any Additional Fundings on the last Distribution Date in the
Funding Period. It is anticipated that the amount of Additional Fundings made by
the Trust will not be exactly equal to the amount on deposit in the Pre-Funding
26
<PAGE> 29
Account and that therefore there will be at least a nominal amount of principal
prepaid to the Noteholders. Any reinvestment risk will be borne directly by the
Noteholders. See also "The Financed Student Loan Pool-- Maturity and Prepayment
Assumptions" regarding the risk to Noteholders and Certificateholders of
prepayment in the event that Consolidation Loans are made with respect to the
Financed Student Loans by the Seller after the Funding Period or by another
lender at any time.
Prepayment, Maturity and Yield Risks. All the Financed Student Loans are
prepayable at any time. (For this purpose the term "prepayments" includes
prepayments in full or in part (including pursuant to Consolidation Loans) and
liquidations due to default (including receipt of Guarantee Payments).) 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 market for
legal, medical, dental and other post-graduate professional services. In
addition, under certain circumstances, the Seller will be obligated to
repurchase or the Servicer will be obligated to purchase Financed Student Loans
from the Trust pursuant to the Sale and Servicing Agreement as a result of
breaches of their respective representations, warranties or covenants. See
"Description of the Transfer and Servicing Agreements -- Sale of Financed
Student Loans; Representations and Warranties" and "-- Servicer Covenants".
Moreover, to the extent borrowers of Financed Student Loans elect to borrow
Consolidation Loans with respect to such Financed Student Loans from the Seller
after the end of the Funding Period or from another lender at any time,
Noteholders (and after the Notes have been paid in full, Certificateholders)
will collectively receive as a prepayment of principal the aggregate principal
amount of such Financed 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, if they do so, that such
Consolidation Loans will not be made by the Seller after the end of the Funding
Period or by another lender at any time. See "The Student Loan Financing
Business" and "The Financed Student Loan Pool -- Maturity and Prepayment
Assumptions".
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 Seller on a loan originated by the
Seller under the Federal Consolidation Loan Program. The availability of such
lower-rate, income-contingent loans may decrease the likelihood that the Seller
would be the originator of a Consolidation Loan with respect to borrowers with
Financed Federal Loans, as well as increase the likelihood that a Financed
Federal Loan in the Trust will be prepaid through the issuance of a Federal
Direct Consolidation Loan. The volume of existing loans that may be prepaid in
this fashion is not determinable at this time.
On the other hand, 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 (each as
defined under "The Student Loan Financing Business -- Federal Loans Under the
Program") or as a result of the conveyance of Serial Loans to the Eligible
Lender Trustee on behalf of the Trust during the Funding Period as described
herein or of refinancings through Consolidation Loans having longer maturities,
which may lengthen the remaining term of the Financed Student Loans and the
average life of the Notes and the Certificates. In addition, the stated maturity
of many of the Financed Student Loans will occur well beyond the Final Maturity
Date. See "The Student Loan Financing Business" and "The Financed Student Loan
Pool -- Maturity and Prepayment Assumptions". Any reinvestment risks resulting
from a faster or slower incidence of prepayment of Financed Student Loans will
be borne entirely by the Noteholders and the Certificateholders. See also
"Description of the Transfer and Servicing Agreements -- Additional Fundings"
regarding the prepayment of principal to Noteholders and Certificateholders if
as of the Special Determination Date the Subsequent Pool Pre-Funded Amount has
not been reduced to zero and the total amount remaining on deposit in the
Pre-Funding Account as of such date exceeds 25% of the initial principal amount
of the Notes and principal balance of the Certificates and the prepayment of
principal to Noteholders as a result of excess funds remaining on deposit in the
Pre-Funding Account prior to a Pre-Funded Amount remaining at the end of the
Funding Period, "-- Insolvency Event" regarding the sale of the Financed Student
Loans if a Seller Insolvency Event occurs and "-- Termination" regarding the
Seller's option to purchase the
27
<PAGE> 30
Financed Student Loans when the aggregate Pool Balance is less than or equal to
5% of the Initial Pool Balance and the auction of the Financed Student Loans
occurs on or after the Distribution Date.
Any Financed Student Loans remaining in the Trust as of the end of the
Collection Period immediately preceding the Distribution
Date will be offered for sale by the Indenture Trustee. 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 and to retire any outstanding Certificates
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,
and applied on such date to redeem any outstanding Notes and retire any
outstanding Certificates. 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 Distribution Date or any
subsequent Distribution Date. See "Description of the Transfer and Servicing
Agreement -- Termination".
Holders of Notes or Certificates should consider, in the case of Notes or
Certificates, as the case may be, purchased at a discount, the risk that a
slower than anticipated rate of principal payments on the Financed Student Loans
could result in an actual yield that is less than the anticipated yield and, in
the case of Notes or Certificates, as the case may be, purchased at a premium,
the risk that a faster than anticipated rate of principal payments on the
Financed Student Loans could result in an actual yield that is less than the
anticipated yield.
Prepayment Risks Differ Between the Notes and the Certificates. Because
(except for certain limited circumstances) the Class A-2 Noteholders will
receive no payments of principal until the Class A-1 Notes have been paid in
full, and the Certificateholders will receive no payments of principal until the
Class A-2 Notes have been paid in full, the Class A-1 Notes and, to a lesser
extent, the Class A-2 Notes bear relatively greater risk than do the
Certificates of an increased rate of principal repayments with respect to the
Financed Student Loans (whether as a result of voluntary prepayments,
Consolidation Loans or liquidations due to default or breach). In addition, the
Class A-1 Notes generally bear the risk of principal prepayments as a result of
any remaining Pre-Funded Amount at the end of the Funding Period. On the other
hand, Certificateholders, and, to a lesser extent, the Class A-2 Notes bear a
greater risk of loss of principal than do Class A-1 Noteholders in the event of
a shortfall in Available Funds and amounts on deposit in the Reserve Account
because the Certificates do not receive principal distributions from Available
Funds until the Class A-2 Notes are paid in full and the Class A-2 Notes do not
receive principal distributions until the Class A-1 Notes are paid in full.
Variability of Actual Cash Flows. Amounts received with respect to the
Financed Student Loans for a particular Collection Period may vary greatly 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 the borrower's selection of a repayment option (which may include interest
only payments for certain periods), and general factors, such as a general
economic downturn which could increase the amount of defaulted Student Loans.
Failures by borrowers to pay timely the principal and interest on the Financed
Student Loans will affect the amount of funds available for distribution on a
Distribution Date, which may reduce the amount of principal and interest paid to
the Securityholders on such Distribution Date. In addition, because the funds
available for distribution on any Distribution Date include Interest Subsidy
Payments and Special Allowance Payments on the Financed Federal Loans that are
received during that Collection Period (and which accrued during the prior
Collection Period) but the Student Loan Rate is based on the amount of Interest
Subsidy Payments and Special Allowance Payments that have accrued during such
Collection Period, a significant increase in the amount of such payments being
made by the Department in respect of the Financed Federal Loans from one
Collection Period to the next (as a result, for example, of a significant
increase in prevailing interest rates) could result in a temporary shortfall in
the funds available for distribution for the given Distribution Date. In
addition, the failure of a Guarantor to timely meet its guarantee obligations
with respect to the Financed Student Loans could also reduce the amount of funds
available for distribution on a given Distribution Date. The effect of such
factors, including the effect on
28
<PAGE> 31
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 Securities is impossible to predict.
Certain incentive programs currently or hereafter made available by the
Seller to borrowers under The Access Group(SM) Loan Program may also be made
available by the Servicer to borrowers with Financed Student Loans. Any such
incentive program that effectively reduces borrower payments on Financed Student
Loans and is not required by the Act will be applicable to the Financed Student
Loans only if and to the extent that the Servicer receives payment from the
Seller in an amount sufficient to offset such effective yield reductions. See
"The Student Loan Financing Business -- The Access Group(SM) Loan
Programs -- Incentive Programs".
Noteholders' Right to Control Upon Certain Defaults. In the event a
Servicer Default or an Administrator Default occurs, the Indenture Trustee or
the Noteholders, as described under "Description of the Transfer and Servicing
Agreements -- Rights upon Servicer Default and Administrator Default", may
remove the Servicer or the Administrator, as the case may be, without the
consent of the Eligible Lender Trustee or any of the Certificateholders.
Moreover, only the Indenture Trustee or the Noteholders, and not the Eligible
Lender Trustee or the Certificateholders, have the ability to remove the
Servicer or the Administrator, as the case may be, if a Servicer Default or an
Administrator Default occurs. In addition, the Noteholders have the ability,
with certain specified exceptions, to waive defaults by the Servicer and the
Administrator, including defaults that could materially adversely affect the
Certificateholders. See "Description of the Transfer and Servicing
Agreements -- Waiver of Past Defaults".
Consumer Protection Laws May Affect Enforceability of Student
Loans. 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. These requirements
impose specific statutory liability that could affect an assignee's ability to
enforce consumer finance contracts such as the Student Loans. In addition, the
remedies available to the Indenture Trustee or the Noteholders upon an Event of
Default under the Indenture may not be readily available or may be limited by
applicable state and federal laws. See "Certain Legal Aspects of the Financed
Student Loans".
Basis Risk. Although the interest rate on the Notes and the Certificates
is generally based on the T-Bill Rate it is possible that a positive spread may
not exist between (a) the Student Loan Rate calculated with respect to one or
both classes of Notes or the Certificates and (b) the interest rate on each
class of Notes and the Certificates based on the T-Bill Rate. In such a case,
the interest rate on one or both classes of Notes and the Certificates, as
applicable, for such Distribution Date will be the applicable Student Loan Rate.
See "Description of the Securities -- The Notes -- Distributions of Interest"
and "-- The Certificates -- Distributions of Interest". Any Noteholders'
Interest Index Carryover or Certificateholders' Interest Index Carryover arising
as a result of the interest rate on one or both classes of Notes and the
Certificates being determined on the basis of the applicable Student Loan Rate
will be paid on that 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, in the case of the Notes, by amounts on
deposit in the Reserve Account (other than amounts in excess of the Specified
Reserve Account Balance) or by subordination of distributions in respect of the
Certificates (although distributions of any Certificateholders' Interest Index
Carryover will be subordinated to payment of any Noteholders' Interest Index
Carryover) and, in the case of the Certificates, by amounts on deposit in the
Reserve Account (other than amounts in excess of the Specified Reserve Account
Balance, subject to certain limitations). See "Description of the Transfer and
Servicing Agreements -- Distributions".
Limitations on Credit Ratings of the Securities. It is a condition to the
issuance and sale of each class of the Notes and of the Certificates that the
Notes be rated in the highest investment rating category and that the
Certificates be rated in one of the three highest investment rating categories
by at least three nationally recognized Rating Agencies. A rating is not a
recommendation to purchase, hold or sell Securities, inasmuch as such rating
does not comment as to market price or suitability for a particular investor.
The ratings of the
29
<PAGE> 32
Securities address the likelihood of the ultimate payment of principal of and
interest on the Securities pursuant to their terms. However, the Rating Agencies
do not evaluate, and the ratings of the Securities do not address, the
likelihood of payment of the Noteholders' Interest Index Carryover or the
Certificateholders' Interest Index 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.
Book-Entry Registration -- Beneficial Owners Not Recognized by Trust. The
Class A-1 Notes, the Class A-2 Notes and the Certificates 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
Securities or their nominees. Because of this, unless and until Definitive
Securities are issued, holders of such Securities will not be recognized by the
Indenture Trustee or the Eligible Lender Trustee as "Noteholders" or
"Certificateholders", as the case may be (as such terms are used in the
Indenture and the Trust Agreement, respectively). Hence, until Definitive
Securities are issued, holders of such Securities will only be able to exercise
the rights of Securityholders indirectly through DTC, Cedel or Euroclear and
their respective participating organizations. See "Description of the
Securities -- Book-Entry Registration" and "-- Definitive Securities".
FORMATION OF THE TRUST
THE TRUST
KeyCorp Student Loan Trust 1996-A is a trust formed under the laws of the
State of New York pursuant to the Trust Agreement for the transactions described
in this Prospectus. The Trust will not engage in any activity other than (i)
acquiring, holding and managing the Financed Student Loans and the other assets
of the Trust and proceeds therefrom, (ii) issuing the Certificates and the
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.
The Trust will be initially capitalized with equity of $
excluding amounts deposited in the Reserve Account by the Seller on the Closing
Date, representing the initial principal balance of the Certificates.
Certificates with an original principal balance of approximately $ will
be sold to and retained by the Seller and the remaining Certificates will be
sold to third-party investors that are expected to be unaffiliated with the
Seller, the Servicer, the Guarantors, the Trust or the Department. The equity of
the Trust, together with the proceeds from the sale of the Notes, will be used
by the Eligible Lender Trustee to purchase on behalf of the Trust the Initial
Financed Student Loans from the Seller pursuant to the Sale and Servicing
Agreement and to fund the deposit of the Pre-Funded Amount. The Seller will use
a portion of the net proceeds it receives from the sale of the Financed Student
Loans to make the Reserve Account Initial Deposit. Upon the consummation of such
transactions, the property of the Trust will consist of (a) a pool of 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 on or after September 1,
1996 , (c) all Assigned Rights with respect to certain Private Loans contained
in such pool and (d) all moneys and investments on deposit in the Collection
Account, the Pre-Funding Account, the Escrow Account, the Negative Carry Account
and the Reserve Account. The Notes will be collateralized by the property of the
Trust. The Collection Account, the Reserve Account, the Pre-Funding Account, the
Negative Carry Account and the Escrow Account will be maintained in the name of
the Indenture Trustee for the benefit of the Noteholders and the
Certificateholders. To facilitate servicing and to minimize administrative
burden and expense, the Servicer will be appointed custodian of the promissory
notes representing the Financed Student Loans by the Eligible Lender Trustee.
The Trust will use funds on deposit in the Escrow Account and the
Pre-Funding Account during the Funding Period (i) to purchase on or prior to the
Special Determination Date from the Subsequent Pool Pre-Funded Amount the
Subsequent Financed Student Loans, (ii) to cover collections of interest on
certain of the Financed Student Loans to the extent such interest is not paid
currently but is capitalized and added to the principal balance of such Financed
Student Loans and (iii) under certain circumstances, together with any
30
<PAGE> 33
amounts on deposit in the Escrow Account, to purchase from the Seller, for an
amount equal to % of the aggregate principal balance thereof plus accrued
interest (to the extent capitalized or to be capitalized), Serial Loans
(including Consolidation Loans and related Private Consolidated Loan guarantee
fees, if any) and Guarantee Fee Advances (collectively, the "Other Student
Loans"; together with the Subsequent Financed Student Loans, "Additional Student
Loans") made by the Seller to those eligible borrowers who have Student Loans
that are part of the pool of Financed Student Loans immediately prior to such
purchase (the expenditures referred to in clauses (i), (ii) and (iii) above
being collectively referred to herein as "Additional Fundings"). See
"Description of the Transfer and Servicing Agreements -- Additional Fundings".
The Pool Balance will be increased during the Funding Period by the principal
amount of Additional Student Loans conveyed to the Eligible Lender Trustee on
behalf of the Trust, less the principal amount of Financed Student Loans sold to
the Seller in connection with the making by the Seller of Federal Consolidation
Loans and Private Consolidation Loans. Any such conveyance of Additional Student
Loans is conditioned on compliance with the procedures described in the Sale and
Servicing Agreement. If on or prior to the Special Determination Date the
Subsequent Pool Pre-Funded Amount has not been reduced to zero, then the
remaining Subsequent Pool Pre-Funded Amount will be distributed on the first
Distribution Date to redeem each class of Notes and prepay the Certificates on a
pro rata basis based on the initial principal amount of each class of Notes and
the principal balance of the Certificates. Although the Seller intends to sell
all of the Student Loans constituting the Subsequent Pool to the Trust on or
prior to the Special Determination Date, any Student Loan in respect of which a
claim is made on a Guarantor following the Statistical Cutoff Date and prior to
the date such Student Loan is to be transferred to the Trust will not be
eligible for transfer to the Trust. In addition, the Seller expects that the
amount of Additional Fundings will approximate 100% of the Pre-Funded Amount by
the last day of the Collection Period preceding the Distribution
Date; however, there can be no assurance that a sufficient amount of Additional
Fundings will be made by such date. If the Pre-Funded Amount has not been
reduced to zero by the end of the Funding Period, the Holders of the Class A-1
Notes and, if the Class A-1 Notes are paid in full, the Holders of the Class A-2
Notes, will receive any amounts remaining in the Pre-Funding Account as a
payment of principal. See "Description of the Transfer and Servicing
Agreements -- Additional Fundings".
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.
CAPITALIZATION OF THE TRUST
The following table illustrates the capitalization of the Trust as of the
Statistical Cutoff Date, as if the issuance and sale of the Securities offered
hereby had taken place on such date:
<TABLE>
<S> <C>
Floating Rate Class A-1 Asset Backed Notes................. $
Floating Rate Class A-2 Asset Backed Notes.................
Floating Rate Asset Backed Certificates....................
------------
Total............................................ $
===========
</TABLE>
ELIGIBLE LENDER TRUSTEE
General. The First National Bank of Chicago is the Eligible Lender Trustee
for the Trust under the Trust Agreement. The First National Bank of Chicago is a
national banking association whose principal offices are located at One First
National Plaza, Suite 0126, Chicago, Illinois 60670 and whose New York offices
are located at First Chicago Trust Company of New York, 14 Wall Street, New
York, New York 10005. The Eligible Lender Trustee will acquire on behalf of the
Trust legal title to all the Financed Student Loans acquired from time to time
pursuant to the Sale 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 Federal Loans and
Private Loans for all purposes under the Higher Education Act and the Guarantee
Agreements. Failure of the Financed Federal Loans to be owned by an eligible
lender would result in the loss of any Guarantee Payments from any Federal
Guarantor and any Federal Assistance with respect to such Financed
31
<PAGE> 34
Federal Loans. See "The Financed Student Loan Pool -- Insurance of Student
Loans; Guarantors of Student Loans". The Eligible Lender Trustee's liability in
connection with the issuance and sale of the Notes and the Certificates is
limited solely to the express obligations of the Eligible Lender Trustee set
forth in the Trust Agreement and the Sale and Servicing Agreement. See
"Description of the Securities" and "Description of the Transfer and Servicing
Agreements". The Seller plans to maintain normal commercial banking relations
with the Eligible Lender Trustee.
Fees. In consideration for its performance of its obligations under the
Sale and Servicing Agreement, the Eligible Lender Trustee will be entitled to
receive an annual fee of $ , payable in quarterly installments on each
Distribution Date.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SOURCES OF CAPITAL AND LIQUIDITY
The Trust's primary sources of capital will be the net proceeds of the
Securities offered hereby. See "Formation of the Trust -- Capitalization of the
Trust".
The Trust's primary sources of liquidity will be collections with respect
to the Financed Student Loans and amounts on deposit in the Reserve Account. In
addition, under certain specified circumstances, amounts on deposit in the
Pre-Funding Account will be available to finance Additional Fundings or to make
principal payments on the Notes at the end of the Funding Period.
RESULTS OF OPERATIONS
The Trust was recently formed and, accordingly, has no meaningful results
of operations as of the date of this Prospectus. Because the Trust does not have
any operating history, there has not been included in this Prospectus any
historical or pro forma ratio of earnings to fixed charges. The earnings on the
Financed Student Loans and other assets owned by the Trust and the interest
costs of the Notes will determine the Trust's results of operations in the
future. The income generated from the Trust's assets will be used to pay
operating costs and expenses of the Trust (to the extent not paid by the
Seller), interest and principal on the Notes and distributions to the holders of
the Certificates. The principal operating expenses of the Trust are expected to
be, but are not limited to, the Servicing Fee, the Administration Fee and the
Excess Servicing Fee, if any.
USE OF PROCEEDS
After making the deposit of the Pre-Funded Amount to the Pre-Funding
Account, the balance of the net proceeds from the sale of the Certificates and
the Notes will be paid to the Seller to purchase the Initial Financed Student
Loans on the Closing Date. The Seller will use such proceeds paid to it (i) to
make the Reserve Account Initial Deposit and the Negative Carry Account Initial
Deposit and (ii) for general corporate purposes.
THE SELLER, THE ADMINISTRATOR AND THE SERVICER
THE SELLER AND ADMINISTRATOR
General. Key Bank USA, National Association (the "Bank"), will act as
Seller pursuant to the Sale and Servicing Agreement and Administrator pursuant
to the Administration Agreement. The Bank, a wholly owned subsidiary of KeyCorp,
is a national banking association providing consumer financial services
nationwide, including credit cards, student loans, and indirect automobile,
marine and recreational vehicle loans. In addition, the Seller provides certain
specialized services tailored to specific markets (including origination of
Student Loans under The Access Group(SM) Loan Program). The Seller, an affiliate
of the Seller and the predecessor of such affiliate have been the exclusive
lender of student loans under the Law Access Loan Program, since 1990, and the
other Access Group(SM) Loan Programs since 1993 and has been selected by
32
<PAGE> 35
The Access Group(SM) to be the exclusive lender of student loans under the
Program through the 1997-1998 school years. See "The Student Loan Financing
Business -- The Access Group(SM) Loan Programs" for a brief description of the
Seller's role under The Access Group(SM) Loan Programs.
As of June 30, 1996, the Bank had total assets of approximately $2.48
billion, total liabilities of approximately $2.24 billion and approximately
$0.24 billion in stockholder's equity. As of such date, the Seller had an
aggregate principal amount of student loans outstanding of approximately $2.25
billion, of which approximately $1.43 billion aggregate principal amount
consists of Student Loans originated under The Access Group(SM) Loan Programs.
The principal executive offices of the Bank are located at KeyCenter, 127 Public
Square, Cleveland, Ohio 44114 and its telephone number is (216) 689-3000.
Services and Fees of Administrator. Pursuant to the Administration
Agreement, the Administrator will be responsible for preparing and filing claim
forms on behalf of the Eligible Lender Trustee for Interest Subsidy Payments and
Special Allowance Payments from the Department and to provide notices and
reports and to perform other administrative obligations required by the
Indenture, the Trust Agreement and the Sale and Servicing Agreement. As
compensation for the performance of the Administrator's obligations and as
reimbursement for its expenses related thereto the administrator will be
entitled to an administration fee in an amount equal to $3,000 per quarter (the
"Administration Fee") payable by the Trust on each Distribution Date. See
"Description of the Transfer and Servicing Agreements -- Administrator."
THE SERVICER
General. PHEAA is a public corporation and a government instrumentality of
the Commonwealth of Pennsylvania. PHEAA was founded in 1964 and is located in
Harrisburg, Pennsylvania. In addition to servicing student loans, PHEAA
guarantees loans under the federal Title IV programs, administers certain state
scholarship and financial aid programs, and issues tax-exempt and taxable notes
to finance its direct lending secondary market purchases of student loan
portfolios. As of December 31, 1995, PHEAA had total assets of approximately
$2.5 billion. As of that date, PHEAA serviced approximately 1.1 million student
loan borrower accounts, with an aggregate principal balance of over $10.1
billion. PHEAA is one of the largest servicers of education loans in the nation.
PHEAA has approximately 2,200 employees.
In May 1995, PHEAA began converting the loans it serviced to a new system.
The purpose of the newly-designed system was to provide PHEAA and its clients
with capabilities to offer features and functionality in a timely and more
comprehensive manner. In July and August 1995, PHEAA converted the loans under
the Access Group(SM) Loan Program it had serviced for several years on existing
systems to the new system. Approximately 30 days after the conversion, PHEAA
identified several issues relative to borrowers' service and reporting requests
of the Access Group(SM) participants. PHEAA has advised the Seller that
corrective action has been taken. However, prior to completing the corrective
actions, PHEAA advised the Seller that there was material uncertainty as to the
impact, if any, of noncompliance with federal regulations and/or servicing
agreements, if any, as of December 31, 1995 and for the year then ended. Because
of the timing and nature of the uncertainty, the corrective procedures that
PHEAA has advised the Seller have been implemented and subsequent discussions
with PHEAA, the Seller believes that the problems PHEAA encountered in the
conversion process are not likely to have a material adverse affect on the
Financed Student Loans or on PHEAA's ability to perform its obligations as
Servicer.
Services and Fees of Servicer. Pursuant to the Sale and Servicing
Agreement and except as otherwise expressly assumed by the Administrator, PHEAA
has agreed as the Servicer to service, and perform all other related tasks with
respect to, all the Financed Student Loans acquired by the Eligible Lender
Trustee on behalf of the Trust. The Servicer is required to perform all services
and duties customary to the servicing of Student Loans and to do so in the same
manner as the Servicer has serviced Student Loans on behalf of the Seller and
otherwise in compliance with all applicable standards and procedures. In
addition, the Servicer is required to maintain its eligibility as a third-party
servicer under the Higher Education Act. See "Description of the Transfer and
Servicing Agreements -- Servicing Procedures".
33
<PAGE> 36
In consideration for performing its obligations under the Sale and
Servicing Agreement, the Servicer will receive, subject to certain limitations
described herein, a monthly fee payable by the Trust on each Monthly Servicing
Payment Date equal to the sum of (i) 0.41% per annum of the Pool Balance as of
the last day of the preceding calendar month and (ii) certain one-time fixed
fees for each Financed Student Loan for which a forbearance period was granted
or renewed or for which a guarantee claim was filed, in each case subject to
certain adjustments, together with other administrative fees and similar
charges. See "Description of Transfer and Servicing Agreements -- Servicing
Compensation".
THE STUDENT LOAN FINANCING BUSINESS
GENERAL
The Financed Student Loans to be sold by the Seller to the Eligible Lender
Trustee on behalf of the Trust pursuant to the Sale and Servicing Agreement have
been selected from Student Loans originated by the Seller under The Access
Group(SM) Loan Programs and made to students enrolled in or recently graduated
from approved or accredited law schools, medical schools, dental schools,
graduate business schools or other graduate level certificate or degree programs
("graduate schools"). The following table sets forth The Access Group(SM) Loan
Programs and the approved or accredited schools:
<TABLE>
<CAPTION>
THE ACCESS GROUP(SM)
LOAN PROGRAMS APPROVED OR ACCREDITED SCHOOLS
- ------------------- -----------------------------------------------------------
<S> <C>
Law Access American Bar Association-approved law schools that are
members of Law School Admission Council, Inc., a non-profit
organization ("LSAC")
Medical Access Liaison Committee on Medical Education or American
Osteopathic Association-accredited graduate medical schools
Dental Access American Dental Association-accredited dental schools
Business Access American Assembly of Collegiate Schools of Business
("AACSB")-accredited graduate business schools; or
AACSB-candidate schools accredited by the New England
Association of Schools and Colleges, the Middle States
Association of Colleges and Schools, the North Central
Association of Colleges and Schools, the Southern Associa-
tion of Colleges and Schools, the Western Association of
Schools and Colleges, or the North West Association of
Schools and Colleges
Graduate Access Schools accredited by the New England Association of
Schools and Colleges, the Middle States Association of
Colleges and Schools, The North Central Association of
Colleges and Schools, the Southern Association of Colleges
and Schools, the Western Association of Schools and
Colleges, or the North West Association of Schools and
Colleges
</TABLE>
The proceeds of these loans are used by students to finance a portion of
the costs of attending law school, medical school, dental school, graduate
business school and other graduate schools, of preparing for and taking one or
more state bar examinations upon graduation from law school, and of
participating in one or more medical residency programs upon graduation from
medical school. As described herein, substantially all payments of principal and
interest with respect to the Financed Federal Loans will be guaranteed against
default, death, bankruptcy or disability of the applicable borrower by PHEAA
pursuant to a guarantee agreement to be entered into between PHEAA and the
Eligible Lender Trustee, or by ASA pursuant to a guarantee agreement to be
entered into between ASA and the Eligible Lender Trustee (such agreements, each
as amended or supplemented from time to time, the "Federal Guarantee
Agreements"). Each of PHEAA and ASA is entitled, subject to certain conditions,
to be reimbursed for all or substantially all Guarantee Payments it makes by the
Department pursuant to a program of federal reinsurance under the Higher
Education Act of 1965, as amended (such Act, together with all rules and
regulations promulgated thereunder by the Department and/or the Federal
Guarantors, the "Higher Education Act"). In addition, the
34
<PAGE> 37
Eligible Lender Trustee, as a holder of the Financed Federal 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
Federal Loans as described herein. See "-- Federal Loans Under the Program" and
"The Financed Student Loan Pool -- Insurance of Student Loans; Guarantors of
Student Loans".
Payment of principal and interest with respect to the Financed Private
Loans will be guaranteed against default, death, bankruptcy or disability of the
applicable borrower by TERI pursuant to a guarantee agreement to be entered into
among TERI, the Seller and the Eligible Lender Trustee (such agreement, as
amended or supplemented from time to time, together with the Federal Guarantee
Agreements, the "Guarantee Agreements"). See "-- Private Loans Under the
Program" and "The Financed Student Loan Pool -- Insurance of Student Loans;
Guarantors of Student Loans". PHEAA, ASA and TERI are sometimes individually
referred to herein as a "Guarantor" and collectively as the "Guarantors".
Legal title to all the Financed Student Loans that from time to time
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
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 (and, with respect to the Guarantee Agreements, by references to the
forms of such agreements included as exhibits to the Registration Statement).
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 -- Changes in Legislation May Adversely Affect Financed
Student Loans and Guarantors".
THE ACCESS GROUP(SM) LOAN PROGRAMS
General. The Access Group(SM) Loan Programs (the "Program") provide
educational financing to graduate and professional students enrolled in or
recently graduated from approved or accredited law schools, medical schools,
dental schools, graduate business schools or other graduate schools. The Law
Access Program has been administered since 1983 by Law School Admission
Services, Inc., a non-profit corporation. The rights and assets of Law School
Admission Services, Inc. relating to the Law Access Program were transferred in
June 1993 to The Access Group(SM), or its predecessor, a Delaware non-profit
corporation controlled by members of LSAC. The Access Group(SM) Loan Programs
were expanded for the 1993-1994 school year to include Business Access(SM)
Loans, and then for the 1995-1996 school year to include the rest of The Access
Group(SM) Loan Programs. The Seller (or its predecessors) has been the exclusive
lender originating loans under the Program since 1990 and has, as of June 30,
1996, originated loans under the Program in an aggregate principal amount of
approximately $ billion. The Program consists of Student Loans which are
guaranteed by PHEAA or ASA and are reinsured by the Department ("Federal Loans")
and Student Loans which are guaranteed by TERI but are not reinsured by the
Department ("Private Loans"). As described below, Federal Loans include
"Stafford Loans", "SLS Loans" and "Federal Consolidation Loans" and Private
Loans include Law Access Loans ("LAL Loans"), Medical Access(SM) Loans ("MAL
Loans"), Dental Access(SM) Loans ("DAL Loans"), Business Access(SM) Loans ("BAL
Loans"), Graduate Access(SM) Loans ("GAL Loans"), Bar Examination Loans ("BEL
Loans"), Residency Loans ("REL Loans") and "Private Consolidation Loans".
Eligibility. To be eligible to obtain a loan under the Program (other than
a Consolidation Loan, BEL Loan or REL Loan), a student must, among other things,
(i) be enrolled in, or admitted for enrollment in, an approved or accredited
school, (ii) be enrolled in, or enroll in an acceptable degree 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, (iii) be a
U.S. citizen, U.S. national or eligible noncitizen, (iv) 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, and (v) not be
in default on any education loan or owe a refund on an educational grant (each
such student, an "Eligible Student").
35
<PAGE> 38
The following table sets forth the approved or accredited schools and the
acceptable degree programs for each Program loan:
<TABLE>
<CAPTION>
ACCEPTABLE
LOAN APPROVED/ACCREDITED SCHOOLS DEGREE PROGRAMS
- --------- --------------------------------------------------- --------------------------
<S> <C> <C>
LAL Loan American Bar Association-approved law schools that Juris Doctor, Master of
are members of LSAC Laws or other joint degree
program
MAL Loan Liaison Committee on Medical Education- or American Medical Doctor or Doctor
Osteopathic Association-accredited graduate medical of Osteopathy
schools
DAL Loan American Dental Association-accredited dental Graduate dental program
schools
BAL Loan American Assembly of Collegiate Schools of Business Graduate business program
("AACSB")-accredited graduate business schools; or
AACSB-candidate schools accredited by the New
England Association of Schools and Colleges, the
Middle States Association of Colleges and Schools,
the North Central Association of Colleges and
Schools, the Southern Association of Colleges and
Schools, the Western Association of Schools and
Colleges, or the North West Association of Schools
and Colleges
GAL Loan Schools accredited by the New England Association Graduate level certificate
of Schools and Colleges, the Middle States or degree program
Association of Colleges and Schools, The North
Central Association of Colleges and Schools, the
Southern Association of Colleges and Schools, the
Western Association of Schools and Colleges, or the
North West Association of Schools and Colleges
</TABLE>
In addition, a law student may also receive a BEL Loan to finance the costs
of preparing for and taking one or more state bar examinations if such student
has applied for a BEL Loan within a limited period before or after graduation
and a medical student may also receive a REL Loan to finance the cost of
participating in one or more medical residency programs if such student has
applied for a REL Loan within a limited period before or after graduation. Prior
to the 1996-1997 Program, a law student could only receive a BEL Loan if such
student had existing Student Loans outstanding under the Program. The 1996-1997
Program does not require the student to have existing Student Loans outstanding
in order to receive a BEL Loan. A medical student is not required to have
existing Student Loans outstanding in order to receive a REL Loan.
Origination Process. The Higher Education Act specifies rules regarding
loan origination practices, which lenders must comply with in order for their
Federal 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.
The Department has recently indicated that a FFELP lender may not
compensate a marketing entity based on a percentage of the lender's profits on
loan volume generated by the marketer's activities because it constitutes
compensation based on loans disbursed rather than loan applications received.
Prior Department correspondence had indicated that marketing compensation was
not subject to restriction under the Higher Education Act.
Dr. Joseph L. McCormick, Acting Director, Guarantor and Lender Oversight
Staff, Department of Education, wrote to Daniel R. Lau, President, The Access
GroupSM, regarding this issue. In this letter, Dr. McCormick informed Mr. Lau
that "the Department will take no adverse action with respect to a loan, the
36
<PAGE> 39
lender, or holder thereof, based on the payment of marketing expenses that are
in conflict with the [new] interpretation. . . . This policy does not, however,
apply to loans made after [August 15, 1995]."
