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File Pursuant To Rule 424(b)(5)
Registration No. 333-80109
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED SEPTEMBER 20, 1999 KEYCORP LOGO
$1,000,000,000
KEYCORP STUDENT LOAN TRUST 1999-B
KEY BANK USA, NATIONAL ASSOCIATION
Seller and Master Servicer
FLOATING RATE ASSET-BACKED NOTES
FLOATING RATE ASSET-BACKED CERTIFICATES
------------------------
SECURITIES OFFERED
- classes of notes and certificates listed in the table below.
ASSETS
- student loans
- certain student loans guaranteed by federal or private guarantors
CREDIT ENHANCEMENT
- class A notes
- subordination of class M notes and certificates
- reserve account
- class M notes
- subordination of certificates
- reserve account
- certificates
- reserve account
You should carefully consider the risk factors beginning on page S-10 of this
prospectus supplement and page 6 of the prospectus.
The securities are obligations only of the trust and are payable solely from the
student loans and other assets of the trust. The initial principal balance of
the student loans will be less than the initial principal balance of the
securities. The securities are not guaranteed by any person. The securities are
not bank deposits.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the prospectus to which it relates is truthful or
complete. Any representation to the contrary is a criminal offense.
<TABLE>
<CAPTION>
ORIGINAL PROCEEDS
PRINCIPAL INTEREST RATE FINAL MATURITY PRICE TO UNDERWRITING TO THE
AMOUNT (PER ANNUM) DATE PUBLIC(1) DISCOUNT SELLER(1)
-------------- ------------------------ -------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Class A-1 Notes............ $ 280,000,000 three month LIBOR plus August 2007 100% 0.185% 99.815%
0.28% per annum(2)
Class A-2 Notes............ $ 625,000,000 three month LIBOR plus August 2027 100% 0.350% 99.650%
0.43% per annum(2)
Class M Notes.............. $ 30,000,000 three month LIBOR plus August 2029 (3) (3) (3)
0.70% per annum(2)
Certificates............... $ 65,000,000 three month LIBOR plus November 2036 (3) (3) (3)
0.90% per annum(2)
Total...................... $1,000,000,000 $997,294,500(4)
</TABLE>
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(1) Plus accrued interest, if any, from September 30, 1999.
(2) Subject to an interest rate cap.
(3) Credit Suisse First Boston initially proposes to offer the Class M Notes and
Certificates in negotiated transactions or otherwise at varying prices to be
determined at the time of sale.
(4) Includes expected proceeds from the sale of the Class M Notes and
Certificates but before deducting expenses estimated to be $1,209,000.
Delivery of the securities will be made on or about September 30, 1999, against
payment in immediately available funds.
CREDIT SUISSE FIRST BOSTON MCDONALD INVESTMENTS
A KEYCORP COMPANY
Prospectus Supplement dated September 30, 1999
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YOU SHOULD RELY ON INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES.
THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS
DOCUMENT.
We provide information to you about the securities in two separate
documents that progressively provide more detail: (1) the accompanying
prospectus, which provides general information, some of which may not apply
to your securities and (2) this prospectus supplement, which describes the
specific terms of your securities.
UNTIL DECEMBER 29, 1999 ALL DEALERS THAT EFFECT TRANSACTIONS IN
THE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE
REQUIRED TO DELIVER A PROSPECTUS AND PROSPECTUS SUPPLEMENT. THIS
REQUIREMENT IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A
PROSPECTUS AND PROSPECTUS SUPPLEMENT WHEN ACTING AS UNDERWRITERS WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
We are not offering the securities in any state where the offer is
not permitted. We do not claim the accuracy of the information in this
prospectus supplement and the accompanying prospectus as of any date other
than the dates stated on their respective covers.
