As filed with the Securities and Exchange Commission on July 18, 1997
REGISTRATION STATEMENT NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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KEYCORP STUDENT LOAN TRUST 1997-A
(Issuer of the Notes and the Certificates)
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KEY BANK USA, NATIONAL ASSOCIATION
(Originator of the Trust described herein)
(Exact name of Registrant as specified in its charter)
UNITED STATES 34-1804148
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
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)
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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)
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COPIES TO:
Robert J. Gilker, Esq. Reed D. Auerbach, Esq.
JONES, DAY, REAVIS & POGUE STROOCK & STROOCK & LAVAN LLP
1900 Huntington Center 180 Maiden Lane
Columbus, Ohio 43215 New York, New York 10038
-----------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
From time to time after this Registration Statement becomes
effective.
-----------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
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, 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, 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, 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. |_|
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT TO PROPOSED PROPOSED AMOUNT OF
SECURITIES TO BE BE MAXIMUM OFFERING MAXIMUM AGGREGATE REGISTRATION
REGISTERED REGISTERED(1) PRICE PER UNIT(2) OFFERING PRICE FEE
<S> <C> <C> <C> <C>
Asset Backed Notes......... $ 500,000 100% $ 500,000 $151.02
Asset Backed Certificates $ 500,000 100% $ 500,000 $151.02
Total...................... $1,000,000 100% $1,000,000 $302.04
(1) This Registration Statement also relates to market-making transactions that
will be made by Key Capital Markets, Inc., an affiliate of the Registrant.
(2) Estimated solely for the purpose of calculating the
registration fee.
</TABLE>
THIS REGISTRATION STATEMENT IS ALSO BEING USED TO REGISTER SECURITIES THAT
MAY BE SOLD IN MARKET-MAKING TRANSACTIONS BY AN AFFILIATE OF THE REGISTRANT.
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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
EXPLANATORY NOTE
THIS REGISTRATION STATEMENT CONTAINS (I) A PROSPECTUS RELATING TO A PUBLIC
OFFERING BY KEYCORP STUDENT LOAN TRUST 1997-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 NOTE. 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>
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.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 18, 1997
$------------
KEYCORP STUDENT LOAN TRUST 1997-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 and Master Servicer
The KeyCorp Student Loan Trust 1997-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 and undergraduate 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 ________, ________, ________ and ________, commencing
________, 1997 (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 distributions 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 24.
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 MASTER SERVICER, THE SERVICERS 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>
PRICE TO THE UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS THE
AND COMMISSIONS SELLER(1)
<S> <C> <C> <C>
Per Class A-1 Note.................................. ___% ___% _____%
Per Class A-2 Note.................................. ___% ___% _____%
Per Certificate..................................... ___% ___% _____%
Total............................................... $_________ $________ $________
(1) Before deducting expenses, estimated to be $________.
</TABLE>
The Notes and the Certificates are offered by _______ , _______ and Key
Capital Markets, Inc. (the "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 ________, 1997.
KEY CAPITAL MARKETS, INC.
The date of this Prospectus is ________, 1997.
<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 ________, 1997 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 ________, 1997 (the "Special Determination
Date") Student Loans from a pool of Student Loans currently owned by the Seller
(the "Subsequent Pool") having as of ________, 1997 the characteristics
described herein. 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, if greater than $10,000,000, 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; if such amount is $10,000,000
or less, it will be distributed on the first Distribution Date only to holders
of the Class A-1 Notes. 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 Financed Student Loans will be master serviced by Key Bank USA,
National Association (in such capacity, the "Master Servicer"). The Master
Servicer will initially designate the Pennsylvania Higher Education Assistance
Agency, an agency of the Commonwealth of Pennsylvania ("PHEAA") and UNIPAC
Service Corporation, a Nebraska corporation ("UNIPAC") as servicers of the
Financed Student Loans. The Financed Student Loans will include loans guaranteed
by PHEAA, American Student Assistance Guarantor, a non-profit corporation
("ASA"), the Nebraska Student Loan Program, an agency of the State of Nebraska
("NSLP"), the Florida Department of Education, an agency of the State of Florida
("OSFA"), USA Group, Inc., a non-profit corporation ("USAF"), the Colorado
Student Loan Program, an agency of the State of Colorado ("CSLP") or the Texas
Guaranteed Student Loan Corporation, an agency of the State of Texas ("TGSLC"),
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 ("TERI"), and not reinsured by the Department.
Neither the Notes nor the Certificates will be listed on any national
securities exchange. _________ and ________ intend to, and Key Capital Markets,
Inc. may, make a secondary market in the Notes and the Certificates but none 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.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NOTES AND THE
CERTIFICATES OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING AND THE
PURCHASE OF NOTES AND CERTIFICATES TO COVER SHORT POSITIONS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
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, 13th Floor, 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.
<PAGE>
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 Key Bank USA, National Association in
its capacity as administrator (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 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,
800 Superior Avenue, Cleveland, Ohio 44114, Attention: Trust Administrator,
KeyCorp Student Loan Trust 1997-A. Telephone requests for such copies should be
directed to the Education Resources Administrator at (800) 523-7248.
<PAGE>
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
1997-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").
Master Servicer and Servicers...... Key Bank USA, National
Association will act as master servicer
with respect to the Financed Student
Loans (as defined under "Assets of the
Trust--Financed Student Loans") (in such
capacity, the "Master Servicer"). The
Financed Federal Loans (as defined under
"Assets of the Trust--Financed Student
Loans") will initially be serviced by
the Pennsylvania Higher Education
Assistance Agency, an agency of the
Commonwealth of Pennsylvania ("PHEAA")
and/or UNIPAC Service Corporation, a
Nebraska corporation ("UNIPAC"), and the
Financed Private Loans (as defined under
"Assets of the Trust--Financed Student
Loans") will initially be serviced by
PHEAA. PHEAA and UNIPAC are each
referred to herein as a "Servicer" and
collectively as the "Servicers."
Eligible Lender Trustee............ The First National Bank of
Chicago, as trustee (the "Eligible
Lender Trustee") under the Trust
Agreement dated as of __________, 1997
(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
____________, 1997 (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 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 ________, ________,
________and ________, commencing
________, 1997 (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 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 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
Maturity Date, the Class A-2 Final
Maturity Date and the 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 and undergraduate
school students ("Student Loans") from a
pool of Student Loans currently owned by
the Seller (the "Subsequent Pool")
having as of ________, 1997 (the
"Statistical Cutoff Date") the
characteristics described under "The
Financed Student Loan Pool."
If as of ________, 1997 (the
"Special Determination Date"), the
Subsequent Pool Pre-Funded Amount has
not been reduced to zero, then the
remaining Subsequent Pool Pre-Funded
Amount, if greater than $10,000,000,
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 initial principal balance of the
Certificates; if such amount is
$10,000,000 or less, it will be
distributed on the first Distribution
Date only to holders of the Class A-1
Notes. See "Description of the Transfer
and Servicing Agreements--Additional
Fundings."
G. Mandatory Redemption
of Notes...................... On the Distribution Date on or
immediately following the last day of
the Funding Period, the amount remaining
on deposit in the Pre-Funding Account on
such Distribution Date will be
distributed to the holders of the Class
A-1 Notes until they have been paid in
full, and then to the holders of the
Class A-2 Notes in each case as a
payment of principal.
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
Master 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.
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 ________, 1997
(as amended and supplemented from time
to time, the "Sale and Servicing
Agreement"), among the Seller, the
Master 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."
The Financed Student Loans
include (i) Student Loans ("Financed
Federal Loans") that were or will be
originated by the Seller or an affiliate
of the Seller in connection with The
Access GroupSM Loan Programs, or that
were or will be originated in connection
with the UNIPAC Programs, and that are
guaranteed as to the payment of
principal and interest by PHEAA, the
Massachusetts Higher Education
Assistance Corporation now doing
business as American Student Assistance
Guarantor, a Massachusetts non-profit
corporation ("ASA"), the Nebraska
Student Loan Program, an agency of the
State of Nebraska ("NSLP"), the Florida
Department of Education, an agency of
the State of Florida ("OSFA"), USA
Group, Inc., a non-profit corporation
("USAF"), Colorado Student Loan Program,
an agency of the State of Colorado
("CSLP") or the Texas Guaranteed Student
Loan Corporation, an agency of the State
of Texas ('TGSLC") (collectively,
including 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 were or
will be originated by the Seller or an
affiliate of the Seller in connection
with The Access GroupSM Loan Programs
and 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 may also be made
available 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 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")
will be applicable to the Financed
Student Loans only if and to the extent
that the Master Servicer receives
payment from the Seller in an amount
sufficient to offset such effective
yield reductions. See "The Student Loan
Financing Business--The Access GROUPSM
Loan Programs--Incentive Programs" and
"--The UNIPAC 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
____% of the outstanding principal
balance of the Initial Financed Student
Loans consisted of Financed Federal
Loans (of which approximately ___%,
___%, ___%, ___%, ___%, ___%, and ___%
are guaranteed by PHEAA, ASA, NSLP,
OSFA, USAF, CSLP and TGSLC,
respectively) and approximately ____%
consisted of Financed Private Loans (all
of which are guaranteed by TERI). As of
the Statistical Cutoff Date,
approximately __% of the Initial
Financed Student Loans (by aggregate
principal balance) were originated under
the UNIPAC Programs.
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
----%, ---%, ---%, ---%, ---%, ---%, and
___% are guaranteed by PHEAA, ASA, NSLP,
OSFA, USAF, CSLP and TGSLC,
respectively) and approximately ____%
consisted of Financed Private Loans (all
of which are guaranteed by TERI). As of
the Statistical Cutoff Date,
approximately __% of the Student Loans
in the Subsequent Pool (by aggregate
principal balance) were originated under
the UNIPAC Programs.
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 calendar 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 _________, 1997).
"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 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 will
be 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 each date Student Loans
from the Subsequent Pool are transferred
to the Trust by the aggregate Purchase
Price of such Student Loans transferred
on such date. In the event that the
Subsequent Pool Pre-Funded Amount is
insufficient to pay the Purchase Price
of the Student Loans from the Subsequent
Pool, then the amount of such deficiency
may be withdrawn from the Other
Additional Pre-Funding Subaccount. The
"Purchase Price" of any Financed Student
Loan will be (i) in the case of any
Initial Financed Student Loan, an amount
equal to ________% of the aggregate
principal balance of such Initial
Financed Student Loan as of the Cutoff
Date, (ii) in the case of any Student
Loan in the Subsequent Pool, an amount
equal to _____% of the aggregate
principal balance of such Student Loan
as of the related Subsequent Cutoff
Date, and (iii) in the case of any Other
Student Loan, 100% of the aggregate
principal balance thereof as of its
Subsequent Cutoff Date. For purposes of
the foregoing calculation, the aggregate
principal balance of each Financed
Student Loan includes accrued interest
thereon from the date of origination to,
with respect to each Initial Financed
Student Loan, the Cutoff Date, and to,
with respect to each Additional Student
Loan, the related Subsequent Cutoff
Date, in each case expected to be
capitalized upon repayment. The Other
Additional Pre-Funded Amount may be used
to make Additional Fundings.
To the extent amounts are on
deposit in the Subsequent Pool
Pre-Funding Subaccount and the Other
Additional Funding 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
(including funds for which the Indenture
Trustee or the Eligible Lender Trustee
or any of their respective affiliates or
any of the Seller's affiliates is an
investment manager or advisor) and other
investments acceptable to Moody's
Investors Service, Inc. ("Moody's"),
Standard & Poor's Ratings Services, a
division of The McGraw- Hill Companies
("Standard and Poor's"), and Fitch
Investors Service, L.P. ("Fitch", and
collectively with Moody's and Standard
and Poor's, 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 initial 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 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 any remaining amounts will be paid
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 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 Master
Servicer shall cause each Servicer to
remit all collections received with
respect to the Financed Student Loans
for which such Servicer is acting as
servicer 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
Programs") 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
Servicers 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 Master
Servicer, and on each Distribution Date
to the following (in the priority
indicated): (i) the Servicing Fee and
all overdue Servicing Fees to the Master
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--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
Master 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 initial
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
sum of the Pool Balance plus the Other
Pre-Funded Amount in each case 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 Additional Student Loans
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 sum of the Pool
Balance plus the Other Pre-Funded Amount
in each case 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."
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 date on which all of
the Student Loans in the Subsequent Pool
that can be transferred to the Trust
have been transferred, but in no event
later than the Special Determination
Date (the "Final Subsequent Transfer
Date"), the Administrator will instruct
the Indenture Trustee to withdraw from
the Negative Carry Account and deposit
into the Collection Account an amount
equal to the difference (if positive)
between (i) the product of (a) a
fraction the numerator of which is the
actual number of days from the Cutoff
Date to the Subsequent Cutoff Date
relating to the Student Loans
transferred on the Final Subsequent
Transfer Date, and the denominator of
which is 366, (b) 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") as
measured for the period of time
commencing on the Closing Date and
ending on the Final Subsequent Pool
Transfer Date, and (c) the Subsequent
Pool Pre-Funded Amount, minus (ii) the
investment earnings on the Subsequent
Pool Pre-Funded Amount. After making
such deposit to the Collection Account,
any amounts remaining in the Negative
Carry Account may 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 Account 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 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 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. The Master Servicer
will agree with the Trust to be
responsible for servicing, managing, and
making collections on the Financed
Student Loans. In addition, the Master
Servicer will be responsible for causing
the Servicers to maintain custody of the
Financed Student Loans in accordance
with the Sale and Servicing Agreement.