The Financed Federal Loans were made by the Seller pursuant to agreements
under the Program under which The Access Group(SM) (and its predecessor, Law
School Admissions Services, Inc.) acted as a marketing agent and received
compensation that would arguably violate the new Department interpretation. Each
of these loans were either made prior to August 15, 1995, and therefore are
covered by the Department's assurance of no adverse action described above, or
pursuant to new agreements providing for compensation that fully complies with
the new interpretation.
With respect to all Student Loans made under the Program (other than
Consolidation Loans discussed below), the Seller forwards each application for
such Student Loans (which should include an executed promissory note) to The
Access Group(SM). On behalf of the Seller, The Access Group(SM) reviews 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. In addition, a credit report of each applicant for Private Loans is
obtained from an applicable credit reporting service, which the Seller then uses
to determine, in consultation with TERI, whether such applicant satisfies
certain specified credit underwriting criteria. Such criteria include that such
credit report shows that no account has been more than 90 days delinquent in the
past two years, that no more than one account is currently more than 60 days
delinquent, that no account has been charged-off in the last two years and that
there is no record of a bankruptcy in the past seven years. The credit criteria
for the 1994-1995 Program also include requirements that no account has been
delinquent 90 or more days in the past five years (or three years with respect
to any previous borrower), and there have been no more than three inquiries (and
none with respect to a previous borrower) to an authorized credit reporting
agency in the past six months. The credit criteria for the 1996-1997 Program
includes the additional requirement that no more than two accounts have been
more than 60 days delinquent in the past two years. The Access Group(SM)
forwards a copy of each 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 Access
Group(SM) and the respective Guarantor (and approval by the Seller, in the case
of LAL Loans, MAL Loans, DAL Loans, BAL Loans, GAL Loans, BEL Loans, and REL
Loans) and receipt of evidence from such Guarantor that the applicable loan is
guaranteed, the Seller causes the proceeds of such loan to be disbursed in one
or more installments. For each loan that is made, The Access Group(SM) forwards
the completed loan application and executed promissory note to the Servicer,
which serves as custodian for such materials.
Any borrower inquiries concerning Consolidation Loans received by The
Access Group(SM) or the Seller are forwarded to the Servicer, who contacts the
borrower, prepares and sends 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 a Federal Consolidation Loan, borrowers typically
express no preference as to the identity of the lender. In that event, the
Servicer is required under the Program to choose 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 Servicer is 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 Federal
Consolidation Loan or Private Consolidation Loan, as the case may be. In
addition, with respect to any Private Consolidation Loan, the Servicer is
required to transmit to the lender such information as the lender may need to
complete the credit review and applicant notification procedures that lender is
currently performing with respect to LAL Loans, MAL Loans, DAL Loans, BAL Loans,
GAL Loans, BEL Loans, and REL Loans, and the lender will transmit the results of
the credit review (i.e., approval or rejection) back to the Servicer. Upon
approval of an application for Consolidation Loans, the applicable lender causes
the proceeds of such Consolidation Loan to be disbursed to each lender of the
loans being consolidated in amounts sufficient to
37
<PAGE> 40
retire each of such loans. For each Consolidation Loan that is made by the
Seller, the Servicer retains the completed loan application and executed
promissory note as custodian.
Servicing and Collections Process. The Higher Education Act, the Program
and the applicable Guarantee Agreements require the holder of Student 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 Student Loans that are designed to ensure that such Student
Loans are repaid on a timely basis by or on behalf of borrowers. The Servicer
performs such procedures on behalf of the Seller and has agreed, pursuant to the
Sale and Servicing Agreement, to perform 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 Servicer's
loan file for the borrower. The Servicer is also required to perform 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 Financed 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 Financed Federal Loan. See "Risk Factors -- Risk of Loss of
Federal Guarantor and Department Payments for Failure to Comply with Loan
Origination and Servicing Procedures for Federal Loans" and "-- Risk of Loss of
Private Guarantor Payments for Failure to Comply with Loan Origination and
Servicing Procedures for Private Loans".
At prescribed times prior to submitting a claim for payment under a
Guarantee Agreement for a delinquent Financed Student Loan, the 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 (in
the case of Federal Loans) or 120 days (in the case of Private Loans), the
Servicer may file a default claim with the respective Guarantor. Failure to file
a claim within 225 days (in the case of Federal Loans) or 180 days (in the case
of Private Loans) of delinquency may result in denial of the guarantee claim
with respect to such loan. The Servicer's failing to file a guarantee claim in a
timely fashion would constitute a breach of its covenants and create an
obligation of the Servicer to purchase the applicable Financed Student Loan. See
"Description of the Transfer and Servicing Agreements -- Servicer Covenants".
Incentive Programs. The Seller has offered, and intends to continue to
offer, incentive programs to certain Student Loan borrowers. Two such programs
are currently made available by the Seller and may apply to Student Loans owned
by the Trust. Under one program, which is made available for all Student Loans
which enter repayment after October 1, 1995, if a borrower makes 48 consecutive
scheduled payments in a timely fashion, the effective interest rate charged to
the borrower will be reduced as long as timely payments continue to be received.
For Stafford Loans and SLS Loans, the rate reduction will be 2.0% per annum. For
Federal Consolidation Loans, the rate reduction will be 1.0% per annum. For
Private Loans, the rate reduction will be 0.5% per annum. Pursuant to the other
program which will take effect during 1996, borrowers who make student loan
payments electronically through automatic monthly deductions from a bank account
receive a 0.25% effective interest rate reduction as long as they continue in
such direct repay plan. It cannot be predicted with certainty the extent to
which borrowers will decide to participate in these programs.
These incentive programs currently or hereafter made available by the
Seller to borrowers under the Program may also be made available by the Servicer
to borrowers with Financed Student Loans. Any such incentive program that
effectively reduces borrower payments on Financed Student Loans and is not
required
38
<PAGE> 41
by the Higher Education Act will be applicable to the Financed Student Loans
only if and to the extent that the Trust receives payment from the Seller in an
amount sufficient to offset such effective yield reductions.
FEDERAL LOANS UNDER THE PROGRAM
General. The following descriptions of the Federal Stafford Loan Program,
the Federal Supplemental Loans for Students Program and the Federal
Consolidation Loan Program (such programs being collectively referred to herein
as the "Federal Programs") 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 1992 Amendments extended the principal provisions
of the Federal Programs to September 30, 1998 (or, in the case of borrowers who
have received Federal Loans prior to that date, September 30, 2002).
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 Student Loans
made thereunder, including the Financed Student Loans, or the Guarantors. In
addition, future measures to reduce the federal budget deficit or for other
purposes 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 Federal Guarantors. For a discussion of each Federal
Guarantor's claims-paying ability, see "The Financed Student Loan Pool --
Insurance of Student Loans; Guarantors of Student Loans."
On August 10, 1993, President Clinton signed the Omnibus Budget
Reconciliation Act of 1993, which made a number of changes that may adversely
affect the financial condition of the Federal 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 substantially
the premiums and default collections that Federal Guarantors are entitled to
receive and/or retain and giving the Department broad powers over Federal
Guarantors and their reserves. These powers include the authority to require a
Federal Guarantor to return all reserve funds to the Department if the
Department determines such action is necessary to ensure an orderly termination
of the Federal Guarantor, to serve the best interests of the student loan
programs or to ensure the proper maintenance of such Federal Guarantor's funds
or assets. The Department is also now authorized to direct a Federal 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
Federal Guarantor and/or to cease any activities involving the use of the
Federal Guarantor's reserve funds or assets which the Department determines is a
misapplication or otherwise improper. The Department may also terminate a
Federal 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
Federal 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 minimum 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 Programs. Under the Federal Direct
Student Loan Program, the Department directly originates and holds student loans
without the involvement of private lenders. Congress may consider amendments to
the Higher Education Act this year to achieve budget savings in connection with
budget reconciliation legislation. While it is unclear what changes will be
included in the final legislation (if any), it is possible that reductions in
the lender's yield on FFELP loans and a decrease in the percentage of such loans
covered by guarantee will be enacted. It is anticipated that the applicability
of such changes would be limited to loans made on or after the date of
enactment. Accordingly, it is anticipated that such changes would only affect
Federal Consolidation Loans and Federally guaranteed Serial Loans purchased by
the Trust. See "Risk Factors -- Changes in Legislation May Adversely Affect
Financed Student Loans and Guarantors".
39
<PAGE> 42
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 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 (PHEAA or ASA
in the case of Financed Federal Loans), 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 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").
The Initial Financed Federal Loans and certain Student Loans in the
Subsequent Pool 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 more than
the maximum Stafford Loan authorized by statute.
(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 (who, in the case of law
school, medical school, dental school, graduate business school and graduate
school students, constitute 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 Access Group(SM) Loan Programs", 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 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. For the time periods applicable to the
Financed Federal Loans, the annual and aggregate limitations applicable to each
law, medical, dental, graduate business or other graduate student in the case of
the Financed Federal Loans are as follows: such student can borrow no more than
$7,500 per year of Stafford Loans (subsidized and unsubsidized) and cannot have
outstanding Federal Loans (but excluding for this purpose SLS Loans and loans
made under the Parent Loans to Undergraduate Students program) in excess of
$54,750 at any one time (or $65,500, for loans first disbursed on or after July
1, 1993). On July 1, 1993, the annual limitation for unsubsidized Stafford Loans
was increased to $10,000, and the graduate student aggregate loan limit amount
was increased to $138,500, not to exceed $65,500 in subsidized loans. On October
1, 1993, the annual limitation for unsubsidized Stafford loans was increased to
40
<PAGE> 43
$8,500. As a result of both revisions, a graduate student may borrow up to
$18,500 per year of Stafford Loans (subsidized and unsubsidized). On August 15,
1996, the Secretary authorized higher annual (but not aggregate) unsubsidized
Stafford Loan limits for certain new health professions student borrowers to
compensate for restrictions recently enacted by Congress on the ability of those
students to borrow under other Federal loan programs. As a result, some
unsubsidized Stafford Loans sold into the Trust made for periods of enrollment
beginning on or after July 1, 1996 may reflect the higher limits.
(3) Interest. Stafford Loans made to students with respect to periods of
enrollment 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. Except as noted in the next paragraph,
for the time periods applicable to the Financed Federal Loans, Stafford Loans
made on or after July 1, 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
at a variable rate reset each July 1 equal to the 91-day Treasury Bill Rate plus
3.25% or, for Stafford loans to such borrowers which are first disbursed after
July 23, 1992, 3.10%, not to exceed 10% per annum thereafter. The rate for
variable rate Stafford Loans applicable for any 12-month period beginning on
July 1 and ending on June 30 is determined on the preceding June 1 and is equal
to the lesser of (a) the applicable maximum rate and (b) the sum of (i) the bond
equivalent rate of 91 day Treasury bills auctioned at the final auction held
prior to such June 1 and (ii) the applicable interest rate margin.
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 91-day Treasury bills 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 3.1% 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, 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 capitalized and added to
the outstanding principal balance of such Stafford Loan at the end of such
Forbearance Period. See "-- (6) Interest Subsidy Payments".
"91-day Treasury Bill Rate" means, on any date of determination, the
weighted average per annum discount rate (expressed on a bond equivalent basis
and applied on a daily basis) for 91-day Treasury bills at the most recent
91-day Treasury bill auction prior to such date as published by the Board of
Governors of the Federal Reserve System or as reported by the U.S. Treasury
Department.
(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 of not more than 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
41
<PAGE> 44
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. For
Stafford Loans and SLS Loans first disbursed on or after July 1, 1993 to a
borrower who has no outstanding Federal Loans on the date such loan is made, the
borrower must be offered the opportunity to repay the loan according to a
graduated or income-sensitive repayment schedule established in accordance with
Department regulations. For Stafford Loans entering repayment on or after
October 1, 1995, borrowers may choose among several repayment options, including
the option to make interest only payments for limited periods.
(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 other
than 7% per annum) (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, during certain other periods (varying from six months to
three years) when the borrower has joined the military or certain volunteer
organizations (for all loans made prior to 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"). In addition, the lender may, and in some
circumstances must, 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 of Loss
of Federal Guarantor and Department Payments for Failure to Comply with Loan
Origination and Servicing Procedures"; "Formation of the Trust -- Eligible
Lender Trustee" and "Description of the Transfer and Servicing
Agreements -- Servicing Procedures". The Seller 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
Financed Federal Loan for a quarter will be equal to the excess, if any, of (i)
the amount of interest that would be
42
<PAGE> 45
payable on such loan at a rate per annum equal to the average bond equivalent
rates of 91-day Treasury bills auctioned for such quarter plus 3.25% (3.10% for
loans first disbursed on or after October 1, 1992) 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 of Loss of Federal Guarantor and Department Payments for
Failure to Comply with Loan Origination and Servicing Procedures"; "Formation of
the Trust -- Eligible Lender Trustee" and "Description of the Transfer and
Servicing Agreements -- Servicing Procedures". The Seller 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 -- Inability of Indenture Trustee to Liquidate
Financed Student Loans"and "-- Variability of Actual Cash Flows". The
Administrator 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 Federal Loans on behalf of the Trust.
The Administrator 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 Financed Federal Loans. Except
under certain conditions described herein, the Eligible Lender Trustee will be
required to remit Interest Subsidy Payments and Special Allowance Payments it
receives with respect to the Financed Federal Loans within two business days of
receipt thereof to the Collection Account.
SLS Loans. In addition to the Federal 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 "Federal Supplemental Loans for Students
Program" (the "SLS Program"). The basic framework and principal provisions of
the Federal 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 in
the case of those constituting Financed Student Loans are as follows: SLS Loans
to a single borrower cannot exceed $4,000 per academic year (or $10,000 for
loans first disbursed on or after July 1, 1993) and $20,000 in aggregate
principal amount (or $73,000 for loans first disbursed on or after July 1, 1993)
(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 Federal 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 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) 3.25% (3.10% for loans first disbursed on and after
43
<PAGE> 46
October 1, 1992), with a maximum rate of 12% per annum (11% for loans first
disbursed on or after 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 maximum borrower 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. For SLS
Loans entering repayment on or after October 1, 1995, borrowers may choose among
several repayment options, including the option to make interest only payments
for limited periods. As of July 1, 1994, the SLS Loan program was discontinued
and SLS Loans will no longer be made.
Federal Consolidation Loans. The Higher Education Act established a
program to facilitate the ability of eligible borrowers of Stafford Loans or SLS
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 "Federal 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 Federal Consolidation Loans and a requirement that the
proceeds of Federal 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 Federal Consolidation Loan will be entitled to
substantially the same guarantee and federal reinsurance arrangements as are
available on Stafford Loans and SLS Loans. Federal Consolidation Loans, like
Stafford Loans, are also eligible for Interest Subsidy Payments and Special
Allowance Payments. Under this program, an eligible borrower of Federal
Consolidation Loans such as those that may be Additional Student Loans means a
borrower (i) with outstanding Underlying Federal Loans and (ii) 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 Federal Consolidation Loan so long as both individuals agree to be held
jointly and severally liable on such Federal Consolidation Loan.
Under this program, a lender may make a Federal 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 Federal Consolidation Loan from any
of the holders of the outstanding Underlying Federal Loans of the borrower. The
lender making any Federal 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 Federal Consolidation Loans in two ways.
First, the Trust may own Underlying Federal Loans with respect to which an
institution other than the Seller (or the Seller if the Pre-Funded Amount has
been reduced to less than the amount of the Federal Consolidation Loan), or the
Department (under the Federal Direct Loan Program) makes the Federal
Consolidation Loan, in which case such Underlying Federal Loans will be prepaid
in full and such prepayment amount will be deemed collections for the applicable
Collection Period. See "Description of the Transfer and Servicing Agreements --
Distributions". Second, the Seller may make a Federal Consolidation Loan during
the Funding Period, in
44
<PAGE> 47
which case it will acquire the related Underlying Federal Loans from the
Eligible Lender Trustee, simultaneously deposit the Purchase Amount thereof in
an escrow account in the name of the Indenture Trustee for the benefit of the
Trust (the "Escrow Account"), and subsequently will sell the Federal
Consolidation Loan back to the Eligible Lender Trustee, to the extent that the
conditions with respect to such Federal Consolidation Loan are satisfied
(including the cap on the aggregate dollar amount of Consolidation Loans which
can be purchased by the Eligible Lender Trustee) and funds are available in the
Escrow Account and the Pre-Funding Account for the purchase thereof. An amount
equal to the excess of the outstanding principal balance of such Federal
Consolidation Loan will be withdrawn first from the Escrow Account to the extent
funds are then available and then from the Pre-Funding Account and paid to the
Seller, and the Pool Balance will increase accordingly. See "Description of the
Transfer and Servicing Agreements -- Additional Fundings".
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 Seller on a loan originated by the
Seller under the Federal Consolidation Loan Program. The availability of such
lower-rate, income-contingent loans may decrease the likelihood that the Seller
would be the originator of a Consolidation Loan with respect to borrowers with
Financed Federal Loans, as well as increase the likelihood that a Financed
Federal Loan in the Trust will be prepaid through the issuance of a Federal
Direct Consolidation Loan. The volume of existing loans that may be prepaid in
this fashion is not determinable at this time.
In accordance with the Higher Education Act, Federal Consolidation Loans
may bear interest, as negotiated between the individual borrower and lender, at
a rate per annum up to the weighted average of the interest rates on the
Underlying Federal Loans (rounded up to the nearest whole percent) or, for loans
made before July 1, 1994, 9%, whichever is greater. In general, a borrower must
repay each Federal Consolidation Loan in scheduled monthly installments over a
period of not more than 10 to 30 years (excluding any Deferral Period and any
Forbearance Period), depending on the original principal amount of such Federal
Consolidation Loan. Borrowers may voluntarily prepay all or a portion of any
Federal Consolidation Loan without premium or penalty. Repayment of a Federal
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 Period and
Forbearance Period. For Federal Consolidation Loans entering repayment on or
after October 1, 1995, borrowers may choose among several repayment options,
including the option to make interest only payments for limited periods.
The Omnibus Budget Reconciliation Act of 1993 made a number of changes to
the Federal Consolidation Loan Program, including requiring holders of Federal
Consolidation Loans made on or after October 1, 1993, to pay to the Department a
monthly fee equal to 1.05% per annum on the outstanding balance of such loans,
requiring lenders of Federal Consolidation Loans made on or after July 1, 1994,
to offer borrowers income-sensitive repayment schedules, repealing the $7,500
minimum indebtedness requirement and removing the 9% interest rate floor for
Federal Consolidation Loans made on or after July 1, 1994. In addition, with
respect to any Federal Loan (including Federal Consolidation Loans) made on or
after October 1, 1993, the lender must pay to the Department an origination fee
equal to 0.50% on the initial principal balance of such loan (the "Federal
Origination Fee"). With respect to any Federal Consolidation Loan originated by
the Seller and purchased by the Eligible Lender Trustee on behalf of the Trust,
the Trust must pay to the Department the Federal Origination Fee, which fee will
be deducted by the Department out of Interest Subsidy Payments and Special
Allowance Payments. If sufficient Interest Subsidy Payments and Special
Allowance Payments are not due to the Trust to cover the amount of the Federal
Origination Fee, the balance of such Federal Origination Fee may be deferred by
the Department until sufficient Interest Subsidy Payments and Special Allowance
Payments accrue to cover such fee. If such amounts never accrue, the Trust would
be obligated to pay any remaining fee from other assets of the Trust prior to
making distributions to Noteholders or Certificateholders. The offset of
Interest Subsidy Payments and Special Allowance Payments, and the payment of any
remaining fee from other Trust assets, will further reduce the amount of
collections
45
<PAGE> 48
from which payments to Noteholders and Certificateholders may be made.
Furthermore, any offset of Interest Subsidy Payments and Special Allowance
Payments will further reduce the Student Loan Rate.
PRIVATE LOANS UNDER THE PROGRAM
General. In addition to the Federal Loans, the Program also provides for
Private Loans to be issued to eligible students who satisfy certain
creditworthiness criteria to provide financial assistance to help pay for the
costs of attending law, medical, dental, graduate business, or graduate school
and of passing one or more state bar examinations upon graduation from law
school, participating in one or more medical residency programs upon graduating
from medical school. The Private Loans under the Program consist of Law Access
Loans ("LAL Loans"), Medical Access(SM) Loans ("MAL Loans"), Dental Access(SM)
Loans ("DAL Loans"), Business Access(SM) Loans ("BAL Loans"), Graduate
Access(SM) Loans ("GAL Loans"), Bar Examination Loans ("BEL Loans"), Residency
Loans ("REL Loans") and Private Consolidation Loans. Subject to the satisfaction
of the conditions imposed by the Program and the applicable Guarantee Agreement,
all Financed Private Loans are fully guaranteed against nonpayment of principal
and interest as a result of a borrower's default, death, disability or
bankruptcy by TERI. Holders of Private Loans, however, are not entitled to
receive any Federal Assistance with respect thereto. See "The Financed Student
Loan Pool -- Insurance of Student Loans; Guarantors of Student Loans". In order
to qualify for the guarantee from TERI, Private Loans may not be made to a
single borrower in excess of the annual and aggregate limits imposed by the
Program and may only be made to borrowers who qualify pursuant to credit
underwriting standards established by the Seller and approved by TERI and who
otherwise satisfy the eligibility requirements discussed above under "-- The
Access Group(SM) Loan Programs". Under the 1990-1991 Program, each law student
was permitted to borrow no more than $13,500 aggregate principal amount of LAL
Loans in any given year and $40,500 in the aggregate and to borrow a single BEL
Loan of up to $4,000 within a specified period before or after completion of
such student's final year of law school. Under the 1991-1992 Program, these
limits were increased for LAL Loans to $14,500 annually and $43,500 in the
aggregate and to $5,000 for the single BEL Loan. Under the 1992-1993 Program,
the limitations on the LAL Loans were increased to $15,000 annually and $45,000
in the aggregate. These limits on LAL Loans and BEL Loans remained in effect
through the 1995-1996 Program. Beginning with the 1996-1997 Program, in addition
to LAL Loans and BEL Loans, MAL Loans, DAL Loans, BAL Loans, GAL Loans, and REL
Loans are also included in the Trust. The following table summarizes the annual
and aggregate loan limits for each loan in the 1996-1997 Program:
<TABLE>
<CAPTION>
AGGREGATE
LOAN ANNUAL MAXIMUM MAXIMUM (2)
---- --------------------------------- -----------
<S> <C> <C>
Law Access Loan.......... Up to the cost of attendance $ 120,000
Medical Access(SM)
Loan................... Up to the cost of attendance 165,000
Dental Access(SM) Loan... Up to the cost of attendance 135,000
Business Access(SM)
Loan................... Up to the cost of attendance (1) 120,000
Graduate Access(SM)
Loan................... Up to the cost of attendance 120,000
Bar Examination Loan..... $5,000
Residency Loan........... 8,000
</TABLE>
- ---------------
(1) Students enrolled less than half-time can borrow a maximum annual amount of
the combined cost of tuition, fees, and a maximum of $500 for books and
supplies.
(2) Including graduate and undergraduate debt.
Prior to 1995, only LAL and BEL Loans were originated. The following table
summarizes the annual and aggregate loan limits by Program year:
<TABLE>
<CAPTION>
ANNUAL AGGREGATE
PROGRAM LOAN MAXIMUM MAXIMUM
------- ---- ------- -----------
<S> <C> <C> <C>
1990-1991......................... LAL $13,500 $40,500
BEL 4,000 4,000
</TABLE>
46
<PAGE> 49
<TABLE>
<CAPTION>
ANNUAL AGGREGATE
PROGRAM LOAN MAXIMUM MAXIMUM
------- ---- ------- ---------
<S> <C> <C> <C>
1991-1992......................... LAL 14,500 43,500
BEL 5,000 5,000
1992-1993......................... LAL 15,000 45,000
through 1995-1996 BEL 5,000 --
</TABLE>
Payment Terms. Each Private Loan earns interest at a rate per annum, reset
quarterly, equal to the 91-day Treasury Bill Rate plus a certain percentage,
depending on the type of loan (or, with respect to each Private Loan made since
the commencement of the 1992-1993 Program, a certain percentage on and after the
applicable Private Loan Repayment Commencement Date). The following table sets
forth the applicable interest rate for each loan:
<TABLE>
<CAPTION>
INTEREST MARGIN
OVER 91-DAY
TREASURY BILLS
---------------------
LOAN (1) (2)
---- -------- --------
<S> <C> <C>
Law Access Loan.................................. 3.25% 3.40%
Medical Access(SM) Loan.......................... 2.50 2.75
Dental Access(SM) Loan........................... 2.50 3.00
Business Access(SM) Loan......................... 3.25 3.40
Graduate Access(SM) Loan......................... 3.25 3.40
Bar Examination Loan............................. 3.25 3.40
Residency Loan................................... 2.50 2.75
- ---------------
<FN>
(1) Interest earned on each Private Loan is at a rate per annum, reset
quarterly, equal to the 91-day Treasury Bill Rate plus the specified margin
(2) Interest earned on all Private Loans made since the commencement of the
1992-1993 Program, on the applicable Private Loan Repayment Date.
</TABLE>
Interest accrues on the outstanding principal amount of each Private Loan
from the date the lender makes such Private Loan and is payable monthly by each
borrower commencing approximately six months after such borrower ceases to be an
Eligible Student (or, with respect to each Private Loan made since the
commencement of the 1996-1997 Program, approximately nine months after such
borrower ceases to be an Eligible Student), subject to deferral or forbearance
as discussed below (the "Private Loan Repayment Commencement Date"). Subject to
certain conditions, borrowers of Private Loans (other than Private Consolidation
Loans) may receive the benefits of certain deferral periods (either prior to
commencing repayment or thereafter) similar to those applicable to Stafford
Loans, during which borrowers are permitted to defer principal payments and to
capitalize the interest accruing on such Private Loans. Borrowers of MAL Loans
and REL Loans, subject to certain conditions, may defer repayment of such loans
until the required residency program is completed, not to exceed 48 months. In
addition, borrowers of Private Loans (other than Private Consolidation Loans)
may, subject to certain conditions, qualify, at the discretion of the lender (in
accordance with standards and guidelines approved by TERI), for periods of
forbearance because of temporary financial hardship, during which borrowers may
defer or make reduced principal payments on such Private Loans. Interest on each
Private Loan that accrues prior to the Private Loan Repayment Commencement Date
may, at the option of the borrower, be paid currently or be capitalized and
added to the principal amount outstanding for such Private Loan on that date.
Each student with outstanding Private Loans (other than Private Consolidation
Loans) is obligated to make scheduled payments of principal at the same time
that he or she makes interest payments in an amount sufficient to repay such
Private Loan in full over a period not to exceed 15 years (or, with respect to
each Private Loan made since the commencement of the 1996-1997 Program, 20
years) after the Private Loan Repayment Commencement Date with respect to such
Private Loan. Any student may at any time voluntarily prepay all or any portion
of his or her outstanding Private Loans (including paying accrued interest prior
to the Private Loan Repayment Commencement Date quarterly in lieu of
capitalizing such amounts) without premium or penalty. The Program presently
requires a
47
<PAGE> 50
minimum annual principal and interest payment with respect to a Private 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. For Private Loans entering
repayment on or after October 1, 1995, borrowers may choose among several
repayment options, including the option to make interest only payments for
limited periods.
With respect to each Private Loan (other than Private Consolidation Loans)
made to a student since the commencement of the 1992-1993 Program, a fee equal
to 2% of the original principal amount of such Private Loan is charged to such
student on the applicable Private Loan Repayment Commencement Date. Commencing
with the 1996-1997 Program, a fee of 4% of the original principal amount of each
LAL Loan and 3% of each GAL Loan and BEL Loan will be charged to such student on
the applicable Private Loan Repayment Commencement Date. The fee will remain at
2% for MAL Loans, DAL Loans, BAL Loans, and REL Loans. At the option of such
student, the Seller will make an additional loan (a "Guarantee Fee Advance") to
such student in an amount equal to such fee, which will be added to the
principal balance of such Private Loan and repaid over the term thereof. See
"Description of the Transfer and Servicing Agreements -- Additional Fundings"
for a discussion of the transfer of such Guarantee Fee Advance to the Trust.
Approximately 12% of each such fee is payable to TERI while the remaining amount
is held in trust for a specified period to secure TERI's guarantee obligation
with respect to all Private Loans guaranteed since the commencement of the
1992-1993 Program. See "The Financed Student Loan Pool -- Insurance of Student
Loans; Guarantors of Student Loans -- Guarantor for the Financed Private
Loans -- Segregated Reserves for Private Loans Under the Program".
Private Consolidation Loans. The Seller has entered into a written
agreement with The Access Group(SM), PHEAA and TERI to establish a private
consolidation loan program as part of the Program, to facilitate the ability of
eligible borrowers of LAL Loans and BEL Loans made under the 1990-1991 Program
or thereafter ("Underlying Private Loans") to consolidate such Private Loans
into a single loan (a "Private Consolidation Loan"; together with Federal
Consolidation Loans, sometimes referred to herein collectively as "Consolidation
Loans"). The Access Group(SM) currently offers Private Consolidation Loans only
to eligible borrowers of LAL Loans and BEL Loans. Similar private consolidation
options for MAL Loans, DAL Loans, BAL Loans, GAL Loans, and REL Loans are
currently being finalized. The Private Consolidation Loan program commenced in
November, 1994. Subject to the satisfaction of certain conditions set forth
under the Program, including limitations on the timing and payment of principal
and interest with respect to Private Consolidation Loans and a requirement that
the proceeds of a Private Consolidation Loan be used to repay the respective
Underlying Private Loans of any borrower, each holder of a Private Consolidation
Loan will be entitled to substantially the same guarantee arrangements as are
available on LAL Loans and BEL Loans. Under this program, an eligible borrower
of Private Consolidation Loans such as those that may be Additional Student
Loans means a borrower (i) with outstanding Underlying Private Loans of at least
$7,500 and (ii) who has begun repaying and is not more than 45 days delinquent
in required payments on any Underlying Private Loan. A borrower of a Private
Consolidation Loan must consolidate all of his or her eligible loans and in
doing so will forgo all opportunities for deferment or forbearance.
Private Consolidation Loans will bear interest at the same rate as any LAL
Loan made under the 1993-1994 Program for which the borrower has entered
repayment. Private Consolidation Loans will be repayable over a period of 15 to
25 years, depending on the original principal amount of such Private
Consolidation Loan. The Private Loan Repayment Commencement Date with respect to
a Private Consolidation Loan will occur immediately upon disbursement, with no
provision for deferment or forbearance. The borrower of a Private Consolidation
Loan will be offered income-sensitive repayment options and, for loans entering
repayment on or after October 1, 1995, several repayment options (including
interest only payments for limited periods), each corresponding to the options
currently offered to borrowers of Federal Consolidation Loans. With respect to
each Private Consolidation Loan, a fee equal to 1% of the amount paid to
discharge the Underlying Private Loans will be charged to the borrower and
included in the original principal amount of such Private Consolidation Loan (a
"Private Consolidation Guarantee Fee").
The Trust may be affected by Private Consolidation Loans in two ways.
First, following the end of the Funding Period, the Seller may make Private
Consolidation Loans in which case the Underlying Private
48
<PAGE> 51
Loans will be prepaid in full and such prepayment amount will be available for
distribution to Noteholders and Certificateholders for the applicable Collection
Period. See "Description of the Transfer and Servicing
Agreements -- Distributions". Second, the Seller may make a Private
Consolidation Loan during the Funding Period, in which case it will acquire the
related Underlying Private Loans from the Eligible Lender Trustee,
simultaneously deposit the Purchase Amount thereof in the Escrow Account, and
subsequently will sell the Private Consolidation Loan back to the Eligible
Lender Trustee, to the extent that conditions with respect to such Private
Consolidation Loan are satisfied (including the cap on the aggregate dollar
amount of Consolidation Loans which can be purchased by the Eligible Lender
Trustee) and funds are available in the Escrow Account and Pre-Funding Account
for the purchase thereof. An amount equal to the outstanding principal balance
of such Private Consolidation Loan will be withdrawn first from the Escrow
Account to the extent funds are then available and then from the Pre-Funding
Account and paid to the Seller, and the Pool Balance will increase accordingly.
See "Description of the Transfer and Servicing Agreements -- Additional
Fundings".
THE FINANCED STUDENT LOAN POOL
GENERAL
The pool of Financed Student Loans will include the Initial Financed
Student Loans purchased by the Eligible Lender Trustee on behalf of the Trust as
of the Statistical Cutoff Date and any Additional Student Loans purchased by the
Eligible Lender Trustee on behalf of the Trust from the Seller as of the
applicable Subsequent Cutoff Dates.
The Financed Student Loans will be selected from the Seller's portfolio of
Student Loans by several criteria, including, as of the Statistical Cutoff Date
or the applicable Subsequent Cutoff Date, as the case may be, the following:
each Financed Student Loan (i) was originated in the United States or its
territories or possessions under and in accordance with the Program (including,
in the case of borrowers of Federal Loans, a financial need analysis and, in the
case of borrowers of Private Loans, a creditworthiness evaluation) to a borrower
who has graduated or otherwise left school or is expected to graduate from or
otherwise leave graduate school by December 31, 1996, (ii) contains terms in
accordance with those required by the Program, the Guarantee Agreements and
other applicable requirements and (iii) with respect to the Initial Financed
Student Loans and Subsequent Financial Student Loans, is not more than 150 days
past due as of the Statistical Cutoff Date or, with respect to the Other Student
Loans, more than 90 days past due as of the applicable Subsequent Cutoff Date,
as the case may be. As of the Statistical Cutoff Date no Initial Financed
Student Loan and no Student Loan in the Subsequent Pool had a borrower who was
noted in the related records of the Servicer as being currently involved in a
bankruptcy proceeding or deceased since the date the Trust was created. Although
there can be no assurance that a borrower of an Initial Financed Student Loan
has not become involved in a bankruptcy proceeding or deceased subsequent to
such date, each such loan is guaranteed as to principal and interest by a
Guarantor in the event of any such bankruptcy of a borrower. Any Student Loan in
the Subsequent Pool in respect of which a claim is made on a Guarantor following
the Statistical Cutoff Date and prior to the date such Student Loan is to be
transferred to the Trust will not be eligible for transfer to the Trust. No
Initial Financed Student Loan as of the Statistical Cutoff Date consists of, and
no Subsequent Financed Student Loan as of the date of its transfer to the Trust
will consist of, a Student Loan that was subject to the Seller's prior
obligation to sell such loan to a third party. No selection procedures believed
by the Seller to be adverse to the Securityholders were used or will be used in
selecting the Financed Student Loans.