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TABLE OF CONTENTS
<TABLE>
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PROSPECTUS SUPPLEMENT PROSPECTUS
<S> <C>
Summary of Terms...............................S-3 RISK FACTORS.........................................6
Risk Factors..................................S-10 INCORPORATION OF CERTAIN
Formation of the Trust........................S-20 DOCUMENTS BY REFERENCE .........................13
Use of Proceeds...............................S-22 FORMATION OF THE TRUSTS.............................13
The Master Servicer and the Sub-Servicers.....S-23 USE OF PROCEEDS.....................................15
The Financed Student Loan Pool................S-25 THE SELLER, THE ADMINISTRATOR, THE MASTER
Description of the Securities.................S-66 SERVICER AND THE SUB-SERVICERS.................15
Description of the Transfer and Servicing THE STUDENT LOAN POOLS..............................18
Agreements...........................S-76 THE STUDENT LOAN FINANCING BUSINESS.................19
Income Tax Consequences......................S-100 WEIGHTED AVERAGE LIVES OF THE SECURITIES............47
ERISA Considerations.........................S-100 POOL FACTORS AND TRADING INFORMATION................50
Underwriting.................................S-102 DESCRIPTION OF THE NOTES............................50
Experts ....................................S-104 DESCRIPTION OF THE CERTIFICATES.....................59
Legal Matters................................S-104 CERTAIN INFORMATION REGARDING THE SECURITIES........60
Index of Principal Terms.....................S-105 DESCRIPTION OF THE TRANSFER AND SERVICING
Appendix I Report of Independent Auditors......A-1 AGREEMENTS.....................................68
CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS..........87
INCOME TAX CONSEQUENCES.............................94
FEDERAL TAX CONSEQUENCES FOR TRUSTS
FOR WHICH A PARTNERSHIP ELECTION
IS MADE.........................................95
FEDERAL TAX CONSEQUENCES FOR TRUSTS IN WHICH
ALL CERTIFICATES ARE RETAINED BY THE
SELLER........................................105
PENNSYLVANIA STATE TAX CONSEQUENCES................105
ERISA CONSIDERATIONS...............................106
PLAN OF DISTRIBUTION...............................109
LEGAL MATTERS......................................110
INDEX OF PRINCIPAL TERMS...........................111
</TABLE>
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[INTENTIONALLY LEFT BLANK]
S-2
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SUMMARY OF TERMS
This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to consider
in making your investment decision. To understand all of the terms of the
offering of the securities, we recommend that you carefully read this entire
prospectus supplement and the accompanying prospectus.
PRINCIPAL PARTIES
THE TRUST
- KeyCorp Student Loan Trust 1999-B
THE SELLER, MASTER SERVICER AND ADMINISTRATOR
- Key Bank USA, National Association
THE SUB-SERVICERS
- Pennsylvania Higher Education Assistance Agency
- Great Lakes Educational Loan Services, Inc.
THE ELIGIBLE LENDER TRUSTEE
- Bank One, National Association
THE INDENTURE TRUSTEE
- Bankers Trust Company
THE GUARANTORS
- American Student Assistance
- California Student Aid Commission
- Educational Credit Management Corporation
- HEMAR Insurance Corporation of America
- Nebraska Student Loan Program
- New York State Higher Education Services
- Pennsylvania Higher Education Assistance Agency
- The Education Resources Institute, Inc.
- United Student Aid Funds, Inc.
DATES
DISTRIBUTION DATES
The 25th day of each February, May, August, and November or if the 25th
is not a business day, the next business day. The first distribution
date is February 25th, 2000.
CUTOFF DATE
- September 1, 1999 for the initial pool 1 student loans
- September 27, 1999 for initial pool 2 student loans
SUBSEQUENT CUTOFF DATE
- The date specified in the related subsequent transfer agreement
for subsequent pool 1 student loans, subsequent pool 2 student
loans and certain other student loans
STATISTICAL CUTOFF DATE
- September 1, 1999 for the initial pool 1 student loans and
initial pool 2 student loans
- August 1, 1999 for the subsequent pool 1 student loans and
subsequent pool 2 student loans
CLOSING DATE
On or about September 30, 1999.
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DESCRIPTION OF THE SECURITIES
OFFERED SECURITIES
- Three classes of notes and one class of certificates
- Original principal amounts and interest rates are on the cover page of
this prospectus supplement
- Securities issued in book-entry form through the Depository Trust
Company, Cedelbank and the Euroclear System
- Minimum denominations of $1,000
LIBOR INDEXED SECURITIES
- The class A-1 notes, the class A-2 notes, the class M notes and the
certificates.
TREASURY BILL INDEXED SECURITIES
- None.
INTEREST PAYMENTS
- Each interest rate is subject to a maximum rate described in this
prospectus supplement under the caption "Description of the Securities"
herein.
- Key Bank USA, National Association, will provide an interest rate cap
for the benefit of the class A-1 notes, class A-2 notes, class M notes
and certificates. The interest rate cap will eliminate the effect of
the maximum rate on the interest rate of your securities. Your right to
receive payments under the interest rate cap is not rated by any rating
agency.