The obligations of the Seller and the
Master Servicer under the Sale and
Servicing Agreement include the
following:
The Seller will be obligated
to repurchase, and the Master Servicer
will be obligated to purchase, any
Financed Student Loan if the interests
of the Noteholders or the
Certificateholders therein are
materially adversely affected by a
breach of any representation, warranty
or covenant (including the Master
Servicer's covenant to cause all the
Financed Student Loans to be serviced in
accordance with, and to otherwise comply
with, applicable laws, restrictions and
guidelines) made by the Seller or the
Master Servicer, as the case may be,
with respect to such Financed Student
Loan, if the breach has not been cured
following the discovery by or notice to
the Seller or the Master 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 Master 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 Master Servicer's
covenants, as the case may be, with
respect to such Financed Federal Loan.
The Master 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)
____% 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
________, 1997.
Notwithstanding the foregoing,
in the event that the fee payable to the
Master 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
unpaid (the "Excess Servicing Fee"),
will be payable to the Master 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 and
the Master Servicer), The Access
GroupSM, PHEAA, [UNIPAC] 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 (other than any
Noteholders' Interest Index Carryover
and Certificateholders' Interest Index
Carryover). 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 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.
<PAGE>
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. ___________________ and _______________ currently intend to, and Key
Capital Markets, Inc. may, make a market in the Securities, but none 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 Programs"),
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 Master Servicer, the Servicers, 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. Each Initial Financed Student Loan
will be purchased by the Trust for an amount equal to _______% of the principal
balance thereof (including any accrued interest thereon expected to be
capitalized upon repayment) as of the Statistical Cutoff 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 (including any accrued
interest thereon expected to be capitalized upon repayment) 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, the amount of
the Reserve Fund and the amount of the Negative Carry Account. 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, the amount of the Reserve Fund and
the 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.
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. 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 GroupSM 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 six 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 GroupSM 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 GroupSM 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 GroupSM 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 _____, 1997, only approximately $_____ million aggregate principal amount
(_____%) of the Student Loans owned by the Seller under The Access GroupSM 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 GroupSM 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 GroupSM 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.
Prior to this transaction, Student Loans originated pursuant to the
UNIPAC Programs were sold on a servicing released basis. Consequently, the
Seller does not have any repayment history for Student Loans originated under
the UNIPAC Programs.
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 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 GroupSM 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, the Guarantors, and in the case
of the Financed Private Loans, the Seller. 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 Master
Servicer has agreed pursuant to the Sale and Servicing Agreement to ensure that
servicing and collection procedures are performed on behalf of the Trust in
accordance with the Higher Education Act and the rules and regulations
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 Master Servicer is
obligated to purchase, any Financed Federal Loan, if a breach of the
representations, warranties or covenants of the Seller or the Master 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 Master 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 Master 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
"--Master Servicer Covenants". There can be no assurance, however, that the
Seller or the Master Servicer will have the financial resources to do so. The
failure of the Seller to so repurchase or the Master 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 GroupSM
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 Master 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 "--Master Servicer Covenants". There can be no assurance,
however, that the Seller or the Master 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. Such changes could result in a reduction of the Trust's ability to
pay principal and interest on the Notes, including as a result of a reduction in
the ability of the Federal Guarantors to make Guarantee Payments to the Eligible
Lender Trustee with respect to the Financed Student Loans. 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 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 Programs" 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 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"). 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
Servicers 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 Servicers 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 Servicers to satisfy their
obligations to service the Financed Student Loans. See "Description of the
Transfer and Servicing Agreements--Master 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.
Proposed federal budget legislation being considered by Congress could
modify many of the provisions of the Higher Education Act and could result in
reductions in reserves of the Federal Guarantors. Until final legislation is
adopted, the impact on the Financed Student Loans, if any, is impossible to
determine. During the 105th session of Congress, the reauthorization of the
Higher Education Act is expected to be considered. The potential impacts on the
Financed Student Loans resulting from the reauthorization process, if any,
cannot be determined at this time.
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[, UNIPAC] and The Access GroupSM will be given the opportunity, upon 30
days' prior notice, to bid to purchase the Financed Student Loans and, if any of
them 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[, UNIPAC] or The Access GroupSM 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[, UNIPAC] or
the Master Servicer), in which the purchaser elects to deconvert the Financed
Student Loans and not retain PHEAA [or UNIPAC as applicable] as a Servicer, (ii)
any termination by the Trust of PHEAA as a Servicer of the Financed Student
Loans, except for any termination for cause or as a result of any Master
Servicer Default which resulted in the termination of PHEAA as a Servicer, the
Trust shall pay to PHEAA 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 AccessSM Loan ("MAL Loan"), Dental AccessSM Loan ("DAL Loan"), Business
AccessSM Loan ("BAL Loan"), Graduate AccessSM Loan ("GAL Loan"), Bar Examination
Loan ("BEL Loan") and Residency Loan ("REL Loan"), (each as described under "The
Student Loan Financing Business--Federal Loans Under the Programs" and
"--Private Loans Under the Programs"); and (b) $____ for each loan of any other
status or loan type [or (iii) any termination by the Trust of UNIPAC as a
Servicer of the Financed Student Loans, except for any termination for cause or
as a result of any Master Servicer Default which resulted in the termination of
UNIPAC as a Servicer, the Trust shall pay to UNIPAC the following deconversion
fee, per loan, based on the status of the loan at the time of deconversion: (a)
$ ________ 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 Federal Family Education Loan Program
("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 Master
Servicer or either of the Servicers]) 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 Master
Servicer or either of the Servicers] will not be fined or held liable by the
Department for liabilities arising out of their FFELP activities for the Trust
or other client lenders, or that their eligibility will not be limited,
suspended, or terminated in the future. If any of [the Master Servicer, PHEAA or
UNIPAC] were so fined or held liable, or their eligibility were limited,
suspended, or terminated, their ability to properly service the Financed Federal
Loans could be adversely affected. [However, in the event of a termination of
eligibility, the Sale and Servicing Agreement requires the Master Servicer to
remove such Servicer and appoint a substitute Servicer which satisfies the
requirements under the Sale and Servicing Agreement.]
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 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 SERVICERS. Pursuant to the Sale and Servicing
Agreement, the applicable 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 Financed 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 "--Master Servicer Covenants."
INSOLVENCY RISK OF MASTER SERVICER OR ADMINISTRATOR. In the event of a
Master Servicer Default or an Administrator Default resulting solely from
certain events of insolvency or bankruptcy that may occur with respect to the
Master Servicer, 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 Master 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
Master 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
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 equaling an amount that is less than the
amount owed by the Department on the loans in the Trust for that quarter.
The Trust Agreement for the Trust and the trust agreement for other
trusts established by the 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, if greater than $10,000,000, 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 initial principal balance of the
Certificates; if such amount is $10,000,000 or less, it will be distributed on
the first Distribution Date only to holders of the Class A-1 Notes. 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, such amounts will be distributed first to the holders of the
Class A-1 Notes until the Class A-1 Notes are paid in full, and the remainder
will be paid to the holders of the Class A-2 Notes, in each case 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 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 Master 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 "-- Master 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 Programs") 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 Funding's"
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 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 and any
remaining Subsequent Pool Pre-Funding Amount after the Final Subsequent Pool
Transfer Date if it is equal to or less than $10,000,000. 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 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 may also be made available by 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 Master Servicer receives payment from the Seller in an amount
sufficient to offset such effective yield reductions. See "The Student Loan
Financing Business--The Access GroupSM Loan Programs--Incentive Programs" and
"-- The UNIPAC Programs--Incentive Programs."
NOTEHOLDERS' RIGHT TO CONTROL UPON CERTAIN DEFAULTS. In the event a
Master 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 Master Servicer Default and Administrator
Default", may remove the Master 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 Master Servicer or the Administrator, as the case may be, if a Master
Servicer Default or an Administrator Default occurs. In addition, the
Noteholders have the ability, with certain specified exceptions, to waive
defaults by the Master 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 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."
<PAGE>
FORMATION OF THE TRUST
THE TRUST
KeyCorp Student Loan Trust 1997-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 Master Servicer, the Servicers, 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 _____________, 1997, (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 applicable 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 amounts
on deposit in the Escrow Account, to purchase from the Seller, for an amount
equal to the aggregate principal balance thereof plus accrued interest (to the
extent capitalized or to be capitalized), Serial Loans (including additional
amounts necessary to purchase Consolidation Loans) 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, if
greater than $10,000,000, 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; if such amount is $10,000,000 or less, it will be
distributed on the first Distribution Date only to holders of the Class A-1
Notes. 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, any amounts remaining in the Pre-Funding Account will be
distributed first to the holders of the Class A-1 Notes until they have been
paid in full, and then to the holders of the Class A-2 Notes, in each case 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:
Floating Rate Class A-1 Asset Backed Notes $----------
Floating Rate Class A-2 Asset Backed Notes ----------
Floating Rate Asset Backed Certificates.......... __________
Total.......................................... $__________
===========
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 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.
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 MASTER SERVICER
GENERAL
Key Bank USA, National Association (the "Bank"), will act as Seller
and Master Servicer 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 GroupSM 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 GroupSM Loan Programs since 1993 and has
been selected by The Access GroupSM to be the exclusive lender of student loans
under its Program through the 1997-1998 school years. See "The Student Loan
Financing Business-- The Access GroupSM Loan Programs" for a brief description
of the Seller's role under The Access GroupSM Loan Programs. [The Seller has
been a lender of student loans under the UNIPAC Programs since ________. See
"The Student Loan Financing Business--The UNIPAC Programs" for a brief
description of the Seller's role under the UNIPAC Programs."]
As of _____, 1997, the Bank had total assets of approximately $____
billion, total liabilities of approximately $ billion and approximately $
billion in stockholder's equity. As of such date, the Seller had an aggregate
principal amount of student loans outstanding of approximately $ billion, of
which approximately $ billion aggregate principal amount consists of Student
Loans originated under The Access GroupSM 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 $ per quarter (the "Administration Fee") payable by the Trust on
each Distribution Date. See "Description of the Transfer and Servicing
Agreements--Administrator."
SERVICES AND FEES OF MASTER SERVICER
Pursuant to the Sale and Servicing Agreement and except as otherwise
expressly assumed by the Administrator, Key Bank USA, National Association has
agreed as the Master Servicer to appoint the Servicers and 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 Master
Servicer is required to perform all services and duties customary to the
servicing of Student Loans and to do so with reasonable care and otherwise in
compliance with all applicable standards and procedures. [In addition, the
Master Servicer is required to [cause each of the Servicers to] maintain its
eligibility as a third-party servicer under the Higher Education Act.] See
"Description of the Transfer and Servicing Agreements--Servicing Procedures."
In consideration for performing its obligations under the Sale and
Servicing Agreement, the Master 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) % 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 SERVICERS
PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY
PHEAA is a body corporate and politic constituting a public corporation
and government instrumentality created pursuant to an act of the Pennsylvania
Legislature. PHEAA has approximately ____ employees. PHEAA's headquarters is
located in Harrisburg, Pennsylvania with ___ regional offices located throughout
Pennsylvania and additional offices located in California, Delaware and West
Virginia.
Under its enabling legislation, PHEAA is authorized to issue bonds or
notes, with the approval of the Governor of the Commonwealth of Pennsylvania for
the purpose of purchasing, making, or guaranteeing loans. PHEAA's enabling
legislation also authorizes PHEAA to undertake the origination of loans and the
servicing of loans made by PHEAA and others.
As of ______, 1997, PHEAA has outstanding debt and/or credit facilities
(under which the entire aggregate amount of funds available had not been drawn)
in the amount (including amounts drawn or available under such credit
facilities) of approximately $__ billion. As of ______, 1997, PHEAA owned
approximately $__ billion outstanding principal amount of student loans financed
with the proceeds of its long-term debt, and had funds available for acquisition
of student loans in the amount of approximately $___ million.
PHEAA has been guaranteeing student loans since 1964. PHEAA has
guaranteed a total of approximately $___ billion principal amount of Stafford
Loans and approximately $__ billion principal amount of PLUS Loans and SLS Loans
under the Higher Education Act. In addition to guaranteeing loans under the
Higher Education Act, PHEAA also operates certain guarantee programs for which
its receives no federal reinsurance. PHEAA has outstanding guarantee obligations
of such loans in the amount of approximately $__ million as of ______, 1997.
PHEAA's two principal servicing products are its full servicing
operation (in which it performs all student loan servicing functions on behalf
of its customers) and its remote servicing operation (in which it provides only
data processing services to its customers that have their own servicing
operations). As of ______, 1997, PHEAA was servicing under its full service
program approximately ___ million student loan accounts representing
approximately $___ billion outstanding principal amount for more than ___
customers and under its remote servicing operation, approximately student loans
representing approximately $ billion outstanding principal amount for ______
customers.