The Additional Student Loans to be conveyed to the Eligible Lender Trustee
on behalf of the Trust during the Funding Period are required to consist of
Student Loans in the Subsequent Pool, Serial Loans or Guarantee Fee Advances, in
each case made by the Seller in accordance with the Program and other applicable
requirements. Such Serial Loans and Guarantee Fee Advances must be made to a
borrower who has, immediately prior to the date of any such conveyance,
outstanding Student Loans that are part of the pool
49
<PAGE> 52
of Financed Student Loans. Each such Additional Student Loan is otherwise
required to comply with the criteria set forth above. See "Description of the
Transfer and Servicing Agreements -- Additional Fundings".
However, except for the criteria described in the preceding paragraphs,
there will be no required characteristics of the Additional Student Loans.
Therefore, following the transfer of the Subsequent Financed Student Loans and
other Additional 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, the distribution
by weighted average interest rate and the distribution by principal amount
described in the following tables, may vary significantly from those of the
Initial Financed Student Loans as of the Statistical Cutoff Date. In addition,
the distribution by weighted average interest rate applicable to the Financed
Student Loans on any date following the Statistical Cutoff Date may vary
significantly from that set forth in the following tables as a result of
variations in the effective rates of interest applicable to the Financed Student
Loans. Moreover, the original term to maturity and remaining term of maturity of
the Initial Financed Student Loans as of the Statistical Cutoff Date may vary
significantly from the actual term to maturity of any of the Financed Student
Loans as a result of the granting of deferral and forbearance periods with
respect thereto.
THE FINANCED STUDENT LOANS AND SUBSEQUENT FINANCED STUDENT LOANS
Set forth below in the following tables is a description of certain
additional characteristics of the Initial Financed Student Loans and the Student
Loans in the Subsequent Pool as of the Statistical Cutoff Date. Regularly
scheduled payments and prepayments of the Student Loans in the Subsequent Pool
(which are prepayable at any time) between the Statistical Cutoff Date and the
date as of which such Student Loans are transferred to the Eligible Lender
Trustee on behalf of the Trust will affect the balances and percentages set
forth herein. Moreover, such Student Loans in the Subsequent Pool may become
delinquent (or more delinquent) between the Statistical Cutoff Date and the date
of transfer to the Trust. While the statistical distribution of the final
characteristics of the Subsequent Financed Student Loans from the Subsequent
Pool when transferred to the Trust will vary somewhat from the statistical
information presented below, the Seller does not believe that the
characteristics of such Subsequent Financed Student Loans will vary materially.
COMPOSITION AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL STUDENT
FINANCED LOANS IN THE
STUDENT LOANS SUBSEQUENT POOL
--------------- ---------------
<S> <C> <C>
Aggregate Outstanding Principal Balance(1)................... $ $
Number of Borrowers..........................................
Average Outstanding Principal Balance Per Borrower........... $ $
Number of Loans..............................................
Average Outstanding Principal Balance Per Loan............... $ $
Weighted Average Original Term to Maturity(2)................ months months
Weighted Average Remaining Term to Maturity(2)............... months months
Weighted Average Annual Interest Rate(3)..................... % %
- ---------------
<FN>
(1) Includes in each case net principal balance due from borrowers, plus accrued
interest thereon estimated to be $ with respect to the
Initial Financed Student Loans and $ , with respect to
the Student Loans in the Subsequent Pool, in each case as of the Statistical
Cutoff Date to be capitalized upon commencement of repayment.
(2) Determined from the date of origination or the Statistical Cutoff Date, as
the case may be, to the stated maturity date of the applicable Initial
Financed Student Loan or Subsequent Financed Student Loan, assuming
repayment commences promptly upon expiration of the typical grace period
following the expected graduation date and without giving effect to any
deferral or forbearance periods that may be granted in the future. See "The
Student Loan Financing Business".
(3) Determined using the interest rates applicable to the Initial Financed
Student Loans and the Subsequent Financed Student Loans as of the
Statistical Cutoff Date. However, because all the Initial Financed
</TABLE>
50
<PAGE> 53
Student Loans and the Subsequent Financed Student Loans effectively bear
interest at a variable rate per annum, there can be no assurance that the
foregoing percentage will remain applicable to the Initial Financed Student
Loans and the Subsequent Financed Student Loans at any time after the
Statistical Cutoff Date. See "The Student Loan Financing Business".
DISTRIBUTION BY LOAN TYPE AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
STUDENT LOANS IN THE SUBSEQUENT
POOL
INITIAL FINANCED STUDENT LOANS -----------------------------------
----------------------------------- PERCENT OF
PERCENT OF SUBSEQUENT
AGGREGATE POOL BY AGGREGATE POOL BY
OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING
NUMBER OF PRINCIPAL PRINCIPAL NUMBER OF PRINCIPAL PRINCIPAL
LOAN TYPE(1) LOANS BALANCE(1) BALANCE LOANS BALANCE(2) BALANCE
- -------------------------- --------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Stafford Loans,
Subsidized..............
Stafford Loans,
Unsubsidized............
SLS Loans.................
Federal Consolidation
Loans...................
--------- ----------- ----- --------- ----------- -----
Subtotal (Federal
Loans)...............
Law Access Loans..........
Medical Access(SM)
Loans...................
Dental Access(SM) Loans...
Business Access(SM)
Loans...................
Graduate Access(SM)
Loans...................
Residency Loans...........
Bar Examination Loans.....
Private Consolidation
Loans...................
--------- ----------- ----- --------- ----------- -----
Subtotal (Private
Loans)...............
--------- ----------- ----- --------- ----------- -----
Total................
========== =========== =========== ========== =========== ===========
<FN>
- ---------------
(1) Includes net principal balance due from borrowers, plus accrued interest
thereon estimated to be $ as of the Statistical Cutoff
Date to be capitalized upon commencement of repayment.
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon estimated to be $ as of the Statistical Cutoff Date to be
capitalized upon commencement of repayment.
</TABLE>
DISTRIBUTION BY INTEREST RATES AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
STUDENT LOANS IN THE SUBSEQUENT
POOL
INITIAL FINANCED STUDENT LOANS -----------------------------------
----------------------------------- PERCENT OF
PERCENT OF SUBSEQUENT
AGGREGATE POOL BY AGGREGATE POOL BY
OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING
NUMBER OF PRINCIPAL PRINCIPAL NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF INTEREST RATES(1) LOANS BALANCE(2) BALANCE LOANS BALANCE(3) BALANCE
- -------------------------- --------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Less than 7.500%..........
7.500% to 7.999%..........
8.000% to 8.499%..........
8.500% to 8.999%..........
9.000% and above..........
--------- ----------- ----- --------- ----------- -----
Total................
========== =========== =========== ========== =========== ===========
<FN>
- ---------------
(1) Determined using the interest rates applicable to the Initial Financed
Student Loans and the Student Loans in the Subsequent Pool as of the
Statistical Cutoff Date. However, because all the Initial Financed Student
Loans and the Student Loans in the Subsequent Pool effectively bear interest
at a variable rate per annum, there can be no assurance that the foregoing
information will remain applicable to the Initial
</TABLE>
51
<PAGE> 54
Financed Student Loans or the Student Loans in the Subsequent Pool at any
time after the Statistical Cutoff Date. See "The Student Loan Financing
Business".
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon estimated to be $ as of the Statistical Cutoff
Date to be capitalized upon commencement of repayment.
(3) Includes net principal balance due from borrowers, plus accrued interest
thereon estimated to be $ as of the Statistical Cutoff Date to be
capitalized upon commencement of repayment.
DISTRIBUTION BY OUTSTANDING PRINCIPAL BALANCE AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
STUDENT LOANS IN THE SUBSEQUENT
POOL
INITIAL FINANCED STUDENT LOANS -----------------------------------
----------------------------------- PERCENT OF
PERCENT OF SUBSEQUENT
AGGREGATE POOL BY AGGREGATE POOL BY
OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING
RANGE OF OUTSTANDING NUMBER OF PRINCIPAL PRINCIPAL NUMBER OF PRINCIPAL PRINCIPAL
PRINCIPAL BALANCES(1) LOANS(2) BALANCE(1) BALANCE LOANS(2) BALANCE(3) BALANCE
- -------------------------- --------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Less than $1,000..........
$1,000 to $1,999..........
$2,000 to $2,999..........
$3,000 to $3,999..........
$4,000 to $4,999..........
$5,000 to $5,999..........
$6,000 to $6,999..........
$7,000 to $7,999..........
$8,000 to $8,999..........
$9,000 to $9,999..........
$10,000 to $10,999........
$11,000 to $11,999........
$12,000 to $12,999........
$13,000 to $13,999........
$14,000 and above.........
--------- ----------- ----- --------- ----------- -----
Total................
========== =========== =========== ========== =========== ===========
<FN>
- ---------------
(1) Includes net principal balance due from borrowers, plus accrued interest
thereon estimated to be $ as of the Statistical Cutoff
Date to be capitalized upon commencement of repayment.
(2) Borrowers generally have more than one outstanding loan. The average
aggregate outstanding principal balance of loans per borrower is
$ , with respect to the Initial Financed Student Loans, and
$ , with respect to the Student Loans in the Subsequent Pool, in
each case as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued interest
thereon estimated to be $ as of the Statistical Cutoff Date to be
capitalized upon commencement of repayment.
</TABLE>
52
<PAGE> 55
DISTRIBUTION BY REMAINING TERM TO SCHEDULED MATURITY
AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
STUDENT LOANS IN THE SUBSEQUENT
POOL
INITIAL FINANCED STUDENT LOANS -----------------------------------
----------------------------------- PERCENT OF
PERCENT OF SUBSEQUENT
AGGREGATE POOL BY AGGREGATE POOL BY
OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING
NUMBER OF MONTHS REMAINING NUMBER OF PRINCIPAL PRINCIPAL NUMBER OF PRINCIPAL PRINCIPAL
TO SCHEDULED MATURITY(1) LOANS BALANCE(2) BALANCE LOANS BALANCE(3) BALANCE
- -------------------------- --------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Less than 24..............
24 to 35..................
36 to 47..................
48 to 59..................
60 to 71..................
72 to 83..................
84 to 95..................
96 to 107.................
108 to 119................
120 to 131................
132 to 143................
144 to 155................
156 to 167................
168 to 179................
180 to 191................
192 and above.............
--------- ----------- ----- --------- ----------- -----
Total................
========== =========== =========== ========== =========== ===========
<FN>
- ---------------
(1) Determined from the Statistical Cutoff Date to the stated maturity date of
the applicable Initial Financed Student Loan or Student Loan in the
Subsequent Pool, assuming repayment commences promptly upon expiration of
the typical grace period following the expected graduation date and without
giving effect to any deferral or forbearance periods that may be granted in
the future. See "The Student Loan Financing Business".
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon estimated to be $ as of the Statistical Cutoff Date to
be capitalized upon commencement of repayment.
(3) Includes net principal balance due from borrowers, plus accrued interest
thereon estimated to be $ as of the Statistical Cutoff Date to be
capitalized upon commencement of repayment.
</TABLE>
DISTRIBUTION BY BORROWER PAYMENT STATUS AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
STUDENT LOANS IN THE SUBSEQUENT
POOL
INITIAL FINANCED STUDENT LOANS -----------------------------------
----------------------------------- PERCENT OF
PERCENT OF SUBSEQUENT
AGGREGATE POOL BY AGGREGATE POOL BY
OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING
NUMBER OF PRINCIPAL PRINCIPAL NUMBER OF PRINCIPAL PRINCIPAL
BORROWER PAYMENT STATUS(1) LOANS BALANCE(2) BALANCE LOANS BALANCE(3) BALANCE
- -------------------------- --------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
In-School.................
Grace.....................
Deferral..................
Forbearance...............
Repayment.................
--------- ----------- ----- --------- ----------- -----
Total................
========== =========== =========== ========== =========== ===========
<FN>
- ---------------
(1) Refers to the status of the borrower of each Initial Financed Student Loan
as of the Statistical Cutoff Date: such borrower may still be attending law
school, medical school, dental school, graduate business school, or another
type of graduate school ("In-School"), may be in a grace period prior to
repayment commencing ("Grace"), may be repaying such loan ("Repayment") or
may have temporarily ceased
</TABLE>
53
<PAGE> 56
repaying such loan through a deferral ("Deferral") or a forbearance
("Forbearance") period. See "The Student Loan Financing Business".
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon estimated to be $ as of the Statistical Cutoff
Date to be capitalized upon commencement of repayment.
(3) Includes net principal balance due from borrowers, plus accrued interest
thereon estimated to be $ as of the Statistical Cutoff Date to be
capitalized upon commencement of repayment.
GEOGRAPHIC DISTRIBUTION AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
STUDENT LOANS IN THE SUBSEQUENT
POOL
INITIAL FINANCED STUDENT LOANS -----------------------------------
----------------------------------- PERCENT OF
PERCENT OF SUBSEQUENT
AGGREGATE POOL BY AGGREGATE POOL BY
OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING
NUMBER OF PRINCIPAL PRINCIPAL NUMBER OF PRINCIPAL PRINCIPAL
STATE(1) LOANS BALANCE(2) BALANCE LOANS BALANCE(3) BALANCE
- -------------------------- --------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Alabama...................
Alaska....................
Arizona...................
Arkansas..................
California................
Colorado..................
Connecticut...............
Delaware..................
Florida...................
Georgia...................
Guam......................
Hawaii....................
Idaho.....................
Illinois..................
Indiana...................
Iowa......................
Kansas....................
Kentucky..................
Louisiana.................
Maine.....................
Maryland..................
Massachusetts.............
Michigan..................
Minnesota.................
Mississippi...............
Missouri..................
Montana...................
Nebraska..................
Nevada....................
New Hampshire.............
New Jersey................
New Mexico................
New York..................
North Carolina............
North Dakota..............
Ohio......................
Oklahoma..................
Oregon....................
Pennsylvania..............
</TABLE>
54
<PAGE> 57
<TABLE>
<CAPTION>
STUDENT LOANS IN THE SUBSEQUENT
POOL
INITIAL FINANCED STUDENT LOANS -----------------------------------
----------------------------------- PERCENT OF
PERCENT OF SUBSEQUENT
AGGREGATE POOL BY AGGREGATE POOL BY
OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING
NUMBER OF PRINCIPAL PRINCIPAL NUMBER OF PRINCIPAL PRINCIPAL
STATE(1) LOANS BALANCE(2) BALANCE LOANS BALANCE(3) BALANCE
- -------------------------- --------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Puerto Rico...............
Rhode Island..............
South Carolina............
South Dakota..............
Tennessee.................
Texas.....................
Utah......................
Vermont...................
Virgin Islands............
Virginia..................
Washington................
Washington DC.............
West Virginia.............
Wisconsin.................
Wyoming...................
Other.....................
--------- ----------- ----- --------- ----------- -----
Total................
========== =========== =========== ========== =========== ===========
<FN>
- ---------------
(1) Based on the permanent billing addresses of the borrowers of the Initial
Financed Student Loans and the Student Loans in the Subsequent Pool shown on
the Servicer's records as of the Statistical Cutoff Date.
(2) Includes net principal balance due from Obligors, plus accrued interest
thereon estimated to be $ as of the Statistical Cutoff Date to
be capitalized upon commencement of repayment.
(3) Includes net principal due from borrowers, plus accrued interest thereon
estimated to be $ as of the Statistical Cutoff Date to be capitalized
upon commencement of repayment.
</TABLE>
Each of the Financed Student Loans provides or will provide 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 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.
MATURITY AND PREPAYMENT ASSUMPTIONS
The rate of payment of principal of the Notes and the Certificates and the
yield on the Notes and the Certificates will be affected by prepayments of the
Financed Student Loans that may occur as described below. All the Financed
Student Loans are prepayable in whole or in part by the borrowers at any time
(including by means of Federal Consolidation Loans or consolidation loans made
under the Federal Direct
55
<PAGE> 58
Student Loan Program as discussed below) or as a result of a borrower's 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 as 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 or obtain consolidation loans under the Federal
Direct Student Loan Program, such Financed Loans will be prepaid; provided,
however, that if the Seller makes any such Consolidation Loan during the Funding
Period (in which event the Seller will then sell that Consolidation Loan to the
Eligible Lender Trustee, to the extent that funds are available in the Escrow
Account and the Pre-Funding Account for the purchase thereof), the aggregate
outstanding principal balance of Financed Student Loans (after giving effect to
the addition of such Consolidation Loan) will be at least equal to and in most
cases greater than such balance prior to such prepayment, although the portion
of the loan guaranteed declines by two percentage points with respect to any
Federal Consolidation Loan made on or after October 1, 1993. See "The Student
Loan Financing Business - Federal Loans Under the Program -- Federal
Consolidation Loans". There can be no assurance that the Seller rather than
another institution will make any particular Consolidation Loan with respect to
borrowers with Financed Student Loans or that borrowers will not choose to
obtain a consolidation loan under the Federal Direct Student Loan Program. In
addition, the Seller is obligated to repurchase any Financed Student Loan
pursuant to the Sale and Servicing Agreement as a result of a breach of any of
its representations and warranties, and the Servicer is obligated to purchase
any Financed Student Loan pursuant to the Sale 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 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 -- Sale of Financed Student Loans; Representations and Warranties"
and "-- Servicer Covenants". See also "Description of the Transfer and Servicing
Agreements -- Additional Fundings" regarding the prepayment of principal to
Noteholders and Certificateholders if as of the Special Determination Date the
Subsequent Pool Pre-Funded amount has not been reduced to zero and the total
amount remaining on deposit in the Pre-Funding Account as of such date exceeds
25% of the initial principal amount of the Notes and principal balance of the
Certificates and the prepayment of principal to Noteholders as a result of
excess funds remaining on deposit in the Pre-Funding Account at the end of the
Funding Period, "-- Insolvency Event" regarding the sale of the Financed Student
Loans if a Seller Insolvency Event occurs and "-- Termination" regarding the
Seller'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 auction
of the Financed Student Loans on or after the Distribution Date.
On the other hand, 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 or as a
result of the conveyance of Serial Loans to the Eligible Lender Trustee on
behalf of the Trust during the Funding Period or of refinancings through
Consolidation Loans to the extent such Consolidation Loans are sold to the
Eligible Lender Trustee on behalf of the Trust as described above. In that
event, the fact that such Consolidation Loans will likely have longer maturities
than the Financed Student Loans they are replacing may lengthen the remaining
term of the Financed Student Loans and the average life of the Notes and the
Certificates. The rate of payment of principal of the Notes and the Certificates
and the yield on the Notes and the Certificates may also be affected by the rate
of defaults resulting in losses on defaulted Student Loans which have been
liquidated, 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. In addition, the maturity of many of the Financed Student Loans
will extend well beyond the Final Maturity Date.
56
<PAGE> 59
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 will be borne entirely by the
Securityholders. Such reinvestment risks may include the risk that interest
rates and the relevant spreads above particular interest rate bases are lower at
the time Securityholders 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 STUDENT LOANS
General. Each Financed Federal Loan will be required to be guaranteed as
to principal and interest by PHEAA or ASA and reinsured by the Department under
the Higher Education Act and must be eligible for Special Allowance Payments
and, with respect to each Financed Federal Loan that is not a SLS Loan or a
Federal Consolidation Loan, Interest Subsidy Payments paid by the Department.
Each Financed Private Loan will be required to be guaranteed as to principal and
interest by TERI.
Federal Reinsurance. Under the Higher Education Act, each Federal
Guarantor is reimbursed by the Department pursuant to certain agreements between
the Department and such Federal 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 Federal Guarantor
depending on the annual claims rate for that Federal Guarantor (i.e., the dollar
amount of reimbursement claims filed by that Federal 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) and the date on which the loan is made as follows:
<TABLE>
<CAPTION>
CLAIMS RATE REIMBURSEMENT BY THE
OF GUARANTOR DEPARTMENT OF EDUCATION(1)
- ---------------------------------------- -------------------------------------------------
<S> <C>
0% to and including 5%.................. 100%
Greater than 5% to and including 9%..... 100% of claims to and including 5%; 90% of claims
greater than 5%
Greater than 9%......................... 100% of claims to and including 5%; 90% of claims
greater than 5% to and including 9%; and 80% of
claims greater than 9%
<FN>
- ---------------
(1) Each of the reimbursement percentages listed above is reduced by two
percentage points for a loan made on or after October 1, 1993.
</TABLE>
The claims experience for any Federal 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, subject to compliance with the Higher Education Act, Federal Guarantors
are deemed to have a contractual right against the United States to receive
reinsurance in accordance with its provisions.
On August 10, 1993 President Clinton signed the Omnibus Budget
Reconciliation Act of 1993, which made a number of changes that may adversely
affect the financial condition of the Federal 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 substantially
the premiums and default collections that Federal Guarantors are entitled to
receive and/or retain and giving the Department broad powers over Federal
Guarantors and their reserves. These powers include the authority to require a
Federal Guarantor to return all reserve funds to the Department if the
Department determines such action is necessary to ensure an orderly termination
of the Federal Guarantor, to serve the best interests of the student loan
programs or to ensure the proper maintenance of such Federal Guarantor's funds
or assets. The Department is also now authorized to direct a Federal 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
Federal Guarantor and/or to cease any activities involving the use of the
Federal Guarantor's reserve funds or assets which the Department determines is a
misapplication or otherwise improper. The Department may also
57
<PAGE> 60
terminate a Federal 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 Federal 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 minimum 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 Programs. Such changes
could have an adverse effect on the financial condition of the Federal
Guarantors and on the ability of a Federal Guarantor to satisfy its obligations
under its Guarantee Agreement with respect to the Financed Federal Loans. See
"Risk Factors -- Changes in Legislation May Adversely Affect Financed Student
Loans and Guarantors".
In issuing guarantees with respect to Student Loans, each Federal 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 Federal 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 Federal
Guarantor for the fiscal year that began 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 and thereafter.
Annually, the Department will collect information from each Federal Guarantor to
determine the amount of such Federal Guarantor's reserves and other information
regarding its solvency. If a Federal Guarantor's current reserve level falls
below the required minimum for any two consecutive years, that Federal
Guarantor's annual claims rate exceeds 9% or the Department determines that a
Federal Guarantor's administrative or financial condition jeopardizes that
Federal Guarantor's continued ability to perform its responsibilities, then that
Federal 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 Federal Guarantor. In that event, however, the Department is required to
assume the functions of such Federal 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 Federal Guarantor in order to assist such Federal
Guarantor in meeting its 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 Federal 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 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 Federal Guarantor or by
making a determination that such Federal Guarantor is unable to meet its
guarantee obligations.
Guarantors for the Financed Federal 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
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 into a Guarantee
Agreement with each of PHEAA and ASA by which each of PHEAA and ASA has agreed
to serve as Guarantor for certain Financed Federal Loans. PHEAA is the
designated Student Loan guarantor for the Commonwealth of Pennsylvania and the
State of West Virginia and has an established operating center in Harrisburg,
Pennsylvania. PHEAA guarantees all Federal Loans made under the Program
58
<PAGE> 61
to borrowers attending law schools in every state except Connecticut, Maine,
Massachusetts, New Hampshire, Rhode Island, Vermont and New York and certain
Loans to borrowers attending school in the District of Columbia. For more
information concerning PHEAA, see "The Seller, the Administrator and the
Servicer -- The Servicer". ASA is the designated Student Loan guarantor for the
Commonwealth of Massachusetts and the District of Columbia and has an
established operating center in Boston, Massachusetts. ASA guarantees all
Federal Loans made under the Program to borrowers attending law schools in
Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont and New
York and certain Loans to borrowers attending school in the District of
Columbia. ASA employed approximately 260 people as of December 31, 1995. As of
the Statistical Cutoff Date, approximately % of the aggregate outstanding
principal balance of the Financed Federal Loans were guaranteed by PHEAA and the
remainder were guaranteed by ASA.
Pursuant to its respective Guarantee Agreement, each of PHEAA and ASA
guarantees payment of 100% of the principal (including any interest capitalized
from time to time) and accrued interest for each Financed 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 Financed Federal Loan when due, provided such
failure continues for a period of 180 days (except that such guarantee
against such failures will be 98% of principal and accrued interest for
loans first disbursed on or after October 1, 1993);
(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 PHEAA and ASA pursuant to their respective Guarantee
Agreements are obligations solely of PHEAA and ASA, respectively, and are not
supported by the full faith and credit of any state government, including
Pennsylvania and West Virginia, and Massachusetts and the District of Columbia,
respectively.
Each of PHEAA's and ASA's guarantee obligations with respect to any
Financed Federal 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 Federal Loan being performed in accordance with the
Program, the Higher Education Act and other applicable requirements, (ii) the
timely payment to PHEAA or ASA, as the case may be, of the guarantee fee payable
with respect to such Financed Federal Loan, (iii) the timely submission to PHEAA
or ASA, as the case may be, of all required pre-claim delinquency status
notifications and of the claim with respect to such Financed Federal Loan and
(iv) the transfer and endorsement of the promissory note evidencing such
Financed Federal Loan to PHEAA or ASA, as the case may be, 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 PHEAA or ASA, as the case may be, to honor their
Guarantee Agreements with respect to such Financed Federal Loan, in the 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 Sale and Servicing Agreement,
such failure to comply would constitute a breach of the Servicer's covenants or
the Seller's representations and warranties, as the case may be, and would
create an obligation of the Seller or the Servicer, as the case may be, to
repurchase or purchase such Financed Federal 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 -- Sale of Financed Student Loans;
Representations and Warranties" and "-- Servicer Covenants".
59
<PAGE> 62
Set forth below is certain current and historical information with respect
to each of PHEAA and ASA in its capacity as a Guarantor of all education loans
(including but not limited to law school loans) guaranteed by each of them:
Guaranty Volume. For the two federal fiscal years ending September
30, 1992 and September 30, 1993, of the 46 guarantors of Federal Loans in
the country, PHEAA has ranked as one of the two largest and ASA has ranked
as one of the seven largest. The following table sets forth the approximate
aggregate principal amount of federally reinsured education loans
(including loans under the Parent Loans to Undergraduate Students (PLUS)
program but excluding Federal Consolidation Loans) that have first become
guaranteed by each Federal Guarantor and by all guarantors in each of the
last five federal fiscal years:*
<TABLE>
<CAPTION>
STAFFORD, SLS AND PLUS LOANS
FEDERAL GUARANTEED
FISCAL --------------------------------------
YEAR PHEAA ASA ALL GUARANTORS
- ------- ------- ------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
1991 $ 1,195 $ 594 $ 13,500
1992 1,295 647 14,749
1993 1,523 730 17,863
1994 1,747 1,100 --**
1995 1,808 906 --**
</TABLE>
* The information set forth in the table above for All Guarantors has
been obtained from the Department of Education's Guaranteed Student
Loan Programs Data Books (each, a "DOE Data Book") for Fiscal Years
1991, 1992 and 1993. Information for PHEAA and ASA was obtained
from PHEAA and ASA, respectively. The information for "All
Guarantors" for 1993 was obtained from the Department of
Education's Loan Volume Update.
** Not available.
Reserve Ratio. Each Federal 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 by such Federal Guarantor minus (i)
the original principal amount of loans cancelled, claims paid, loans paid
in full and loan guarantees transferred from such Federal Guarantor to
other guarantors, plus (ii) the original principal amount of loan
guarantees transferred to such Federal Guarantor from other guarantors. The
following table sets forth PHEAA's and ASA's cumulative cash reserves and
their corresponding reserve ratios and the national average reserve ratio
for all guarantors for the last five federal fiscal years:*
<TABLE>
<CAPTION>
PHEAA ASA
---------------------- ---------------------- NATIONAL
FEDERAL CUMULATIVE CUMULATIVE AVERAGE
FISCAL CASH RESERVE CASH RESERVE RESERVE
YEAR RESERVES RATIO RESERVES RATIO RATIO
- ------- ---------- ------- ---------- ------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1991 $ 29.41 0.4% $17.54 0.5% 0.8%
1992 85.89 1.1 24.60 0.6 1.5
1993 100.95 1.1 26.20 0.6 1.7
1994 133.63 1.3 38.16 0.7 --**
1995 166.31 1.5 43.06 0.8 --**
</TABLE>
* The information set forth in the table above with respect to PHEAA
and ASA has been obtained from PHEAA and ASA, respectively and the
information with respect to the national average
60
<PAGE> 63
has been obtained from the Fiscal Years 1991, 1992 and 1993 DOE Data
Books. The above information with respect to PHEAA for fiscal years
1993 and earlier represents a restatement of such information from
that previously supplied by PHEAA to the Department. The restated
information corrects certain errors in the cumulative cash reserves
previously reported, which PHEAA has indicated resulted from a failure
to properly reflect in cumulative cash reserves all transactions which
should have been reflected in a reconciliation of its sources and uses
of funds as at September 30 of the years indicated. The restatement of
these reserves did not affect PHEAA's claims-paying ability during
these years.
** Not available.
Recovery Rates. A Federal 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 the Federal Guarantor by
the aggregate amount of default claims paid by the Federal Guarantor during
the applicable federal fiscal year with respect to borrowers. With respect
to Stafford Loans only, the table below sets forth the recovery rates for
each of PHEAA and ASA and the national average recovery rates for all
guarantors for the last five federal fiscal years:*
<TABLE>
<CAPTION>
FEDERAL RECOVERY RATE
FISCAL ------------------------------------
YEAR PHEAA ASA NATIONAL AVERAGE
- ------- ----- ----- ----------------
<S> <C> <C> <C>
1991 44.5 % 39.1% 28.9%
1992 46.5 41.0 32.0
1993 48.1 42.5 --**
1994 52.9 43.3 --**
1995 53.3 43.4 --**
</TABLE>
* The information set forth in the table above for the National
Average has been compiled from the Fiscal Year 1990 DOE Data Book
for Fiscal Year 1991 and 1992. Information for PHEAA and ASA, as
applicable, was provided by each entity, respectively.
** Not available.
Loan Loss Reserve. Neither PHEAA nor ASA maintains a segregated loan
loss reserve with respect to its student loan guarantee obligations. In the
event that a Federal Guarantor receives less than full reimbursement of its
guarantee obligations from the Department (see "-- Federal Reinsurance"
above), such Federal Guarantor would be forced to look to its existing
assets to satisfy any such guarantee obligations not so reimbursed.
Pursuant to its guarantee agreements with lending institutions, ASA is
required to maintain generally an amount of cash, marketable securities and
other assets with a value of at least 1% of the aggregate amount of unpaid
principal on outstanding loans guaranteed by ASA.
Claims Rate. For the past five federal fiscal years, neither Federal
Guarantor's claims rates have exceeded 5%, and as a result, all claims of
both Federal Guarantors have been fully reimbursed by the Department. See
"-- Federal Reinsurance" above. Nevertheless, there can be no assurance
that either Federal Guarantor will continue to receive full reimbursement
for such claims (or the full 98% maximum reimbursement for loans first
disbursed on or after October 1, 1993). The following table sets forth the
61
<PAGE> 64
claims rates of each Federal Guarantor and the national average for all
guarantors for each of the last five federal fiscal years:*
<TABLE>
<CAPTION>
FEDERAL CLAIMS RATE
FISCAL ------------------------------------
YEAR PHEAA ASA ALL GUARANTORS
- ------- ----- ----- ----------------
<S> <C> <C> <C>
1991 2.9 % 3.1% 4.5%
1992 2.8 3.0 --**
1993 2.3 3.0 --**
1994 2.2 3.5 --**
1995 2.0 3.5 --**
</TABLE>
* The information set forth in the table above has been obtained from
the Department (with respect to fiscal years 1991 and 1992) and
from PHEAA and ASA, as applicable (with respect to fiscal years
1993, 1994 and 1995).
** Not available.
There can be no assurance that the claims rate experience of PHEAA and
ASA for any future year will be similar to the historical claims rate
experience set forth above. See "Risk Factors -- Lack of Substantial
Repayment History with Respect to Student Loans Under The Access GroupSM
Loan Program".
Guarantor for the Financed Private Loans. The Eligible Lender Trustee will
enter into a Guarantee Agreement with TERI by which TERI will agree to serve as
Guarantor for the Financed Private Loans. TERI was incorporated in 1985 to
guarantee Student Loans. Beginning in 1990, TERI began guaranteeing LAL Loans,
in 1993 began guaranteeing BEL Loans, and in 1995 began guaranteeing MAL, DAL,
BAL, GAL and REL Loans pursuant to The Access GroupSM Loan Program. TERI is a
Massachusetts non-profit corporation headquartered in Boston, Massachusetts.
TERI employs approximately 124 people.
Pursuant to its Guarantee Agreement, TERI guarantees payment of 100% of the
principal (including any interest or fees capitalized from time to time) and
accrued interest for each Financed Private Loan 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 Financed Private Loan when due, provided such
failure continues for a period of 120 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 be
employed on a full-time basis, as certified by two qualified physicians.
TERI's guarantee obligation with respect to any Financed Private Loan is
conditioned upon the satisfaction of all the conditions set forth in the
Guarantee Agreement between TERI and the Eligible Lender Trustee. These
conditions include, but are not limited to, the following: (i) the origination
and servicing of such Financed Private Loan being performed in accordance with
the Program and other applicable requirements, (ii) the timely payment to TERI
of all guarantee fees payable with respect to such Financed Private Loan, (iii)
the timely submission to TERI of all required pre-claim delinquency status
notifications and of the claim with respect to such Financed Private Loan and
(iv) the transfer and endorsement of the promissory note evidencing such
Financed Private Loan to TERI 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 TERI to honor
its Guarantee Agreement with respect to such Financed Private Loan. In addition,
in the event that any Financed Private Loan is determined to be unenforceable
because the terms of such Financed Private Loan or the forms of the application
or promissory note related
62
<PAGE> 65
thereto violate any provisions of applicable state law, TERI's guarantee
obligation is reduced to 50% of principal (including capitalized interest and
fees) and accrued interest with respect to such Private Loan. Under the Sale and
Servicing Agreement, such failure to comply or such unenforceability would
constitute a breach of the Servicer's covenants or the Seller's representations
and warranties, as the case may be, and would create an obligation of the Seller
to repurchase such Financed Private Loan or of the Servicer to purchase such
Financed Private Loan. See "Description of the Transfer and Servicing
Agreements -- Sale of Financed Student Loans; Representations and Warranties"
and "-- Servicer Covenants".