- Interest calculations
- actual/360 for the LIBOR indexed securities
- actual/365 or 366 as applicable for the Treasury-Bill indexed
securities
- Interest not paid on a distribution date due to the effect of
the maximum rate and not paid because of a default by the cap
provider may be paid on future distribution dates as described
in this prospectus supplement under the caption "Description
of the Securities" herein.
PRINCIPAL PAYMENTS
Principal payments on the securities will be made on each distribution date in
an amount described in this prospectus supplement under the caption "Description
of the Securities" herein.
CREDIT ENHANCEMENT
- class A notes
- subordination of class M notes and certificates
- reserve account
- class M notes
- subordination of certificates
- reserve account
- certificates
- reserve account
PRIORITY OF PAYMENTS
On each distribution date, the indenture trustee will make the following
distributions and deposits to the extent of available funds in the order
indicated:
1. to the master servicer certain fees;
2. to the administrator, certain fees;
3. to the holders of the class A-1 and class A-2 notes, interest on a pro rata
basis, subject to the maximum rate;
4. to the holders of the class M notes, interest, subject to the maximum
rate;
5. to the holders of the certificates, interest, subject to the maximum rate;
6. to the reserve account, an amount, if any, necessary to reinstate the
balance of the reserve account to a specified amount;
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7. to the holders of the notes, principal as follows:
(a) first to the class A-1 notes until paid in full; and then (b) to the
class A-2 notes until paid in full;
8. following the date on which the class A-2 notes have been paid in full, to
the holders of the class M notes, principal until paid in full;
9. following the date on which the notes have been paid in full, to the
holders of the certificates, principal;
10. to the holders of the class A-1 and class A-2 notes, interest due in excess
of the maximum rate, if any, on a pro rata basis, to the extent not paid by
the cap provider;
11. to the holders of the class M notes, interest due in excess of the maximum
rate, if any, to the extent not paid by the cap provider;
12. to the holders of the certificates, interest due in excess of the maximum
rate, if any, to the extent not paid by the cap provider;
13. to the cap provider, an amount sufficient to reimburse the cap provider for
previous payments under the interest rate cap; and
14. to the seller, any remaining amounts.
If the interest rate on any class of securities for any interest period is
capped at the maximum rate, the cap provider will be obligated to pay until the
termination of the cap agreement the difference between interest that would have
been due without giving effect to the maximum rate and interest due at the
maximum rate.
FINAL MATURITY DATES
The unpaid principal amount of each class of securities will be payable in full
on the applicable final maturity date listed on the cover page of this
prospectus supplement.
AUCTION SALE
Any student loans remaining in the trust as of the end of the collection period
immediately preceding the November 2009 distribution date will be offered for
sale. The proceeds of any sale will be used to redeem your securities. The
auction price must at least equal the unpaid principal amount of the securities,
plus accrued and unpaid interest.
OPTIONAL PURCHASE
The seller may repurchase all remaining student loans when the principal balance
of the pool of student loans is equal to 5% or less of the initial principal
balance of the pool of the aggregate of the initial financed student loans and
subsequent pool student loans.
TRUST PROPERTY
THE INITIAL STUDENT LOANS
The initial student loans consist of certain graduate and undergraduate student
loans. The initial student loans consist of two separate pools--initial pool 1
and initial pool 2. Although all of the initial student loans will be sold to
the trust on the closing date, each pool will have a different cutoff date.
Initial Pool 1
The initial pool 1 student loans have the characteristics set forth below as of
September 1, 1999. Unless otherwise specified, percentages are of initial pool 1
principal balance (including certain interest accrued to be capitalized).
Aggregate Characteristics
- Aggregate principal
amount:.........................$452,594,254.69
- Weighted average annual
percentage rate:...........................7.67%
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- Weighted average original
term:...............................212.12 mths
- Weighted average remaining
term: ..............................184.20 mths
Guarantees
- Percent reinsured by the
Department of Education..................43.10%
- Percent not reinsured by the
Department of Education..................56.90%
- Percent guaranteed by federal
guarantors...............................43.10%
- Percent guaranteed by the
Pennsylvania Higher Education
Assistance Agency....................19.38%
- Percent guaranteed by American
Student Assistance...................13.38%
- Percent guaranteed by Nebraska
Student Loan Program.................10.26%
- Percent guaranteed by Educational
Credit Management Corporation.........0.04%
- Percent guaranteed by California
Student Aid Commission................0.02%
- Percent guaranteed by New York
State Higher Education Services
Corporation...........................0.01%
- Percent guaranteed by United
Student Aid Funds, Inc................0.02%
- Percent guaranteed by private
guarantors...........................22.20%
- Percent guaranteed by The
Educational Resources
Institute, Inc.......................17.33%
- Percent guaranteed by HEMAR
Insurance Corporation.................4.87%
- Percent not guaranteed by any party
or reinsured by Department of
Education............................34.70%
Initial Pool 2
The initial pool 2 student loans have the characteristics set forth below as of
September 1, 1999. Unless otherwise specified, percentages are of initial pool 2
balance (including certain interest accrued to be capitalized).