[Pursuant to a sub-servicing agreement, PHEAA has agreed to service and
perform all other related tasks with respect to certain of the Financed Student
Loans, including all of the Financed Private Loans. PHEAA is required to perform
all services and duties customary to the servicing of such Financed Student
Loans in compliance with all applicable standards and procedures. See
"Description of the Transfer and Servicing Agreements--Servicing Procedures."]
The above information relating to PHEAA has been obtained from PHEAA
and the Seller has not conducted any independent verification of such
information. PHEAA has agreed that it will provide a copy of its most recent
audited financial statements to Securityholders upon receipt of a written
request directed to Mr. Tim Guenther, Chief Financial Officer, Financial
Management, 1200 North Seventh Street, Harrisburg, Pennsylvania 17102.
[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 GroupSM 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 GroupSM 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 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 after 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.]
UNIPAC SERVICE CORPORATION
UNIPAC began its education loan servicing operations on January 1,
1978, and provides education loan servicing, time sharing, administration and
other services to lenders, secondary market purchasers and guarantee agencies
throughout the United States. UNIPAC is a privately held corporation, owned
primarily by Union Bank and Trust Company, Lincoln, Nebraska, with a minority
ownership held by Packers Service Group, Inc., Lincoln, Nebraska. UNIPAC offers
student loan servicing to lending institutions and secondary markets. UNIPAC's
corporate headquarters is located in Aurora, Colorado, where UNIPAC employs
approximately ___ people. In December 1989, UNIPAC opened a second servicing
center in Lincoln, Nebraska, which currently employs approximately ____ people.
As of _______, 1997, UNIPAC's servicing volume in its Colorado office was
approximately $___ billion for its full-service and secondary market clients,
and approximately $___ billion for its remote lender clients and, in its
Nebraska office, was approximately $___ billion for its full-service and
secondary market clients.
UNIPAC'S due diligence schedule is conducted through automated letter
generation. Telephone calls are made by an auto-dialer system. All functions are
monitored by an internal quality control system to ensure their performance.
Compliance training is provided on both centralized and unit level basis. In
addition, UNIPAC has distinct compliance and internal auditing departments whose
functions are to advise and coordinate compliance issues. In order to provide
these services, UNIPAC has developed and maintains a computer mainframe and
software system.
[Pursuant to a sub-servicing agreement, UNIPAC has agreed to service
and perform all other related tasks with respect to certain of the Financed
Student Loans. UNIPAC is required to perform all services duties customary to
the servicing of such Financed Student Loans in compliance with all applicable
standards and procedures. See "Description of the Transfer and Servicing
Agreements-- Servicing Procedures."]
The above information relating to UNIPAC has been obtained from UNIPAC
and the Seller has not conducted any independent verification of such
information. UNIPAC 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 _____________________.
FEES OF THE SERVICERS
[The Servicers will not be entitled to receive compensation for their
servicing activities from the Trust. However, each of the Servicers has entered
into an arrangement with the Master Servicer whereby each Servicer will be
compensated by the Master Servicer with a percentage of the Servicing Fee.]
<PAGE>
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 and/or
its affiliates under various loan programs. 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, by ASA pursuant to a
guarantee agreement to be entered into between ASA and the Eligible Lender
Trustee, by NSLP pursuant to a guarantee agreement to be entered into between
NSLP and the Eligible Lender Trustee, by OSFA pursuant to a guarantee agreement
to be entered into between OSFA and the Eligible Lender Trustee, by USAF
pursuant to a guarantee agreement to be entered into between USAF and the
Eligible Lender Trustee, by CSLP pursuant to a guarantee agreement to be entered
into between CSLP and the Eligible Lender Trustee, or by TGSLC pursuant to a
guarantee agreement to be entered into between TGSLC and the Eligible Lender
Trustee (such agreements, each as amended or supplemented from time to time, the
"Federal Guarantee Agreements"). Each of PHEAA, ASA, NSLP, OSFA, USAF, CSLP and
TGSLC 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. In addition, the
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 Programs" 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 Access
Programs" and "The Financed Student Loan Pool--Insurance of Student Loans;
Guarantors of Student Loans." PHEAA, ASA, NSLP, OSFA, USAF, CSLP, TGSLC 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 GROUPSM LOAN PROGRAMS
Loans originated under The Access GroupSM Loan Programs (the "Access
Program") are 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 GroupSM Loan Programs, the
approved or accredited schools and the acceptable degree programs:
<TABLE>
<CAPTION>
THE ACCESS GROUPSM APPROVED OR ACCREDITED SCHOOLS ACCEPTABLE
LOAN PROGRAMS DEGREE
PROGRAMS
<S> <C> <C>
Law Access American Bar Association-approved
(LAL Loan, BEL Loan) law schools that are members of
Law School Admission Council,
Inc., a non-profit organization
("LSAC")
Medical Access Liaison Committee on Medical
(MAL Loan) Education or American Osteopathic
Association-accredited graduate
medical schools
Dental Access American Dental
(DAL Loan) Association-accredited dental
schools
Business Access American Assembly of Collegiate
(BAL Loan) 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 Association
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
(GAL Loan) 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.
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 GroupSM, or its predecessor, a Delaware
non-profit corporation controlled by members of LSAC. The Access GroupSM Loan
Programs were expanded for the 1994-1995 school year to include Business
AccessSM Loans, and then for the 1995-1996 school year to include the rest of
The Access GroupSM Loan Programs. The Seller (or its predecessors) has been the
exclusive lender originating loans under the Access Program since 1990 and has,
as of ______, 1997, originated loans under the Access Program in an aggregate
principal amount of approximately $ billion. The Access Program consists of
Student Loans which are guaranteed by PHEAA and 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
AccessSM Loans ("MAL Loans"), Dental AccessSM Loans ("DAL Loans"), Business
AccessSM Loans ("BAL Loans"), Graduate AccessSM 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 Access 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 Access
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").
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 Access Program, a law student could only receive a BEL Loan if
such student had existing Student Loans outstanding under the Access Program.
Commencing with the 1996-1997 Access Program, the student is no longer required
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
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]."
Certain of the Financed Federal Loans were made by the Seller pursuant
to agreements under the Access Program under which The Access GroupSM (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 Access 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 GroupSM. On behalf of the Seller, The Access GroupSM 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 Access 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 Access 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 Access 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 GroupSM 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 GroupSM 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
GroupSM forwards the completed loan application and executed promissory note to
PHEAA, which serves as custodian for such materials.
Any borrower inquiries concerning Consolidation Loans received by The
Access GroupSM or the Seller are forwarded to PHEAA, 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, PHEAA is required under the Access
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 Access Program,
PHEAA 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, PHEAA 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 PHEAA. 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 retire each of such loans. For each Consolidation Loan that is
made by the Seller, PHEAA retains the completed loan application and executed
promissory note as custodian.
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 took 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 Access Program may also be made available by PHEAA
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 Trust receives payment from the Seller
in an amount sufficient to offset such effective yield reductions.
THE UNIPAC PROGRAMS
The UNIPAC Programs are made up of three distinct loan programs
originated by the Seller and/or its affiliates and serviced by UNIPAC. The
programs include Graduate Title IV Medical and Dental loans, Undergraduate Title
IV loans, and Consolidation loans. The Graduate Title IV Medical and Dental
loans are made to students enrolled in approved or fully accredited medical or
dental schools. The Undergraduate Title IV loans are made to students attending
various undergraduate institutions across the country, with concentrations in
the following states: Florida, Wyoming, and Colorado. The Consolidation loans
are made to students who wish to consolidate their undergraduate debt into one
loan. The proceeds of these loans are used by students to finance a portion of
the costs of attending graduate (medical or dental) and undergraduate
institutions.
ELIGIBILITY. To be eligible to obtain a loan under the UNIPAC Programs,
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 UNIPAC Programs, and (v) not be in default on any education loan or
owe a refund on an educational grant (each such student, an "Eligible Student").
ORIGINATION PROCESS. The Origination Process varies for each of the
UNIPAC Programs. The Graduate Title IV Medical and Dental loans are originated
by Knight College Resource Group in Boston, a subsidiary of the Seller. Loans
are serviced on UNIPAC's remote servicing system until they are fully dispersed,
at which time they are transferred to UNIPAC for full servicing. These loans are
guaranteed by NSLP.
The Undergraduate Title IV loans are originated, then guaranteed by
OSFA, CSLP, or USAF, as applicable. In many cases, the guarantor is designated
by the state in which the borrower's school is located.
The Consolidation loans are guaranteed by TGSLC, USAF, and NSLP.
INCENTIVE PROGRAMS. The Seller has offered incentive programs to
borrowers serviced by UNIPAC. These incentives were put into place for new
borrowers after July 1, 1997, and most likely will not affect any of the
borrowers in this transaction. The borrower incentive program allows for a
borrower to receive a 2% reduction in the effective interest rate, after making
36 consecutive scheduled payments in a timely fashion. In addition, the borrower
can receive a 0.25% interest rate reduction for electing to make payments
electronically through automatic monthly deductions from a bank account.
SERVICING AND COLLECTIONS PROCESS.
The Higher Education Act, the Access 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 Master Servicer 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 loan file for the borrower. The Master 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 Master Servicer
is required to notify the applicable Guarantor of the existence of such
delinquency. These requests notify the Guarantors of seriously delinquent
accounts and allow the Guarantors to make additional attempts to collect on such
loans prior to the filing of claims. If a loan is delinquent for 180 days (in
the case of Federal Loans) or 120 days (in the case of Private Loans), the
Master 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 Master 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 Master Servicer to purchase the applicable
Financed Student Loan. See "Description of the Transfer and Servicing
Agreements-- Master Servicer Covenants." For a discussion of how the Master
Servicer intends to perform its obligations under the Sale and Servicing
Agreement, see "Description of the Transfer and Servicing Agreements--Servicing
Procedures."
FEDERAL LOANS UNDER THE PROGRAMS
GENERAL. The following descriptions of 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.
Proposed federal budget legislation being considered by Congress could
modify many of the provisions of the Higher Education Act and could result in
reductions in reserves of the Federal Guarantors. Until final legislation is
adopted, the impact on the Financed Student Loans, if any, is impossible to
determine. During the 105th session of Congress, the reauthorization of the
Higher Education Act is expected to be considered. The potential impacts on the
Financed Student Loans resulting from the reauthorization process, if any,
cannot be determined at this time. See "Risk Factors-- Changes in Legislation
May Adversely Affect Financed Student Loans and Guarantors."
STAFFORD LOANS. "Stafford Loans" are loans made by eligible lenders in
accordance with the Higher Education Act to eligible students, based on
financial need, to finance a portion of the costs of attending an eligible
institution of higher education or a vocational school. The Higher Education Act
limits the amount of Stafford Loans that may be made to a student in any given
academic year and 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, ASA,
NSLP, OSFA, USAF, CSLP or TGSLC 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 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 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
$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 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 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
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 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 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 ACCESS PROGRAM
GENERAL. In addition to the Federal Loans, the Access 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 AccessSM Loans ("MAL Loans"), Dental AccessSM Loans
("DAL Loans"), Business AccessSM Loans ("BAL Loans"), Graduate AccessSM 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 Access 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 Access
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 GroupSM Loan Programs." Under the 1990-1991 Access 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
Access 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 Access 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 1997-1998 Access Program:
<PAGE>
<TABLE>
<CAPTION>
Annual Maximum Aggregate Maximum(2)
<S> <C> <C>
Law Access Loan.......................... Up to the cost of $120,000
attendance
Medical AccessSM Loan.................... Up to the cost of 165,000
attendance
Dental AccessSM Loan..................... Up to the cost of 135,000
attendance
Business AccessSM Loan................... Up to the cost of 120,000
attendance (1)
Graduate AccessSM Loan................... Up to the cost of 120,000
attendance
Bar Examination Loan..................... $5,000
Residency Loan........................... 8,000
- --------------
(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.
</TABLE>
Prior to 1995, only LAL and BEL Loans were originated. The following table
summarizes the annual and aggregate loan limits by Access 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
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 Access 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:
Interest Margin
over 91-day
Treasury Bills
----------------
LOAN (1) (2)
---- ------- -----
Law Access Loan 3.25% 3.40%
Medical AccessSM Loan 2.50 2.75
Dental AccessSM Loan 2.50 3.00
Business AccessSM Loan 3.25 3.40
Graduate AccessSM Loan 3.25 3.40
Bar Examination Loan 3.25 3.40
Residency Loan 2.50 2.75
- --------------
(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.
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 Access 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 Access 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 Access Program presently requires a 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 Access 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 Access Program, a fee of 4% of the original
principal amount of each LAL Loan and 3% of each GAL Loan and BEL Loan is
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 Access 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 Access
Program."
PRIVATE CONSOLIDATION LOANS. The Seller has entered into a written
agreement with The Access GroupSM, PHEAA and TERI to establish a private
consolidation loan program as part of the Access Program, to facilitate the
ability of eligible borrowers of LAL Loans and BEL Loans made under the
1990-1991 Access 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 GroupSM 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 Access 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 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."
<PAGE>
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 Access Program
or the UNIPAC Programs (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, with respect to the Initial
Student Loans and Student Loans in the Subsequent Pool, has graduated or
otherwise left school or is expected to graduate from or otherwise leave
graduate school (and in the case of the UNIPAC Loans, undergraduate school) by ,
(ii) contains terms in accordance with those required by the Access Program or
the UNIPAC Programs, as applicable, the Guarantee Agreements and other
applicable requirements and (iii) with respect to the Initial Financed Student
Loans and Student Loans in the Subsequent Pool, 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 Master 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 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 and Student Loans in the Subsequent Pool 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
and Student Loans in the Subsequent Pool 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.