TERI, as a Guarantor of Private Loans, is not entitled to any federal
reinsurance or assistance from the Department. Although TERI maintains a loan
loss reserve intended to absorb losses arising from its guarantee commitments,
there can be no assurance that the amount of such reserve will be sufficient to
cover the obligations of TERI over the term of the Financed Private Loans. Based
upon the Rating Agencies' assessment of TERI's financial position, reserves and
potential claims against it, the Seller has structured the Trust and the
Securities assuming that TERI will not have the financial resources to satisfy
all its obligations under its Guarantee Agreement with respect to the Financed
Private Loans throughout the term of such loans.
The following sets forth certain current and historical information with
respect to TERI in its capacity as a Guarantor:
Financial Information Summary. The following table is a summary of
certain financial information of TERI for the five calendar years and the
six-month period referred to below:*
<TABLE>
<CAPTION>
SIX
MONTHS
CALENDAR YEARS ENDING DECEMBER 31, ENDING
------------------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- --------
(AS RESTATED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Excess of revenues over
expenses before income
taxes....................... $ 1,409 $ 5,207 $ 6,947 $ 6,597 $10,506 $ 4,641
Income tax provision.......... -- -- -- -- -- --
Fund Balance.................. 22,080 27,287 34,234 40,831 51,337 55,978
Total Assets............. 49,006 69,270 79,503 74,381 87,399 89,111
</TABLE>
- ---------------
* The information set forth in the table above has been obtained from TERI's
audited financial statements for the years ending December 31, 1991 through
1995; and from TERI's unaudited interim financial statements for the six
months ending June 30, 1996.
** The information set forth in the table above for 1991 (as restated), 1992,
1993, 1994 and 1995 and the six months ending June 30, 1996 does not reflect
any consolidation of TERI's financial results with those of its formerly
consolidated subsidiary discussed below.
Education Loan Services Incorporated, a for-profit company providing
data processing and loan portfolio servicing for lenders of student loans
("ELSI"), is affiliated with, and at all relevant times prior to 1992 (at
which time TERI sold a controlling interest in ELSI) was a wholly owned
subsidiary of, TERI. As a result, TERI's 1992 and 1993 financial statements
(and its 1991 restated financial statements) account for TERI's investment
in ELSI using the equity method rather than consolidating ELSI with TERI.
For the years 1991 and 1992, ELSI had total revenues of $18,590,508 and
$21,825,549, respectively, total assets of $5,392,749 and $7,620,671,
respectively, and a net loss of $137,147 and $436,539, respectively. This
accounting change had no impact on TERI's reported fund balances. In 1993,
TERI divested itself of all ELSI ownership.
63
<PAGE> 66
Guaranty Volume. The following table sets forth the non-federally
reinsured education loans that have first become guaranteed by TERI in each
of the five calendar years and the six-month period referred to below:*
<TABLE>
<CAPTION>
PRIVATE LOANS
PERIOD GUARANTEED PER PERIOD
------ ---------------------
(IN MILLIONS)
<S> <C>
1991 ............................................. $ 355.6
1992 ............................................. 472.7
1993 ............................................. 342.9
1994............................................... 292.2
1995............................................... 303.4
1996**............................................. 117.6
</TABLE>
* The information set forth in the table above has been obtained from
TERI and has not been audited.
** For the six-month period ending June 30, 1996.
Proprietary Loans. Default rates for student loans made to students
attending proprietary or vocational schools are significantly higher than
those made to students attending other 2-year and 4-year institutions.
Except for a few selected, accredited proprietary schools which grant
degrees, TERI does not guarantee student loans made to students attending
proprietary or vocational schools.
Reserve Ratio. Unlike the Federal Guarantors, TERI computes its
reserve ratio by dividing the "total dollars available for guaranty
payment" by the "total loans outstanding". TERI defines "total dollars
available for guaranty payment" as the sum of the amounts set forth below
under the caption "Amounts Available To Meet Guarantee Commitments" (which
amounts include for this purpose the segregated reserves described below
under the caption "Segregated Reserves for Private Loans Under the
Program"). It defines "total loans outstanding" as the total outstanding
principal amount of all loans it has agreed to guarantee as of December 31
of each year. Consequently, the reserve ratio information provided above
for the Federal Guarantors is not comparable to that provided for TERI
below. TERI's reserve ratio as of December 31 for the five calendar years
and the six-month period referred to below is set forth below:*
<TABLE>
<CAPTION> AMOUNTS AVAILABLE
FOR GUARANTEE RESERVE
PERIOD PAYMENTS RATIO
------ ----------------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
1990.............................. $32,037 8.0%
1991.............................. 46,385 7.6
1992.............................. 66,366 7.2
1993.............................. 75,974 7.0
1994.............................. 69,697 5.9
1995.............................. 83,663 5.7
1996**............................ 85,818 5.6
</TABLE>
* The information set forth in the table above has been obtained from
TERI and has not been audited.
** For the six-month period ending June 30, 1996.
Amounts Available To Meet Guarantee Commitments. As part of guarantee
agreements with lending institutions, with certain such agreements being
revised in 1995, TERI has agreed to hold as security for its guarantees a
percentage of the amount of unpaid principal on outstanding loans which is
either at least 2% in cash and marketable securities or their equivalents
or 5.5% in total TERI funds available as security for the performance of
TERI obligations. At December 31, 1995, the balance of loans outstanding
guaranteed directly by TERI amounted to approximately $1.5 billion. At
December 31,
64
<PAGE> 67
1995, TERI was required to have approximately $81 million in reserves
(consisting of loan loss reserves, deferred revenue and unrestricted and/or
temporarily unrestricted net assets) available as security for TERI's
performance as guarantor.
As of the end of each of the five calendar years and the six-month period
referred to below, TERI had available the following funds and reserves to meet
its loan guarantee commitments:*
<TABLE>
<CAPTION>
SIX
MONTHS
ENDING
CALENDAR YEARS ENDING DECEMBER 31, JUNE 30,
------------------------------------------------------- ---------
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- ---------
(AS RESTATED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Deferred Guarantee Fee
Income....................... $ 4,686 $ 5,496 $ 5,564 $ 5,269 $ 5,234 $ 4,320
Loan Loss Reserve.............. 21,733 35,669 38,269 25,698 29,092 27,520
Designated Purposes Fund**..... 12,492 12,060 12,234 12,470 12,708 12,860
Guarantee Reserve Fund......... 3,159 5,331 10,643 20,681 33,411 38,051
Operating Fund................. 4,314 7,810 9,264 5,579 3,218 3,067
------- ------- ------- ------- ------- ---------
Total Amounts Available for
Guarantee Payments........ $46,385 $66,366 $75,974 $69,697 $83,663 $85,818
======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
* The information set forth in the table above has been obtained from TERI's
audited financial statements for the years ending December 31, 1991 through
1995 and from TERI's unaudited interim financial statements for the six
months ending June 30, 1996.
** Represents an irrevocable gift of funds to TERI for its use in promoting the
furtherance of higher education, which includes satisfying TERI's loan
guarantee obligations.
Subject to the minimum restrictions imposed by lending institutions and
the segregated reserves discussed below under "Segregated Reserves for
Private Loans Under the Program", TERI establishes its loan loss reserve
based solely on its management's estimates of probable losses arising from
its guarantee commitments, based on the historical experience of TERI and
those of other lending institutions and programs. TERI has significantly
increased its loan loss reserve over the last two years in conjunction with
an increase in the outstanding principal amount of loans guaranteed by TERI
over such period.
Recovery Rate. Unlike the Federal Guarantor's calculation of recovery
rates discussed above, which consists of an annual measure of recoveries as
compared to default claims, the recovery rate for TERI is determined by
dividing the cumulative amount recovered from borrowers by the cumulative
amount of default claims paid by TERI as a guarantor for the year when the
loan defaulted. Consequently, the recovery rate information provided above
for the Federal Guarantors is not comparable to that provided for TERI below.
TERI's recovery rates as of June 30, 1996, with respect to loans defaulting
in each of the five calendar years and the six-month period referred to below
are as follows:*
<TABLE>
<CAPTION>
PERIOD OF CUMULATIVE
DEFAULT RECOVERY RATE
--------- --------------------------------------------------
<S> <C>
1991 59% (January 1, 1991-June 30, 1996)
1992 55% (January 1, 1992-June 30, 1996)
1993 40% (January 1, 1993-June 30, 1996)
1994 29% (January 1, 1994-June 30, 1996)
1995 16% (January 1, 1995-June 30, 1996)
1996** 2%
</TABLE>
65
<PAGE> 68
- ---------------
* The information set forth in the table above has been obtained from TERI and
has not been audited.
** For the six-month period ending June 30, 1996.
The appearance of a declining trend in the foregoing recovery rates
can largely be attributed to the fact that each succeeding default year
listed above includes one fewer year in which to obtain recoveries for the
amounts paid out on guarantee claims in the default year.
Claims Rate. Unlike the Federal Guarantor's calculation of claims
rates discussed above, which consists of an annual measure of claims made
to outstanding loan balances guaranteed at the start of that year, the
claims rate for TERI set forth below is based on the aggregate amount of
claims, whenever paid, on loans guaranteed by TERI in a particular year or
period. The "Cohort Default Rate" refers to the total principal amount of
defaulted loans for which guarantee payments were made by TERI (exclusive
of any subsequent recoveries by TERI) for the cohort year (or period) as a
percentage of the aggregate principal amount of loans guaranteed by TERI
for the cohort year (or period). As a result, the claims rate information
provided above for the Federal Guarantors is not comparable to that
provided for TERI below. The following table sets forth the total defaults
paid and the cohort default rate as of June 30 for each of the five
calendar years and the six-month period referred to below:*
<TABLE>
<CAPTION>
YEAR IN
WHICH
LOANS
GUARANTEED COHORT
(COHORT YEAR) DEFAULT RATE
------------- TOTAL DEFAULTS PAID FOR ------------
LOANS GUARANTEED IN
COHORT YEAR
-----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
1991 $27,378 7.70%
1992 18,352 3.38
1993 6,200 1.81
1994 1,298 0.44
1995 306 0.10
1996** -- 0.00
</TABLE>
- ---------------
* The information set forth in the table above has been obtained from TERI and
has not been audited.
** For the six-month period ending June 30, 1996.
The declining trend reflected above in the claims rates experienced by
TERI can largely be attributed to the fact that in each succeeding cohort
year fewer loans guaranteed by TERI were in repayment. As the number of
loans entering repayment increases, the percentage of loans becoming
delinquent and subsequently defaulting also tends to increase. In addition,
the recent general economic recession may have contributed to reducing
borrowers' ability to satisfy their loan obligations. There can be no
assurance that the claims rate experience of TERI for any future year will
be similar to the historical claims rate experience set forth above. See
"Risk Factors -- Lack of Substantial Repayment History with Respect to
Student Loans Under The Access GroupSM Loan Program".
Segregated Reserves for Private Loans Under the Program. A portion of
the reserves described above that are maintained by TERI have been
segregated solely to support its guarantee obligations under the Program.
These segregated reserves, which are not available to cover TERI-guaranteed
loans outside of the Program, are equally available to all holders of
Private Loans made under the 1993-1994 Program, the 1994-1995 Program, the
1995-1996 Program and the 1996-1997 Program, respectively, which include
both the Seller and third-party purchasers of the Seller's Private Loans,
including but not limited to the Eligible Lender Trustee on behalf of the
Trust. Such segregated reserves are not available to cover TERI's
obligations in respect of Private Loans made under the 1990-1991 and
1991-1992 Programs, and the 1992-1993 Program, which are supported by their
own segregated reserves. Draws on such segregated reserves will be paid in
the order received, to the extent of amounts remaining in the applicable
segregated reserve account. Consequently, there may be one or more owners
of Private Loans for which a
66
<PAGE> 69
claim could, in the event of a default by a student borrower, be filed
against such segregated reserves. As a result, there can be no assurance
that amounts in these segregated reserves will be available to support
Guarantee Payments by TERI owing in respect of the Financed Private Loans
made under any of the aforementioned Programs, or that such amounts, if
available, will be sufficient to satisfy all existing Guarantee Payments
due with respect to such Financed Private Loans. The Seller will assign the
portion of its rights under the various agreements implementing these
segregated reserves that is attributable to such Financed Private Loans to
the Trust.
TERI has agreed that it will provide a copy of its most recent audited
financial statements to Securityholders upon receipt of a written request
directed to Paul McCarty, 330 Stuart Street, Suite 500, Boston, Massachusetts
02116.
POOL FACTORS AND TRADING INFORMATION
Each of the "Class A-1 Note Pool Factor," the "Class A-2 Note Pool Factor"
and the "Certificate Pool Factor" (each, a "Pool Factor") is a seven-digit
decimal which the Administrator will compute for each Distribution Date
indicating the remaining outstanding principal balance of each class of Notes or
the remaining Certificate Balance, respectively, as of that Distribution Date
(after giving effect to distributions on such Distribution Date), as a fraction
of the initial outstanding principal balance of each class of Notes or the
initial Certificate Balance, respectively. Each Pool Factor will be 1.0000000 as
of the Closing Date, and thereafter will decline to reflect reductions in the
outstanding principal balance of each class of Notes or the Certificate Balance,
as applicable. A Securityholder's portion of the aggregate outstanding principal
balance of each class of Notes or the Certificate Balance, as applicable, is the
product of (i) the original denomination of that Securityholder's Note or
Certificate and (ii) the applicable Pool Factor.
Pursuant to the Indenture and the Trust Agreement, the Securityholders will
receive quarterly reports concerning the payments received on the Financed
Student Loans, the reduction of the Pre-Funded Amount resulting from Additional
Fundings, the Pool Balance, the applicable Pool Factor and various other items
of information. Securityholders of record during any calendar year will be
furnished information for tax reporting purposes not later than the latest date
permitted by law. See "Description of the Securities -- Reports to
Securityholders".
DESCRIPTION OF THE SECURITIES
Terms used in this section and not previously defined and not defined
herein are defined under "Description of the Transfer and Servicing
Agreements -- Distributions."
GENERAL
The Notes will be issued pursuant to the terms of the Indenture and the
Certificates will be issued pursuant to the terms of the Trust Agreement, in
each case substantially in the form filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The following summary describes
certain terms of the Notes, the Certificates, the Indenture and the Trust
Agreement. The summary does not purport to be complete and is qualified in its
entirety by reference to the provisions of the Notes, the Certificates, the
Indenture and the Trust Agreement.
The Class A-1 Notes, the Class A-2 Notes and the Certificates will each
initially be represented by one or more Notes and Certificates, respectively, in
each case 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 Securities will be available for purchase in denominations
of $1,000 and integral multiples 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 Securities. Unless and until
Definitive Notes or Definitive Certificates are issued under the limited
circumstances described herein, no Noteholder or Certificateholder will be
entitled to receive a physical certificate representing a Note or Certificate.
All references herein to actions by Noteholders or Certificateholders 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 or Certificateholders refer to distributions, notices,
reports and
67
<PAGE> 70
statements to DTC or Cede, as the registered holder of the Notes or the
Certificates, as the case may be, for distribution to Noteholders or
Certificateholders in accordance with DTC's procedures with respect thereto. See
"-- Book-Entry Registration" and "-- Definitive Securities".
THE NOTES
Distributions of Interest. Interest will accrue on the principal balance
of the Class A-1 Notes and the Class A-2 Notes at a rate per annum (calculated
as provided below) equal to the Class A-1 Rate and the Class A-2 Rate,
respectively. Interest will accrue from and including the Closing Date or from
the most recent Distribution Date on which interest has been paid to but
excluding the current Distribution Date (each an "Interest Period") and will be
payable to the Noteholders on each Distribution Date. Interest accrued as of any
Distribution Date but not paid on such Distribution Date will be due on the next
Distribution Date together with an amount equal to interest on such amount at
the Note Interest Rate. Interest payments on the Notes for any Distribution Date
will generally be funded from Available Funds and amounts on deposit in the
Reserve Account remaining after the distribution of the Servicing Fee for each
Monthly Servicing Payment Date and of the Servicing Fee and the Administration
Fee for each Distribution Date. See "Description of the Transfer and Servicing
Agreements -- Distributions" and "-- Credit Enhancement". If such sources are
insufficient to pay the Noteholders' Interest Distribution Amount for such
Distribution Date, such shortfall will be allocated pro rata to the Class A-1
Noteholders and the Class A-2 Noteholders (based upon the total amount of
interest then due on each class of Notes).
The "Class A-1 Rate" for each Interest Period will be equal to the lesser
of (a) the T-Bill Rate for such Interest Period (determined as set forth under
"-- Determination of the T-Bill Rate") plus % and (b) the Student Loan Rate
for such Interest Period. The "Class A-2 Rate" for each Interest Period will be
equal to the lesser of the T-Bill Rate for such Interest Period (determined as
set forth under "-- Determination of the T-Bill Rate") plus % and (b) the
Student Loan Rate for such Interest Period. The Class A-1 Rate and the Class A-2
Rate are the "Note Interest Rates."
The "Student Loan Rate" for any Interest Period will equal the product of
(a) the quotient obtained by dividing (i) 365 (or 366 in a leap year) by (ii)
the actual number of days elapsed in such Interest Period and (b) the percentage
equivalent of a fraction, (i) the numerator of which is equal to Expected
Interest Collections for the Collection Period relating to such Interest Period
less the Servicing Fees and the Administration Fee payable on the related
Distribution Date and any Servicing Fees paid on the two preceding Monthly
Servicing Payment Dates during the related Collection Period and (ii) the
denominator of which is the sum of (x) the Pool Balance as of the first day of
the Collection Period in which the preceding Distribution Date occurs and (y)
the principal balance on deposit in the Pre-Funding Account as of the first day
of the Collection Period in which the preceding Distribution Date occurs (after
giving effect to all deposits thereto and withdrawals therefrom on such
preceding Distribution Date).
"Expected Interest Collections" means, with respect to any Collection
Period, the sum of (i) the amount of interest accrued, net of amounts required
by the Higher Education Act to be paid to the Department or to be repaid to
borrowers, with respect to the Financed Student Loans for such Collection Period
(whether or not such interest is actually paid), (ii) all Interest Subsidy
Payments and Special Allowance Payments expected to be received by the Eligible
Lender Trustee for such Collection Period (whether or not actually received)
with respect to the Financed Federal Loans and (iii) Investment Earnings for
such Collection Period.
Any Noteholders' Interest Index Carryover that may exist on any
Distribution Date will be payable to the Noteholders on that Distribution Date,
and any succeeding Distribution Dates solely out of the amount of Available
Funds remaining in the Collection Account on any such Distribution Date after
distribution of the Servicing Fee, the Administration Fee, the Noteholders'
Distribution Amount, the Certificateholders' Distribution Amount, the amount, if
any, necessary to be deposited into the Reserve Account to reinstate the balance
therein to the Specified Reserve Account Balance and the aggregate unpaid Excess
Servicing Fee, if any, and then only if the Overcollateralization Amount is
greater than the Specified Overcollateralization Amount; provided that no
amounts on deposit in the Reserve Account (other than amounts in excess of the
Specified Reserve Account Balance not required to be paid to Noteholders as an
additional payment of
68
<PAGE> 71
principal in order to reinstate the Overcollateralization Amount to the
Specified Overcollateralization Amount) will be available to pay any such
Noteholders' Interest Index Carryover. Any amount of Noteholders' Interest Index
Carryover remaining after distribution of all Available Funds on the Note Final
Maturity Date will never become due and payable and will be discharged on such
date.
Distributions of Principal. Principal payments will be made to the
Noteholders on each Distribution Date in an amount generally equal to the
Principal Distribution Amount for such Distribution Date, until the principal
balance of the Notes is reduced to zero. Principal payments on the Notes will
generally be derived from Available Funds and amounts on deposit in the Reserve
Account remaining after the distribution of the Servicing Fee, the
Administration Fee and the Noteholders' Interest Distribution Amount. In
addition, (i) on each Distribution Date on which the Overcollateralization
Amount is less than the Specified Overcollateralization Amount and (ii) in the
event the Financed Student Loans are not sold pursuant to the auction process
described under "Description of the Transfer and Servicing Agreements --
Termination", with respect to any Distribution Date occurring on or after the
Distribution Date on which the Pool Balance is equal to 10% or
less of the Initial Pool Balance, in each case if the amount on deposit in the
Reserve Account is greater than the Specified Reserve Account Balance, such
excess will generally be released from the Reserve Account and distributed to
Noteholders as an accelerated payment of principal. 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 Distribution Date, such shortfall will be added to the principal
payable to the Noteholders on subsequent Distribution Dates.
Principal payments on the Notes will be applied on each Distribution Date,
first, to the principal balance of the Class A-1 Notes until such principal
balance is reduced to zero and then to the principal balance of the Class A-2
Notes until such principal balance is reduced to zero. The aggregate outstanding
principal amount of the Class A-1 Notes will be payable in full on the
Distribution Date (the "Class A-1 Final Maturity Date") and the
Class A-2 Notes will be payable in full on the Distribution Date (the
"Class A-2 Final Maturity Date"). Although the maturity of many of the Financed
Student Loans will extend well beyond such maturity dates, the actual date on
which the aggregate outstanding principal and accrued interest of the Class A-1
Notes or Class A-2 Notes are paid may be earlier than the Note Final Maturity
Date based on a variety of factors, including those described above under "Risk
Factors -- Prepayment Risk from Pre-Funded Amount", "Risk Factors -- Prepayment,
Maturity and Yield Risks", "Risk Factors -- Prepayment Risks Differ Between the
Notes and the Certificates" and "The Financed Student Loan Pool -- Maturity and
Prepayment Assumptions".
Mandatory Redemption. If as of the Special Determination Date the
Subsequent Pool Pre-Funded Amount has not been reduced to zero, then the
remaining Subsequent Pool Pre-Funded Amount will be distributed on the first
Distribution Date to redeem each class of Notes and prepay the Certificates on a
pro rata basis based on the initial principal amount of each class of Notes and
principal balance of the Certificates. The Class A-1 Notes and, if the Class A-1
Notes are paid in full, the Class A-2 Notes, will be redeemed in part on the
Distribution Date on or immediately following the last day of the Funding
Period, in the event that any amount remains on deposit in the Pre-Funding
Account after giving effect to all Additional Fundings on or prior to such date,
in an aggregate principal amount equal to the amount then on deposit in the
Pre-Funding Account.
THE CERTIFICATES
Distributions of Interest. Certificateholders will be entitled to
distributions in an amount equal to the amount of interest that would accrue on
the Certificate Balance at the Certificate Rate. Such amounts will be
distributable quarterly on each Distribution Date. That interest entitlement
will accrue from and including the Closing Date or from the most recent
Distribution Date on which interest distributions have been made to but
excluding the current Distribution Date and will be calculated as provided
below. Interest distributions due 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 Certificate Rate. Interest
distributions with respect to the Certificates for such Distribution Date will
generally be funded from the portion of the
69
<PAGE> 72
Available Funds and the amounts on deposit in the Reserve Account remaining
after the distribution of the Servicing Fee, and the Noteholders' Interest
Distribution Amount (and the Administration Fee on any Distribution Date) for
such Distribution Date. See "Description of the Transfer and Servicing
Agreements -- Distributions" and "-- Credit Enhancement -- Reserve Account".
The "Certificate Rate" for each Interest Period will be equal to the lesser
of (a) the T-Bill Rate for such Interest Period (determined as set forth under
"-- Determination of the T-Bill Rates") plus % and (b) the Student Loan Rate
for such Interest Period.
Any Certificateholders' Interest Index Carryover that may exist on any
Distribution Date will be payable to the Certificateholders on that Distribution
Date and any succeeding Distribution Dates solely out of the amount of Available
Funds remaining in the Collection Account on any such Distribution Date after
distribution of the Servicing Fee, the Administration Fee, the Noteholders'
Distribution Amount, the Certificateholders' Distribution Amount, the amount, if
any, necessary to be deposited into the Reserve Account to reinstate the balance
therein to the Specified Reserve Account Balance, the aggregate unpaid Excess
Servicing Fee, if any, and any Noteholders' Interest Index Carryover, and then
only if the Overcollateralization Amount is greater than the Specified
Overcollateralization Amount; provided that amounts on deposit in the Reserve
Account (other than amounts in excess of the Specified Reserve Account Balance
not required to be paid to Noteholders as an additional payment of principal in
order to reinstate the Overcollateralization Amount to the Specified
Overcollateralization Amount) will not be available to pay any such
Certificateholders' Interest Index Carryover. Any amount of Certificateholders'
Interest Index Carryover remaining after distribution of all Available Funds on
the Certificate Final Maturity Date will never become due and payable and will
be discharged on such date.
Distributions of Principal. Certificateholders will be entitled to
distributions on each Distribution Date on and after which the Notes are paid in
full in an amount generally equal to the Principal Distribution Amount for such
Distribution Date. Distributions with respect to principal payments on the
Certificates for such Distribution Date will generally be funded from the
portion of Available Funds and amounts on deposit in the Reserve Account
remaining after distribution of the Servicing Fee, the Administration Fee and
the Certificateholders' Interest Distribution Amount for such Distribution Date.
See "Description of the Transfer and Servicing Agreements -- Distributions" and
"-- Credit Enhancement -- Reserve Account". In addition, in the event the
Financed Student Loans are not sold pursuant to the auction process described
under "Description of the Transfer and Servicing Agreements -- Termination",
with respect to any Distribution Date occurring on or after the
Distribution Date on which the Pool Balance is equal to 10% or less of the
Initial Pool Balance, if the amount on deposit in the Reserve Account is greater
than the Specified Reserve Account Balance, such excess will generally be
released and paid to the Certificateholders as accelerated principal payments as
described under "Description of the Transfer and Servicing Agreements -- Credit
Enhancement -- Reserve Account", subject to the prior payment in full of the
Notes.
The outstanding principal amount of the Certificates will be payable in
full on the Distribution Date (the "Certificate Final Maturity
Date"). The actual date on which the aggregate outstanding principal and accrued
interest of the Certificates will be paid may be earlier than the Certificate
Final Maturity Date, however, based on a variety of factors, including those
described above under "Risk Factors -- Prepayment Risk from Pre-Funded Amount",
"Risk Factors -- Prepayment, Maturity and Yield Risks", "Risk Factors --
Prepayment Risks Differ Between the Notes and the Certificates" and "The
Financed Student Loan Pool -- Maturity and Prepayment Assumptions".
If as of the Special Determination Date the Subsequent Pool Pre-Funded
Amount has not been reduced to zero, then the remaining Subsequent Pool
Pre-Funded Amount will be distributed on the first Distribution Date to redeem
each class of Notes and prepay the Certificates on a pro rata basis based on the
initial principal amount of each class of Notes and principal balance of the
Certificates.
Subordination of the Certificates. The interests of the Certificateholders
in the assets of the Trust will be subordinated to the payment to Noteholders of
the Noteholders' Interest Distribution Amount for any Distribution Date.
Consequently, on any Distribution Date, Available Funds and amounts on deposit
in the
70
<PAGE> 73
Reserve Account remaining after payment of the Servicing Fee (and the
Administration Fee on any Distribution Date) will be applied to the payment of
the Noteholders' Interest Distribution Amount (but not to the payment of any
Noteholders' Interest Index Carryover) for such Distribution Date prior to any
distribution thereof to Certificateholders. Moreover, no distributions in
respect of principal of the Certificates will be made until the Distribution
Date on or after which the Notes have been paid in full. In addition, on any
Distribution Date, Available Funds remaining after payment of the Servicing Fee,
the Administration Fee, the Noteholders' Distribution Amount, the
Certificateholders' Distribution Amount, the amount, if any, necessary to be
deposited into the Reserve Account to reinstate the balance therein to the
Specified Reserve Account Balance and the aggregate unpaid Excess Servicing Fee,
if any, for such Distribution Date will be applied to the payment of the
Noteholders' Interest Index Carryover prior to any distribution thereof to
Certificateholders to cover the Certificateholders' Interest Index Carryover.
Any portion of the Certificateholders' Interest Distribution Amount not received
on such Distribution Date in connection with such subordination will be treated
as a Certificateholders' Interest Carryover Shortfall to be paid on succeeding
Distribution Dates.
DETERMINATION OF THE T-BILL RATES
"T-Bill Rate" means, on any day, the weighted average per annum discount
rate (expressed on a bond equivalent basis and applied on a daily basis) for
91-day Treasury bills sold at the most recent 91-day Treasury bill auction prior
to such date, as reported by the U.S. Department of the Treasury. In the event
that the results of the auctions of 91-day Treasury bills cease to be reported
as provided above, or that no such auction is held in a particular week, then
the T-Bill Rate in effect as a result of the last such publication or report
will remain in effect until such time, if any, as the results of auctions of
91-day Treasury bills shall again be reported or such an auction is held, as the
case may be. The T-Bill Rate will be subject to a Lock-In Period of six business
days.
"Lock-In Period" means the period of days preceding any Distribution Date
during which the Note Rate or Certificate Rate, as applicable, in effect on the
first day of such period will remain in effect until the end of the Accrual
Period related to such Distribution Date.
Accrued interest on either class of Notes from and including the Closing
Date or the preceding Distribution Date, as applicable, to but excluding the
current Distribution Date is calculated by multiplying the principal amount of
such Notes by an "accrued interest factor." This factor is calculated by adding
the interest rates applicable to each day on which each such Note has been
outstanding since the Closing Date or the preceding Distribution Date, as
applicable, and dividing the sum by 365 (or by 366 in the case of accrued
interest which is payable on a Distribution Date in a leap year) and rounding
the resulting number to nine decimal places.
The following table sets forth the accrued interest factors that would have
been applicable to any Note bearing interest at the indicated rates, assuming a
365-day year:
<TABLE>
<CAPTION>
ASSUMED INTEREST
-------------------------
SETTLEMENT DAYS RATE ON INTEREST
DATE OUTSTANDING THE NOTES FACTOR
---------------------------------------- ----------- --------- -----------
<S> <C> <C> <C> <C>
1st ........................................ 0 5.00000% 0.000000000
2nd ........................................ 1 5.00000 0.000136986
3rd ........................................ 2 5.00000 0.000273973
4th ........................................ 3 5.00000 0.000410959
5th* ........................................ 4 5.15000 0.000547945
6th ........................................ 5 5.15000 0.000689041
7th ........................................ 6 5.15000 0.000830137
8th ........................................ 7 5.15000 0.000971233
9th ........................................ 8 5.15000 0.001112329
10th ........................................ 9 5.15000 0.001253425
</TABLE>
- ---------------
* First interest rate adjustment (91-day Treasury bills are generally auctioned
weekly).
71
<PAGE> 74
The numbers in this table are examples given for information purposes only
and are in no way a prediction of interest rates on any Notes. A similar factor
calculated in the same manner is applicable to the return on the Certificates.
Information concerning the current 91-day Treasury Bill Rate and the
accrued interest factor will be available through Telerate Systems Incorporated
or Bloomberg L.P.
THE INDENTURE
Modification of Indenture. With the consent of the holders of a majority
of the outstanding Notes, 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.
Without the consent of the holder of each outstanding Note affected
thereby, however, no supplemental indenture will (i) change the due date of any
installment of principal of or interest on any Note or reduce the principal
amount thereof, the interest rate specified thereon or the redemption price with
respect thereto 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 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 of certain
defaults thereunder and their consequences as provided for in the Indenture,
(iv) modify or alter the provisions of the Indenture regarding the voting of
Notes held by the Trust, the Seller, an affiliate of either of them or any
obligor on the Notes, (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 if the proceeds of such sale would be insufficient to pay
the principal amount and accrued but unpaid interest on the outstanding Notes,
(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 or (vii) 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.
The Trust and the Indenture Trustee may also enter into supplemental
indentures, without obtaining the consent of Noteholders, for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Indenture or of modifying in any manner the rights of
Noteholders 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.
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 days or more in the payment of any interest on any Note
after the same becomes due and payable; (ii) a default in the payment of the
principal of or any installment of the 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 and the continuation of
any such default for a period of thirty 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 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 thirty 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 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 under
the Indenture on any Distribution
72
<PAGE> 75
Date is limited to the amount of Available Funds and amounts on deposit in the
Reserve Account after payment of the Servicing Fee, the Administration Fee and
the Noteholders' Interest Distribution Amount. Any such shortfalls on any
Distribution Date will be carried over as a Noteholders' Principal Carryover
Shortfall to be paid on succeeding Distribution Dates. Therefore, the failure to
pay principal on the Class A-1 Notes may not result in the occurrence of an
Event of Default until the Class A-1 Final Maturity Date and the failure to pay
principal on the Class A-2 Notes may not result in the occurrence of an Event of
Default until the Class A-2 Final Maturity Date. In addition, the failure to pay
the aggregate amount of Noteholders' Interest Index 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 the
Notes, the Indenture Trustee or holders of a majority in principal amount of the
Notes then outstanding may declare the principal of the Notes to be immediately
due and payable. Such declaration may be rescinded by the holders of a majority
in principal amount of the Notes then outstanding at any time prior to the entry
of judgment 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 (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,
either require the Eligible Lender Trustee to sell the Financed Student Loans,
subject to compliance with the rights of first offer held by The Access
Group(SM) and PHEAA, 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 in the payment of any principal or a
default for five days or more in the payment of any interest on any Note, unless
(i) the holders of all outstanding Notes 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 outstanding Notes at the date of such sale or (iii) the
Indenture Trustee determines that the collections on the Financed Student Loans
would not be sufficient on an ongoing basis to make all payments on the Notes 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. If the
proceeds of any such sale are insufficient to pay the then outstanding principal
amount of the Notes and any accrued interest, such proceeds shall be distributed
to the Holders of Class A-1 Notes and Class A-2 Notes on a pro rata basis, based
on the amount then owing on each class of Notes.
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 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 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 failed to institute such proceeding and (v) no direction inconsistent with
such written request has been given
73
<PAGE> 76
to the Indenture Trustee during such 60-day period by the holders of a majority
in principal amount of the outstanding Notes.