Aggregate Characteristics
- Aggregate principal
amount:....................$290,200,021.71
- Weighted average annual
percentage rate: .....................7.49%
- Weighted average original term: ....218.46 mths
- Weighted average remaining
term: ..............................189.28 mths
Guarantees
- Percent reinsured by the
Department of Education...............66.22%
- Percent not reinsured by the
Department of Education...............33.78%
- Percent guaranteed by federal
guarantors............................66.22%
- Percent guaranteed by the
Pennsylvania Higher Education
Assistance Agency..................24.04%
- Percent guaranteed by American
Student Assistance.................13.80%
- Percent guaranteed by Nebraska
Student Loan Program...............28.15%
- Percent guaranteed by Educational
Credit Management Corporation.......0.15%
- Percent guaranteed by California
Student Aid Commission..............0.04%
- Percent guaranteed by New York
State Higher Education Services
Corporation.........................0.01%
- Percent guaranteed by United
Student Aid Funds, Inc..............0.03%
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- Percent guaranteed by private
guarantors.............................22.76%
- Percent guaranteed by The
Educational Resources
Institute, Inc....................18.40%
- Percent guaranteed by HEMAR
Insurance Corporation.............4.36%
- Percent not guaranteed by any party
or reinsured by Department of
Education.............................11.02%
SUBSEQUENT POOL STUDENT LOANS
The subsequent pool student loans consist of certain graduate and undergraduate
student loans to be purchased by the trust by no later than December 24, 1999
from funds on deposit in the pre-funding account. The subsequent pool student
loans consist of two separate pools--subsequent pool 1 and subsequent pool 2.
Each of the subsequent pools may be purchased by the trust on different dates
and may have different cutoff dates.
Subsequent Pool 1
The subsequent pool 1 student loans have the characteristics set forth below as
of August 1, 1999. Unless otherwise specified, percentages are of subsequent
pool 1 balance (including certain interest accrued to be capitalized).
Aggregate Characteristics
- Aggregate principal
amount:.........................$121,603,388.55
- Weighted average annual
percentage rate: ..........................6.96%
- Weighted average original
term:....................................184.31 mths
- Weighted average remaining
term: ...................................169.30 mths
- Percent reinsured by the
Department of Education...................59.49%
- Percent not reinsured by the
Department of Education...................40.51%
Guarantees
- Percent guaranteed by federal
guarantors.................................59.49%
- Percent guaranteed by American
Student Assistance.....................31.01%
- Percent guaranteed by California
Student Aid Commission.................25.15%
- Percent guaranteed by New York
State Higher Education Services
Corporation.............................0.71%
- Percent guaranteed by United
Student Aid Funds, Inc..................2.61%
- Percent guaranteed by private
guarantors.................................40.51%
- Percent guaranteed by The
Educational Resources
Institute, Inc.......................40.51%
- Percent not guaranteed by any
party or reinsured by Department
of Education.................................0%
Subsequent Pool 2
The subsequent pool 2 student loans have the characteristics set forth below as
of August 1, 1999. Unless otherwise specified, percentages are of subsequent
pool 2 balance (including certain interest accrued to be capitalized).
Aggregate Characteristics
- Aggregate principal
amount:.........................$53,599,136.40
- Weighted average annual
percentage rate: .........................7.59%
- Weighted average original
term:...................................199.33 mths
- Weighted average remaining
term: ..................................178.91 mths
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Guarantees
- Percent reinsured by the
Department of Education..................54.34%
- Percent not reinsured by the
Department of Education..................45.66%
- Percent guaranteed by federal
guarantors...............................54.34%
- Percent guaranteed by the
Pennsylvania Higher Education
Assistance Agency...................26.38%
- Percent guaranteed by American
Student Assistance..................27.96%
- Percent guaranteed by private
guarantors...............................41.51%
- Percent guaranteed by The
Educational Resources
Institute, Inc......................41.51%
- Percent not guaranteed by any party
or reinsured by Department of
Education.................................4.15%
PRE-FUNDING ACCOUNT
There will be a pre-funding account of approximately $235,202,525. The trust
expects to use those amounts (1) on or prior to December 24, 1999, to purchase
subsequent pool 1 student loans and subsequent pool 2 student loans, and (2) on
or prior to October 31, 2001, to purchase consolidation loans and serial loans,
to pay capitalized interest on the pool of student loans and to pay advances for
certain fees related to the student loans.