<PAGE>
COMPOSITION AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
STUDENT
INITIAL LOANS IN THE
FINANCED SUBSEQUENT
STUDENT POOL
LOANS
<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)...................................................... ----% ----%
- --------------
(1) Includes in each case net principal balance due from
borrowers, plus accrued interest thereon to be capitalized upon
commencement of repayment, 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.
(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 and Student Loans 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."
(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 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 percentage will remain applicable
to the Initial Financed Student Loans and the Student Loans in the
Subsequent Pool at any time after the Statistical Cutoff Date. See
"The Student Loan Financing Business."
</TABLE>
<PAGE>
DISTRIBUTION BY LOAN TYPE AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL FINANCED STUDENT LOANS STUDENT LOANS IN THE SUBSEQUENT POOL
Perecent of
Percent of Subsequent
Aggregate Pool by Aggregate Pool by
Outstanding Outstanding Outstanding Outstanding
Number of Principal Principal Number Principal Principal
Loan Type Loans Balance Balance of Loans Balance 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 AccessSM
Loans......................
Dental AccessSM
Loans......................
Business
AccessSM Loans.............
Graduate
AccessSM Loans.............
Residency Loans............
Bar Examination
Loans......................
Private Consolidation
Loans...................... ------- ------ ------ ------- ------- ----------
Subtotal (Private Loans)... ------- ------ ------ ------- ------- ----------
Total................... ====== $====== 100.00% ====== $====== 100.00%
====== =======
- --------------
(1) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $ as of the Statistical Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $ as of the Statistical Cutoff Date.
</TABLE>
<PAGE>
DISTRIBUTION BY INTEREST RATES AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL FINANCED STUDENT LOANS STUDENT LOANS IN THE SUBSEQUENT POOL
Perecent of
Percent of Subsequent
Aggregate Pool by Aggregate Pool by
Outstanding Outstanding Outstanding Outstanding
Number of Principal Principal Number Principal Principal
Range of Interest Rates(1) Loans Balance(2) Balance of 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................... ======== $============= 100% ===== $====== 100%
==== =======
- --------------
(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 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 to be capitalized upon commencement of repayment,
estimated to be $ as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $ as of the Statistical Cutoff Date.
</TABLE>
<PAGE>
DISTRIBUTION BY OUTSTANDING PRINCIPAL BALANCE AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL FINANCED STUDENT LOANS STUDENT LOANS IN THE SUBSEQUENT POOL
Perecent of
Percent of Subsequent
Aggregate Pool by Aggregate Pool by
Outstanding Outstanding Outstanding Outstanding
Number of Principal Principal Number Principal Principal
Range of Outstanding Loans(1) Balance(2) Balance of Loans Balance(3) Balance
Principal Balances(1)
<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................... ====== $======= 100.00% ===== $======= 100.00%
====== =======
- --------------
(1) 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.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $ as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $ as of the Statistical Cutoff Date.
</TABLE>
<PAGE>
DISTRIBUTION BY REMAINING TERM TO SCHEDULED MATURITY AS OF THE
STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL FINANCED STUDENT LOANS STUDENT LOANS IN THE SUBSEQUENT POOL
Perecent of
Percent of Subsequent
Aggregate Pool by Aggregate Pool by
Outstanding Outstanding Outstanding Outstanding
Number of Months Number of Principal Principal Number Principal Principal
Remaining to Loans Balance(2) Balance of Loans Balance(3) Balance
Scheduled Maturity(1)
<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................... ====== $======= 100.00% ===== $======= 100.00%
====== =======
- --------------
(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 to be capitalized upon commencement of repayment,
estimated to be $ as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $ as of the Statistical Cutoff Date.
</TABLE>
<PAGE>
DISTRIBUTION BY BORROWER PAYMENT STATUS AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL FINANCED STUDENT LOANS STUDENT LOANS IN THE SUBSEQUENT POOL
Perecent of
Percent of Subsequent
Aggregate Pool by Aggregate Pool by
Outstanding Outstanding Outstanding Outstanding
Number of Principal Principal Number Principal Principal
Borrower Payment Loans Balance(2) Balance of Loans Balance(3) Balance
Status(1)
<S> <C> <C> <C> <C> <C> <C>
In-School.................. $ % $ %
Grace......................
Deferral...................
Forbearance................
Repayment.................. ------ -------- ------ ----- -------- -------
Total................... ====== $======= 100.00% ===== $======= 100.00%
====== =======
- --------------
(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 or undergraduate 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 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 to be capitalized upon commencement of repayment,
estimated to be $ as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $ as of the Statistical Cutoff Date.
</TABLE>
<PAGE>
GEOGRAPHIC DISTRIBUTION AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL FINANCED STUDENT LOANS STUDENT LOANS IN THE SUBSEQUENT POOL
Perecent of
Percent of Subsequent
Aggregate Pool by Aggregate Pool by
Outstanding Outstanding Outstanding Outstanding
Number of Principal Principal Number Principal Principal
Loan Type Loans Balance(2) Balance of Loans(3) 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...............
Puerto Rico................
Rhode Island...............
South Carolina.............
South Dakota...............
Tennessee..................
Texas......................
Utah.......................
Vermont....................
Virgin Islanda.............
Virginia...................
Washington.................
Washington DC..............
West Virginia..............
Wisconsin..................
Wyoming....................
Other...................... ------ ------- ------ ------ ------- -------
Total................... ====== $====== 100.00% ====== $====== 100.00%
====== =======
- --------------
(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 applicable Servicer's records as of the Statistical
Cutoff Date.
(2) Includes net principal balance due from Obligors, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to
be $ as of the Statistical Cutoff Date.
(3) Includes net principal due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to
be $ as of the Statistical Cutoff Date.
</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 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 Programs--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 Master 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 "-- Master 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.
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, ASA, NSLP, OSFA, USAF, CSLP or TGSLC 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%
- --------------
(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 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. Such changes could result in a reduction of the Trust's ability to pay
principal and interest on the Notes, including as a result of a reduction in the
ability of the Federal Guarantors to make Guarantee Payments to the Eligible
Lender Trustee with respect to the Financed Student Loans. 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, ASA, NSLP, OSFA, USAF, CSLP and TGSLC by which
each of PHEAA, ASA, NSLP, OSFA, USAF, CSLP and TGSLC 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 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 Servicers." 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 people as of . [NSLP is....OSFA is....USAF
is....CSLP is....TGSLC is.....] As of the Statistical Cutoff Date, approximately
%, %, %, %, %, ___% and % of the aggregate outstanding principal balance of the
Initial Financed Student Loans which are Financed Federal Loans and %, %, %, %,
%, ___% and % of the Student Loans in the Subsequent Pool which are Financed
Federal Loans were guaranteed by PHEAA, ASA, NSLP, OSFA, USAF, CSLP and TGSLC,
respectively.
Pursuant to its respective Guarantee Agreement, each of the Federal
Guarantors 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, ASA, NSLP, OSFA, USAF, CSLP and TGSLC pursuant
to their respective Guarantee Agreements are obligations solely of PHEAA, ASA,
NSLP, OSFA, USAF, CSLP and TGSLC, respectively, and are not supported by the
full faith and credit of any state government, [including Pennsylvania and West
Virginia; Massachusetts and the District of Columbia; Nebraska; Florida;
Colorado; and Texas, respectively.]
Each of the Federal Guarantor'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
Access Program, the Higher Education Act and other applicable requirements, (ii)
the timely payment to the applicable Federal Guarantor of the guarantee fee
payable with respect to such Financed Federal Loan, (iii) the timely submission
to the applicable Federal Guarantor 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 the applicable Federal Guarantor upon and in connection
with making a claim to receive Guarantee Payments thereon. Failure to comply
with any of the applicable conditions, including the foregoing, may result in
the refusal of the applicable Federal Guarantor to honor its 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 Master 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 Master 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 "-- Master Servicer Covenants."
Set forth below is certain current and historical information with
respect to each of PHEAA, ASA, NSLP, OSFA, USAF, CSLP and TGSLC 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, ASA has ranked as one of
the seven largest, NSLP has ranked as...., OSFA has ranked as...., USAF has
ranked as...., CSLP has ranked as..... and TGSLC has ranked as ...... 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:*
<PAGE>
<TABLE>
<CAPTION>
Stafford, SLS and PLUS Loans Guaranteed
Federal
Fiscal All
YEAR PHEAA ASA NSLP OSFA USAF CSLP TGSLC GUARANTORS
---- ----- --- ---- ---- ---- ---- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1992 $ $ $ $ $ $ $ $
1993 $ $ $ $ $ $ $ $
1994 $ $ $ $ $ $ $ $
1995 $ $ $ $ $ $ $ $
1996 $ $ $ $ $ $ $ $
- ----------
* 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 1992 and 1993.
Information for PHEAA, ASA, NSLP, OSFA, USAF, CSLP and
TGSLC was obtained from PHEAA, ASA, NSLP, OSFA, USAF, CSLP
and TGSLC, respectively. The information for "All
Guarantors" for 1993 was obtained from the Department of
Education's Loan Volume Update.
** [Not available.]
</TABLE>
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 each Federal Guarantor'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:*
<PAGE>
<TABLE>
<CAPTION>
PHEAA ASA NSLP OSFA USAF CSLP TGSLC
National
Fed. Cum. Cum. Cum. Cum. Cum. Cum. Cum. Average
Fiscal Cash Resv. Cash Resv. Cash Resv. Cash Resv. Cash Resv. Cash Resv. Cash Resv. Reserve
Year Resv. Ratio Resv. Ratio Resv. Ratio Resv. Ratio Resv. Ratio Resv. Ratio Resv. Ratio Ratio
(dollars
in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992 $ % $ % $ % $ % $ % $ % %
1993 --
1994 --
1995 --
1996 --
- -----------
* The information set forth in the table above with respect
to PHEAA, ASA, NSLP, OSFA, USAF, CSLP and TGSLC has been
obtained from PHEAA, ASA, NSLP, OSFA, USAF, CSLP and
TGSLC, respectively, and the information with respect to
the national average has been obtained from the Fiscal
Years 1992 and 1993 DOE Data Books. The above information
with respect to PHEAA for fiscal years 1992 and 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.]
</TABLE>
<PAGE>
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
Federal Guarantor and the national average recovery rates for all guarantors for
the last five federal fiscal years:*
<TABLE>
<CAPTION>
Recovery Rate
Federal
Fiscal National
YEAR PHEAA ASA NSLP OSFA USAF CSLP TGSLC AVERAGE
---- ----- --- ---- ---- ---- ---- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1992 % % % % % % % %
1993 % % % % % % % %
1994 % % % % % % % %
1995 % % % % % % % %
1996 % % % % % % % %
- -------------
* 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 1992. Information for PHEAA, ASA, NSLP, OSFA, USAF, CSLP and TGSLC
as applicable, was provided by each entity, respectively.
** [Not available.]
</TABLE>
LOAN LOSS RESERVE. [None of the Federal Guarantors] 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, [none of the] Federal
Guarantor's claims rates have exceeded 5%, and as a result, all claims of each
of the Federal Guarantors have been fully reimbursed by the Department. See
"--Federal Reinsurance" above. Nevertheless, there can be no assurance that any
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 claims rates of each
Federal Guarantor and the national average for all guarantors for each of the
last five federal fiscal years:*
<PAGE>
<TABLE>
<CAPTION>
Claims Rate
Federal
Fiscal All
YEAR PHEAA ASA NSLP OSFA USAF CSLP TGSLC GUARANTORS
---- ----- --- ---- ---- ---- ---- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1992 % % % % % % % %
1993 % % % % % % % %
1994 % % % % % % % %
1995 % % % % % % % %
1996 % % % % % % % %
- -----------
* The information set forth in the table above has been obtained from the
Department (with respect to fiscal years 1992 and 1993) and from PHEAA,
ASA, NSLP, OSFA, USAF, CSLP and TGSLC as applicable (with respect to
fiscal years 1994, 1995 and 1996).
** [Not available.]
</TABLE>
There can be no assurance that the claims rate experience of any of
the Federal Guarantors 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."
GUARANTOR FOR THE FINANCED PRIVATE LOANS. The Eligible Lender Trustee
and the Seller 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 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, the Eligible Lender Trustee and the Seller.
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 Access 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 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 Master
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 Master Servicer to purchase such Financed Private Loan.
See "Description of the Transfer and Servicing Agreements--Sale of Financed
Student Loans; Representations and Warranties" and "-- Master 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:
<PAGE>
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
Ending
CALENDAR YEARS ENDING DECEMBER 31, JUNE 30,
1992 1993 1994 1995 1996 1997
-------- -------- -------- ------- -------- ------
(as restated)
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total revenue and other Support............. $ $ $ $ $ $
Total expenses..............................
Equity in loss of related party.............
Investment in subsidiary....................
Excess of revenues over expenses............
before income taxes.......................
Income tax provision........................
Net assets, end of year.....................
Total Assets...........................
- --------------
* The information set forth in the table above has been obtained from
TERI's audited financial statements for the years ending December 31,
1992 through 1996; and from TERI's unaudited interim financial
statements for the six months ending June 30, 1997.