In addition, the Indenture Trustee and the Noteholders will covenant that
they will not at any time institute against the Trust any bankruptcy,
reorganization or other proceeding under any Federal or state bankruptcy or
similar law.
None of the Indenture Trustee, the Seller, the Administrator, the Servicer
or the Eligible Lender Trustee in its individual capacity, nor any holder of a
Certificate representing an ownership interest in the Trust, nor any of their
respective owners, beneficiaries, agents, officers, directors, employees,
successors or assigns will, in the absence of an express agreement to the
contrary, be personally liable for the payment of the principal of or interest
on the Notes or for the agreements of the Trust contained in the Indenture.
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, any state or the
District of Columbia, (ii) 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,
(iii) no Event of Default has occurred and is continuing immediately after such
merger or consolidation, (iv) the Trust has been advised that the rating of the
Notes and the Certificates would not be reduced or withdrawn by the Rating
Agencies as a result of such merger or consolidation and (v) the Trust has
received an opinion of counsel to the effect that such consolidation or merger
would have no material adverse federal or Pennsylvania state tax consequence to
the Trust or to any Certificateholder or Noteholder.
The Trust will not, among other things, (i) except as expressly permitted
by the Indenture, the Transfer and Servicing Agreements or certain related
documents (collectively, 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 the
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 to be impaired or permit any
person to be released from any covenants or obligations with respect to the
Notes under the Indenture except as may be expressly permitted thereby or (v)
permit any lien, charge, excise, claim, security interest, mortgage or other
encumbrance 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, except as expressly permitted by the Related Documents.
The Trust may not engage in any activity other than financing, purchasing,
owning, selling and managing the Financed Student Loans and the other assets of
the Trust and making Additional Fundings, in each case in the manner
contemplated by the Related Documents and activities incidental thereto. After
the Funding Period, the Trust may not make any Additional Fundings.
The Trust will not incur, assume or guarantee any indebtedness other than
indebtedness incurred pursuant to the Notes and the Indenture or otherwise in
accordance with the Related Documents.
Annual Compliance Statement. The Trust will be required to file annually
with the Indenture Trustee a written statement as to the fulfillment of its
obligations under the Indenture.
Indenture Trustee's Annual Report. The Indenture Trustee will be required
to mail each year to all Noteholders a brief report relating to, among other
things, its eligibility and qualification to continue as the Indenture Trustee
under the Indenture, any amounts advanced by it under the Indenture, the amount,
interest rate and maturity date of certain indebtedness owing by the Trust to
the Indenture Trustee in its individual capacity, the property and funds
physically held by the Indenture Trustee as such and any action taken by it that
materially affects the Notes and that has not been previously reported.
74
<PAGE> 77
Satisfaction and Discharge of Indenture. The Indenture will be discharged
with respect to the collateral securing the Notes 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.
The Indenture Trustee. Bankers Trust Company, a New York banking
corporation, will be the Indenture Trustee under the Indenture. The Seller
maintains normal commercial banking relations with the Indenture Trustee.
BOOK-ENTRY REGISTRATION
Persons acquiring beneficial ownership interests in the Notes may hold
their interests through The Depository Trust Company ("DTC") in the United
States or Cedel or Euroclear in Europe and persons acquiring beneficial
ownership interests in the Certificates may hold their interests through DTC.
Securities will be registered in the name of Cede & Co. ("Cede") as nominee for
DTC. Cedel and Euroclear will hold omnibus positions with respect to the Notes
on behalf of Cedel Participants and the Euroclear Participants, respectively,
through customers' securities accounts in Cedel's and Euroclear's name on the
books of their respective depositaries (collectively, the "Depositaries") which
in turn will hold such positions in customers' securities accounts in the
Depositaries' names on the books of DTC.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC and a "clearing agency"
registered pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for its participating organizations ("Participants") and to
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entries, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations. Indirect access to
the DTC system also is available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants").
Securityholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Securities may do so only through Participants and Indirect Participants. In
addition, Securityholders will receive all distributions of principal and
interest from the Indenture Trustee or the Eligible Lender Trustee, as
applicable (the "Applicable Trustee"), through Participants and Indirect
Participants. Under a book-entry format, Securityholders may experience some
delay in their receipt of payments, since such payments will be forwarded by the
Applicable Trustee to Cede, as nominee for DTC. DTC will forward such payments
to its Participants, which thereafter will forward them to Indirect Participants
or Securityholders. It is anticipated that the only "Securityholder",
"Certificateholder" and "Noteholder" will be Cede, as nominee for DTC.
Securityholders will not be recognized by the Applicable Trustee as Noteholders
or Certificateholders, as such terms are used in the Indenture and the Trust
Agreement, respectively, and Securityholders will be permitted to exercise the
rights of Securityholders only indirectly through DTC and its Participants.
Transfers between DTC participants will occur in the ordinary way 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.
Because of time-zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a DTC Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedel Participants 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.
75
<PAGE> 78
Cross-market transfers between persons holding Notes 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 Depositary; 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 Depositary 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 Depositaries.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Securities among Participants on whose behalf it acts with respect to the
Securities and to receive and transmit distributions of principal of, and
interest on, the Securities. Participants and Indirect Participants with which
Securityholders have accounts with respect to the Securities similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Securityholders. Accordingly, although
Securityholders will not possess Securities, the Rules provide a mechanism by
which Participants will receive payments and will be able to transfer their
interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to such
Securities, may be limited due to the lack of a physical certificate for such
Securities.
Cedel Bank, societe anonyme ("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 any underwriters, agents or
dealers with respect to the Notes offered hereby. 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 several 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 Systems, S.C., 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 establishes
policy for the Euroclear System on behalf of Euroclear Participants. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries and may include any
underwriters, agents
76
<PAGE> 79
or dealers with respect to the Notes offered hereby. Indirect access to the
Euroclear System is also available to other firms that clear through or 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 and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawals 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 Depositary. Such distributions will be subject to tax reporting
in accordance with relevant United States tax laws and regulations. Cedel or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a beneficial holder of Notes under the Indenture on behalf of a
Cedel Participant or Euroclear Participant only in accordance with its relevant
rules and procedures and subject to its Depositary's ability to effect such
actions on its behalf through DTC.
DTC has advised the Administrator that it will take any action permitted to
be taken by a Securityholder under the Indenture or the Trust Agreement, as the
case may be, only at the direction of one or more Participants to whose accounts
with DTC the Securities are credited. DTC may take conflicting actions with
respect to other undivided interests to the extent that such actions are taken
on behalf of Participants whose holdings include such undivided interests.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of interests in the 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.
NEITHER THE TRUST, THE SELLER, THE SERVICER, THE ADMINISTRATOR, THE
ELIGIBLE LENDER TRUSTEE, THE INDENTURE TRUSTEE NOR THE UNDERWRITER WILL HAVE ANY
RESPONSIBILITY OR OBLIGATION TO ANY PARTICIPANTS, CEDEL PARTICIPANTS OR
EUROCLEAR PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS NOMINEES WITH RESPECT
TO (1) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC, CEDEL OR EUROCLEAR OR ANY
PARTICIPANT, (2) THE PAYMENT BY DTC, CEDEL OR EUROCLEAR OR ANY PARTICIPANT OF
ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE PRINCIPAL AMOUNT OR
INTEREST ON THE SECURITIES, (3) THE DELIVERY BY ANY PARTICIPANT, CEDEL
PARTICIPANT OR EUROCLEAR PARTICIPANT OF ANY NOTICE TO ANY BENEFICIAL OWNER WHICH
IS REQUIRED OR PERMITTED UNDER THE TERMS OF THE INDENTURE OR THE TRUST AGREEMENT
TO BE GIVEN TO SECURITYHOLDERS OR (4) ANY OTHER ACTION TAKEN BY DTC AS THE
SECURITYHOLDER.
DEFINITIVE SECURITIES
The Notes and the Certificates will initially be issued in book-entry form.
The Notes and the Certificates will be issued in fully registered, certificated
form ("Definitive Notes" and "Definitive Certificates",
77
<PAGE> 80
respectively, and collectively referred to herein as "Definitive Securities") to
Noteholders or Certificateholders or their respective nominees, rather than to
DTC or its nominee, only if (i) the Administrator advises the Applicable Trustee
in writing that DTC is no longer willing or able to discharge properly its
responsibilities as depository with respect to the Securities and the
Administrator is unable to locate a qualified successor, (ii) the Administrator,
at its option, elects to terminate the book-entry system through DTC or (iii)
after the occurrence of an Event of Default, a Servicer Default or an
Administrator Default, Securityholders representing at least a majority of the
outstanding principal amount of the Notes or the Certificates, as the case may
be, advise the Applicable Trustee through DTC in writing that the continuation
of a book-entry system through DTC (or a successor thereto) with respect to such
Notes or Certificates is no longer in the best interest of the holders of such
Securities.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Applicable Trustee will be required to notify all applicable
Securityholders through Participants of the availability of Definitive
Securities. Upon surrender by DTC of the definitive security representing the
corresponding Securities and receipt of instructions for re-registration, the
Applicable Trustee will reissue such Securities as Definitive Securities to such
Securityholders.
Distributions of principal of, and interest on, such Definitive Securities
will thereafter be made by the Applicable Trustee in accordance with the
procedures set forth in the Indenture or the Trust Agreement, as the case may
be, directly to holders of Definitive Securities in whose names the Definitive
Securities were registered at the close of business on the Record Date. Such
distributions will be made by check mailed to the address of such holder as it
appears on the register maintained by the Applicable Trustee. The final payment
on any such Definitive Security, however, will be made only upon presentation
and surrender of such Definitive Security at the office or agency specified in
the notice of final distribution to Securityholders.
Definitive Securities will be transferable and exchangeable at the offices
of the Applicable Trustee or of a registrar named in a notice delivered to
holders of Definitive Securities. No service charge will be imposed for any
registration of transfer or exchange, but the Applicable Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
LIST OF SECURITYHOLDERS
Three or more holders of the Notes or one or more holders of Notes
evidencing not less than 25% of the aggregate outstanding principal balance of
the Notes 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.
Three or more Certificateholders or one or more holders of Certificates
evidencing not less than 25% of the Certificate Balance may, by written request
to the Eligible Lender Trustee, obtain access to the list of all
Certificateholders for the purpose of communicating with other
Certificateholders with respect to their rights under the Trust Agreement or
under the Certificates.
REPORTS TO SECURITYHOLDERS
On each Distribution Date, the Applicable Trustee will provide to
Securityholders of record as of the related Record Date a statement setting
forth substantially the same information as is required to be provided on the
related quarterly report provided to the Indenture Trustee and the Trust
described under "Description of Transfer and Servicing Agreements -- Statements
to Indenture Trustee and Trust".
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of the Indenture or the Trust
Agreement, as the case may be, the Applicable Trustee will mail to each person
who at any time during such calendar year was a Securityholder and received any
payment
78
<PAGE> 81
thereon, a statement containing certain information for the purposes of such
Securityholder's preparation of federal income tax returns. See "Material Tax
Consequences".
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
GENERAL
The following is a summary of certain terms of the Sale and Servicing
Agreement, pursuant to which the Eligible Lender Trustee on behalf of the Trust
will purchase, the 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 will be
created and the Certificates will be issued (collectively, 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. However, the summary does not purport to be
complete and is qualified in its entirety by reference to the provisions of such
Transfer and Servicing Agreements.
SALE OF FINANCED STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
On or prior to the Closing Date, the Seller will sell and assign to the
Eligible Lender Trustee on behalf of the Trust, without recourse, its entire
interest in the Initial Financed Student Loans, all collections received and to
be received with respect thereto for the period on and after September 1, 1996
and all the Assigned Rights pursuant to the Sale and Servicing Agreement. Each
Initial Financed Student Loan will be identified in schedules appearing as an
exhibit to the Sale and Servicing Agreement. The Eligible Lender Trustee will,
concurrently with such sale and assignment, execute, authenticate and deliver
the Notes. The net proceeds received from the sale of the Notes and the
Certificates will be applied to the purchase of the Financed Student Loans and
the Assigned Rights and to the deposit of the Pre-Funded Amount in the
Pre-Funding Account. See "-- Additional Fundings" for a description of the
application of funds on deposit in the Pre-Funding Account during the Funding
Period.
In the Sale and Servicing Agreement, the Seller will make certain
representations and warranties with respect to the Financed Student Loans to the
Trust for the benefit of the Certificateholders and the Noteholders, including,
among other things, that (i) each Financed Student Loan, on the date on which
transferred 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 threatened; (ii) the information provided with respect to the
Initial Financed Student Loans is true and correct as of the Statistical Cutoff
Date and, in some cases, the Closing Date (iii) the information provided with
respect to the Subsequent Financed Student Loans is true and correct as of the
Statistical Cutoff Date and, as of the related Subsequent Cutoff Date, no claim
has been made to a Guarantor with respect to such Student Loans, and (iv) each
Financed Student Loan, at the time it was originated, complied and, at the
Closing Date or Transfer Date (as defined below), as applicable, 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 Seller 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 Seller will, unless such breach is cured within 60 days,
repurchase such Financed Student Loan from the Eligible Lender Trustee, as of
the first day following the end of such 60-day period that is the last day of a
Collection Period, at the related Purchase Price as of the day of repurchase
plus accrued interest thereon to the day of repurchase (the "Purchase Amount").
In addition, the Seller will reimburse the Trust with respect to a Financed
Federal Loan for any accrued interest amounts that
79
<PAGE> 82
a Federal Guarantor refuses to pay pursuant to its Guarantee Agreement due to,
or for any Interest Subsidy Payments and Special Allowance Payments that are
lost or that must be repaid to the Department as a result of, a breach of any
such representation or warranty by the Seller. The repurchase and reimbursement
obligations of the Seller will constitute the sole remedy available to or on
behalf of the Trust, the Certificateholders or the Noteholders for any such
uncured breach. The Seller's repurchase and reimbursement obligations are
contractual obligations pursuant to the Sale and Servicing Agreement that may be
enforced against the Seller, but the breach of which will not constitute an
Event of Default.
To assure uniform quality in servicing and to reduce administrative costs,
the Servicer will be appointed custodian of the promissory notes representing
the Financed Student Loans by the Eligible Lender Trustee on behalf of the
Trust. The Seller's and the Servicer's accounting and other records will reflect
the sale and assignment of the Financed Student Loans to the Eligible Lender
Trustee on behalf of the Trust, and Uniform Commercial Code financing statements
reflecting such sale and assignment will be filed.
ACCOUNTS
The Administrator will establish and maintain the Collection Account, the
Pre-Funding Account, the Escrow Account, the Negative Carry Account and the
Reserve Account, in the name of the Indenture Trustee on behalf of the
Noteholders and the Certificateholders.
Funds in the Collection Account, the Pre-Funding Account, the Escrow
Account, the Negative Carry Account and the Reserve Account (collectively, the
"Trust Accounts") will be invested as provided in the Sale and Servicing
Agreement in Eligible Investments. "Eligible Investments" are generally limited
to short-term U.S. government backed securities, certain highly rated commercial
paper and money market funds and other investments acceptable to the Rating
Agencies as being consistent with the rating of the Notes. Subject to certain
conditions, Eligible Investments may include securities or other obligations
issued by the Seller or its affiliates, or trusts originated by the Seller or
its affiliates, or shares of investment companies for which the Seller or its
affiliates may serve as the investment advisor. Eligible Investments are limited
to obligations or securities that mature not later than the business day
immediately preceding the next Distribution Date. 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 on each Distribution Date 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.
"Eligible Institution" means 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), (i) which has a
long-term unsecured debt rating and/or a short-term unsecured debt rating
acceptable to Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Corporation ("Standard & Poor's") and Fitch Investors Services, Inc. and (ii)
whose deposits are insured by the FDIC.
ADDITIONAL FUNDINGS
On the Closing Date, for administrative convenience, a portion of the
Pre-Funded Amount in an amount equal to the Subsequent Pool Pre-Funded Amount
will be allocated to the Subsequent Pool Pre-Funding Subaccount and the
remainder of the Pre-Funded Amount, equal to the Other Additional Pre-Funded
Amount ($ ), will be allocated to the Other Additional Funding Subaccount.
The Subsequent Pool Pre-Funded Amount may only be used by the Trust on or prior
to the Special Determination Date to purchase from the Seller Student Loans
constituting all or part of the Subsequent Pool. The Subsequent Pool Pre-
80
<PAGE> 83
Funded Amount will be reduced on the date Student Loans from the Subsequent Pool
are transferred to the Trust by the aggregate amount of the Purchase Price of
each Student Loan.
The Trust intends to use funds on deposit in the Subsequent Pool
Pre-Funding Subaccount on or prior to the Special Determination Date to acquire
the Subsequent Financed Student Loans. Funds on deposit in the Other Additional
Funding Subaccount will be used from time to time during the Funding Period (i)
to cover collections of interest on certain of the Financed Student Loans to the
extent such interest is not paid currently but is capitalized and added to the
principal balance of such Financed Student Loans and (ii) under certain
circumstances, together with any amounts on deposit in the Escrow Account, to
purchase from the Seller, for an amount equal to 100% of the aggregate principal
balance thereof plus accrued interest (to the extent capitalized or to be
capitalized), Serial Loans (including Consolidation Loans and Private
Consolidation Loan guarantee fees, if any) and Guarantee Fee Advances made by
the Seller to those eligible borrowers who have Student Loans that are part of
the pool of Initial Financed Student Loans as of the Statistical Cutoff Date and
Subsequent Financed Student Loans as of the related Subsequent Cut-off Date. See
"The Student Loan Financing Business -- Federal Loans Under the
Program -- Federal Consolidation Loans" and "-- Private Loans Under the
Program -- Private Consolidation Loans". "Serial Loans" constitute Student Loans
which are made to a borrower who is also a borrower under at least one
outstanding Initial Financed Student Loan or Subsequent Financed Student Loan.
The Seller expects that the amount of Additional Fundings will approximate 100%
of the Pre-Funded Amount by the last day of the Collection Period preceding the
Distribution Date; however, there can be no assurance that a
sufficient amount of Additional Fundings will be made during such time. If the
Pre-Funded Amount has not been reduced to zero by the end of the Funding Period,
the Holders of the Class A-1 Notes and, if the Class A-1 Notes are paid in full,
the Holders of the Class A-2 Notes, will receive any amounts remaining in the
Pre-Funding Account as a payment of principal. If as of the Special
Determination Date the Subsequent Pool Pre-Funded Amount has not been reduced to
zero, then the remaining Subsequent Pool Pre-Funded Amount will be distributed
on the first Distribution Date to redeem each class of Notes and prepay the
Certificates on a pro rata basis based on the initial principal amount of each
class of Notes and principal balance of the Certificates. Although the Seller
intends to sell all of the Student Loans constituting the Subsequent Pool to the
Trust on or prior to the Special Determination Date, because of the potential
for a bankruptcy or death of a borrower subsequent to the Statistical Cutoff
Date and other administrative reasons, the Seller may not be able to sell all
such Student Loans to the Trust.
Pursuant to the Sale and Servicing Agreement, the Seller is obligated to
sell, and the Eligible Lender Trustee on behalf of the Trust is obligated to
purchase, subject to the limitation set forth below on the amount of
Consolidation Loans that may be transferred to the Trust, Other Student Loans
having an aggregate principal balance (net of the aggregate principal balance of
the Financed Student Loans repaid by any Other Student Loans that are
Consolidation Loans) of not less than $ (less the amount of
other Additional Fundings made by the Trust during the Funding Period) to the
extent that such Other Student Loans are available (of which an amount equal to
approximately $ will be expressly set aside within the Other
Additional Funding Subaccount for the purchase of Guarantee Fee Advances during
the Funding Period). The obligation to purchase any Additional Student Loan
(including a Student Loan in the Subsequent Pool) by the Eligible Lender Trustee
on behalf of the Trust is subject to the following conditions, among others: (i)
such Additional Student Loan must satisfy all applicable origination
requirements and all other requirements specified in the Sale and Servicing
Agreement or elsewhere, (ii) the Seller will not select such Additional Student
Loan in a manner that it believes is adverse to the interests of the
Securityholders and (iii) the Seller will deliver certain opinions of counsel to
the Indenture Trustee and the Rating Agencies with respect to the validity of
the conveyance of such Additional Student Loan. In addition, (a) no Private
Consolidation Loan will be transferred to the Trust unless at least one
underlying loan was held by the Eligible Lender Trustee on behalf of the Trust
at the time of consolidation and (b) no Consolidation Loan will be transferred
to the Trust if the purchase price required to be paid for such Consolidation
Loan when added to the aggregate purchase price previously paid by the Eligible
Lender Trustee for all Consolidation Loans during the Funding Period would cause
the aggregate purchase price paid by the Eligible Lender Trustee for
Consolidation Loans transferred to the Trust to exceed $ . On each
fifteenth day (or, if such day
81
<PAGE> 84
is not a business day, the next succeeding business day) of each month and
certain other dates designated by the Seller during the Funding Period (each, a
"Transfer Date"), the Seller will sell and assign, without recourse, to the
Eligible Lender Trustee on behalf of the Trust, its entire interest in the Other
Student Loans made or, with respect to Student Loans in the Subsequent Pool,
owned during the period preceding such Transfer Date, in each case as of the
date specified in the applicable Transfer Agreement to be delivered on such
Transfer Date (each, a "Subsequent Cutoff Date"). Subject to the satisfaction of
the foregoing conditions, the Seller will convey the Additional Student Loans to
the Eligible Lender Trustee on behalf of the Trust on each such Transfer Date
pursuant to the Sale and Servicing Agreement and the applicable Transfer
Agreement (a "Transfer Agreement") executed by the Seller, the Servicer, the
Eligible Lender Trustee and the Administrator on such Transfer Date. Each such
Transfer Agreement will include as an exhibit a schedule identifying each
Additional Student Loan transferred on such Transfer Date. Upon such conveyance
of Additional Student Loans to the Eligible Lender Trustee on behalf of the
Trust, the Pool Balance will increase in an amount equal to the aggregate
principal balances of the Additional Student Loans (less any existing Financed
Student Loans being repaid pursuant to any Consolidation Loans included within
such Additional Student Loans) and an amount equal to the aggregate principal
balance of such Additional Student Loans, will be withdrawn first from the
Escrow Account to the extent amounts are available therein and then from the
Pre-Funding Account on such date and transferred to the Seller. Amounts in the
Escrow Account will not be available to purchase any Student Loan in the
Subsequent Pool.
With respect to any Consolidation Loan to be made by the Seller to a given
borrower, the Eligible Lender Trustee on behalf of the Trust will convey to the
Seller all Underlying Federal Loans and Underlying Private Loans, as applicable,
held by it with respect to that borrower, as specified in a notice delivered by
or on behalf of the Seller. In exchange for and simultaneously with such
conveyance, the Seller will deposit into the Escrow Account an amount of cash
equal to the principal balances of all such Underlying Federal Loans (and
Underlying Private Loans, as applicable) plus accrued interest thereon to the
date of such conveyance. Each purchase of a Serial Loan will be funded by means
of a transfer from the Pre-Funding Account of an amount equal to the principal
balance owed by the applicable borrower thereon plus accrued interest thereon
expected to be capitalized upon repayment.
Amounts on deposit in the Escrow Account will be invested in Eligible
Investments (see "-- Accounts") and will be used on the succeeding Transfer
Date, as described above, to purchase Additional Student Loans from the Seller.
Any of such amounts remaining in the Escrow Account on such Transfer Date after
giving effect to the conveyance of all such Additional Student Loans on such
Transfer Date will be deposited into the Collection Account and distributed as
Available Funds on the Distribution Date immediately following such Transfer
Date.
SERVICING PROCEDURES
Pursuant to the Sale and Servicing Agreement, PHEAA has agreed as the
Servicer to service, and perform all other related tasks with respect to, all
the Financed Student Loans acquired from time to time. So long as no claim is
being made against a Guarantor for any Financed Student Loan, the Servicer will
hold on behalf of the Trust the notes evidencing, and other documents relating
to, that Financed Student Loan. The Servicer is required pursuant to the Sale
and Servicing Agreement to perform all services and duties customary to the
servicing of Student Loans (including all collection practices), and to do so in
the same manner as the Servicer has serviced student loans on behalf of the
Seller 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 Servicer under the Sale
and Servicing Agreement include, but are not limited to, the following:
collecting and depositing into the Collection Account (or, in the event that
daily deposits into the Collection Account are not required, paying to the
Administrator) all payments with respect to the Financed Student Loans,
including claiming and obtaining any Guarantee Payments with respect thereto but
excluding such tasks with respect to Interest Subsidy Payments and Special
Allowance Payments (as to which the Administrator and the Eligible Lender
Trustee have agreed to perform, see "-- Administrator"), responding to inquiries
from borrowers on the Financed Student Loans, investigating
82
<PAGE> 85
delinquencies and sending out statements, payment coupons and tax reporting
information to borrowers. In addition, the Servicer will keep ongoing records
with respect to such Financed Student Loans and collections thereon and will
furnish quarterly and annual statements to the Administrator with respect to
such information, in accordance with the Servicer's customary practices with
respect to the Seller and as otherwise required in the Sale and Servicing
Agreement. In its capacity as servicer, the Servicer will from time to time be
required on behalf of the Trust to file claims against, and pursue the receipt
of Guarantee Payments from, itself as a Federal Guarantor.
PAYMENTS ON FINANCED STUDENT LOANS
Except as provided below, the Servicer will deposit all payments on
Financed Student Loans (from whatever source) and all proceeds of Financed
Student Loans collected by it during each Collection Period into the Collection
Account within two business days of receipt thereof. Except as provided below,
the Eligible Lender Trustee will deposit all Interest Subsidy Payments and all
Special Allowance Payments with respect to the Financed Student Loans received
by it during each Collection Period into the Collection Account within two
business days of receipt thereof.
However, in the event that Key Bank USA, National Association, satisfies
certain requirements for quarterly remittances and the Rating Agencies affirm
their ratings of the Notes and the Certificates at the initial level, then so
long as Key Bank USA, National Association, is the Administrator and provided
that (i) there exists no Administrator Default (as described below) and (ii)
each other condition to making quarterly deposits as may be specified by the
Rating Agencies is satisfied, the Servicer and the Eligible Lender Trustee will
pay all the amounts referred to in the preceding paragraph that would otherwise
be deposited into the Collection Account to the Administrator, and the
Administrator will not be required to deposit such amounts into the Collection
Account until on or before the business day immediately preceding each Monthly
Servicing Payment Date (to the extent of the Servicing Fee payable on such date)
and on or before the business day immediately preceding each Distribution Date
(to the extent of the remainder of such amounts). In such event, the
Administrator will deposit the aggregate Purchase Amount of Financed Student
Loans repurchased by the Seller and purchased by the Servicer into the
Collection Account on or before the business day preceding each Distribution
Date. Pending deposit into the Collection Account, collections may be invested
by the Administrator at its own risk and for its own benefit, and will not be
segregated from funds of the Administrator.
SERVICER COVENANTS
In the Sale and Servicing Agreement, the Servicer covenants that: (a) it
will duly satisfy 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
for servicing student loans in general and those of the Seller in particular and
any applicable Program requirements.
Certain incentive programs currently or hereafter made available by the
Seller to borrowers may also be made available by the Servicer to borrowers with
Financed Student Loans. Any such incentive program that effectively reduces
borrower payments on Financed Student Loans and is not required by the Act will
be applicable to the Financed Student Loans only if and to the extent that the
Servicer receives payment from the Seller in an amount sufficient to offset such
effective yield reductions.
83
<PAGE> 86
Under the terms of the Sale and Servicing Agreement, if the Seller or the
Servicer discovers, or receives written notice, that any covenant of the
Servicer set forth above has not been complied with in all material respects and
such noncompliance has not been cured within 60 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 Servicer will purchase such
Financed Student Loan as of the first day following the end of such 60-day
period that is the last day of a Collection Period. In that event, the 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
Servicer. In addition, the Servicer will reimburse the Trust with respect to any
Financed Federal Loan for any accrued interest amounts that a Federal Guarantor
refuses to pay pursuant to its Guarantee Agreement due to, or for any Interest
Subsidy Payments and Special Allowance Payments that are lost or that must be
repaid to the Department as a result of, a breach of any such covenant of the
Servicer.
SERVICING COMPENSATION
The Servicer will be entitled to receive, subject to the limitations set
forth in the following paragraph, the Servicing Fee monthly in an amount equal
to the sum of (i) 0.41% per annum of the Pool Balance as of the last day of the
preceding calendar month and (ii) certain one-time fixed fees for each Financed
Student Loan for which a forbearance period was granted or renewed or for which
a guarantee claim was filed, in each case subject to adjustment, together with
other administrative fees and similar charges, as compensation for performing
the functions as servicer for the Trust described above. The Servicing Fee set
forth in clause (i) above may be subject to reasonable increase agreed to by the
Administrator, the Eligible Lender Trustee and the Servicer to the extent that a
demonstrable and significant increase occurs in the costs incurred by the
Servicer in providing the services to be provided under the Sale and Servicing
Agreement, whether due to changes in applicable governmental regulations,
guarantor program requirements or regulations, United States Postal Service
postal rates or some other identifiable cost increasing event. The Servicing Fee
(together with any portion of the Servicing Fee that remains unpaid from prior
Distribution Dates) will be payable on each Monthly Servicing Payment Date and
will be paid solely out of Available Funds and amounts on deposit in the Reserve
Account on such Monthly Servicing Payment Date.
Notwithstanding the foregoing, in the event that the fee payable to the
Servicer as defined above for any Monthly Payment Date would exceed % per
annum of the Pool Balance as of the last day of the preceding calendar month
(the "Capped Amount"), then the "Servicing Fee" for such Monthly Servicing
Payment Date will instead be the Capped Amount for such date plus any
deconversion fees referred to below. The remaining amount in excess of such
Servicing Fee, together with any such excess amounts from prior Monthly
Servicing Payment Dates that remain unpaid (the "Excess Servicing Fee"), will be
payable to the Servicer on each succeeding Distribution Date out of Available
Funds after payment on such Distribution Date of the Servicing Fee, the
Administration Fee, the Noteholders' Distribution Amount, the
Certificateholders' Distribution Amount and the amount, if any, necessary to be
deposited in the Reserve Account to reinstate the balance thereof to the
Specified Reserve Account Balance, but only if the Overcollateralization Amount
is greater than the Specified Overcollateralization Amount. The Servicer will
only be entitled to receive the Excess Servicing Fee if and to the extent that
Available Funds exist to make such payments after making all prior distributions
and deposits.
The Servicing Fee and the Excess Servicing Fee will compensate the Servicer
for performing the functions of a third party 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 and the Excess Servicing Fee
also will reimburse the Servicer for certain taxes, accounting fees, outside
auditor fees, data processing costs and other costs incurred in connection with
administering the Financed Student Loans.
84
<PAGE> 87
In the event of (i) any sale of the Financed Student Loans on behalf of the
Trust to any person (other than the Seller, the Administrator, PHEAA or the
Servicer) in which the purchaser elects to deconvert the Financed Student Loans
and not retain PHEAA as Servicer or (ii) any termination by the Trust of PHEAA
as Servicer of the Financed Student Loans, except for any termination for cause
or as a result of any Servicer Default, the Trust shall pay to PHEAA as a part
of the Servicing Fee (not subject to the Capped Amount) the following
deconversion fee, per loan, based on the status of the loan at the time of
deconversion: (a) $115.00 for each in-school Stafford Loan, in-school deferred
SLS Loan, LAL Loan, MAL Loan, DAL Loan, BAL Loan, GAL Loan, BEL Loan, and REL
Loan; and (b) $62.50 for each loan of any other status or loan type.
DISTRIBUTIONS
Deposits to Collection Account. On or about the third business day prior to
each Distribution Date (the "Determination Date"), the Administrator will
provide the Indenture Trustee with certain information with respect to the
distributions to be made on such Distribution Date.
On or before the business day preceding each Monthly Servicing Payment Date
that is not a Distribution Date, the Administrator will cause (or will cause the
Servicer and the Eligible Lender Trustee to cause) a portion of the amount of
the Available Funds equal to the Servicing Fee, payable on such date to be
deposited into the Collection Account for payment of the Servicing Fee. On or
before the business day prior to each Distribution Date, the Administrator will
cause (or will cause the Servicer and the Eligible Lender Trustee to cause) the
amount of Available Funds to be deposited into the Collection Account.
For purposes hereof, the term "Available Funds" means, with respect to a
Distribution Date or any Monthly Servicing Payment Date, the sum of the
following amounts received with respect to the related Collection Period (or, in
the case of a Monthly Servicing Payment Date, the applicable portion thereof) to
the extent not previously distributed:
(i) all collections received by the Servicer on the Financed Student
Loans (including any Guarantee Payments received with respect to the
Financed Student Loans) but net of (x) any Federal Origination Fee payable
to the Department on Federal Consolidation Loans disbursed after October 1,
1993, and (y) any collections in respect of principal on the Financed
Student Loans applied by the Trust to repurchase guaranteed loans from the
Guarantors in accordance with the Guarantee Agreements;
(ii) any Interest Subsidy Payments and Special Allowance Payments
received by the Eligible Lender Trustee during such Collection Period with
respect to the Financed Federal Loans;
(iii) all proceeds of the liquidation of defaulted Financed Student
Loans ("Liquidated Student Loans"), which became Liquidated Student Loans
during such Collection Period in accordance with the Servicer's customary
servicing procedures, net of expenses incurred by the Servicer in
connection with such liquidation and any amounts required by law to be
remitted to the borrower on such Liquidated Student Loans ("Liquidation
Proceeds"), and all recoveries in respect of Liquidated Student Loans which
were written off in prior Collection Periods;
(iv) that portion of amounts released from the Pre-Funding Account
with respect to Additional Fundings relating to those interest costs on the
Financed Student Loans which were, are or will be capitalized for the then
elapsed portion of such Collection Period;
(v) the aggregate Purchase Amounts received for those Financed Student
Loans repurchased by the Seller or purchased by the Servicer under an
obligation which arose during such Collection Period;
(vi) amounts deposited by the Seller into the Collection Account in
connection with the making of Consolidation Loans;
(vii) with respect to the first Distribution Date, the amount
transferred from the Negative Carry Account to the Collection Account; and
(viii) Investment Earnings for such Distribution Date;
85
<PAGE> 88
provided, however, that Available Funds will exclude (A) all payments and
proceeds (including Liquidation Proceeds) of any Financed Student Loans the
Purchase Amount of which has been included in Available Funds for a prior
Monthly Payment Date or Distribution Date and (B) except as expressly included
in clause (iv) above, amounts released from the Pre-Funding Account.