THE RESERVE ACCOUNT
There will be a reserve account to cover servicing fees, administration fees,
interest on the notes and, except as described under "Description of the
Transfer and Servicing Agreements -Credit Enhancement" herein, interest on the
class M notes and the certificates. The reserve account will also be used to
make principal payments on the securities in the same order of priority as
described above under "Priority of Payments", generally to the extent realized
losses on the financed student loans during any collection period exceed excess
interest available to be distributed as principal on the securities. Amounts
on deposit in the reserve account also will be available, if necessary, to
pay principal on each class of securities on its respective final maturity
date.
Initially, the amount in the reserve account will be approximately $17,500,000.
On each distribution date, any available funds remaining after making all prior
required distributions will be deposited into the reserve account up to the
specified reserve account balance.
TAX STATUS
Thompson Hine & Flory LLP, as federal tax counsel to the trust, is of the
opinion that (1) the trust will not be classified as an association or a
publicly traded partnership taxable as a corporation for federal income tax
purposes and (2) the notes will be characterized as debt for federal income tax
purposes. Each noteholder, by accepting a note, will agree to treat the notes as
indebtedness.
Kirkpatrick & Lockhart LLP, as Pennsylvania tax counsel to the
trust, is of the opinion that the same characterizations of the notes and the
trust would apply for Pennsylvania state income tax purposes as for federal
income tax purposes.
ERISA CONSIDERATIONS
Subject to the considerations discussed under "ERISA Considerations" herein the
notes are eligible for purchase by employee benefit plans.
The certificates may not be acquired by employee benefit plans or other
retirement arrangements subject to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), and/or Section 4975 of the Internal Revenue Code
of 1986, as amended or by any other entity that is deemed to hold assets of such
plan or arrangement.
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RATINGS
At least two nationally recognized rating agencies (each a "Rating Agency" and
together, the "Rating Agencies") must each rate the class A notes in the highest
investment rating category, must rate the class M notes in one of the three
highest investment rating categories and must rate the certificates in one of
the four highest investment rating categories.
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RISK FACTORS
We recommend that you consider the following risk factors together with
all the information contained in this prospectus supplement (this "Prospectus
Supplement") and the related prospectus (the "Prospectus") in deciding whether
to purchase any of the securities.
YOU MAY HAVE DIFFICULTY
SELLING YOUR SECURITIES The securities will not be listed on any
securities exchange. As a result, if you
want to sell your securities you must locate
a purchaser that is willing to purchase
those securities. The underwriters intend to
make a secondary market for the securities.
The underwriters will do so by offering to
buy the securities from investors that wish
to sell. However, the underwriters will not
be obligated to make offers to buy the
securities and may stop making offers at any
time. In addition, the prices offered, if
any, may not reflect prices that other
potential purchasers would be willing to
pay, were they to be given the opportunity.
There have been times in the past where
there have been very few buyers of asset
backed securities, and there may be such
times in the future. As a result, you may
not be able to sell your securities when you
want to do so or you may not be able to
obtain the price that you wish to receive.
IF THE TRUST ASSETS ARE
INSUFFICIENT TO MAKE
PAYMENTS ON THE SECURITIES,
YOU MAY INCUR A LOSS The trust is not permitted to have any
significant assets or sources of funds other
than the student loans, the guarantee
agreements, the reserve account, the escrow
account, the pre-funding account and to a
limited extent the interest rate cap. The
notes and the certificates will not be
insured or guaranteed by any entity.
Consequently, you must rely for repayment
upon payments only from the trust's assets.
If the reserve account and the pre-funding
account are exhausted, the trust will depend
solely on payments with respect to the
student loans to make payments on the
securities and you could suffer a loss. You
will have no claim to any amounts properly
distributed to Key Bank USA, National
Association, in its capacities as seller,
administrator, cap provider or master
servicer, or to any of the sub-servicers,
from time to time.