** The information set forth in the table above for 1992, 1993, 1994, 1995
and 1996 and the six months ending June 30, 1997 does not reflect any
consolidation of TERI's financial results with those of its formerly
consolidated subsidiary discussed below.
</TABLE>
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 account for TERI's
investment in ELSI using the equity method rather than consolidating ELSI with
TERI. For the year 1992, ELSI had total revenues of $________, total assets of
$________, and a net loss of $________. This accounting change had no impact on
TERI's reported fund balances. In 1993, TERI divested itself of all ELSI
ownership.
<TABLE>
<CAPTION>
Recovery Rate
Federal
Fiscal National
YEAR PHEAA ASA NSLP OSFA USAF CSLP TGSLC AVERAGE
---- ----- --- ---- ---- ---- ---- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1992 % % % % % % % %
1993 % % % % % % % %
1994 % % % % % % % %
1995 % % % % % % % %
1996 % % % % % % % %
</TABLE>
<PAGE>
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:*
PRIVATE
PERIOD LOANS GUARANTEED PERIOD
(IN MILLIONS)
1992..........................................
1993..........................................
1994..........................................
1995..........................................
1996..........................................
1997**........................................
- --------------
* 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, 1997.
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:*
<PAGE>
AMOUNTS AVAILABLE
FOR GUARANTEE RESERVE
PERIOD PAYMENTS RATIO
(dollars in thousands)
1992.......................
1993.......................
1994.......................
1995.......................
1996.......................
1997**.....................
- --------------
* 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, 1997.
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, 1996, the balance of loans outstanding guaranteed either directly or
indirectly by TERI amounted to approximately $ billion. At December 31, 1996,
TERI was required to have approximately $ 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. The unrestricted and/or temporarily unrestricted net assets consist
of amounts in the Designated Purposes Fund, the Guarantee Reserve Fund and the
Operating Fund
set forth below.
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:*
<PAGE>
<TABLE>
<CAPTION>
Six Months
Ending
Calendar Years Ending December 31, June 30,
1992 1993 1994 1995 1996 1997
(as restated)
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Deferred Guarantee Fee Income.................
Loan Loss Reserve.............................
Designated Purposes Fund**....................
Guarantee Reserve Fund........................
Operating Fund................................
Total Amounts Available for
Guarantee Payments........................
- --------------
* The information set forth in the table above has been obtained from
TERI's audited financial statements for the years ending December 31,
1992 through 1996 and from TERI's unaudited interim financial
statements for the six months ending June 30, 1997.
** 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.
</TABLE>
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, 1997, with respect to loans defaulting in each of the five
calendar years and the six-month period referred to below are as follows:*
<PAGE>
PERIOD OF CUMULATIVE
DEFAULT RECOVERY RATE
1992
1993
1994
1995
1996
1997**
- --------------
* 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, 1997.
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:*
YEAR IN WHICH TOTAL DEFAULTS PAID FOR COHORT
LOANS GUARANTEED LOANS GUARANTEED TO COHORT YEAR DEFAULT RATE
(COHORT YEAR) (dollars in thousands)
1992
1993
1994
1995
1996
1997**
- --------------
* 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, 1997.
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."
SEGREGATED RESERVES FOR PRIVATE LOANS UNDER THE ACCESS PROGRAM. A portion
of the reserves described above that are maintained by TERI have been segregated
solely to support its guarantee obligations under the Access Program. These
segregated reserves, which are not available to cover TERI-guaranteed loans
outside of the Access Program, are equally available to all holders of Private
Loans made under the 1993-1994 Access Program, the 1994-1995 Access Program, the
1995-1996 Access Program, the 1996-1997 Access Program and the 1997-1998 Access
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 Access Programs, and the 1992-1993 Access 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 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 Access 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."
<PAGE>
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 or incorporated by reference 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 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 Fee and the Administration Fee payable on the related
Distribution Date and any Servicing Fee paid on the two preceding Monthly
Servicing Payment Dates during the related Collection Period and (ii) the
denominator of which is the outstanding principal balance of the Securities as
of the first day of such Interest Period.
"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
on a pro rata basis, based on the amount of the Noteholders' Interest Index
Carryover then owing on each class of Notes, 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 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 Class A-1 or Class A-2 Final
Maturity Date, as applicable, 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. On the Distribution Date on or
immediately following the last day of the Funding Period, amounts remaining on
deposit in the Pre-Funding Account after giving effect to all Additional
Fundings on or prior to such date, will be applied first to redeem the Class A-1
Notes until they have been paid in full, and any remaining amounts will be
applied to redeem the Class A-2 Notes.
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 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, any
Noteholders Distribution Amount 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 initial 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 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.
<PAGE>
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>
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
- --------------
* First interest rate adjustment (91-day Treasury bills are
generally auctioned weekly).
</TABLE>
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.
The Administrator intends to make information concerning the current
91-day Treasury Bill Rate and the accrued interest factor available through
Bloomberg L.P., but such information may not become available until several
months after the Closing Date.
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 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 GroupSM, PHEAA [and UNIPAC], 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 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
Master Servicer, the Servicers 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.
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 DTC in the United States or Cedel 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 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.
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 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 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.
NONE OF THE TRUST, THE SELLER, THE MASTER SERVICER, THE SERVICERS, THE
ADMINISTRATOR, THE ELIGIBLE LENDER TRUSTEE, THE INDENTURE TRUSTEE NOR THE
UNDERWRITERS 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",
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 Master 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 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 Master Servicer will service and the Administrator will
perform certain administrative functions with respect to the Financed Student
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 or incorporated by reference 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 _____, 1997 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 Access Program, the UNIPAC Programs 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 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 applicable 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 applicable 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 (including funds for which the Indenture Trustee or
the Eligible Lender Trustee or any of their respective affiliates or any of the
Seller's affiliates is investment manager or advisor) 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.
Any such accounts may be maintained with the Seller or any of its affiliates, if
such accounts meet the requirements described in clause (a) of the preceding
sentence. "Eligible Institution" means a depository institution (which may be
the Master Servicer or an affiliate thereof, the Eligible Lender Trustee or an
affiliate thereof, or the Indenture Trustee or an affiliate thereof) 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 the Rating Agencies 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-Funded
Amount will be reduced on each date Student Loans from the Subsequent Pool are
transferred to the Trust by the aggregate amount of the Purchase Price of each
Student Loan so transferred on such date.
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. In the event that the Subsequent Pool
Pre-Funded Amount is insufficient to pay the Purchase Price of the Student Loans
from the Subsequent Pool, then the amount of such deficiency may be withdrawn
from the Other Additional Funding Subaccount. In addition, 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 additional amounts
necessary to purchase Consolidation Loans) 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 Programs--Federal
Consolidation Loans" and "--Private Loans Under the Access 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, any amounts remaining in the
Pre-Funding Account will be distributed first to the holders of the Class A-1
Notes until they have been paid in full, and any remaining amounts will be paid
to the holders of the Class A-2 Notes 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, if
greater than $10,000,000, 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 initial principal
balance of the Certificates; if such amount is $10,000,000 or less, it will be
distributed on the first Distribution Date only to holders of the Class A-1
Notes. 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); provided
however, that the Trust will not purchase Other Student Loans which constitute
Financed Private Loans such that the amount of Financed Private Loans would
exceed 20% of the Financed Student Loans, based on the aggregate principal
balance thereof. 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 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 Master 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
Purchase Price 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 Purchase
Price of such Serial Loan.
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, the Master Servicer has
agreed to service, and perform all other related tasks with respect to, all the
Financed Student Loans acquired from time to time. So long as no claim is being
made against a Guarantor for any Financed Student Loan, the applicable Servicer
will hold on behalf of the Trust the notes evidencing, and other documents
relating to, that Financed Student Loan. The Master Servicer is required
pursuant to the Sale and Servicing Agreement to perform all services and duties
customary to the servicing of Financed Student Loans (including all collection
practices), and to do so with reasonable care and in compliance with all
standards and procedures provided for in the Higher Education Act, the Guarantee
Agreements and all other applicable federal and state laws.
Without limiting the foregoing, the duties of the Master Servicer
under the 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 delinquencies and
sending out statements, payment coupons and tax reporting information to
borrowers. In addition, the Master Servicer will keep ongoing records with
respect to such Financed Student Loans and collections thereon and will furnish
quarterly and annual statements to the Administrator with respect to such
information, in accordance with the customary standards and as otherwise
required in the Sale and Servicing Agreement.
The Master Servicer does not currently service Student Loans for itself or
for others. The Sale and Servicing Agreement requires that the Master Servicer
will appoint sub-servicers to service the Financed Student Loans. The Master
Servicer will initially appoint PHEAA as sub-servicer with respect to certain of
the Financed Federal Loans and all of the Financed Private Loans and UNIPAC as
sub-servicer with respect to certain of the Financed Federal Loans. [The Master
Servicer may terminate one or both of the Servicers or decide not to renew its
contractual relationship with one or both of the Servicers; however, no party
other than PHEAA and UNIPAC may be the sub-servicers of any Financed Student
Loans unless the Rating Agency Condition has been satisfied.] "Rating Agency
Condition" means, with respect to any action, that each Rating Agency shall have
been given 30 days' prior notice thereof (or such shorter period as shall be
acceptable to the Rating Agencies) and that none of the Rating Agencies shall
have noticed the Seller, the Master Servicer, the Eligible Lender Trustee or the
Indenture Trustee in writing that such action will, in and of itself, result in
a reduction or withdrawal of the then current rating of any class of Notes.
In any event, no sub-servicing arrangement will relieve the Master
Servicer of its duties and obligations under the Sale and Servicing Agreement as
if it alone were servicing the Financed Student Loans.
PAYMENTS ON FINANCED STUDENT LOANS
Except as provided below, the Master Servicer shall cause each Servicer
to deposit all payments on Financed Student Loans for which such Servicer is
acting as Servicer (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 Servicers 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 Master 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.
MASTER SERVICER COVENANTS
In the Sale and Servicing Agreement, the Master 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 Access or UNIPAC program requirements.
Certain incentive programs currently or hereafter made available by the
Seller to borrowers may also be made available 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 Master Servicer receives payment from the Seller in an amount
sufficient to offset such effective yield reductions.
Under the terms of the Sale and Servicing Agreement, if the Seller or
the Master Servicer discovers, or receives written notice, that any covenant of
the Master Servicer set forth above has not been complied with in all material
respects and such noncompliance has not been cured within 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 Master 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 Master
Servicer will be obligated to deposit into the Collection Account an amount
equal to the Purchase Amount of such Financed Student Loan and the Trust's
interest in any such purchased Financed Student Loan will be automatically
assigned to the Master Servicer. In addition, the Master 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 Master Servicer.
SERVICING COMPENSATION
The Master 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) % 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 master 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
Master Servicer to the extent that a demonstrable and significant increase
occurs in the costs incurred by the Master 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
Master 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 Master 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 Master 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
Master Servicer and, indirectly, each 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 Master Servicer for certain
taxes, accounting fees, outside auditor fees, data processing costs and other
costs incurred in connection with administering the Financed Student Loans.
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,
[UNIPAC] or the Master Servicer in which the purchaser elects to deconvert the
Financed Student Loans and not retain PHEAA [or UNIPAC, as applicable] as a
Servicer or (ii) any termination by the Trust of PHEAA as a Servicer of the
Financed Student Loans, except for any termination for cause or as a result of
any Master Servicer Default which resulted in the termination of PHEAA as a
Servicer, the Trust shall pay to PHEAA 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, LAL Loan, MAL Loan, DAL
Loan, BAL Loan, GAL Loan, BEL Loan, and REL Loan; and (b) $ for each loan of any
other status or loan type [or (iii) any termination by the Trust of UNIPAC as a
Servicer of the Financed Student Loans, except for any termination for cause or
as a result of any Master Servicer Default which resulted in the termination of
UNIPAC as a Servicer, the Trust shall pay to UNIPAC the following deconversion
fee, per loan, based on the status of the loan at the time of deconversion: (a)
$______ and (b) $____ 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 Master 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 Master 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 either 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
Master Servicer's customary servicing procedures, net of expenses
incurred by the Master 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 Master
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;
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 Master 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 Master 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 Master 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.
"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 Certificate 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 weighted average of the
Class A-1 Rate and the Class A-2 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 aggregate amount of interest accrued at
the respective Note Interest Rate for the related Interest Period on the
outstanding principal balance of each class of Notes on the immediately
preceding Distribution Date after giving effect to all principal distributions
to Noteholders of each class on such date (or, in the case of the first
Distribution Date, on the Closing Date) and (ii) the Noteholders' Interest
Carryover Shortfall for such 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.