Distributions from Collection Account. On each Monthly Servicing Payment
Date that is not a Distribution Date, the Administrator will instruct the
Indenture Trustee to pay to the Servicer the Servicing Fee due with respect to
the period from and including the preceding Monthly Servicing Payment Date from
amounts on deposit in the Collection Account.
On each Distribution Date, the Administrator will instruct the Indenture
Trustee to make the following deposits and distributions, in the amounts and in
the order of priority specified below, to the extent of the Available Funds for
the related Collection Period:
(i) to the Servicer, the Servicing Fee due on such Distribution Date
and all prior unpaid Servicing Fees;
(ii) to the Administrator, the Administration Fee and all unpaid
Administration Fees from prior Collection Periods;
(iii) to the Noteholders, the Noteholders' Interest Distribution
Amount;
(iv) to the applicable Noteholders, the Noteholders' Principal
Distribution Amount;
(v) to the Certificateholders, the Certificateholders' Interest
Distribution Amount;
(vi) on each Distribution Date on and after which the Notes have been
paid in full, to the Certificateholders, the Certificateholders' Principal
Distribution Amount;
(vii) to the Reserve Account, the amount, if any, necessary to
reinstate the balance of the Reserve Account to the Specified Reserve
Account Balance;
(viii) if the Overcollateralization Amount is greater than the
Specified Overcollateralization Amount, to the Servicer, the aggregate
unpaid amount, if any, of the Excess Servicing Fee;
(ix) if the Overcollateralization Amount is greater than the Specified
Overcollateralization Amount, to the Noteholders on a pro rata basis, based
on the amount of the Noteholders' Interest Index Carryover owing on each
class of Notes, the aggregate unpaid amount of the Noteholders' Interest
Index Carryover, if any;
(x) if the Overcollateralization Amount is greater than the Specified
Overcollateralization Amount, to the Certificateholders, the aggregate
unpaid amount of the Certificateholders' Interest Index Carryover, if any;
and
(xi) to the Reserve Account, any remaining amounts after application
of clauses (i) through (x).
For purposes hereof, the following terms have the following meanings:
"Certificate Balance" equals $ as of the Closing Date and,
thereafter, equals the initial Certificate Balance, reduced by all amounts
allocable to principal previously distributed to Certificateholders.
"Certificateholders' Distribution Amount" means, 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, with respect to
any Distribution Date, the excess of (i) the sum of the 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 on such preceding Distribution Date, plus interest on the
amount of such excess interest due to the Certificateholders, to the extent
permitted by law, at the Certificate Rate from such preceding Distribution Date
to the current Distribution Date.
86
<PAGE> 89
"Certificateholders' Interest Distribution Amount" means, with respect to
any Distribution Date, the sum of (i) the amount of interest accrued at the
Certificate Rate for the related Interest Period on the outstanding Certificate
Balance on the immediately preceding Distribution Date, after giving effect to
all distributions of principal to Certificateholders on such Distribution Date
(or, in the case of the first Distribution Date, on the Closing Date) and (ii)
the Certificateholders' Interest Carryover Shortfall for such Distribution Date;
provided, however, that the Certificateholders' Interest Distribution Amount
will not include any Certificateholders' Interest Index Carryover.
"Certificateholders' Principal Carryover Shortfall" means, as of the close
of any Distribution Date on or after which the Notes have been paid in full, the
excess 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 on and after which the principal balance of the Notes has been
paid in full, the sum of (a) the Principal Distribution Amount for such
Distribution Date (or, in the case of the Distribution Date on which the
principal balance of the Notes is paid in full, any remaining Principal
Distribution Amount not otherwise distributed to Noteholders on such
Distribution Date) and (b) 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
Certificate Balance. In addition, on the Final Maturity Date, the principal
required to be distributed to the Certificateholders will include the amount
required to reduce the outstanding principal balance of the Certificates to
zero.
"Covered Losses" means the lesser of (a) Realized Losses and (b) the sum of
Excess Interest plus the Reserve Account Covered Amount.
"Excess Interest" for any Distribution Date means the net amount of
interest collections on deposit in the Collection Account after taking into
account any withdrawals therefrom to pay the Servicing Fee, Administration Fee
and Noteholders' Interest Distribution Amount due on such date and the Servicing
Fee, on prior Monthly Servicing Distribution Dates relating to the current
Collection Period.
"Noteholders' Distribution Amount" means, with respect to any Distribution
Date, the sum of the Noteholders' Interest Distribution Amount and the
Noteholders' Principal Distribution Amount for such Distribution Date.
"Noteholders' Interest Carryover Shortfall" means, with respect to any
Distribution Date, the excess of (i) the sum of the 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 distributed to the 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 Note Interest Rate from
such preceding Distribution Date to the current Distribution Date.
"Noteholders' Interest Distribution Amount" means, with respect to any
Distribution Date, the sum of (i) the amount of interest accrued at the Note
Interest Rate for the related Interest Period on the outstanding principal
balance of the Notes on the immediately preceding Distribution Date after giving
effect to all principal distributions to Noteholders 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 Distribution Date; provided,
however, that the Noteholders' Interest Distribution Amount will not include any
Noteholders' Interest Index 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 distributed to the Noteholders on such Distribution
Date.
87
<PAGE> 90
"Noteholders' Principal Distribution Amount" means, with respect to any
Distribution Date, the Principal Distribution Amount for such Distribution Date
plus the Noteholders' Principal Carryover Shortfall as of the close of the
preceding Distribution Date; provided, however, that the Noteholders' Principal
Distribution Amount will not exceed the outstanding principal balance of the
Notes. In addition, (i) on the Class A-1 Final Maturity Date, the principal
required to be distributed to the Class A-1 Noteholders will include the amount
required to reduce the outstanding principal balance of the Class A-1 Notes to
zero, and (ii) on the Class A-2 Final Maturity Date, the principal required to
be distributed to the Class A-2 Noteholders will include the amount required to
reduce the outstanding principal balance of the Class A-2 Notes to zero.
"Overcollateralization Adjustment" means the excess of (a) the excess of
(i) the Overcollateralization Amount over (ii) the Specified
Overcollateralization Amount over (b) the excess of (x) Realized Losses over (y)
Covered Losses.
"Overcollateralization Amount" for any Distribution Date means the excess
of (i) the sum of the Pool Balance and the Pre-Funded Amount over (ii) the
outstanding principal amount of the Notes and the Certificate Balance as of the
preceding Distribution Date (after giving effect to any distribution of
principal on such date).
"Pool Balance" means, at any time, 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 upon commencement of repayment and for which a corresponding
Additional Funding will be made on the related Transfer Date), after giving
effect to the following without duplication: (i) all payments received by the
Trust during such Collection Period from or on behalf of borrowers, Guarantors
and, with respect to certain payments on certain Financed Federal Loans, the
Department (collectively, "Obligors"), (ii) all purchase Amounts received by the
Trust for such Collection Period from the Seller or the Servicer, (iii) all
Additional Fundings made from the Escrow Account and the Pre-Funding Account
with respect to such Collection Period and (iv) all losses realized on Financed
Student Loans liquidated during such Collection Period.
"Principal Distribution Amount" means, with respect to any Distribution
Date, the sum of the following amounts with respect to the related Collection
Period: (i) that portion of all collections received by the 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) all Liquidation Proceeds attributable to the principal
amount of Financed Student Loans which became Liquidated Student Loans during
such Collection Period in accordance with the Servicer's customary servicing
procedures, together with all Covered Losses on such Financed Student Loans;
(iii) to the extent attributable to principal, the Purchase Amount received with
respect to each Financed Student Loan repurchased by the Seller or purchased by
the Servicer under an obligation which arose during the related Collection
Period; (iv) the Principal Distribution Adjustment, if any; and (v) to the
extent attributable to principal amounts, if any, released from the Escrow
Account (other than Investment Earnings) and deposited into the Collection
Account on any Transfer Date; provided, however, that the Principal Distribution
Amount will exclude all payments and proceeds (including Liquidation Proceeds)
of any Financed Student Loans the Purchase Amount of which has been included in
Available Funds for a prior Collection Period; and provided further, that for
each Distribution Date before the Distribution Date and, in the
event the Financed Student Loans are not sold pursuant to the auction process
described under "Description of the Transfer and Servicing Agreements --
Termination," on any Distribution Date thereafter on which the Pool Balance is
not equal to 10% or less of the Initial Pool Balance, the Principal Distribution
Amount shall be reduced by an amount equal to the Overcollateralization
Adjustment, if any.
"Principal Distribution Adjustment" means, with respect to any Distribution
Date, the amount of Available Funds on such Distribution Date to be used to make
additional principal distributions to Noteholders (and, after the Notes have
been paid in full, Certificateholders) to account for (i) the amount of any
insignificant balance remaining outstanding as of such Distribution Date on a
Financed Student Loan after receipt of a final payment from a borrower or
Guarantor, when such insignificant balances are waived in
88
<PAGE> 91
the ordinary course of business by the Servicer at the direction of the
Administrator in accordance with the Sale and Servicing Agreement, or (ii) the
amount of principal collections erroneously treated as interest collections
including, without limitation, by reason of the failure by a borrower to
capitalize interest that had been expected to be capitalized or the rebate to
borrowers of amounts paid by borrowers as required by applicable law.
"Realized Losses" means the excess of the principal balance of the
Liquidated Student Loans over Liquidation Proceeds to the extent allocable to
principal.
"Reserve Account Covered Amount" for any Distribution Date means the excess
of Realized Losses over the sum of (a) Excess Interest and (b) the
Overcollateralization Amount.
CREDIT ENHANCEMENT
Negative Carry Account. Pursuant to the Sale and Servicing Agreement, the
Negative Carry Account will be created with an initial deposit by the Seller on
the Closing Date of cash or certain Eligible Investments in an amount equal to
the Negative Carry Account Initial Deposit. On the first Distribution Date, the
Servicer will instruct the Indenture Trustee to withdraw from the Negative Carry
Account and deposit into the Collection Account an amount equal to the Negative
Carry Amount for each month of the first Collection Period. For each such month,
the "Negative Carry Amount" will be calculated by the Servicer as the difference
(if positive) between (i) the product of (a) one-twelfth of the sum of (1) the
current weighted average of the Note Interest Rate and the Certificate Interest
Rate and (2) 0.41% and (3) % by (b) the Subsequent Pool Pre-Funded Amount as
of the last day of such month minus (ii) the investment earnings earned on the
Subsequent Pool Pre-Funded Amount during such month. If the amount on deposit in
the Negative Carry Account on any Transfer Date following the related transfer
of Student Loans in the Subsequent Pool is greater than the Required Negative
Carry Account Balance, the excess will be released to the Seller; provided,
however, that if the amount on deposit in the Subsequent Pool Pre-Funding
Subaccount is less than $ following any transfer of Student Loans in
the Subsequent Pool, all amounts on deposit in the such Subaccount will be
released to the Seller. The "Required Negative Carry Account Balance" on any
Transfer Date occurring during the month of October, 1996 is equal to (X) the
Negative Carry Account Initial Deposit less (Y) the product of (a) one-twelfth
the sum of the weighted average Margins on the Notes and Certificates and 0.41%
and % and (b) the principal balance of the Subsequent Pool Student Loans
transferred on such Transfer Date as of the related Subsequent Cutoff Date;
thereafter the Required Negative Carry Account Balance will equal the amount on
deposit in the Negative Carry Account. All amounts remaining on deposit in the
Negative Carry Account on the first Distribution Date following the transfer of
any amounts to the Collection Account will be released to the Seller.
Reserve Account. Pursuant to the Sale and Servicing Agreement, the Reserve
Account will be created with an initial deposit by the Seller on the Closing
Date of cash or Eligible Investments in an amount equal to the Reserve Account
Initial Deposit. The Reserve Account will be augmented on each Distribution Date
by deposit therein of (i) 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 payment of the Servicing Fee, the
Administration Fee, the Noteholders' Distribution Amount and the
Certificateholders' Distribution Amount, all for such Distribution Date, and
(ii) any remaining Available Funds after application of clause (i) above and
after payment of any unpaid Excess Servicing Fee, any unpaid Noteholders'
Interest Index Carryover and Certificateholders' Interest Index Carryover as of
such Distribution Date to the extent described above under "-- Distributions".
The Reserve Account will also be augmented on each date that a Student Loan in
the Subsequent Pool is transferred by the Seller to the Trust by a transfer from
the Pre-Funding Account of a portion of the Purchase Price payable to the Seller
in respect of such Student Loan in the Subsequent Pool in an amount equal to %
of the aggregate principal balance of such Subsequent Pool Student Loan. As
described below, subject to certain limitations, amounts on deposit in the
Reserve Account will be released to the Seller to the extent that the amount on
deposit in the Reserve Account exceeds the Specified Reserve Account Balance.
89
<PAGE> 92
"Specified Reserve Account Balance" with respect to any Distribution Date
generally will be equal to the greater of (i) % of the Pool Balance as of the
close of business on the last day of the related Collection Period and (ii) %
of the Initial Pool Balance; provided, however, that such balance will be
subject to adjustment in certain circumstances described herein and in no event
will such balance exceed the sum of the outstanding principal amount of the
Notes and the outstanding principal balance of the Certificates.
"Specified Overcollateralization Amount" with respect to any Distribution
Date will be equal to the excess of the Specified Credit Enhancement Amount over
the Specified Reserve Account Balance.
"Specified Credit Enhancement Amount" with respect to any Distribution Date
generally will be equal to the greater of (i) % of the Pool Balance as of the
close of business on the last day of the related Collection Period and (ii) %
of the Initial Pool Balance.
"Overcollateralization Amount" for any Distribution Date means the excess
of (i) the sum of the Pool Balance and the Pre-Funded Amount over (ii) the
outstanding principal amount of the Notes and the outstanding principal balance
of the Certificates as of the preceding Distribution Date (after giving effect
to any distribution of principal on such date).
Funds will be withdrawn from cash in the Reserve Account on any Monthly
Servicing Payment Date or Distribution Date to the extent that the amount of
Available Funds on such Monthly Servicing Payment Date or Distribution Date is
insufficient to pay the Servicing Fee on a Monthly Servicing Payment Date or any
of the items specified in clauses (i) through (vi) under
"-- Distributions -- Distributions from Collection Account" on a Distribution
Date. Such funds will be paid from the Reserve Account to the Servicer, on a
Monthly Servicing Payment Date, and to the persons and in the order of priority
specified for distributions out of the Collection Account in such clauses (i)
through (vi) on a Distribution Date. As a result of the subordination of the
Certificates to the Notes described elsewhere herein, however, any amounts that
the Certificateholders would otherwise receive from the Reserve Account in
respect of the Certificateholders' Distribution Amount will be paid to the
Noteholders until the Noteholders' Distribution Amount for such Distribution
Date has been paid in full. See "-- Subordination of the Certificates".
On each Distribution Date on which the Overcollateralization Amount is less
than the Specified Overcollateralization Amount, if the amount on deposit in the
Reserve Account on such Distribution Date (after giving effect to all deposits
or withdrawals therefrom on such Distribution Date, other than withdrawals
described in this sentence) is greater than the Specified Reserve Account
Balance for such Distribution Date, subject to certain limitations, the
Administrator will instruct the Indenture Trustee to distribute the amount of
such excess to Noteholders as an accelerated payment of principal; provided,
however, that such excess shall only be distributed to Noteholders to the extent
required to raise the Overcollateralization Amount on such date (after giving
effect to all distributions on such date) to an amount equal to the Specified
Overcollateralization Amount.
In the event the Financed Student Loans are not sold pursuant to the
auction process described below under "-- Termination", with respect to any
Distribution Date occurring on or after the Distribution Date on
which the Pool Balance is equal to 10% or less of the Initial Pool Balance, if
the amount on deposit in the Reserve Account (after giving effect to all
deposits or withdrawals therefrom on such Distribution Date, other than
withdrawals described in this sentence) is greater than the Specified Reserve
Account Balance for such Distribution Date, the Administrator will instruct the
Indenture Trustee to distribute the amount of such excess as an accelerated
payment of principal first to the Noteholders until the outstanding principal
balance of the Notes is paid in full and then to the Certificateholders until
the Certificate Balance is paid in full; provided that the amount of such
distribution shall not exceed the principal balance of the Notes or the
Certificate Balance, as applicable, after giving effect to all other payments of
principal to be made on such date.
If the amount 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 for
such Distribution Date and the Overcollateralization Amount is greater than or
equal to the Specified Overcollateralization Amount, subject to certain
limitations, the Administrator will instruct the
90
<PAGE> 93
Indenture Trustee to distribute the amount of the excess, after payment of any
unpaid Excess Servicing Fee, Noteholders' Interest Index Carryover and
Certificateholders' Interest Index Carryover, to the Seller. Upon any
distribution to the Seller of amounts from the Reserve Account, neither the
Noteholders nor the Certificateholders will have any rights in, or claims to,
such amounts. Subject to the limitation described in the preceding sentence,
amounts held from time to time in the Reserve Account will continue to be held
for the benefit of the Trust.
The Reserve Account is intended to enhance the likelihood of timely receipt
by the Noteholders and the Certificateholders of the full amount of principal
and interest due them and to decrease the likelihood that the Noteholders or the
Certificateholders will experience losses. In certain circumstances, however,
the Reserve Account could be depleted. Moreover, amounts on deposit in the
Reserve Account (other than amounts in excess of the Specified Reserve Account
Balance not required to be paid to the Noteholders as an additional payment of
principal in order to raise the Overcollateralization Amount to the Specified
Overcollateralization Amount) will not be available to cover any aggregate
unpaid Excess Servicing Fees, Noteholders' Interest Index Carryover or
Certificateholders' Interest Index Carryover.
Subordination of the Certificates. The interests of the Certificateholders
in the assets of the Trust will be subordinated to payments on the Notes to the
extent of the Noteholders' Distribution Amount for any Distribution Date. This
subordination is intended to increase the likelihood of timely receipt by the
Noteholders of the Noteholders' Distribution Amount for any Distribution Date.
See "Description of the Securities -- The Certificates -- Subordination of the
Certificates".
STATEMENTS TO INDENTURE TRUSTEE AND TRUST
Prior to each Distribution Date, the Administrator (based on the quarterly
statements and other information provided to it by the Servicer) will provide to
the Indenture Trustee and the Trust as of the close of business on the last day
of the preceding Collection Period a statement, which will include the following
information with respect to such Distribution Date or the preceding Collection
Period as to the Notes and the Certificates, to the extent applicable:
(i) the amount of the distribution allocable to principal of the Class
A-1 Notes, the Class A-2 Notes or the Certificates, as the case may be;
(ii) the amount of the distribution allocable to interest on each of
the Class A-1 Notes, the Class A-2 Notes and the Certificates, together
with the interest rates applicable with respect thereto (indicating whether
such interest rates are based on the T-Bill Rate or on the Student Loan
Rate and specifying what each such interest rate would have been if it had
been calculated using the alternate basis; provided that no such
calculation of the Student Loan Rate will be required to be made unless the
T-Bill Rate for such Interest Period is 100 basis points greater than the
T-Bill Rate of the preceding Determination Date or the 52 Week Treasury
Bill Rate is 100 basis points lesser than the T-Bill Rate as of such
Determination Date);
(iii) the amount of the distribution, if any, allocable to any
Noteholders' Interest Index Carryover and any Certificateholders' Interest
Index Carryover, together with the outstanding amount, if any, of each
thereof after giving effect to any such distribution;
(iv) the Pool Balance as of the close of business on the last day of
the preceding Collection Period, after giving effect to payments allocated
to principal reported as described in clause (i) above;
(v) the aggregate outstanding principal balance of Notes, the
Certificate Balance and each Pool Factor as of such Distribution Date,
after giving effect to payments allocated to principal reported under
clause (i) above;
(vi) the amount of the Servicing Fee and any Excess Servicing Fee paid
to the Servicer and the amount of the Administration Fee paid to the
Administrator, respectively, with respect to such Collection Period, and
the amount, if any, of the Excess Servicing Fee remaining unpaid after
giving effect to any such payment;
91
<PAGE> 94
(vii) the amount of the aggregate Realized Losses, if any, for such
Collection Period and the balance of Financed Student Loans that are
delinquent in each delinquency period as of the end of such Collection
Period;
(viii) the balance of the Reserve Account on such Distribution Date,
after giving effect to changes therein on such Distribution Date;
(ix) for Distribution Dates during the Funding Period, the remaining
Pre-Funded Amount on such Distribution Date, after giving effect to changes
therein during the related Collection Period; and
(x) for the first Distribution Date on or following the end of the
Funding Period, the amount of any remaining Pre-Funded Amount that has not
been used to make Additional Fundings and is being paid out to Noteholders.
"52 Week T-Bill Rate" means, on any date of determination, the bond
equivalent rate of 52-week Treasury bills auctioned at the final auction held
prior to the preceding June 1.
EVIDENCE AS TO COMPLIANCE
The Sale and Servicing Agreement will provide that a firm of independent
public accountants will furnish to the Trust and the Indenture Trustee annually
a statement (based on a limited examination of certain documents and records and
on such accounting and auditing procedures considered appropriate under the
circumstances) as to compliance by the Servicer during the preceding twelve
months (or, in the case of the first such certificate, the period from the
Closing Date to December 31, 1996) with certain standards under the Sale and
Servicing Agreement relating to the servicing of the Financed Student Loans.
The Sale 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 Trust 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 twelve months (or, in the case of the first such certificate, the
period from the Closing Date to December 31, 1996) with all applicable standards
under the Sale and Servicing Agreement and the Administration Agreement relating
to the administration of the Trust and the Financed Student Loans.
The Sale and Servicing Agreement will also provide for delivery to the
Trust 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 Servicer or the Administrator, as the case may be, stating that, to his
knowledge, the Servicer or the Administrator, as the case may be, has fulfilled
its obligations under the Sale and Servicing Agreement throughout the preceding
twelve months (or, in the case of the first such certificate, the period from
the Closing Date to December 31, 1996) or, if there has been a default in the
fulfillment of any such obligation, describing each such default. Each of the
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 Sale and Servicing Agreement.
Copies of such statements and certificates may be obtained by
Securityholders by a request in writing addressed to the Applicable Trustee.
CERTAIN MATTERS REGARDING THE SERVICER
The Sale and Servicing Agreement will provide that PHEAA may not resign
from its obligations and duties as Servicer thereunder, except upon
determination that PHEAA's performance of such duties is no longer permissible
under applicable law. No such resignation will become effective until the
Indenture Trustee or a successor servicer has assumed PHEAA's servicing
obligations and duties under the Sale and Servicing Agreement.
The Sale and Servicing Agreement will further provide that neither the
Servicer nor any of its directors, officers, employees or agents will be under
any liability to the Trust, the Noteholders or the Certificateholders
92
<PAGE> 95
for taking any action or for refraining from taking any action pursuant to the
Sale and Servicing Agreement, or for errors in judgment; provided, however, that
neither the 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 its duties thereunder or by reason of reckless
disregard of obligations and its duties thereunder. In addition, the Sale and
Servicing Agreement will provide that the Servicer is under no obligation to
appear in, prosecute, or defend any legal action that is not incidental to its
servicing responsibilities under the Sale and Servicing Agreement and that, in
its opinion, may cause it to incur any expense or liability.
Under the circumstances specified in the Sale and Servicing Agreement, any
entity into which the Servicer may be merged or consolidated, or any entity
resulting from any merger or consolidation to which the Servicer is a party, or
any entity succeeding to the business of the Servicer, which corporation or
other entity in each of the foregoing cases assumes the obligations of the
Servicer, will be the successor of the Servicer under the Sale and Servicing
Agreement.
SERVICER DEFAULT; ADMINISTRATOR DEFAULT
"Servicer Default" under the Sale and Servicing Agreement will consist of
(i) any failure by the Servicer to deliver to the Indenture Trustee for deposit
in any of the Trust Accounts (or, in the event that daily deposits into the
Collection Account are not required, to the Administrator) 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 or the Eligible Lender Trustee is
received by the Servicer or after discovery by the Servicer; (ii) any failure by
the Servicer duly to observe or perform in any material respect any other
covenant or agreement in the Sale and Servicing Agreement which failure
materially and adversely affects the rights of Noteholders or Certificateholders
and which continues unremedied for 60 days after the giving of written notice of
such failure (1) to the Servicer by the Indenture Trustee, the Eligible Lender
Trustee or the Administrator or (2) to the Servicer and to the Indenture Trustee
and the Eligible Lender Trustee by holders of Notes or Certificates, as
applicable, evidencing not less than 25% in principal amount of the outstanding
Notes or Certificates; (iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities, or similar proceedings with respect to
the Servicer and certain actions by the Servicer indicating its insolvency,
reorganization pursuant to bankruptcy proceedings or inability to pay its
obligations and (iv) failure by the Servicer to comply with any requirements
under the Higher Education Act resulting in a loss of its eligibility as a
third-party servicer.
"Administrator Default" under the Sale and Servicing Agreement or the
Administration Agreement will consist of (i)(A) in the event that daily deposits
into the Collection Account are not required, any failure by the Administrator
to deliver to the Indenture Trustee for deposit in any of the Trust Accounts any
required payment on or before the business day prior to any Monthly Servicing
Payment Date or Distribution Date, as applicable, or (B) any failure by the
Administrator to direct the Indenture Trustee to make any required distributions
from any of the Trust Accounts on any Monthly Servicing Payment Date or any
Distribution Date, which failure in case of either clause (A) or (B) 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 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 Sale and Servicing Agreement which failure
materially and adversely affects the rights of Noteholders or Certificateholders
and which continues unremedied for 60 days after the giving of written notice of
such failure (1) to the Administrator by the Indenture Trustee or the Eligible
Lender Trustee or (2) to the Administrator and to the Indenture Trustee and the
Eligible Lender Trustee by holders of Notes or Certificates, as applicable,
evidencing not less than 25% in principal amount of the outstanding Notes or
Certificates; 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 Sale and Servicing Agreement or an
Administrator Default under the Sale and Servicing Agreement or the
Administration Agreement remains unremedied, the Indenture
93
<PAGE> 96
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
Servicer under the Sale and Servicing Agreement, or the Administrator under the
Sale 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 Servicer under the Sale and Servicing Agreement,
or the Administrator under the Sale and Servicing Agreement and the
Administration Agreement, as the case may be, and will be entitled to similar
compensation arrangements. If, however, a bankruptcy trustee or similar official
has been appointed for the Servicer or the Administrator, and no Servicer
Default or Administrator Default other than such appointment has occurred, such
trustee or official may have the power to prevent the Indenture Trustee or the
Noteholders from effecting such a transfer. In the event that the Indenture
Trustee is unwilling or unable to so act, it may appoint, or petition a court of
competent jurisdiction for the appointment of, a successor servicer whose
regular business includes the servicing of student loans or a successor
administrator whose regular business includes administering trusts containing
pools of loans or receivables. The Indenture Trustee may make such arrangements
for compensation to be paid, which in no event may be greater than the
compensation to the Servicer under the Sale and Servicing Agreement or the
Administrator under the Sale and Servicing Agreement and the Administration
Agreement, as the case may be, unless such compensation arrangements will not
result in a downgrading of the Notes and the Certificates by any Rating Agency.
In the event a Servicer Default or an Administrator Default occurs and is
continuing, the Indenture Trustee or the Noteholders, as described above, may
remove the Servicer or the Administrator, as the case may be, without the
consent of the Eligible Lender Trustee or any of the Certificateholders.
Moreover, only the Indenture Trustee or the Noteholders, and not the Eligible
Lender Trustee or the Certificateholders, have the ability to remove the
Servicer or the Administrator, as the case may be, if a Servicer Default or an
Administrator Default occurs and is continuing.
WAIVER OF PAST DEFAULTS
The holders of Notes evidencing at least a majority in principal amount of
the then outstanding Notes (or the holders of Certificates evidencing not less
than a majority of the outstanding Certificate Balance, in the case of any
default which does not adversely affect the Indenture Trustee or the
Noteholders) may, on behalf of all Noteholders and Certificateholders, waive any
default by the Servicer in the performance of its obligations under the Sale and
Servicing Agreement, or any default by the Administrator of its obligations
under the Sale 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 Sale and Servicing
Agreement. Therefore, the Noteholders have the ability, except as noted above,
to waive defaults by the Servicer and the Administrator which could materially
adversely affect the Certificateholders. No such waiver will impair the
Noteholders' or the Certificateholders' rights with respect to subsequent
defaults.
Unless and until Definitive Securities are issued, holders of Notes and
Certificates will not be recognized by the Indenture Trustee or the Eligible
Lender Trustee as "Noteholders" or "Certificateholders", as the case may be (as
such terms are used in the Indenture and the Trust Agreement, respectively).
Hence, until Definitive Securities are issued, holders of such Securities will
only be able to exercise the rights of Securityholders indirectly through DTC,
Cedel or Euroclear and their respective participating organizations.
AMENDMENT
The Transfer and Servicing Agreements may be amended by the parties
thereto, without the consent of the Noteholders or the Certificateholders, 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 that
such action will not, in the opinion of counsel satisfactory to the Indenture
Trustee and the Eligible Lender Trustee, materially and adversely affect the
interest of any Noteholder or Certificateholder. The Transfer and Servicing
Agreements may also be amended by the Seller, the Administrator, the Servicer,
the Eligible Lender Trustee and the Indenture Trustee, as applicable, with the
consent of the holders of Notes evidencing at least a majority in principal
amount of the then outstanding Notes and the holders of Certificates evidencing
at least a majority of the
94
<PAGE> 97
Certificate Balance for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of such Transfer and Servicing
Agreements or of modifying in any manner the rights of Noteholders or the
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 (including any Guarantee Payments) with respect to the
Financed Student Loans or distributions that are required to be made for the
benefit of the Noteholders or the Certificateholders 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.
INSOLVENCY EVENT
If any of certain events of insolvency or receivership, readjustment of
debt, marshalling of assets and liabilities, or similar proceedings with respect
to the Seller or certain actions by the Seller indicating its insolvency or
inability to pay its obligations (each, a "Seller Insolvency Event") occurs, the
Financed Student Loans will be liquidated and the Trust will be terminated 90
days after the date of such Seller Insolvency Event, unless, before the end of
such 90-day period, the Eligible Lender Trustee shall have received written
instructions from the holders of the Certificates (other than the Seller)
representing more than 50% of the aggregate unpaid principal amount of the
Certificates (not including the principal amount of Certificates held by the
Seller) to the effect that such group disapproves of the liquidation of the
Financed Student Loans and termination of the Trust. Promptly after the
occurrence of any Seller Insolvency Event, notice thereof is required to be
given to Noteholders and Certificateholders; 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. Each of PHEAA and LAI will be given the opportunity, upon 30 days' prior
notice of any such proposed sale, to bid to purchase the Financed Student Loans
and, if either is the highest bidder, the Financed Student Loans must be sold to
that entity. 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. If such
amounts are not sufficient to pay the Notes and the Certificates in full, the
amount of principal returned to the Certificateholders will be reduced and the
Certificateholders will incur a loss.
The Trust Agreement provides that the Eligible Lender Trustee does not have
the power to commence a voluntary proceeding in bankruptcy relating to the Trust
without the unanimous prior approval of all Certificateholders and the delivery
to the Eligible Lender Trustee by each Certificateholder of a certificate
certifying that such Certificateholder reasonably believes that the Trust is
insolvent.
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 Sale and Servicing Agreement, except as
otherwise provided therein.
SELLER LIABILITY
Under the Trust Agreement, the Seller will agree to be liable directly to
an injured party for the entire amount of any losses, claims, damages or
liabilities (other than those incurred by a Noteholder or a Certificateholder in
the capacity of an investor) arising out of or based on the arrangement created
by the Trust Agreement as though such arrangement created a partnership under
the Delaware Revised Uniform Limited Partnership Act in which the Seller was a
general partner.
TERMINATION
The obligations of the Servicer, the Seller, the Administrator, the
Eligible Lender Trustee and the Indenture Trustee pursuant to the Transfer and
Servicing Agreements will terminate upon (i) the maturity or
95
<PAGE> 98
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 and the Certificateholders of all amounts
required to be paid to them pursuant to the Transfer and Servicing Agreements.
In order to avoid excessive administrative expense, the Seller 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, all
remaining Financed Student Loans at a price sufficient to retire the
Certificates concurrently therewith. Upon termination of the Trust, all right,
title and interest in the Financed Student Loans and other funds of the Trust,
after giving effect to any final distributions to Noteholders and
Certificateholders therefrom, will be conveyed and transferred to the Seller.
Any Financed Student Loans remaining in the Trust as of the end of the
Collection Period immediately preceding the Distribution Date
will be offered for sale by the Indenture Trustee. KeyCorp, its affiliates
(other than the Seller), The Access Group(SM), PHEAA and unrelated third parties
may offer bids to purchase such Financed Student Loans on such Distribution
Date. If at least two bids are received, the Indenture Trustee will solicit and
resolicit bids from all participating bidders until only one bid remains or the
remaining bidders decline to resubmit bids. The Indenture Trustee will accept
the highest of such remaining bids if it is equal to or in excess of an amount
(the "Minimum Purchase Amount") equal to the greater of (i) the Auction Purchase
Amount, (ii) the fair market value of such Financed Student Loans as of the end
of the Collection Period immediately preceding such Distribution Date and (iii)
the aggregate unpaid principal amount of the Notes and principal balance of the
Certificates plus, in each case, accrued and unpaid interest thereon payable on
such Distribution Date. If at least two bids are not received or the highest bid
after the resolicitation process is completed is not equal to or in excess of
the Auction Purchase Amount and the fair market value of the Financed Student
Loans, the Indenture Trustee will not consummate such sale. The Indenture
Trustee may consult, and, at the direction of the Seller, shall consult, with a
financial advisor, including the Underwriter or the Administrator, to determine
if the fair market value of the Financed Student Loans has been offered. The net
proceeds of any such sale will be used to redeem any outstanding Notes and to
retire any outstanding Certificates on such Distribution Date. 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 Trustee will be successful in
soliciting acceptable bids to purchase the Financed Student Loans on either the
Distribution Date or any subsequent Distribution Date. In the
event the Financed Student Loans are not sold in accordance with the foregoing,
on each Distribution Date on and after the Distribution Date, if
the Pool Balance is equal to 10% or less of the Initial Pool Balance and the
amount on deposit in the Reserve Account on such Distribution Date (after giving
effect to all withdrawals therefrom on such Distribution Date, other than
withdrawals described in this sentence) is in excess of the Specified Reserve
Account Balance for such Distribution Date the Administrator will direct the
Indenture Trustee to distribute the amount of such excess as an accelerated
payment of principal.
ADMINISTRATOR
The Bank, in its capacity as Administrator, will enter into the
Administration Agreement with the Trust and the Indenture Trustee and the Sale
and Servicing Agreement with the Trust, the Seller, the Servicer and the
Eligible Lender Trustee, pursuant to which the Administrator will agree, to the
extent provided therein, (i) in the event that daily deposits into the
Collection Account are not required, to deliver to the Indenture Trustee for
deposit in any of the Trust Accounts any required payment on or before the
business day prior to any Servicing Payment Date or any Distribution Date, as
applicable, (ii) to direct the Indenture Trustee to make the required
distributions from the Trust Accounts on each Servicing Payment Date and each
Distribution Date, (iii) to prepare and file with the Department all appropriate
claims forms and other documents and filings on behalf of the Eligible Lender
Trustee in order to claim any Interest Subsidy Payments and Special Allowance
Payments that may be payable in respect of each Collection Period with respect
to the Financed Federal Loans, (iv) to prepare (based on the quarterly and
annual reports received from the Servicer) and provide monthly, quarterly and
annual statements to the Eligible Lender Trustee and
96
<PAGE> 99
the Indenture Trustee with respect to distributions to Noteholders and
Certificateholders and any related federal income tax reporting information and
(v) to provide the notices and to perform other administrative obligations
required by the Indenture, the Trust Agreement and the Sale and Servicing
Agreement. As compensation for the performance of the Administrator's
obligations under the Administration Agreement and the Sale and Servicing
Agreement and as reimbursement for its expenses related thereto, the
Administrator will be entitled to an administration fee in an amount equal to
$3,000 per quarter (the "Administration Fee").
CERTAIN LEGAL ASPECTS OF THE FINANCED STUDENT LOANS
TRANSFER OF FINANCED STUDENT LOANS
The Seller intends that the transfer of the Financed Student Loans by it to
the Eligible Lender Trustee on behalf of the Trust constitutes a valid sale and
assignment of such Financed Student Loans. In addition, the Seller has taken and
will take all actions that are required under applicable state law to perfect
the Eligible Lender Trustee's ownership interest in the Financed Student Loans
and the collections with respect thereto. 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, the Financed Student Loans
would be considered general intangibles for purposes of the applicable Uniform
Commercial Code (the "UCC"). If such transfer is deemed to create a security
interest, the UCC applies and filing an appropriate financing statement or
statements is also required in order to perfect the Eligible Lender Trustee's
security interest. 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 Seller is deemed to be
subject to the UCC. If a transfer of general intangibles is deemed to be a sale,
then the UCC is not applicable and no further action under the UCC is required
to protect the Eligible Lender Trustee's interest from third parties.
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 coming into existence after the Closing Date could have an
interest in such Financed Student Loans with priority over the Eligible Lender
Trustee's interest. A tax or other government lien on property of the Seller
arising prior to the time a Financed Student Loan comes into existence may also
have priority over the interest of the Eligible Lender Trustee in such Financed
Student Loan. Furthermore, if the FDIC were appointed as a receiver or
conservator of the Seller, the FDIC's administrative expenses may also have
priority over the interest of the Eligible Lender Trustee in such Financed
Student Loans. Under the Sale and Servicing Agreement, however, the Seller will
warrant that it has transferred the Financed Student Loans to the Eligible
Lender Trustee on behalf of the Trust free and clear of the lien of any third
party. In addition, the Seller 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 the Trust,
except as provided below.
Pursuant to the Sale and Servicing Agreement, the Servicer as custodian on
behalf of the Trust will have custody of the promissory notes evidencing the
Financed Student Loans following the sale of the Financed Student Loans to the
Eligible Lender Trustee. Although the accounts of the Seller will be marked to
indicate the sale and although the Seller will cause UCC financing statements to
be filed with the appropriate authorities, the Financed Student Loans will not
be physically segregated, stamped or otherwise marked to indicate that such
Financed Student Loans have been sold to the Eligible Lender Trustee. 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 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 interest. See "Description of the
Transfer and Servicing Agreements -- Sale of Financed Student Loans;
Representations and Warranties" and "-- Servicer Covenants".
97
<PAGE> 100
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 Seller.
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 Seller, 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
Seller's insolvency and was not taken in contemplation of insolvency or with the
intent to hinder, delay or defraud the Seller 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
Seller. 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 and the
Certificates. 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 FIRREA, delays in payments on the Notes and the Certificates and
possible reductions in the amount of those payments could occur.
In the event of a Servicer Default or an Administrator Default resulting
solely from certain events of insolvency or bankruptcy that may occur with
respect to the Servicer or the Administrator, a court, conservator, receiver or
liquidator may have the power to prevent either the Indenture Trustee or
Noteholders from appointing a successor Servicer or Administrator, as the case
may be. See "Description of the Transfer and Servicing Agreements -- Rights Upon
Servicer Default and Administrator Default".
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. These requirements impose
specific statutory liabilities upon lenders who fail to comply with their
provisions. In certain circumstances, the Trust may be liable for certain
violations of consumer protection laws that apply to the Financed Student Loans,
either as assignee from the Seller or as the party directly responsible for
obligations arising after the transfer. 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 Transfer and
Servicing Agreements -- Sale of Financed Student Loans; Representations and
Warranties" and "-- 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), and The Access Group(SM) Loan Program 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
Federal Loans and the performance of a creditworthiness evaluation in the case
of Private 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 forbearances 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
98
<PAGE> 101
procedures (primarily telephone calls and demand letters) which vary depending
upon the length of time a loan is delinquent. The Servicer has agreed pursuant
to the Sale and Servicing Agreement to perform collection and servicing
procedures on behalf of the Trust. However, failure to follow these procedures
or failure of the Seller to follow procedures relating to the origination of any
Financed Federal Loans could result in adverse consequences. In the case of any
such Financed Federal Loans, any such failure could result in the Department's
refusal to make reinsurance payments to the Federal Guarantors or to make
Interest Subsidy Payments and Special Allowance Payments to the Eligible Lender
Trustee with respect to such Financed Federal Loans or in the Federal
Guarantors' refusal to honor their Guarantee Agreements with the Eligible Lender
Trustee with respect to such Financed Federal Loans. Failure of the Federal
Guarantors to receive reinsurance payments from the Department could adversely
affect the Federal Guarantors' ability or legal obligation to make Guarantee
Payments to the Eligible Lender Trustee with respect to such Financed Federal
Loans. In the case of the Financed Private Loans, failure to make or service
properly such Private Loans in accordance with such procedures could adversely
affect the Eligible Lender Trustee's ability to obtain Guarantee Payments from
TERI with respect to such Financed Private 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 and to make distributions in respect of the Certificates. Under certain
circumstances, pursuant to the Sale and Servicing Agreement, the Seller is
obligated to repurchase any Financed Student Loan, or the Servicer is obligated
to purchase any Financed Student Loan, if a breach of the representations,
warranties or covenants of the Seller or the 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 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 -- Sale of Financed Student Loans;
Representations and Warranties" and "-- Servicer Covenants". The failure of the
Seller or the Servicer to so purchase a Financed Student Loan would constitute a
breach of the Sale 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.
STUDENT LOANS GENERALLY NOT SUBJECT TO DISCHARGE IN BANKRUPTCY
Neither Financed Federal Loans nor Financed Private Loans are generally
dischargeable by a borrower in bankruptcy pursuant to the Bankruptcy Code,
unless (A) with respect to Financed Federal Loans only, such Student Loan first
became due before seven years (exclusive of any applicable suspension of the
repayment period) before the date of the bankruptcy or (B) excepting such debt
from discharge will impose an undue hardship on the debtor and the debtor's
dependents.
MATERIAL TAX CONSEQUENCES
Set forth below is a summary of material Federal income tax consequences of
the purchase, ownership and disposition of the Securities. Jones, Day, Reavis &
Pogue, special tax counsel for the Trust ("Tax Counsel") is of the opinion that
the discussion hereunder fully and fairly discloses all material tax risks
associated with the purchase, ownership and disposition of the Securities.
This summary does not deal with all aspects of Federal income taxation
applicable to all categories of holders of the Securities, 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 Securityholders
that are insurance companies, banks and certain other financial institutions,
regulated investment companies, 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
99
<PAGE> 102
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.
Prospective investors are advised to consult their own tax advisors with
regard to their particular circumstances as 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 (other than
Pennsylvania), foreign country or other jurisdiction. The Trust has been
provided with an opinion of 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.
MATERIAL FEDERAL TAX CONSEQUENCES WITH RESPECT TO THE NOTES
Tax Characterization of the Notes and the Trust. 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.
Although the matters are not free from doubt, Tax Counsel is also of the
opinion that based on the applicable provisions of the Trust Agreement and
related documents, the Trust will not be classified as an association or
publicly traded partnership taxable as a corporation for Federal income tax
purposes and will not be subject to Pennsylvania income or franchise tax. If the
Trust were taxable for Federal income tax purposes as a corporation, 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.
Likewise, if the Trust were subject to Pennsylvania income or franchise tax, the
amount of cash available to make payments on the Notes would be reduced.
If, contrary to the opinion of 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 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 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"). However, because of limitations
on the payment of interest on the Notes to the extent of the Trust's having
insufficient Available Funds the IRS may contend that the Notes should be
treated as having been issued with OID. In such case, Noteholders (regardless of
whether they otherwise use the cash or accrual method of accounting) would be
required to include interest on the Notes in taxable income on an accrual basis.
However, until the IRS determines otherwise, the Trust intends to take the
position that the Notes are not issued with OID. A holder who purchases a Note
at a discount that exceeds a statutorily 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, market discount and gain previously
included by such Noteholder in income with respect to the Note and decreased by
the amount of 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 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.
100
<PAGE> 103
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
KeyCorp (including a holder of 10% of the outstanding Certificates) or a
"controlled foreign corporation" with respect to which the Trust or KeyCorp 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 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 person is not present in the United States for 183 days or
more in the taxable year.
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.
Proposed regulations ("Withholding Proposals") issued by the IRS were
published in the Federal Register on April 22, 1996. If and when finalized, the
Withholding Proposals would substantially modify the existing rules summarized
above for the withholding of U.S. tax on payments of certain kinds of income
(including interest and OID paid by U.S. obligors) to foreign persons. The
Withholding Proposals would, if finalized in their current form and upon
becoming effective, make significant changes to certain of the procedures and
certification requirements described above in order to secure a reduction in, or
an exemption from, U.S. withholding tax otherwise due with respect to payments
to Noteholders who are foreign persons. Subject to certain exceptions and
transition rules, if finalized in their current form the Withholding Proposals
would be effective for payments made after December 31, 1997, regardless of the
date of issuance of the instrument with respect to which those payments are
made. There can be no assurance that the Withholding Proposals will be finalized
(whether before or after their proposed effective date) or, if they are
finalized, that they will not be materially modified from their current form.
Prospective Noteholders who are foreign persons are urged to consult their own
tax advisors with respect to the possible impact of the Withholding Proposals on
their particular situations.
Information Reporting and Backup 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 accounts, or
nonresident aliens who provide certification as to their status as
nonresidents). 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
101
<PAGE> 104
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, the Trust will be required to withhold 31% 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.
The Withholding Proposals would, if finalized in their current form and
upon becoming effective, modify the foregoing rules to conform them generally to
the rules proposed therein with respect to withholding of U.S. tax on certain
payments to foreign persons and referred to above. Prospective Noteholders who
are foreign persons are urged to consult their own tax advisors with respect to
the possible impact of the Withholding Proposals on their particular situations.
PENNSYLVANIA INCOME AND FRANCHISE TAX CONSEQUENCES WITH RESPECT TO THE NOTES
The activities to be undertaken by the Servicer in servicing and collecting
the Financed Student Loans will take place in Pennsylvania. There is no
authority in Pennsylvania addressing the question of whether the Notes will be
treated as debt or equity for Pennsylvania purposes. Furthermore, Pennsylvania
does not necessarily adopt Federal income tax definitions in characterizing
income for state tax purposes. Nonetheless, subject to the foregoing
uncertainties, Tax Counsel has advised the Trust that, assuming the Notes are
treated as debt for Federal income tax purposes, the Notes will be treated as
debt for Pennsylvania income tax purposes. Noteholders not otherwise subject to
taxation in Pennsylvania should not become subject to taxation in Pennsylvania
solely because of a holder's ownership of Notes. However, for Pennsylvania
resident Noteholders otherwise subject to Pennsylvania tax, the interest on the
Notes will be included in Pennsylvania taxable income.
MATERIAL FEDERAL TAX CONSEQUENCES WITH RESPECT TO THE CERTIFICATES
Tax Characterization of the Trust. The Seller and the Servicer have
agreed, and the Certificateholders will agree by their purchase of Certificates,
to treat the Trust as a partnership for purposes of Federal and state income
tax, state franchise tax and any other tax measured in whole or in part by
income, with the assets of the partnership being the assets held by the Trust,
the partners of the partnership being the Certificateholders (including the
Seller in its capacity as recipient of distributions from the Reserve Account),
and the Notes being debt of the partnership. However, the proper
characterization of the arrangement involving the Trust, the Certificates, the
Notes, the Seller and the Servicer is not clear because there is no authority on
transactions closely comparable to that contemplated herein.
If the Trust were held to be an "association" taxable as a corporation for
Federal income tax purposes, rather than a partnership, the Trust would be
subject to a corporate level income tax. Any such corporate income tax could
materially reduce or eliminate cash that would otherwise be distributable with
respect to the Certificates (and Certificateholders could be liable for any such
tax that is unpaid by the Trust). However, in the opinion of Tax Counsel, the
Trust will not be classified as an association taxable as a corporation because
it will not have certain "corporate" characteristics necessary for a business
trust to be an association taxable as a corporation.
Even if the Trust were not an association taxable as a corporation under
the rules described above, it would still be subject to corporate income tax if
it were a "publicly traded partnership" taxable as a corporation. However,
(although the matter is not free from doubt) because of the nature of the income
of the Trust, in the opinion of Tax Counsel, the Trust will not be a publicly
traded partnership taxable as a corporation.
As a result of the foregoing, in the opinion of Tax Counsel, the Trust will
not be an association or publicly traded partnership taxable as a corporation.
Nonetheless, because of the lack of cases or rulings on similar transactions, a
variety of alternative characterizations are possible in addition to the
position to be taken by Certificateholders that the Certificates represent
equity interests in a partnership. For example, because the Certificates have
certain features characteristic of debt, the Certificates might be considered
debt of the Trust or of the Seller. Any such characterization should not result
in materially adverse tax consequences to Certificateholders as compared to the
consequences from treatment of the Certificates as equity in a
102
<PAGE> 105
partnership. The remainder of this summary assumes that the Certificates
represent equity interests in a partnership that owns the Financed Student
Loans.
Partnership Taxation. As a partnership, the Trust will not be subject to
Federal income tax, but each Certificateholder will be required to separately
take into account such holder's allocated share of income, gains, losses,
deductions and credits of the Trust. The Trust's income will consist primarily
of interest earned on the Financed Student Loans (including appropriate
adjustments for market discount, original issue discount and premium),
investment income from Eligible Investments in the Trust Accounts and any gain
upon collection or disposition of the Financed Student Loans. The Trust's
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees and losses or deductions upon collection or
disposition of the Financed Student Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide that
the Certificateholders will be allocated taxable income of the Trust for each
Interest Period equal to the sum of (i) the amount of interest that accrues on
the Certificates for such Interest Period based on the Certificate Rate; (ii) an
amount equivalent to interest that accrues during such Interest Period on
amounts previously due on the Certificates but not yet distributed; and (iii)
any Trust income attributable to discount on the Financed Student Loans that
corresponds to any excess of the principal amount of the Certificates over their
initial issue price. All remaining taxable income of the Trust will be allocated
to the Seller. It is believed that this allocation will be valid under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to
Certificateholders. Moreover, under the foregoing method of allocation, holders
may be allocated income equal to the entire amount of interest accruing on the
Certificates for an Interest Period based on the Certificate Rate plus the other
items described above even though the Trust might not have sufficient cash to
make current cash distributions of such amount. Thus, cash basis holders will in
effect be required to report income from the Certificates on the accrual basis.
In addition, because tax allocations and tax reporting will be done on a uniform
basis for all Certificateholders but Certificateholders may be purchasing
Certificates at different times and at different prices, Certificateholders may
be required to report on their tax returns taxable income that is greater or
less than the amount reported to them by the Trust.
Additionally, most of the taxable income allocated to a Certificateholder
that is a tax-exempt entity will constitute "unrelated business taxable income",
which, under the Code, is generally taxable to such a holder despite the
holder's tax exempt status.
An individual taxpayer may generally deduct miscellaneous itemized
deductions (which do not include interest expenses) only to the extent they
exceed two percent of the individual's adjusted gross income. Those limitations
would apply to an individual Certificateholder's share of expenses of the Trust
(including fees paid to the Servicer) and might result in such holder being
taxed on an amount of income that exceeds the amount of cash actually
distributed to such holder over the life of the Trust.
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each of the Financed
Student Loans, the Trust might be required to incur additional expense, but it
is believed that there would not be a material adverse affect on
Certificateholders.
Discount and Premium. It is believed that the Financed Student Loans were
not issued (or will not be issued) with OID, and, therefore, the Trust should
not have OID income. However, the purchase price paid by the Trust for the
Financed Student Loans may be greater or less than the remaining principal
balance of the Financed Student Loans at the time of purchase. If so, the
Financed Student Loans will have been acquired at a premium or discount, as the
case may be. (As indicated above, the Trust will make this calculation on an
aggregate basis, but might be required to recompute it on a loan by loan basis.)
The Trust will make an election that will result in any such market discount on
the Financed Student Loans being included in income currently as such discount
accrues over the life of the loans. As indicated above, a portion of such market
discount income will be allocated to Certificateholders. Similarly, the Trust
will make an
103
<PAGE> 106
election to amortize any market premium over the life of the Financed Student
Loans, which could result in additional deductions allocated to the
Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust will be
deemed to terminate for Federal income tax purposes if 50% or more of the
capital and profits interests in the Trust (which include the Certificates and
the Seller's interest) are sold or exchanged within a 12-month period. If such a
termination occurs, the Trust will be considered to distribute its assets to the
partners, who would then be treated as recontributing those assets to the Trust,
as a new partnership. (Treasury Regulations that would change this treatment
have recently been proposed, but are not yet effective.) The Trust will not
comply with certain technical requirements that might apply when such a
constructive termination occurs. As a result, the Trust may be subject to
certain tax penalties and may incur additional expenses if it is required to
comply with those requirements. Furthermore, the Trust might not be able to
comply due to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of a Certificate in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificate sold.
A Certificateholder's tax basis in a Certificate will generally equal his cost
increased by his share of Trust income that is includible in his gross income
and decreased by any distributions received with respect to such Certificate. In
addition, both the tax basis in the Certificate and the amount realized on a
sale of a Certificate would include the holder's share of the Notes and other
liabilities of the Trust. A holder acquiring Certificates at different prices
may be required to maintain a single aggregate adjusted tax basis in such
Certificates, and, upon sale or other disposition of some of the Certificates,
allocate a pro rata portion of such aggregate tax basis to the Certificates sold
(rather than maintaining a separate tax basis in each Certificate for purposes
of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Financed Student Loans would
generally be treated as ordinary income to the holder and would give rise to
special tax reporting requirements. The Trust does not expect to have any other
assets that would give rise to such special reporting requirements. Thus, to
avoid these special reporting requirements, the Trust will elect to include any
such market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed miscellaneous itemized
deductions described above) over the life of the Certificates that exceeds the
aggregate cash distributions with respect thereto, such excess will generally
give rise to a capital loss upon the retirement of the Certificates.
Allocations Between Transferor and Transferee. In general, the Trust's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the close
of the last day of such month. As a result, a holder purchasing Certificates may
be allocated tax items (which will affect the tax liability and tax basis of the
holder) attributable to periods before the actual purchase takes place.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or is allowed only for
transfers of less than all of the partner's interest), taxable income or losses
of the Trust might be reallocated among the Certificateholders. The Seller is
authorized to revise the Trust's method of allocation between transferors and
transferees to conform to a method permitted by any future authority.
Section 754 Election. In the event that a Certificateholder sells a
Certificate at a profit (or loss), the purchasing Certificateholder will have a
higher (or lower) basis in the Certificate than the selling Certificateholder
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust files an election under Section 754 of
the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust will not make such an election. As
a result, Certificateholders might be
104
<PAGE> 107
allocated a greater or lesser amount of Trust income than would be appropriate
based on their own purchase price for Certificates.
Administrative Matters. The Eligible Lender Trustee is required to keep or
cause to be kept complete and accurate books of the Trust. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and the
taxable year of the Trust will be the calendar year. The Eligible Lender Trustee
will file a partnership information return (IRS Form 1065) with the IRS for each
taxable year of the Trust and will report to holders (and to the IRS) each
Certificateholder's allocable share of items of Trust income and expense on
Schedule K-1. The Trust will provide the Schedule K-1 information to nominees
that fail to provide the Trust with the information statement described below
and such nominees will be required to forward such information to the beneficial
owners of the Certificates. Generally, holders must file tax returns that are
consistent with the information returns filed by the Trust or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee on behalf of another person at any time during a calendar year is
required to furnish the Trust with a statement containing certain information on
the nominee, the beneficial owners and the Certificates so held. Such
information includes (i) the name, address and taxpayer identification number of
the nominee and (ii) as to each beneficial owner (x) the name, address and
taxpayer identification number of such person, (y) whether such person is a
United States person, a tax-exempt entity or a foreign government, an
international organization, or any wholly-owned agency or instrumentality of
either of the foregoing and (z) certain information concerning Certificates that
were held, acquired or transferred on behalf of such person throughout the year.
In addition, brokers and financial institutions that hold Certificates through a
nominee are required to furnish directly to the Trust information as to
themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act that holds Certificates as a nominee is
not required to furnish any such information statement to the Trust. The
information referred to above for any calendar year must be furnished to the
Trust on or before the following January 31. Nominees, brokers and financial
institutions that fail to provide the Trust with the information described above
may be subject to penalties. The Trust will provide the Schedule K-1 information
to nominees that fail to provide the Trust with the information described above
and such nominees will be required to forward such information to the beneficial
owners of the Certificates.
The Seller, as the "tax matters partner", will be responsible for
representing the Certificateholders in any dispute with the IRS. The Code
provides for administrative examination of a partnership as if the partnership
were a separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust by the appropriate taxing authorities could
result in an adjustment of the returns of the Certificateholders, and, under
certain circumstances, a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Trust. An adjustment could
also result in an audit of a Certificateholder's returns and adjustments of
items not related to the income and losses of the Trust.
Tax Consequences to Foreign Certificateholders. If the Trust is considered
to be engaged in a trade or business in the United States, it may be required to
withhold taxes on income allocable to non-U.S. Certificateholders. It is not
clear whether the Trust would be considered to be engaged in a trade or business
in the United States for purposes of Federal withholding taxes with respect to
non-U.S. persons because there is no clear authority dealing with that issue
under facts substantially similar to those described herein. Because it is
unclear whether the Trust would be engaged in a trade or business in the United
States for such purposes, the Trust will withhold as if it were so engaged in
order to protect the Trust from possible adverse consequences of a failure to
withhold. The Trust expects to withhold on the portion of its taxable income
that is allocable to foreign Certificateholders pursuant to Section 1446 of the
Code, as if such income were effectively connected to a U.S. trade or business,
at a rate of 35% for foreign holders that are taxable as corporations and 39.6%
for all other foreign holders. Subsequent adoption of Treasury regulations or
the issuance of other administrative pronouncements may require the Trust to
change its withholding procedures.
105
<PAGE> 108
In determining a holder's nonforeign status, the Trust may rely on IRS Form W-8,
IRS Form W-9 or the holder's certification of nonforeign status signed under
penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the
computation of the branch profits tax) on its share of the Trust's income. Each
foreign holder should obtain a taxpayer identification number from the IRS and
submit that number to the Trust on Form W-8 in order to assure appropriate
crediting of the taxes withheld. A foreign holder may be entitled to file with
the IRS a claim for refund with respect to taxes withheld by the Trust, taking
the position that no taxes were due because the Trust was not engaged in a U.S.
trade or business. The Trust will cooperate in any such refund claim if it can
do so without incurring any out-of-pocket cost. No assurance can be given as to
whether any such refund claim would be granted.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
Proposed Tax Legislation. Certain proposed legislation would apply special
rules to "large partnerships", defined as partnerships with at least 250
partners during a taxable year (counting towards such total each owner during
the year of a partnership interest that is transferred during the year). Under
the legislation, certain computations are made at the partnership level rather
than the partner level, which could have the effect of disallowing a share of
partners' deductions under certain circumstances. Moreover, large partnerships
would become subject to new audit procedures. No prediction can be made whether
such legislation will be enacted, the form in which it might be enacted or the
ultimate effective date of such legislation.
PENNSYLVANIA INCOME AND FRANCHISE TAX CONSEQUENCES WITH RESPECT TO THE
CERTIFICATES
Because state and local income and franchise tax laws vary greatly, it is
impossible to predict the income and franchise tax consequences to the
Certificateholders in all of the state and local taxing jurisdictions in which
they are already subject to tax. Certificateholders are urged to consult their
own advisors with respect to state and local income and franchise taxes.
However, Tax Counsel is of the opinion that the Trust will not be subject to
Pennsylvania corporate net income tax or capital stock franchise tax or any
other Pennsylvania entity level income or franchise tax. There is no assurance,
however, that this conclusion will not be challenged by the Pennsylvania taxing
authorities or, if challenged, that the taxing authorities will not be
successful. If the Trust were subject to an entity level tax in Pennsylvania,
any such tax could materially reduce or eliminate cash that would otherwise be
distributable with respect to the Certificates (and Certificateholders could be
liable for any such tax that is unpaid by the Trust). Certificateholders not
otherwise subject to taxation in Pennsylvania should not become subject to
taxation in Pennsylvania solely because of a holding ownership of Certificates.
However, for Pennsylvania resident Certificateholders otherwise subject to
Pennsylvania tax, the distributions on the Certificates will be included in
Pennsylvania taxable income.
ERISA CONSIDERATIONS
THE NOTES
The Notes may be purchased by an employee benefit plan subject to ERISA or
by an individual retirement account described in Section 408(a) of the Code
(both hereinafter referred to as "Plans"). Before acquiring a Note, a fiduciary
of a Plan must determine that the acquisition of the Note is consistent with its
fiduciary duties under ERISA and does not result in a nonexempt prohibited
transaction as defined in Section 406 of ERISA or Section 4975 of the Code.
Employee benefit plans which 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 the fiduciary responsibility or prohibited transaction provisions
of ERISA or the Code, but rather are subject to state laws regulating fiduciary
conduct.
106
<PAGE> 109
THE CERTIFICATES
The Certificates may not be purchased by a Plan or by any entity whose
underlying assets include Plan Assets by reason of a Plan's investment in the
entity (each, a "Benefit Plan"). The acquisition of a Certificate is the
acquisition of an equity interest in the Trust. The acquisition of an equity
interest in the Trust by a Benefit Plan could result in the assets of the Trust
being deemed to be assets of a Benefit Plan ("Plan Assets") under ERISA. ERISA
and the Code contain prohibited transaction rules which apply to transactions
involving Benefit Plans and to transactions involving Plan Assets. A violation
of the prohibited transaction rules may result in an excise tax or other penalty
or liability being imposed on the persons engaged in the prohibited transaction.
By its acceptance of a Certificate, each Certificateholder will be deemed to
have represented and warranted that it is not a Benefit Plan.
UNDERWRITING
Subject to the terms and conditions set forth in the respective
Underwriting Agreements relating to the Notes and the Certificates (the
"Underwriting Agreements"), the Seller has agreed to cause the Trust to sell to
the underwriters named below (the "Underwriters"), and each of the Underwriters
has severally agreed to purchase, the principal amount of Class A-1 Notes, Class
A-2 Notes and Certificates set forth opposite its name:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT PRINCIPAL AMOUNT PRINCIPAL AMOUNT
UNDERWRITER OF CLASS A-1 NOTES OF CLASS A-2 NOTES OF CERTIFICATES
- ------------------------------------------- ------------------ ------------------ ----------------
<S> <C> <C> <C>
CS First Boston Corporation................ $ $ $
Key Capital Markets, Inc................... $ $ $
------------------ ------------------ ----------------
Total.................................... $ $ $
============== ============== =============
</TABLE>
In the respective Underwriting Agreements, the several Underwriters have
agreed, subject to the terms and conditions set forth therein, to purchase (i)
all the Notes offered hereby if any of the Notes are purchased and (ii) all the
Certificates offered hereby if any of the Certificates are purchased. The Seller
has been advised by the Underwriters that the Underwriters propose initially to
offer the Securities to the public at the respective public offering prices set
forth on the covering page of this Prospectus, and to certain dealers at such
prices less a concession not in excess of % per Class A-1 Note, % per
Class A-2 Note and % per Certificate. The Underwriters may allow and such
dealers may reallow to other dealers a discount not in excess of % per
Class A-1 Note, % per Class A-2 Note and % per Certificate. After the
initial public offering, such public offering prices, concessions and
reallowances may be changed.
The Representative has informed the Seller that it does not expect
discretionary sales by the Underwriters to exceed 5% of the aggregate principal
amount of the Notes and the Certificates being offered hereby.
The Underwriting Agreements provide that the Seller 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 Trust may, from time to time, invest the funds in the Trust Accounts in
Eligible Investments acquired from the Underwriters.
The closing of the sale of the Certificates is conditioned on the closing
of the sale of the Notes and the closing of the sale of the Notes is conditioned
on the closing of the sale of the Certificates.
CS First Boston Corporation is engaged from time to time by KeyCorp, the
parent corporation of the Servicer, to provide investment banking services.
Key Capital Markets, Inc. is a broker-dealer registered as such with the
National Association of Securities Dealers, Inc., and commenced business on
February 26, 1996. The Seller is an affiliate of Key Capital Markets, Inc.
107
<PAGE> 110
LEGAL MATTERS
Certain legal matters relating to the Securities will be passed upon for
the Trust, the Seller and the Administrator by Forrest F. Stanley, Esq., General
Counsel and Secretary of the Seller, as counsel for the Seller, and by Jones,
Day, Reavis & Pogue, Columbus, Ohio and for the Underwriters by Stroock &
Stroock & Lavan, New York, New York. Certain federal and Pennsylvania state
income tax and other matters will be passed upon for the Trust by Jones, Day,
Reavis & Pogue.