"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 or on the related
Distribution Date following a sale of the Financed Student Loans in the manner
described under "--Termination," 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
Servicers, (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 any Servicer
on the Financed Student Loans that is allocable to principal (including the
portion of any Guarantee Payments received that is allocable to principal of the
Financed Student Loans); (ii) 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 Master 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 Master 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 the ordinary course of
business by the Master 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 date on which all of the
Student Loans in the Subsequent Pool that can be transferred to the Trust have
been transferred, but in no event later than the Special Determination Date (the
"Final Subsequent Transfer Date"), the Administrator will instruct the Indenture
Trustee to withdraw from the Negative Carry Account and deposit into the
Collection Account an amount equal to the difference (if positive) between (i)
the product of (a) a fraction the numerator of which is the actual number of
days from the Cutoff Date to the Subsequent Cutoff Date relating to the Student
Loans transferred on the Final Subsequent Transfer Date, and the denominator of
which is 366, (b) 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") as measured for the period of time commencing on the Closing Date
and ending on the Final Subsequent Pool Transfer Date, and (c) the Subsequent
Pool Pre-Funded Amount, minus (ii) the investment earnings on the Subsequent
Pool Pre-Funded Amount. After making such deposit to the Collection Account, any
amounts remaining in the Negative Carry Account may 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 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.
"Specified Reserve Account Balance" with respect to any
Distribution Date generally will be equal to the greater of (i)
% of the sum of the Pool Balance plus the Other Pre-Funded Amount, in each
case 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 sum of the Pool Balance plus the Other Pre-Funded Amount, in each
case 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 Master 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 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 Master
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 less 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 Master 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;
(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;
(x) for the first Distribution Date, the amount, if any,
remaining in the Subsequent Pool Pre-Funding Subaccount that has not
been used to acquire Student Loans in the Subsequent Pool and is being
paid out to Noteholders and Certificateholders; and
(xi) 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 Master Servicer
during the preceding twelve months (or, in the case of the first such
certificate, the period from the Closing Date to December 31, 1997) 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, 1997) 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 Master Servicer or the Administrator, as the case may be, stating that,
to his knowledge, the Master Servicer or the Administrator, as the case may be,
has fulfilled 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, 1997) or, if there has been a
default in the fulfillment of any such obligation, describing each such default.
Each of the Master Servicer and the Administrator has agreed to give the
Indenture Trustee and the Eligible Lender Trustee notice of certain Master
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 MASTER SERVICER
The Sale and Servicing Agreement will provide that the Master Servicer
may not resign from its obligations and duties as Master Servicer thereunder,
except upon determination that the Master Servicer's performance of such duties
is no longer permissible under applicable law or shall violate any final order
of a court or administrative agency with jurisdiction over the Master Servicer
or its properties. No such resignation will become effective until the Indenture
Trustee or a successor servicer has assumed the Master Servicer's servicing
obligations and duties under the Sale and Servicing Agreement.
The Sale and Servicing Agreement will further provide that neither the
Master Servicer nor any of its directors, officers, employees or agents will be
under any liability to the Trust, the Noteholders or the Certificateholders 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 Master Servicer nor any such person will be protected against any
liability that would otherwise be imposed by reason of willful misfeasance, bad
faith or negligence in the performance of 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 Master 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 Master Servicer may be merged or consolidated, or any
entity resulting from any merger or consolidation to which the Master Servicer
is a party, or any entity succeeding to the business of the Master Servicer,
which corporation or other entity in each of the foregoing cases assumes the
obligations of the Master Servicer, will be the successor of the Master Servicer
under the Sale and Servicing Agreement.
MASTER SERVICER DEFAULT; ADMINISTRATOR DEFAULT
"Master Servicer Default" under the Sale and Servicing Agreement will
consist of (i) any failure by the Master Servicer to deliver to the Indenture
Trustee for deposit in any of the Trust Accounts (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 Master Servicer or after discovery by the Master
Servicer; (ii) any failure by the Master Servicer duly to observe or perform in
any material respect any 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 Master Servicer by
the Indenture Trustee, the Eligible Lender Trustee or the Administrator or (2)
to the Master 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 Master Servicer and
certain actions by the Master Servicer indicating its insolvency, reorganization
pursuant to bankruptcy proceedings or inability to pay its obligations [and (iv)
failure by the Master Servicer [to cause the Servicers] to comply with any
requirements under the Higher Education Act resulting in a loss of its [such
Servicer's] 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 MASTER SERVICER DEFAULT AND ADMINISTRATOR DEFAULT
[As long as a Master 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 Trustee or
holders of Notes evidencing not less than 25% in principal amount of then
outstanding Notes may terminate all the rights and obligations of the Master
Servicer under the 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 Master 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 Master Servicer or the Administrator, and no Master
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 Master 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 Master Servicer Default or an Administrator Default occurs and is
continuing, the Indenture Trustee or the Noteholders, as described above, may
remove the Master 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 Master
Servicer or the Administrator, as the case may be, if a Master 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 Master 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 Master 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 Master
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 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 UNIPAC] 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 Master 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 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 and the Master Servicer), The Access GroupSM, PHEAA, [UNIPAC] 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
greatest 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
Underwriters (as set forth under "Underwriting") 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 Indenture 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 Master 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 Master Servicer) and provide monthly, quarterly
and annual statements to the Eligible Lender Trustee and the Indenture Trustee
with respect to distributions to Noteholders and Certificateholders and any
related federal income tax reporting information; and (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 $ 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 applicable 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 "--Master Servicer Covenants."
CERTAIN MATTERS RELATING TO RECEIVERSHIP
The FDIA, as amended by FIRREA, sets forth certain powers that the FDIC
could exercise if it were appointed as receiver or conservator of the 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 Master Servicer Default or an Administrator Default
resulting solely from certain events of insolvency or bankruptcy that may occur
with respect to the Master 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 Master Servicer or
Administrator, as the case may be. See "Description of the Transfer and
Servicing Agreements--Rights Upon Master 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 "--Master Servicer Covenants."
LOAN ORIGINATION AND SERVICING PROCEDURES APPLICABLE TO FINANCED
STUDENT LOANS
The Higher Education Act, including the implementing regulations
thereunder (in the case of Federal Loans), The Access GroupSM Loan Program, and
the UNIPAC Programs 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 procedures
(primarily telephone calls and demand letters) which vary depending upon the
length of time a loan is delinquent. The Master Servicer has agreed pursuant to
the 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 Master Servicer is
obligated to purchase any Financed Student Loan, if a breach of the
representations, warranties or covenants of the Seller or the Master Servicer,
as the case may be, with respect to such Financed Student Loan has a material
adverse effect on the interest of the Trust therein and such breach is not cured
within any applicable cure period (it being understood that any such breach that
does not affect any Guarantor's 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 "--Master Servicer Covenants". The
failure of the Seller or the Master 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 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.
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 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%
[or 30% for nonresident aliens] of the amount otherwise payable to the holder,
and remit the withheld amount to the IRS as a credit against the holder's
Federal income tax liability.
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 PHEAA 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 Master 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 Master 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 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 Master 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 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 includable 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 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. 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.
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.
<PAGE>
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 Principal Principal
Amount of Amount of Amount of
UNDERWRITER CLASS A-1 CLASS A-2 CERTIFICATES
NOTES NOTES
<S> <C> <C> <C>
Key Capital Markets, Inc................... $------------ $--------- $----------
- ---------------------...................... $------------ $--------- $----------
- ---------------------...................... $------------ $--------- $----------
Total............................... $------------ $--------- $----------
</TABLE>
The Seller has also agreed to pay _______________ a structuring fee
equal to $_______.
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.
________________ is engaged from time to time by KeyCorp, the parent
corporation of the Seller, 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. Key Capital Markets, Inc. has acted as an underwriter with
respect to a variety of public finance transactions as well as several
asset-backed securitizations for KeyCorp's subsidiaries. The Seller is an
affiliate of Key Capital Markets, Inc.
In connection with the offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the Notes
and the Certificates. Specifically, the Underwriters may overallot the offering,
creating a short position in the Notes and the Certificates for their own
account. The Underwriters may bid for and purchase Notes and Certificates in the
open market to cover such short positions. In addition, the Underwriters may bid
for and purchase Notes and Certificates in the open market to stabilize the
price of the Notes and the Certificates. These activities may stabilize or
maintain the market price of the Notes and the Certificates above independent
market levels. The Underwriters are not required to engage in these activities,
and may end these activities at any time.
LEGAL MATTERS
Certain legal matters relating to the Securities will be passed upon
for the Trust, the Seller, the Master Servicer 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 LLP, 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.
<PAGE>
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.
PAGE
1992 Amendments....................................................... 51
91-day Treasury Bill Rate..............................................54
91-day Treasury bills.................................................. 7
AACSB................................................................. 46
Additional Fundings...................................................106
Additional Student Loans...............................................11
Administration Agreement................................................6
Administration Fee.....................................................19
Administrator...........................................................6
Administrator Default..................................................10
Applicable Trustee....................................................100
ASA ...................................................................3
Assigned Rights........................................................25
Auction Purchase Amount................................................23
Available Funds........................................................36
BAL Loans..............................................................47
Bank ..................................................................41
BEL Loans..............................................................47
Benefit Plan............................................................1
Capped Amount..........................................................22
Cede ...................................................................4
Cedel...................................................................5
Cedel Participants....................................................100
Certificate Balance....................................................89
Certificate Final Maturity Date........................................ 9
Certificate Pool Factor................................................89
Certificate Rate.......................................................93
Certificateholder......................................................91
Certificateholders......................................................1
Certificateholders' Distribution Amount...............................111
Certificateholders' Interest Carryover Shortfall.......................95
Certificateholders' Interest Distribution Amount.......................94
Certificateholders' Interest Index Carryover............................8
Certificateholders' Principal Carryover Shortfall.....................114
Certificateholders' Principal Distribution Amount.....................114
Certificates............................................................1
Class A-1 Final Maturity Date.......................................... 9
Class A-1 Notes.........................................................1
Class A-1 Rate.........................................................91
Class A-2 Final Maturity Date.......................................... 9
Class A-2 Notes.........................................................1
Class A-2 Rate.........................................................91
Class A-1 Note Pool Factor.............................................89
Class A-2 Note Pool Factor.............................................89
Closing Date............................................................6
Code .................................................................126
Collection Account.....................................................16
Collection Period......................................................10
Commission..............................................................4
Consolidation Loans....................................................34
Cooperative...........................................................102
Covered Losses........................................................115
CSLP ...................................................................3
DAL Loans..............................................................47
deferral...............................................................57
Deferral Period........................................................55
Definitive Certificates...............................................103
Definitive Notes......................................................103
Definitive Securities.................................................103
Department..............................................................3
Depositaries..........................................................100
Depository.............................................................91
Determination Date....................................................112
Distribution Dates......................................................6
DOE Data Book..........................................................79
DTC ...................................................................4
Eligible Deposit Account..............................................106
Eligible Institution..................................................106
Eligible Investments...................................................15
Eligible Lender Trustee.................................................6
Eligible Student.......................................................47
ELSI ..................................................................84
ERISA..................................................................24
Escrow Account.........................................................58
Euroclear...............................................................5
Euroclear Operator....................................................102
Euroclear Participants................................................101
Event of Default.......................................................97
Excess Interest.......................................................115
Excess Servicing Fee...................................................22
Exchange Act............................................................4
Expected Interest Collections..........................................92
FDIA ..................................................................32
FDIC ..................................................................31
Federal Assistance.....................................................52
Federal Consolidation Loans............................................57
Federal Direct Student Loan Program....................................29
Federal Guarantee Agreements...........................................45
Federal Guarantors.....................................................12
Federal Loans..........................................................47
Federal Origination Fee................................................59
Federal Programs.......................................................51
FFELP..................................................................31
Final Subsequent Transfer Date.........................................18
Financed Private Loans.................................................12
Financed Student Loans..................................................1
FIRREA.................................................................32
forbearance............................................................55
Forbearance Periods....................................................35
foreign person........................................................131
Funding Period.........................................................10
GAL Loans..............................................................47
Grace..................................................................71
Grace Period...........................................................54
Guarantee Agreement....................................................28
Guarantee Agreements...................................................25
Guarantee Fee Advance..................................................62
Guarantee Payments.....................................................28
Guarantor..............................................................45
Guarantors.............................................................12
Indenture...............................................................6
Indenture Trustee.......................................................6
Indirect Participants.................................................100
Initial Financed Student Loans.........................................10
Initial Pool Balance...................................................18
In-School..............................................................71
Interest Period.........................................................7
Interest Subsidy Payments..............................................52
Investment Earnings...................................................106
IRS .................................................................129
LAL Loans..............................................................47
Liquidated Student Loans..............................................112
Liquidation Proceeds..................................................112
Lock-In Period.........................................................95
LSAC ..................................................................46
MAL Loans..............................................................47
Margin..................................................................7
Master Servicer.........................................................5
Minimum Purchase Amount................................................23
Monthly Servicing Payment Date.........................................17
Negative Carry Account.................................................18
Negative Carry Account Initial Deposit.................................18
new borrowers..........................................................53
Noteholder............................................................100
Noteholders............................................................38
Noteholders' Distribution Amount......................................115
Noteholders' Interest Carryover Shortfall.............................115
Noteholders' Interest Distribution Amount.............................115
Noteholders' Interest Index Carryover...................................8
Noteholders' Principal Carryover Shortfall............................115
Noteholders' Principal Distribution Amount............................115
Notes...................................................................1
NSLP ..................................................................11
Obligors..............................................................116
OID .................................................................130
OSFA ..................................................................11
Other Additional Funding Subaccount....................................15
Other Additional Pre-Funded Amount.....................................11
Other Student Loans....................................................11
Overcollateralization Adjustment......................................116
Overcollateralization Amount...........................................15
Participants...........................................................91
PHEAA...................................................................3
Plan Assets...........................................................138
Plans.................................................................137
Pool Balance...........................................................14
Pool Factor............................................................89
portfolio interest....................................................131
Pre-Funded Amount......................................................14
Pre-Funding Account....................................................14
Principal Distribution Adjustment.....................................116
Principal Distribution Amount.........................................116
Private Consolidation Guarantee Fee....................................63
Private Consolidation Loans............................................62
Private Loan Repayment Commencement Date...............................61
Private Loans..........................................................29
Purchase Amount.......................................................105
Purchase Price.........................................................15
Realized Losses.......................................................117
Record Date.............................................................7
Registration Statement..................................................4
REL Loan...............................................................30
Related Documents..................................................... 99
Repayment..............................................................71
Reserve Account........................................................19
Reserve Account Covered Amount........................................117
Reserve Account Initial Deposit........................................19
Rules.................................................................101
Sale and Servicing Agreement...........................................10
Securities..............................................................1
Securities Act..........................................................4
Securityholder........................................................100
Securityholders.........................................................5
Seller..................................................................5
Seller Insolvency Event...............................................124
Seller Trusts..........................................................33
Servicer................................................................5
Servicer Default.......................................................10
Servicers...............................................................5
Servicing Fee..........................................................17
SLS Loans..............................................................47
SLS Program............................................................56
Special Allowance Payments.............................................52
Special Determination Date..............................................3
Specified Credit Enhancement Amount....................................18
Specified Overcollateralization Amount.................................18
Specified Reserve Account Balance.....................................118
Stafford Loans.........................................................47
Statistical Cutoff Date................................................ 9
Student Loan Rate.......................................................8
Student Loans.......................................................... 9
Subsequent Cutoff Date................................................108
Subsequent Financed Student Loans.....................................11
Subsequent Pool.........................................................3
Subsequent Pool Pre-Funded Amount.......................................3
Subsequent Pool Pre-Funding Subaccount.................................14
Tax Counsel...........................................................129
T-Bill..................................................................1
TERI ..................................................................12
Terms and Conditions..................................................102
Transfer Agreement....................................................108
Transfer and Servicing Agreements......................................21
Transfer Date.........................................................108
Trust...................................................................1
Trust Accounts........................................................106
Trust Agreement.........................................................6
UCC .................................................................126
Underlying Federal Loan................................................57
Underlying Private Loans...............................................62
Underwriters..........................................................139
Underwriting Agreements...............................................139
UNIPAC..................................................................3
Unsubsidized Stafford Loans............................................52
USAF ..................................................................12
Withholding Proposals.................................................131
<PAGE>
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
PAGE
Available Information................................ 3
Reports to Securityholders........................... 4
Incorporation of Certain Documents by Reference...... 4
Summary of Terms..................................... 5
Risk Factors......................................... 24
Formation of the Trust............................... 28
Use of Proceeds...................................... 40
The Seller, the Administrator and the Master
Servicer........................................... 40
The Servicers........................................ 41
The Student Loan Financing Business.................. 44
The Financed Student Loan Pool....................... 63
Pool Factors and Trading Information................. 88
Description of the Securities........................ 90
Description of the Transfer
and Servicing Agreements...........................103
Certain Legal Aspects of the
Financed Student Loans.............................125
Material Tax Consequences............................128
ERISA Considerations.................................136
Underwriting.........................................137
Legal Matters........................................139
Index of Principal Terms.............................140
UNTIL ___________, 1997 (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 1997-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 AND MASTER SERVICER
PROSPECTUS
KEY CAPITAL MARKETS, INC.