108
<PAGE> 111
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>
91-day Treasury Bill Rate.......................................................... 39
91-day Treasury Bills.............................................................. 4
1992 Amendments.................................................................... 36
Additional Fundings................................................................ 28, 77
Additional Student Loans........................................................... 7
Administration Agreement........................................................... 3
Administration Fee................................................................. 31
Administrator...................................................................... 3
Administrator Default.............................................................. 90
Applicable Trustee................................................................. 73
ASA................................................................................ 7
Assigned Rights.................................................................... 17
Auction Purchase Amount............................................................ 16
Available Funds.................................................................... 83
BAL Loans.......................................................................... 21, 43, 77
BEL Loans.......................................................................... 21, 43, 77
Benefit Plan....................................................................... 104
Capped Amount...................................................................... 15, 82
Cede............................................................................... 2, 72
Cedel.............................................................................. 3, 74
Cedel Participants................................................................. 74
Certificate Balance................................................................ 84
Certificate Final Maturity Date.................................................... 5, 68
Certificate Pool Factor............................................................ 65
Certificate Rate................................................................... 67
Certificateholder.................................................................. 73
Certificateholders................................................................. 27
Certificateholders' Distribution Amount............................................ 84
Certificateholders' Interest Carryover Shortfall................................... 84
Certificateholders' Interest Distribution Amount................................... 84
Certificateholders' Interest Index Carryover....................................... 5
Certificateholders' Principal Carryover Shortfall.................................. 84
Certificateholders' Principal Distribution Amount.................................. 84
</TABLE>
<TABLE>
<S> <C>
Certificates....................................................................... 3
Class A-1 Final Maturity Date...................................................... 7
Class A-2 Final Maturity Date...................................................... 7
Class A-1 Note Pool Factor......................................................... 67
Class A-2 Note Pool Factor......................................................... 67
Class A-1 Notes.................................................................... 4
Class A-2 Notes.................................................................... 4
Class A-1 Rate..................................................................... 68
</TABLE>
109
<PAGE> 112
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Class A-2 Rate..................................................................... 68
Closing Date....................................................................... 3
Code............................................................................... 97
Collection Account................................................................. 10
Collection Period.................................................................. 9
Commission......................................................................... 2
Cooperative........................................................................ 74
Consolidation Loans................................................................ 45
Covered Losses..................................................................... 85
DAL Loans.......................................................................... 21, 33, 43
Deferral........................................................................... 52
Deferral Period.................................................................... 39
Definitive Certificates............................................................ 75
Definitive Notes................................................................... 75
Definitive Securities.............................................................. 75
Department......................................................................... 2, 7
Depositaries....................................................................... 73
Depository......................................................................... 65
Determination Date................................................................. 83
Distribution Date.................................................................. 1, 4
DOE Data Book...................................................................... 58
DTC................................................................................ 3, 72
Eligible Deposit Account........................................................... 78
Eligible Institution............................................................... 78
Eligible Investments............................................................... 78
Eligible Lender Trustee............................................................ 1, 3
Eligible Student................................................................... 33
ELSI............................................................................... 61
ERISA.............................................................................. 16
Escrow Account..................................................................... 42
Euroclear.......................................................................... 3, 74
Euroclear Operator................................................................. 74
Euroclear Participants............................................................. 74
Event of Default................................................................... 70
Excess Interest.................................................................... 85
Excess Servicing Fee............................................................... 15, 82
Exchange Act....................................................................... 2
Expected Interest Collections...................................................... 66
FDIA............................................................................... 22
FDIC............................................................................... 22
Federal Assistance................................................................. 37
Federal Consolidation Loan......................................................... 42
Federal Direct Student Loan Program................................................ 21
Federal Guarantee Agreements....................................................... 32
</TABLE>
110
<PAGE> 113
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Federal Guarantors................................................................. 7
Federal Loans...................................................................... 19
Federal Origination Fee............................................................ 43
Federal Programs................................................................... 36
FFELP.............................................................................. 21
Financed Federal Loans............................................................. 7
Financed Private Loans............................................................. 7
Financed Student Loans............................................................. 1, 3
FIRREA............................................................................. 22
Forbearance........................................................................ 52
Forbearance Period................................................................. 39
Foreign person..................................................................... 98
Funding Period..................................................................... 6
GAL Loans.......................................................................... 21, 33, 43
Grace.............................................................................. 51
Grace Period....................................................................... 39
Guarantee Agreement................................................................ 20
Guarantee Agreements............................................................... 32
Guarantee Fee Advance.............................................................. 45
Guarantee Payments................................................................. 20
Guarantor.......................................................................... 32
Guarantors......................................................................... 8, 32
Higher Education Act............................................................... 32
In-School.......................................................................... 51
Indenture.......................................................................... 3
Indenture Trustee.................................................................. 3
Indirect Participants.............................................................. 73
Initial Financed Student Loans..................................................... 7, 8
Initial Pool Balance............................................................... 12
Interest Period.................................................................... 4, 66
Interest Subsidy Payments.......................................................... 37
Investment Earnings................................................................ 78
IRS................................................................................ 97
LAL Loans.......................................................................... 21, 33, 43
Liquidated Student Loans........................................................... 83
Liquidation Proceeds............................................................... 83
Lock-In Period..................................................................... 69
LSAC............................................................................... 31
MAL Loans.......................................................................... 21, 33, 43
Margin............................................................................. 4
Minimum Purchase Amount............................................................ 15, 93
Monthly Servicing Payment Date..................................................... 11
Moody's............................................................................ 78
Negative Carry Account............................................................. 14
</TABLE>
111
<PAGE> 114
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Negative Carry Account Initial Deposit............................................. 14
New borrowers...................................................................... 38
Note Interest Rate................................................................. 66
Noteholder......................................................................... 73
Noteholders........................................................................ 27
Noteholders' Distribution Amount................................................... 85
Noteholders' Interest Carryover Shortfall.......................................... 85
Noteholders' Interest Distribution Amount.......................................... 85
Noteholders' Interest Index Carryover.............................................. 5
Noteholders' Principal Carryover Shortfall......................................... 85
Noteholders' Principal Distribution Amount......................................... 85
Notes.............................................................................. 1, 3
Obligors........................................................................... 86
OID................................................................................ 97
Other Additional Funding Subaccount................................................ 9
Other Additional Pre-Funded Amount................................................. 7
Other Student Loans................................................................ 7
Overcollateralization Adjustment................................................... 85
Overcollateralization Amount....................................................... 12, 85, 87
Participants....................................................................... 73
PHEAA.............................................................................. 3
Plan Assets........................................................................ 104
Plans.............................................................................. 104
Pool Balance....................................................................... 85
Pool Factor........................................................................ 65
Portfolio interest................................................................. 98
Pre-Funded Amount.................................................................. 9
Pre-Funding Account................................................................ 9
Principal Distribution Adjustment.................................................. 86
Principal Distribution Amount...................................................... 86
Private Consolidation Guarantee Fee................................................ 46
Private Consolidation Loan......................................................... 45
Private Loan Repayment Commencement Date........................................... 45
Private Loans...................................................................... 19, 32
Program............................................................................ 33
Purchase Price..................................................................... 11
Purchase Amount.................................................................... 77
Realized Losses.................................................................... 86
Record Date........................................................................ 4
Registration Statement............................................................. 2
REL Loan........................................................................... 20, 33, 43
Related Documents.................................................................. 72
Repayment.......................................................................... 51
Required Negative Carry Account Balance............................................ 86
</TABLE>
112
<PAGE> 115
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Reserve Account.................................................................... 12
Reserve Account Covered Amount..................................................... 86
Reserve Account Initial Deposit.................................................... 12
Rules.............................................................................. 73
Sale and Servicing Agreement....................................................... 7
Securities......................................................................... 1
Securities Act..................................................................... 2
Securityholder..................................................................... 73
Securityholders.................................................................... 26
Seller............................................................................. 1, 3
Seller Insolvency Event............................................................ 92
Seller Trusts...................................................................... 23
Serial Loans....................................................................... 78
Servicer........................................................................... 3
Servicer Default................................................................... 90
Servicing Fee...................................................................... 14
SLS Loans.......................................................................... 41
SLS Program........................................................................ 41
Special Allowance Payments......................................................... 36
Special Determination Date......................................................... 2, 6
Special Distribution Date.......................................................... 6
Specified Credit Enhancement Amount................................................ 12, 87
Specified Reserve Account Balance.................................................. 12, 87
Specified Overcollateralization Amount............................................. 12, 87
Stafford Loans..................................................................... 36
Standard & Poor's.................................................................. 78
Statistical Cutoff Date............................................................ 6
Student Loan Rate.................................................................. 5, 66
Student Loans...................................................................... 6
Subsequent Cutoff Date............................................................. 79
Subsequent Financed Student Loans.................................................. 7
Subsequent Pool.................................................................... 2, 6
Subsequent Pool Pre-Funded Amount.................................................. 2, 6
Subsequent Pool Pre-Funding Subaccount............................................. 9
Tax Counsel........................................................................ 96
T-Bill Pak......................................................................... 69
TERI............................................................................... 7
Terms and Conditions............................................................... 74
Transfer Agreement................................................................. 79
Transfer and Servicing Agreements.................................................. 76
Transfer Date...................................................................... 79
Trust.............................................................................. 1, 3
Trust Accounts..................................................................... 78
Trust Agreement.................................................................... 3
</TABLE>
113
<PAGE> 116
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
UCC................................................................................ 94
Underlying Federal Loan............................................................ 41
Underlying Private Loans........................................................... 45
Underwriters....................................................................... 104
Underwriting Agreements............................................................ 104
Unsubsidized Stafford Loans........................................................ 37
Withholding Proposals.............................................................. 98
</TABLE>
114
<PAGE> 117
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SELLER, THE TRUST OR
THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION
BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR
IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO
OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................. 2
Reports to Securityholders............. 2
Summary of Terms....................... 4
Risk Factors........................... 19
Formation of the Trust................. 30
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 32
Use of Proceeds........................ 32
The Seller, the Administrator and the
Servicer............................. 32
The Student Loan Financing Business.... 34
The Financed Student Loan Pool......... 49
Pool Factors and Trading Information... 67
Description of the Securities.......... 67
Description of the Transfer and
Servicing Agreements................. 79
Certain Legal Aspects of the Financed
Student Loans........................ 97
Material Tax Consequences.............. 99
ERISA Considerations................... 106
Underwriting........................... 107
Legal Matters.......................... 108
Index of Principal Terms............... 109
</TABLE>
------------------
UNTIL , 1996 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES, 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.
- ------------------------------------------------------
- ------------------------------------------------------
$
KeyCorp Student Loan Trust 1996-A
$
Floating Rate Class A-1
Asset Backed Notes
$
Floating Rate Class A-2
Asset Backed Notes
$
Floating Rate
Asset Backed Certificates
Key Bank USA, National Association
Seller
PROSPECTUS
CS First Boston
Key Capital Markets, Inc.
- ------------------------------------------------------
<PAGE> 118
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY
NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
[ALTERNATE PAGE]
SUBJECT TO COMPLETION, DATED SEPTEMBER 12, 1996
KEYCORP STUDENT LOAN TRUST 1996-A
$ Floating Rate Class A-1 Asset Backed Notes
$ Floating Rate Class A-2 Asset Backed Notes
$ Floating Rate Asset Backed Certificates
------------------
KEY BANK USA, NATIONAL ASSOCIATION
Seller
------------------
The KeyCorp Student Loan Trust 1996-A (the "Trust") will issue $
aggregate principal amount of Floating Rate Class A-1 Asset Backed Notes (the
"Class A-1 Notes"), $ aggregate principal amount of Floating Rate
Class A-2 Asset Backed Notes (the "Class A-2 Notes" and, with the Class
A-1 Notes, the "Notes"), and $ aggregate principal amount of
Floating Rate Asset Backed Certificates (the "Certificates"; and
together with the Notes, the "Securities"). The assets of the Trust
will include a pool of law school, medical school, dental school,
graduate business school, and other graduate school student loans
purchased by The First National Bank of Chicago, as eligible
lender trustee on behalf of the Trust (the "Eligible Lender
Trustee"), from Key Bank USA, National Association (the
"Seller") (such loans, together with any Additional Student
Loans purchased from the Seller from time to time by the
Eligible Lender Trustee on behalf of the Trust, 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 Negative
Carry Account and the Pre-Funding Account). The Notes
will be collateralized by the assets of the Trust.
The interests of the Certificateholders in the
assets of the Trust will be subordinated to
payments of interest and principal due on the
Notes to the extent described herein. Funds on
deposit in the Pre-Funding Account will be
used from time to time during the Funding
Period to purchase Additional Student Loans
and to make certain other additional
fundings with respect to the Financed
Student Loans.
------------------
The Securities will be available for purchase in denominations of $1,000 and
integral multiples thereof in book-entry form only. Interest on and principal
of the Securities will be payable quarterly on or about the twenty-seventh
day of each November, February, May and August, commencing November 27,
1996 (each, a "Distribution Date"); provided, that no distributions in
respect of principal of the Class A-2 Notes will be payable until the
Class A-1 Notes are paid in full, and no distribution in respect of
principal of the Certificates will be payable until the Class A-2
Notes are paid in full. Interest will accrue, subject to certain
limitations described herein, for each quarterly interest period
on each class of Securities at a per annum rate equal to the
T-Bill Rate (determined as described herein) plus the Margin.
The Margin will be % for the Class A-1 Notes, % for the
Class A-2 Notes and % for the Certificates. The final
maturity date for the Class A-1 Notes will be the
Distribution Date, the final maturity date
for the Class A-2 Notes will be the
Distribution Date and the final maturity date for the
Certificates will be the Distribution
Date.
(Continued on following page)
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS"
BEGINNING ON PAGE 19.
------------------
THE CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN, AND THE NOTES REPRESENT
OBLIGATIONS OF, THE TRUST ONLY AND DO NOT REPRESENT INTERESTS IN OR
OBLIGATIONS OF THE SELLER, THE SERVICER OR ANY AFFILIATE THEREOF.
NEITHER THE CERTIFICATES NOR THE NOTES ARE GUARANTEED OR INSURED
BY ANY GOVERNMENTAL AGENCY.
------------------
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>
UNDERWRITING
PRICE TO THE DISCOUNTS PROCEEDS TO THE
PUBLIC AND COMMISSIONS(1) SELLER(2)
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Per Class A-1 Note...................................... % % %
Per Class A-2 Note...................................... % % %
Per Certificate......................................... % % %
Total...................................................
</TABLE>
(1) The underwriting discount only applies to aggregate principal amount of the
Notes and aggregate principal amount of the Certificates that are offered by
the Underwriters. See "Underwriting."
(2) Before deducting expenses, estimated to be $ .
------------------
The Notes and the Certificates are offered by the several Underwriters
when, as and if issued by the Trust, delivered to and accepted by the
Underwriters and subject to their right to reject orders in whole or in part. It
is expected that delivery of the Notes and the Certificates in book-entry form
will be made through the facilities of The Depository Trust Company on the Same
Day Funds Settlement System and, in the case of the Notes, also Cedel Bank,
societe anonyme and the Euroclear System on or about , 1996.
THIS PROSPECTUS IS TO BE USED BY KEY BANK CAPITAL MARKETS, INC. ("KCMI") AN
AFFILIATE OF THE SELLER IN CONNECTION WITH OFFERS AND SALES RELATED TO
MARKET-MAKING TRANSACTIONS IN THE SECURITIES IN WHICH KCMI ACTS AS
PRINCIPAL. KCMI MAY ALSO ACT AS AGENT IN SUCH TRANSACTIONS. SALES
WILL BE MADE AT PRICES RELATED TO THE PREVAILING PRICES AT THE
TIME OF SALE.
The date of this Prospectus is , 1996.
LOGO
<PAGE> 119
[ALTERNATE PAGE]
(Continued from preceding page)
However, payment in full of the Notes and the Certificates could occur earlier
than such final maturity dates as described herein. In addition, the Notes and
the Certificates will be repaid (i) on any Distribution Date on which the
Seller exercises its option to purchase the Financed Student Loans,
exercisable when the aggregate principal balance of the Financed Student
Loans is reduced to 5% or less of the Initial Pool Balance and (ii) upon
the sale of any Financed Student Loans remaining in the Trust as of the
end of the month preceding the Distribution Date
pursuant to the auction procedures described herein.
On the date of issuance of the Securities, the aggregate principal balance of
the Initial Financed Student Loans as of September 1, 1996 will be
approximately $ and the aggregate amount on deposit in the Pre-Funding
Account will be $ . Approximately $ (the "Subsequent Pool Pre-Funded
Amount") of the amount on deposit in the Pre-Funding Account will be set
aside to purchase on or prior to November 22, 1996 (the "Special
Determination Date") Student Loans from a pool of Student Loans
currently owned by the Seller (the "Subsequent Pool") having as of
September 1, 1996 the characteristics described herein. If as of the
Special Determination Date (i) the Subsequent Pool Pre-Funded Amount
has not been reduced to zero and (ii) the total amount remaining in
the Pre-Funding Account as of such date exceeds $ , then the
remaining Subsequent Pool Pre-Funded Amount will be distributed
on the first Distribution Date to Noteholders and
Certificateholders as a prepayment of principal on a pro rata
basis as described herein. The Seller intends to sell all or
substantially all of the Student Loans in the Subsequent Pool
to the Trust on or prior to the Special Determination Date
thereby avoiding any such prepayment of the Securities.
The Pennsylvania Higher Education Assistance Agency, an agency of the
Commonwealth of Pennsylvania ("PHEAA"), will service all the Financed Student
Loans. The Financed Student Loans will include loans guaranteed by PHEAA
or American Student Assistance Guarantor, a non-profit corporation,
and reinsured by the United States Department of Education (the
"Department") and loans privately guaranteed by The Education
Resources Institute, Inc., a non-profit corporation, and not
reinsured by the Department.
Neither the Notes nor the Certificates will be listed on any national securities
exchange. CS First Boston Corporation intends to, and Key Capital Markets,
Inc. may, make a secondary market in the Notes and the Certificates but
neither has any obligation to do so. There can be no assurance that a
secondary market for the Notes or the Certificates will develop or,
if it does develop, that it will continue.
------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AND THE
CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
The Seller, as originator of the Trust, 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
Securities 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, New York, New York
10048; and 500 West Madison Street, 14th Floor, Chicago, Illinois 60661, and
copies of all or any part thereof may be obtained from the Public Reference
Branch of the Commission upon the payment of certain fees prescribed by the
Commission. In addition, the Registration Statement may be accessed
electronically at the Commission's site on the World Wide Web located at
http://www.sec.gov.
REPORTS TO SECURITYHOLDERS
Unless and until Definitive Notes or Definitive Certificates are issued,
quarterly and annual unaudited reports containing information concerning the
Financed Student Loans will be prepared by 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 and the Certificates but will
not be sent to any beneficial holder
2
<PAGE> 120
[Alternate Page]
of the Securities. Such reports will not constitute financial statements
prepared in accordance with generally accepted accounting principles. See
"Description of the Securities--Book-Entry Registration" and "-- Reports to
Securityholders". 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.
PROSPECTUS SUPPLEMENT
On or about , 1996, this Prospectus will be distributed
together with, and should be read in conjunction with, an accompanying
supplement to the Prospectus. Such supplement generally will include the
information contained in the monthly statement furnished to Noteholders and
Certificateholders. See "Description of the Securities--Reports to the
Securityholders".
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 Securities
Exchange Act of 1934, as amended (the "Exchange Act") subsequent to the date of
this Prospectus and prior to the termination of the offering of the Notes and
Certificates shall be deemed to be incorporated by reference into this
Prospectus and to be 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 Key Bank USA, National Association, Education Resources,
5000 Tiedeman Road, Brooklyn, Ohio 44144, Attention: Trust Administrator,
KeyCorp Student Loan Trust 1996-A. Telephone requests for such copies should be
directed to the Administrator at (800) 523-7248.
3
<PAGE> 121
[ALTERNATE PAGE]
THE CERTIFICATES
The Certificates may not be purchased by a Plan or by any entity whose
underlying assets include Plan Assets by reason of a Plan's investment in the
entity (each, a "Benefit Plan"). The acquisition of a Certificate is the
acquisition of an equity interest in the Trust. The acquisition of an equity
interest in the Trust by a Benefit Plan could result in the assets of the Trust
being deemed to be assets of a Benefit Plan ("Plan Assets") under ERISA. ERISA
and the Code contain prohibited transaction rules which apply to transactions
involving Benefit Plans and to transactions involving Plan Assets. A violation
of the prohibited transaction rules may result in an excise tax or other penalty
or liability being imposed on the persons engaged in the prohibited transaction.
By its acceptance of a Certificate, each Certificateholder will be deemed to
have represented and warranted that it is not a Benefit Plan.
PLAN OF DISTRIBUTION
This Prospectus is to be used by KCMI, as affiliate of the Seller in
connection with offers and sales related to market-making transactions in the
Securities in which KCMI acts as principal. KCMI may also act as agent in such
transactions. Sales will be made at prices related to prevailing prices at the
time of sale. Any obligations of KCMI are the sole obligations of KCMI and do
not create any obligations on the part of any affiliate of KCMI.
LEGAL MATTERS
Certain legal matters relating to the Securities will be passed upon for
the Trust, the Seller and the Administrator by Forrest F. Stanley, Esq., General
Counsel and Secretary of the Seller, as counsel for the Seller, and by Jones,
Day, Reavis & Pogue, Columbus, Ohio and for the Underwriters by Stroock &
Stroock & Lavan, New York, New York. Certain federal and Pennsylvania state
income tax and other matters will be passed upon for the Trust by Jones, Day,
Reavis & Pogue.
107
<PAGE> 122
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses in connection with the offering of the Notes and the Certificates
being registered herein are estimated as follows:
<TABLE>
<S> <C>
SEC registration fee................................................. $ --
Legal fees and expenses.............................................. 70,000
Accounting fees and expenses......................................... 50,000
Rating agency fees................................................... 600,000
Eligible Lender Trustee fees and expenses............................ 14,000
Indenture Trustee fees and expenses.................................. 13,000
Printing and engraving............................................... 55,000
Servicer conversion fees............................................. 100,000
Miscellaneous........................................................ *
-------------
Total...................................................... $ *
============
</TABLE>
- ---------------
* To be filed by Amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Paragraph (a) of Article Tenth of the Articles of Association of the
Registrant (this "Association") provides as follows:
(a) This Association shall indemnify, to the full extent permitted or
authorized by the Ohio General Corporation Law as it may from time to time
be amended, any person made or threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, or investigative, by reason of the fact that he
is or was a director, officer, or employee of this Association, or is or
was serving at the request of this Association as a director, trustee,
officer, or employee of another association, corporation, partnership,
joint venture, trust, or other enterprise; in the case of a person serving
at the request of this Association, such request shall be evidenced by a
resolution of the Board of Directors or a duly-authorized committee thereof
or by a writing executed by an officer of this Association pursuant to a
resolution of the Board of Directors or a duly-authorized committee
thereof. In the case of a merger into this Association of a constituent
association which, if its separate existence had continued, would have been
required to indemnify directors, officers, or employees in specified
situations prior to the merger, any person who served as a director,
officer, or employee of the constituent association, or served at the
request of the constituent association as a director, trustee, officer, or
employee of another association, corporation, partnership, joint venture,
trust, or other enterprise, shall be entitled to indemnification by this
Association (as the surviving association) for acts, omissions, or other
events or occurrences prior to the merger to the same extent he would have
been entitled to indemnification by the constituent association if its
separate existence had continued. The indemnification provided by this
[Article Tenth] shall not be deemed exclusive of any other rights to which
any person seeking indemnification may be entitled by law or under these
Articles or the Bylaws [of this Association], or any agreement, vote of
shareholders or disinterested directors, or otherwise, both as to action in
his official capacity and as to action in another capacity while holding
such office, and shall continue as to a person who has ceased to be a
director, trustee, officer, or employee and shall inure to the benefit of
the heirs, executors, and administrators of such a person.
(b) Notwithstanding division (a) of this [Article Tenth], no director,
officer, or employee of this Association shall be indemnified against
expenses, including attorneys' fees, penalties or other payments
II-1
<PAGE> 123
incurred in an administrative proceeding or action instituted by the
Comptroller of the Currency or other appropriate bank regulatory agency
when such proceeding or action results in a final order assessing civil
money penalties against, or requiring affirmative action of, such director,
officer, or employee in the form of payments to this Association.
Reference is made to Section 1701.13(E) of the General Corporation Law of
the State of Ohio relating to indemnification of directors, officers and
employees of an Ohio corporation. For the full text of Article Tenth of the
Registrant's Articles of Association, reference is hereby made to Exhibit 3(a)
hereto.
The Registrant also maintains insurance on behalf of each director and
certain officers against any loss arising from any claim asserted against him in
any such capacity, subject to certain exclusions.
ITEM 15. RECENT SALE OF UNREGISTERED SECURITIES.
On or about January 12, 1996, Key Bank USA, National Association began
offering for sale its senior bank notes with maturities ranging from 30 days to
one year from their respective dates of issue, its senior bank notes with
maturities ranging from more than one year to 15 years from their respective
dates of issue, and its subordinated bank notes with maturities ranging from
more than five years to 15 years from their respective dates of issue
(collectively, the "Bank Notes"). Key Bank USA, National Association has
authority to issue Bank Notes in an aggregate principal amount not to exceed
$600,000,000. Key Bank USA, National Association anticipates offering and
selling the Bank Notes on a continuous basis. As of August 15, 1996,
approximately $50,000,000 aggregate principal amount of such Bank Notes have
been sold and were outstanding. The principal amount of such Bank Notes have
been sold and were outstanding. The principal agents for such offering by Key
Bank USA, National Association are Salomon Brothers Inc. CS First Boston
Corporation, Goldman, Sachs & Co., Lehman Brothers Inc. (including its affiliate
Lehman Commercial Paper Inc.), Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, J.P. Morgan Securities Inc. and Morgan Stanley &
Co. Incorporated. The Bank Notes are being sold at par to the public. Key Bank
USA, National Association will pay a commission ranging from .050% to .625% to
any agent for Bank Notes placed through such agent. The Bank Notes are being
sold only to "accredited investors" within the meaning of Rule 501 under the
Act. The Bank Notes are being sold without registration in reliance upon the
exemption from registration in Section 3(a)(2) of the Act.
II-2
<PAGE> 124
ITEM 16. FINANCIAL STATEMENTS AND EXHIBITS.
a. Exhibits:
<TABLE>
<S> <C>
1(a) -- Form of Underwriting Agreement for Notes**
1(b) -- Form of Underwriting Agreement for Certificates**
3(a) -- Articles of Association of Key Bank USA, National Association**
3(b) -- Bylaws of Key Bank USA, National Association**
4(a) -- Form of Indenture between the Trust and the Indenture Trustee (including as
exhibits thereto a form of Floating Rate Asset Backed Note)**
4(b) -- Form of Amended and Restated Trust Agreement between Key Bank USA, National
Association and the Eligible Lender Trustee (including as an exhibit thereto a
form of Floating Rate Asset Backed Certificate)**
5 -- Opinion of Forrest F. Stanley, Esq. with respect to legality*
8 -- Opinion of Jones, Day, Reavis & Pogue with respect to federal and Pennsylvania tax
matters*
10(a) -- Form of Sale and Servicing Agreement among the Seller, PHEAA, the Trust, the
Eligible Lender Trustee and the Administrator**
10(b) -- Form of Supplemental Sale and Servicing Agreement among Key Bank USA, National
Association, as Seller and Administrator, PHEAA, the Trust, the Eligible Lender
Trustee, the Indenture Trustee and The Access(SM) Group.**
10(c) -- Form of Administration Agreement among the Administrator, the Trust, and the
Indenture Trustee**
10(d) -- Form of Guarantee Agreement between the Eligible Lender Trustee on behalf of the
Trust and PHEAA**
10(e) -- Form of Guarantee Agreement between the Eligible Lender Trustee on behalf of the
Trust and ASA**
10(f) -- Form of Guarantee Agreement among the Eligible Lender Trustee on behalf of the
Trust, Key Bank USA, National Bank and TERI**
23(a) -- Consent of Forrest F. Stanley, Esq. (included as part of Exhibit 5)*
23(b) -- Consent of Jones, Day, Reavis & Pogue (included as part of Exhibit 8)*
24 -- Powers of Attorney of directors and officers of Key Bank USA, National
Association**
25 -- Statement of Eligibility under the Trust Indenture Act of 1939 of the Indenture
Trustee**
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
b. Financial Statements:
Not applicable.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) To provide to the Underwriter at the closing specified in the
Underwriting Agreements Notes and Certificates in such denominations and
registered in such names as required by the Underwriter to permit prompt
delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described under Item 14, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is therefore unenforceable. In the
II-3
<PAGE> 125
event that a claim for indemnification against such liabilities (other than
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of such Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, such Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(3) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(4) For the purpose of determining any liability under the Securities Act
of 1933 each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(5) For purposes of determining any liability under the Securities Act,
each filing of the Registrant's annual report pursuant to section 13(a) or
section 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(6) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(7) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(8) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-4
<PAGE> 126
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Cleveland, State of Ohio, on the 12th day of September, 1996.
KEY BANK USA, NATIONAL
ASSOCIATION
By: /s/ FORREST F. STANLEY
Forrest F. Stanley, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed on September 12, 1996, by
the following persons in the capacities indicated.
<TABLE>
<CAPTION>
NAME TITLE
- --------------------------------------------- --------------------------------------------
<S> <C>
* Principal Executive Officer and Director
A. Jay Meyerson
* Principal Financial Officer
Ronald J. Nicolas
* Principal Accounting Officer
Joseph A. Pampush
* Director
Lee Irving
* Director
Craig C. Brooks
* Director
Allen J. Gula, Jr.
</TABLE>
<TABLE>
<S> <C>
Jeanne B. Krips * Director
* Director
John H. Mancuso
* Director
Bruce E. Tofte
_ Director
Frederick E. Wolfert
* Director
Stephen E. Wall
*By: /s/ FORREST F. STANLEY
Forrest F. Stanley
Attorney-in-Fact
September 12, 1996
</TABLE>
II-5
<PAGE> 127
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION OF EXHIBIT PAGE NUMBER
- ------ ------------------------------------------------------------------- ------------
<S> <C> <C>
1(a) -- Form of Underwriting Agreement for Notes**
1(b) -- Form of Underwriting Agreement for Certificates**
3(a) -- Articles of Association of Key Bank USA, National Association**
3(b) -- Bylaws of Key Bank USA, National Association**
4(a) -- Form of Indenture between the Trust and the Indenture Trustee
(including as exhibits thereto a form of Floating Rate Asset Backed
Note)**
4(b) -- Form of Amended and Restated Trust Agreement between Key Bank USA,
National Association and the Eligible Lender Trustee (including as
an exhibit thereto a form of Floating Rate Asset Backed
Certificate)**
5 -- Opinion of Forrest F. Stanley, Esq. with respect to legality*
8 -- Opinion of Jones, Day, Reavis & Pogue with respect to federal and
Pennsylvania tax matters*
10(a) -- Form of Sale and Servicing Agreement among the Seller, PHEAA, the
Trust, the Eligible Lender Trustee and the Administrator**
10(b) -- Form of Supplemental Sale and Servicing Agreement among Key Bank
USA, National Association, as Seller and Administrator, PHEAA, the
Trust, the Eligible Lender Trustee, the Indenture Trustee and The
Access(SM) Group.**
10(c) -- Form of Administration Agreement among the Administrator, the Trust
and the Indenture Trustee**
10(d) -- Form of Guarantee Agreement between the Eligible Lender Trustee on
behalf of the Trust and PHEAA**
10(e) -- Form of Guarantee Agreement between the Eligible Lender Trustee on
behalf of the Trust and ASA**
10(f) -- Form of Guarantee Agreement among the Eligible Lender Trustee on
behalf of the Trust, Key Bank USA, National Association and TERI**
23(a) -- Consent of Forrest F. Stanley, Esq. (included as part of Exhibit
5)*
23(b) -- Consent of Jones, Day, Reavis & Pogue (included as part of Exhibit
8)*
24 -- Powers of Attorney of directors and officers of Key Bank USA,
National Association**
25 -- Statement of Eligibility under the Trust Indenture Act of 1939 of
the Indenture Trustee**
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
<PAGE> 128
REGISTRATION NO. 333-4274
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
FILED WITH
AMENDMENT NO. 3
TO
FORM S-3
(FORMERLY FORM S-1)
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
KEYCORP STUDENT LOAN TRUST 1996-A
(Issuer of the Notes and the Certificates)
------------------------
KEY BANK USA, NATIONAL ASSOCIATION
(Originator of the Trust described herein)
(Exact name of Registrant as specified in its charter)
------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 1
Exhibit 5
[KEY CORP LOGO]
KEYCORP
127 Public Square
Cleveland, OH 44114-1306
September 12, 1996
Key Bank USA, National Association
127 Public Square
Cleveland, Ohio 44114
Re: FLOATING RATE ASSET BACKED NOTES AND FLOATING
RATE ASSET BACKED CERTIFICATES OF KEYCORP
STUDENT LOAN TRUST 1996-A
Gentlemen:
I am the General Counsel of Key Bank USA, National Association and have
acted as counsel to the Bank ("Bank") in connection with the KeyCorp Student
Loan Trust 1996-A (the "Trust") and the issuance and sale by the Trust of (i)
certain Floating Rate Asset Backed Notes (the "Notes") pursuant to an Indenture,
to be dated as of September 1, 1996 (the "Indenture"), by and between the Trust,
as Issuer, and Bankers Trust Company, as Indenture Trustee (the "Indenture
Trustee") and (ii) certain Floating Rate Asset Backed Certificates (the
"Certificates") pursuant to a Trust Agreement, to be dated as of September 1,
1996 (the "Trust Agreement"), by and between the Bank, as Depositor, and The
First National Bank of Chicago, as Eligible Lender Trustee (the "Eligible Lender
Trustee").
This Opinion Letter is governed by, and shall be interpreted in
accordance with, the Legal Opinion Accord (the "Accord") of the ABA Section of
Business Law (1991). As a consequence, it is subject to a number of
qualifications, exceptions, definitions, limitations on coverage, and other
limitations, all as more particularly described in the Accord, and this Opinion
Letter should be read in conjunction therewith. The Law covered by the opinions
expressed herein is limited to the Laws of the State of Ohio and Federal Law.
Based upon and subject to the foregoing, I am of the opinion that:
(1) The Notes have been duly authorized and, when duly executed,
authenticated, delivered, and paid for as contemplated by the Registration
Statement referred to below, will be validly issued, will be binding obligations
of the Trust, and will be entitled to the benefits of the Indenture.
<PAGE> 2
Key Bank USA, National Association Page 2
September 12, 1996
(2) The Certificates have been duly authorized and, when duly executed,
delivered, and paid for as contemplated by the Registration Statement referred
to below, will be binding obligations of the Trust, and will be entitled to the
benefits of the Trust Agreement.
I hereby consent to the filing of this Opinion Letter as an Exhibit to
Registration Statement No. 333-4274 on Form S-1 filed by the Bank as originator
of the Trust to effect registration of the Notes and Certificates under the
Securities Act of 1933 and to the references to me under the caption "Legal
Matters" in the Prospectus constituting a part of such Registration Statement.
Very truly yours,
Forrest F. Stanley
General Counsel
63512
<PAGE> 1
Exhibit 8
Key Bank USA, National Association
127 Public Square
Cleveland, Ohio 44114-1306
Re: KeyCorp Student Loan Trust 1996-A
Asset Backed Certificates and
Asset Backed Notes
---------------------------------
Dear Sirs:
We have acted as special tax counsel for KeyCorp Student Loan
Trust 1996-A, a New York business trust (the "Trust"), and Key Bank USA,
National Association, a national banking association ("Key Bank"), in connection
with (i) the issuance and sale of Floating Rate Asset Backed Notes (the
"Notes"), to be issued pursuant to an Indenture (the "Indenture"), between the
Trust and Bankers Trust Company, as Trustee; and (ii) the issuance and sale of
Floating Rate Asset Backed Certificates (the "Certificates"), to be issued
pursuant to an Amended and Restated Trust Agreement (the "Trust Agreement"),
between Key Bank and The First National Bank of Chicago, as Eligible Lender
Trustee. Capitalized terms not otherwise defined herein are used as defined in a
Sale and Servicing Agreement (the "Sale and Servicing Agreement"), among the
Trust, as Issuer, Key Bank as Seller, and Pennsylvania Higher Education
Assistance Agency, as Servicer.
In that capacity, we have examined originals or copies,
certified or otherwise, identified to our satisfaction, of such documents,
corporate records and other instruments as we have deemed necessary or
appropriate for the purposes of this opinion, including (a) the preliminary
prospectus, as included as part of the registration statement on Form S-1
(Registration No. 333-4274), as amended, as filed with the Securities and
Exchange Commission (the "Registration Statement"), (b) the Indenture, (c) the
Sale and Servicing Agreement, and (d) the Trust Agreement.
<PAGE> 2
Key Bank USA, National Association
Page 2
Based upon the foregoing, we hereby confirm that the
statements set forth in the prospectus forming a part of the Registration
Statement under the heading "MATERIAL TAX CONSEQUENCES" accurately reflect our
opinion.
We know that we are referred to under the headings "MATERIAL
TAX CONSEQUENCES" and "LEGAL MATTERS" in the prospectus, and we hereby consent
to the use of our name therein and to the use of this opinion for filing with
the Registration Statement as Exhibit 8 thereto.
Very truly yours,
JONES, DAY, REAVIS & POGUE