<PAGE>
[ALTERNATE PAGE]
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.
<PAGE>
[ALTERNATE PAGE]
SUBJECT TO COMPLETION, DATED JULY 18, 1997
$------------
KEYCORP STUDENT LOAN TRUST 1997-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 and Master Servicer
The KeyCorp Student Loan Trust 1997-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 and undergraduate 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 ________, ________, ________ and ________, commencing
________, 1997 (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 distributions 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 24.
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 MASTER SERVICER, THE SERVICERS 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.
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS TO THE
THE AND SELLER(1)
PUBLIC COMMISSIONS
Per Class A-1 Note ___% ___% _____%
Per Class A-2 Note ___% ___% _____%
Per Certificate ___% ___% _____%
Total $_________ $________ $________
(1) Before deducting expenses, estimated to be $________.
The Notes and the Certificates are offered by ___, _____ and Key Capital
Markets, Inc. (the "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 ________, 1997.
This Prospectus is to be used by Key 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 ________, 1997.
<PAGE>
[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 ________, 1997 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 ________, 1997 (the "Special Determination Date") Student Loans
from a pool of Student Loans currently owned by the Seller (the "Subsequent
Pool") having as of ________, 1997 the characteristics described herein. 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, if
greater than $10,000,000, 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; if such amount is $10,000,000 or less, it will be
distributed on the first Distribution Date only to holders of the Class A-1
Notes. 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 Financed Student Loans will be master serviced by Key Bank USA,
National Association (in such capacity, the "Master Servicer"). The Master
Servicer will initially designate the Pennsylvania Higher Education Assistance
Agency, an agency of the Commonwealth of Pennsylvania ("PHEAA") and UNIPAC
Service Corporation, a Nebraska corporation ("UNIPAC") as the servicers of the
Financed Student Loans. The Financed Student Loans will include loans guaranteed
by PHEAA, American Student Assistance Guarantor, a non-profit corporation
("ASA"), the Nebraska Student Loan Program, an agency of the State of Nebraska
("NSLP"), the Florida Department of Education, an agency of the State of Florida
("OSFA"), USA Group, Inc., a non-profit corporation ("USAF"), the Colorado
Student Loan Program, an agency of the State of Colorado ("CSLP") or the Texas
Guaranteed Student Loan Corporation, an agency of the State of Texas ("TGSLC"),
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 ("TERI"), and not reinsured by the Department.
Neither the Notes nor the Certificates will be listed on any national
securities exchange. _________ and ________ intend to, and Key Capital Markets,
Inc. may, make a secondary market in the Notes and the Certificates but none 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.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NOTES AND THE
CERTIFICATES OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING AND THE
PURCHASE OF NOTES AND CERTIFICATES TO COVER SHORT POSITIONS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION."
[Alternate Page]
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 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 _______________, 1997, 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 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,
800 Superior Avenue, Cleveland, Ohio 44114, Attention: Trust Administrator,
KeyCorp Student Loan Trust 1997-A. Telephone requests for such copies should be
directed to the Education Resources Administrator at (800) 523-7248.
<PAGE>
[Alternate Page]
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.
In connection with the offering, KCMI may engage in transactions that
stabilize, maintain or otherwise affect the price of the Notes and the
Certificates. Specifically, KCMI may overallot the offering, creating a short
position in the Notes and the Certificates for its own account. KCMI may bid for
and purchase Notes and Certificates in the open market to cover such short
positions. In addition, KCMI may bid for and purchase Notes and Certificates in
the open market to stabilize the price of the Notes and the Certificates. These
activities may stabilize or maintain the market price of the Notes and the
Certificates above independent market levels. KCMI is not required to engage in
these activities, and may end these activities at any time.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. 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:
SEC registration fee...................................... $ 302.04
Legal fees and expenses................................... *
Accounting fees and expenses.............................. *
Rating agency fees........................................ *
Eligible Lender Trustee fees and expenses................. *
Indenture Trustee fees and expenses....................... *
Printing and engraving.................................... *
Servicer conversion fees.................................. *
Miscellaneous............................................. *
Total............................................ $
- -----------
* To be filed by Amendment.
ITEM 15. 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 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 16. EXHIBITS.
1.1. Form of Underwriting Agreement for Notes*
1.2. Form of Underwriting Agreement for Certificates*
3.1. Articles of Association of Key Bank USA, National
Association*
3.2. Bylaws of Key Bank USA, National Association*
4.1. Form of Indenture between the Trust and the Indenture
Trustee (including as exhibits thereto a form of
Floating Rate Asset Backed Note)*
4.2. 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)*
5.1. Opinion of Forrest F. Stanley, Esq. with respect to
legality*
8.1. Opinion of Jones, Day, Reavis & Pogue with respect to
federal and Pennsylvania tax matters*
10.1. Form of Sale and Servicing Agreement among the Seller,
the Master Servicer, the Trust, the Eligible Lender
Trustee and the Administrator*
10.2. Form of Supplemental Sale and Servicing Agreement
among Key Bank USA, National Association, as Seller,
Administrator and Master Servicer, the Trust and the
Eligible Lender Trustee*
10.3. Form of Administration Agreement among the
Administrator, the Trust and the Indenture Trustee*
10.4. Form of Guarantee Agreement between the Eligible
Lender Trustee on behalf of the Trust and PHEAA*
10.5. Form of Guarantee Agreement between the Eligible
Lender Trustee on behalf of the Trust and ASA*
10.6. Form of Guarantee Agreement between the Eligible
Lender Trustee on behalf of the Trust and NSLP*
10.7. Form of Guarantee Agreement between the Eligible
Lender Trustee on behalf of the Trust and OSFA*
10.8. Form of Guarantee Agreement between the Eligible
Lender Trustee on behalf of the Trust and USAF*
10.9. Form of Guarantee Agreement between the Eligible
Lender Trustee on behalf of the Trust and CSLP*
10.10 Form of Guarantee Agreement between the Eligible
Lender Trustee on behalf of the Trust and TGSLC*
10.11. Form of Guarantee Agreement among the Eligible Lender
Trustee on behalf of the Trust, Key Bank USA, National
Association, as Seller, and TERI*
23.1. Consent of Forrest F. Stanley, Esq. (included as part
of Exhibit 5.1)*
23.2. Consent of Jones, Day, Reavis & Pogue (included as
Exhibit 8.1)*
24.1. Powers of Attorney of directors and officers of Key
Bank USA, National Association
25.1. Statement of Eligibility under the Trust Indenture Act
of 1939 of the Indenture Trustee*
- ---------------------
* To be filed by Amendment.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) To provide to the Underwriters at the closing specified in the
Underwriting Agreements Notes and Certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act") may be permitted
to directors, officers and controlling persons of the Registrant pursuant
to the provisions described under Item 15, 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
Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or
controlling person of the 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, the
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 Securities Act and will be governed by
the final adjudication of such issue.
(3) For purposes of determining any liability under the Securities
Act, 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, 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 the 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;
(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, 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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3, it believes that the securities rating
requirement for use of Form S-3 will be met by the time of sale of the
securities and it has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Cleveland, State of Ohio, on July 17, 1997.
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 Registration
Statement has been signed on July 17, 1997, by the following persons in the
capacities indicated.
SIGNATURE TITLE
* Principal Executive Officer
A. Jay Meyerson and Director
* Principal Financial Officer
Ronald J. Nicolas, Jr.
* Principal Accounting Officer
Joseph A. Pampush
* Director
Lee Irving
* Director
Craig C. Brooks
* Director
Allen J. Gula, Jr.
* Director
Jeanne B. Krips
* Director
John H. Mancuso
* Director
Kevin M. Blakely
* Director
K. Brent Somers
* Director
Stephen E. Wall
*By: /S/ FORREST F. STANLEY
Forrest F. Stanley
Attorney-in-Fact
July 17, 1997
<PAGE>
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NO. DESCRIPTION OF EXHIBIT PAGE NUMBER
1.1. Form of Underwriting Agreement for Notes*
1.2. Form of Underwriting Agreement for Certificates*
3.1. Articles of Association of Key Bank USA, National
Association*
3.2. Bylaws of Key Bank USA, National Association*
4.1. Form of Indenture between KeyCorp Student Loan
Trust 1997-A (the "Trust") and Bankers Trust Company
(the "Indenture Trustee") (including as exhibits
thereto a form of Floating Rate Asset Backed Note)*
4.2. Form of Amended and Restated Trust Agreement between Key
Bank USA, National Association and The First National
Bank of Chicago (the "Eligible Lender Trustee")
(including as an exhibit thereto a form of Floating
Rate Asset Backed Certificate)*
5.1. Opinion of Forrest F. Stanley, Esq. with respect to
legality*
8.1. Opinion of Jones, Day, Reavis & Pogue with respect to
federal and Pennsylvania tax matters*
10.1. Form of Sale and Servicing Agreement among Key Bank USA,
National Association (in its capacity as the Seller,
the Master Servicer and the Administrator), the Trust
and the Eligible Lender Trustee*
10.2. Form of Supplemental Sale and Servicing Agreement among
Key Bank USA, National Association, as Seller,
Administrator and Master Servicer, the Trust and the
Eligible Lender Trustee *
10.3. Form of Administration Agreement among the Administrator,
the Trust and the Indenture Trustee*
10.4. Form of Guarantee Agreement between the Eligible Lender
Trustee on behalf of the Trust and the Pennsylvania
Higher Education Assistance Agency ("PHEAA")*
10.5. Form of Guarantee Agreement between the Eligible Lender
Trustee on behalf of the Trust and American Student
Assistance Guarantor ("ASA")*
10.6. Form of Guarantee Agreement between the Eligible Lender
Trustee on behalf of the Trust and the Nebraska Student
Loan Program ("NSLP")*
10.7. Form of Guarantee Agreement between the Eligible Lender
Trustee on behalf of the Trust and the Florida Department
of Education ("OSFA")*
10.8. Form of Guarantee Agreement between the Eligible Lender
Trustee on behalf of the Trust and USA Group, Inc.
("USAF")*
10.9. Form of Guarantee Agreement between the Eligible Lender
Trustee on behalf of the Trust and the Colorado Student
Loan Program ("CSLP")*
10.10 Form of Guarantee Agreement among the Eligible Lender
Trustee on behalf of the Trust and the Texas Guaranteed
Student Loan Corporation ("TGSLC")
10.11. Form of Guarantee Agreement among the Eligible Lender
Trustee on behalf of the Trust, Key Bank USA, National
Association and The Education Resources Institute,
Inc. ("TERI")*
23.1. Consent of Forrest F. Stanley, Esq. (included as part
of Exhibit 5.1)*
23.2. Consent of Jones, Day, Reavis & Pogue (included as
Exhibit 8.1)*
24.1. Powers of Attorney of directors and officers of Key
Bank USA, National Association
25.1. Statement of Eligibility under the Trust Indenture Act
of 1939 of the Indenture Trustee*
- ---------------------
* To be filed by Amendment.
EXHIBIT 24.1
POWER OF ATTORNEY
The undersigned director, officer, or director and officer of Key Bank USA,
National Association, a National banking association (the "Bank"), which
proposes to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Act of 1933, as amended, a Registration
Statement with respect to the issuance of up to $1,000,000,000 in securities by
one or more Trusts, to be established by the Bank in connection with the
securitization of a portion of the Bank's student loan portfolio, hereby
constitutes and appoints Craig C. Brooks, John H. Mancuso, and Forrest F.
Stanley, and each of them, as his attorney, with full power of substitution and
resubstitution, for and in his or her name, place and stead, to sign and file
the proposed Registration Statement and any and all amendments, post-effective
amendments, and exhibits thereto, and any and all applications and other
documents to be filed with the Securities and Exchange Commission pertaining to
such securities or such registration, with full power and authority to do and
perfrom any and all acts and things whatsoever requisite and necessary to be
done in the premises, hereby ratifying and approving the acts of such attorney
or any such substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand at Cleveland,
Ohio this 17th day of July, 1997.
/s/ A. Jay Meyerson
Name: A. Jay Meyerson
<PAGE>
POWER OF ATTORNEY
The undersigned director, officer, or director and officer of Key Bank USA,
National Association, a national banking association (the "Bank"), which
proposes to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Act of 1933, as amended, a Registration
Statement with respect to the issuance of up to $1,000,000,000 in securities by
one or more Trusts, to be established by the Bank in connection with the
securitization of a portion of the Bank's student loan portfolio, hereby
constitutes and appoints Craig C. Brooks, John H. Mancuso, and Forrest F.
Stanley, and each of them, as his attorney, with full power of substitution and
resubstitution, for and in his or her name, place, and stead, to sign and file
the proposed Registration Statement and any and all amendments, post-effective
amendments, and exhibits thereto, and any and all applications and other
documents to be filed with the Securities and Exchange Commission pertaining to
such securities or such registration, with full power and authority to do and
perform any and all acts and things whatsoever requisite and necessary to be
done in the premises, hereby ratifying and approving the acts of such attorney
or any such substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand at Cleveland,
Ohio this 17th day of July, 1997.
/s/ Ronald J. Nicholas, Jr.
Name: Ronald J. Nicholas, Jr.
POWER OF ATTORNEY
The undersigned director, officer, or director and officer of Key Bank USA,
National Association, a national banking association (the "Bank"), which
proposes to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Act of 1933, as amended, a Registration
Statement with respect to the issuance of up to $1,000,000,000 in securities by
one or more Trusts, to be established by the Bank in connection with the
securitization of a portion of the Bank's student loan portfolio, hereby
constitutes and appoints Craig C. Brooks, John H. Mancuso, and Forrest F.
Stanley, and each of them, as his attorney, with full power of substitution and
resubstitution, for and in his or her name, place, and stead, to sign and file
the proposed Registration Statement and any and all amendments, post-effective
amendments, and exhibits thereto, and any and all applications and other
documents to be filed with the Securities and Exchange Commission pertaining to
such securities or such registration, with full power and authority to do and
perform any and all acts and things whatsoever requisite and necessary to be
done in the premises, hereby ratifying and approving the acts of such attorney
or any such substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand at Cleveland,
Ohio this 10th day of July, 1997.
/s/ Joseph A. Pampush
Name: Joseph A. Pampush
<PAGE>
POWER OF ATTORNEY
The undersigned director, officer, or director and officer of Key Bank USA,
National Association, a national banking association (the "Bank"), which
proposes to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Act of 1933, as amended, a Registration
Statement with respect to the issuance of up to $1,000,000,000 in securities by
one or more Trusts, to be established by the Bank in connection with the
securitization of a portion of the Bank's student loan portfolio, hereby
constitutes and appoints Craig C. Brooks, John H. Mancuso, and Forrest F.
Stanley, and each of them, as his attorney, with full power of substitution and
resubstitution, for and in his or her name, place, and stead, to sign and file
the proposed Registration Statement and any and all amendments, post-effective
amendments, and exhibits thereto, and any and all applications and other
documents to be filed with the Securities and Exchange Commission pertaining to
such securities or such registration, with full power and authority to do and
perform any and all acts and things whatsoever requisite and necessary to be
done in the premises, hereby ratifying and approving the acts of such attorney
or any such substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand at Cleveland,
Ohio this 17th day of July, 1997.
/s/ Lee Irving
Name: Lee Irving
<PAGE>
POWER OF ATTORNEY
The undersigned director, officer, or director and officer of Key Bank USA,
National Association, a national banking association (the "Bank"), which
proposes to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Act of 1933, as amended, a Registration
Statement with respect to the issuance of up to $1,000,000,000 in securities by
one or more Trusts, to be established by the Bank in connection with the
securitization of a portion of the Bank's student loan portfolio, hereby
constitutes and appoints Craig C. Brooks, John H. Mancuso, and Forrest F.
Stanley, and each of them, as his attorney, with full power of substitution and
resubstitution, for and in his or her name, place, and stead, to sign and file
the proposed Registration Statement and any and all amendments, post-effective
amendments, and exhibits thereto, and any and all applications and other
documents to be filed with the Securities and Exchange Commission pertaining to
such securities or such registration, with full power and authority to do and
perform any and all acts and things whatsoever requisite and necessary to be
done in the premises, hereby ratifying and approving the acts of such attorney
or any such substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand at Cleveland,
Ohio this 17th day of July, 1997.
/s/ Craig C. Brooks
Name: Craig C. Brooks
<PAGE>
POWER OF ATTORNEY
The undersigned director, officer, or director and officer of Key Bank USA,
National Association, a national banking association (the "Bank"), which
proposes to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Act of 1933, as amended, a Registration
Statement with respect to the issuance of up to $1,000,000,000 in securities by
one or more Trusts, to be established by the Bank in connection with the
securitization of a portion of the Bank's student loan portfolio, hereby
constitutes and appoints Craig C. Brooks, John H. Mancuso, and Forrest F.
Stanley, and each of them, as his attorney, with full power of substitution and
resubstitution, for and in his or her name, place, and stead, to sign and file
the proposed Registration Statement and any and all amendments, post-effective
amendments, and exhibits thereto, and any and all applications and other
documents to be filed with the Securities and Exchange Commission pertaining to
such securities or such registration, with full power and authority to do and
perform any and all acts and things whatsoever requisite and necessary to be
done in the premises, hereby ratifying and approving the acts of such attorney
or any such substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand at Cleveland,
Ohio this 17th day of July, 1997.
/s/ Allen J. Gula
Name: Allen J. Gula
<PAGE>
POWER OF ATTORNEY
The undersigned director, officer, or director and officer of Key Bank USA,
National Association, a national banking association(the "Bank"), which proposes
to file with the Securities and Exchange Commission, Washington, D.C., under the
provisions of the Securities Act of 1933, as amended, a Registration Statement
with respect to the issuance of up to $1,000,000,000 in securities by one or
more Trusts, to be established by the Bank in connection with the securitization
of a portion of the Bank's student loan portfolio, hereby constitutes and
appoints Craig C. Brooks, John H. Mancuso, and Forrest F. Stanley, and each of
them, as his attorney, with full power of substitution and resubstitution, for
and in his or her name, place, and stead, to sign and file the proposed
Registration Statement and any and all amendments, post-effective amendments,
and exhibits thereto, and any and all applications and other documents to be
filed with the Securities and Exchange Commission pertaining to such securities
or such registration, with full power and authority to do and perform any and
all acts and things whatsoever requisite and necessary to be done in the
premises, hereby ratifying and approving the acts of such attorney or any such
substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand at Cleveland,
Ohio this 10th day of July, 1997.
/s/ Jeanne B. Krips
Name: Jeanne B. Krips
<PAGE>
POWER OF ATTORNEY
The undersigned director, officer, or director and officer of Key Bank USA,
National Association, a national banking association(the "Bank"), which proposes
to file with the Securities and Exchange Commission, Washington, D.C., under the
provisions of the Securities Act of 1933, as amended, a Registration Statement
with respect to the issuance of up to $1,000,000,000 in securities by one or
more Trusts, to be established by the Bank in connection with the securitization
of a portion of the Bank's student loan portfolio, hereby constitutes and
appoints Craig C. Brooks, John H. Mancuso, and Forrest F. Stanley, and each of
them, as his attorney, with full power of substitution and resubstitution, for
and in his or her name, place, and stead, to sign and file the proposed
Registration Statement and any and all amendments, post-effective amendments,
and exhibits thereto, and any and all applications and other documents to be
filed with the Securities and Exchange Commission pertaining to such securities
or such registration, with full power and authority to do and perform any and
all acts and things whatsoever requisite and necessary to be done in the
premises, hereby ratifying and approving the acts of such attorney or any such
substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand at Cleveland,
Ohio this 17th day of July, 1997.
/s/ John H. Mancuso
Name: John H. Mancuso
<PAGE>
POWER OF ATTORNEY
The undersigned director, officer, or director and officer of Key Bank USA,
National Association, a national banking association (the "Bank"), which
proposes to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Act of 1933, as amended, a Registration
Statement with respect to the issuance of up to $1,000,000,000 in securities by
one or more Trusts, to be established by the Bank in connection with the
securitization of a portion of the Bank's student loan portfolio, hereby
constitutes and appoints Craig C. Brooks, John H. Mancuso, and Forrest F.
Stanley, and each of them, as his attorney, with full power of substitution and
resubstitution, for and in his or her name, place, and stead, to sign and file
the proposed Registration Statement and any and all amendments, post-effective
amendments, and exhibits thereto, and any and all applications and other
documents to be filed with the Securities and Exchange Commission pertaining to
such securities or such registration, with full power and authority to do and
perform any and all acts and things whatsoever requisite and necessary to be
done in the premises, hereby ratifying and approving the acts of such attorney
or any such substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand at Cleveland,
Ohio this 10th day of July, 1997.
/s/ Kevin M. Blakely
Name: Kevin M. Blakely
<PAGE>
POWER OF ATTORNEY
The undersigned director, officer, or director and officer of Key Bank USA,
National Association, a national banking association (the "Bank"), which
proposes to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Act of 1933, as amended, a Registration
Statement with respect to the issuance of up to $1,000,000,000 in securities by
one or more Trusts, to be established by the Bank in connection with the
securitization of a portion of the Bank's student loan portfolio, hereby
constitutes and appoints Craig C. Brooks, John H. Mancuso, and Forrest F.
Stanley, and each of them, as his attorney, with full power of substitution and
resubstitution, for and in his or her name, place, and stead, to sign and file
the proposed Registration Statement and any and all amendments, post-effective
amendments, and exhibits thereto, and any and all applications and other
documents to be filed with the Securities and Exchange Commission pertaining to
such securities or such registration, with full power and authority to do and
perform any and all acts and things whatsoever requisite and necessary to be
done in the premises, hereby ratifying and approving the acts of such attorney
or any such substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand at Cleveland,
Ohio this 10th day of July, 1997.
/s/ K. Brent Somers
Name: K. Brent Somers
<PAGE>
POWER OF ATTORNEY
The undersigned director, officer, or director and officer of Key Bank USA,
National Association, a national banking association (the "Bank"), which
proposes to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Act of 1933, as amended, a Registration
Statement with respect to the issuance of up to $1,000,000,000 in securities by
one or more Trusts, to be established by the Bank in connection with the
securitization of a portion of the Bank's student loan portfolio, hereby
constitutes and appoints Craig C. Brooks, John H. Mancuso, and Forrest F.
Stanley, and each of them, as his attorney, with full power of substitution and
resubstitution, for and in his or her name, place, and stead, to sign and file
the proposed Registration Statement and any and all amendments, post-effective
amendments, and exhibits thereto, and any and all applications and other
documents to be filed with the Securities and Exchange Commission pertaining to
such securities or such registration, with full power and authority to do and
perform any and all acts and things whatsoever requisite and necessary to be
done in the premises, hereby ratifying and approving the acts of such attorney
or any such substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand at Cleveland,
Ohio this 10th day of July, 1997.
/s/ Stephen E. Wall
Name: S. E. Wall, President & COO