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THE TRUST'S PURCHASE OF
STUDENT LOANS AT A
PREMIUM MAY RESULT
IN LOSSES The original principal amount of the
securities will be equal to approximately
99.18% of the sum of the outstanding
principal balance of the initial student
loans as of the cutoff date and the amount
deposited in the pre-funding account, the
reserve account and the collection account
on the closing date. The above percentage
without giving effect to amounts initially
on deposit in the reserve account is
approximately 100.93%. In addition, each
subsequent pool 1 student loan and
subsequent pool 2 student loan will be
purchased by the trust for an amount equal
to 100% of the principal balance thereof. In
addition, 100% of the initial student loans
and 100% of the subsequent pool student
loans have repayment terms that require
borrowers to make only interest payments for
the first two years after entry into
repayment. There can be no assurance that
the aggregate principal amount of the
securities at all times will be equal to or
less than the sum of the principal amount of
the pool of student loans and the amounts on
deposit in the reserve account. If the
student loans were liquidated at a time when
the outstanding principal amount of the
securities exceeded the sum of the principal
amount of the student loans, the amount on
deposit in the pre-funding account and the
amounts on deposit in the reserve account,
you may suffer a loss.
THE CERTIFICATES WILL
ABSORB CASH SHORTFALLS AND
LOSSES BEFORE THE NOTES The rights of the holders of certificates to
receive payments of interest are
subordinated to the rights of the holders of
notes to receive payments of interest. The
holders of certificates will not receive any
payments of principal until the notes are
paid in full. Consequently, amounts
available to cover cash shortfalls will be
applied to the payment of interest on the
notes before payment of interest on the
certificates. In addition, following the
occurrence of certain events of default
under the indenture and the acceleration of
the notes, all amounts due on the notes will
be payable before any amounts are payable on
the certificates. Additionally, if the
outstanding principal balance of the notes
is in excess of a specified amount,
described under "Description of the Transfer
and Servicing Agreements - Credit
Enhancement" herein, principal will be
payable to
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the holders of the class of notes then
entitled to receive principal in the amount
of such excess to the extent of funds
available before any amounts are payable to
the holders of the certificates. If amounts
otherwise allocable to the certificates are
used to fund payments of interest or
principal on the notes, distributions on the
certificates may be delayed or reduced.
THE CLASS M NOTES WILL
ABSORB CASH SHORTFALLS AND
LOSSES BEFORE THE CLASS A NOTES The rights of the holders of class M notes
to receive payments of interest are
subordinated to the rights of the holders of
class A notes to receive payments of
interest. The holders of class M notes will
not receive any payments of principal until
the class A notes are paid in full.
Consequently, amounts available to cover
cash shortfalls will be applied to the
payment of interest on the class A notes
before payment of interest on the class M
notes. Additionally, if the outstanding
principal balance of the class A notes is in
excess of a specified amount, described
under "Description of the Transfer and
Servicing Agreements - Credit Enhancement"
herein, principal will be payable to the
holders of the class A notes in the amount
of such excess to the extent of funds
available before any amounts are payable to
the holders of the class M notes. So long as
the class A notes are outstanding, there
cannot be an event of default under the
indenture for the failure to pay interest or
principal on the class M notes. If amounts
otherwise allocable to the class M notes are
used to fund payments of interest or
principal on the class A notes,
distributions on the class M notes may be
delayed or reduced.
THE HOLDERS OF CLASS A NOTES
HAVE CERTAIN CONTROLLING RIGHTS Until the class A notes are no longer
outstanding, the class A noteholders will
control substantially all of the rights of
the class M noteholders and the
certificateholders. Without the consent of
the class M noteholders or the
certificateholders, a majority of the class
A noteholders may, among other things, (1)
declare or waive certain defaults by or
cause the removal of the administrator
and/or the master servicer, (2) consent to
the entering into of certain supplemental
indentures, and (3) upon the occurrence and
continuation of an event of default under
the indenture, instruct the indenture
trustee
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to declare the principal of the notes to be
immediately due and payable or to
subsequently rescind such acceleration,
instruct the indenture trustee concerning
any related proceedings or remedies, and
waive certain non-payment defaults under the
indenture. After the class A notes are paid
in full, the class M noteholders will then
possess these controlling rights.
THE CHARACTERISTICS OF THE
STUDENT LOANS MAY CHANGE Certain characteristics of the student loans
will vary from the characteristics of the
initial student loans and the subsequent
pool student loans due to the trust's
purchase of consolidation loans and serial
loans. The distribution by weighted average
interest rates may vary as a result of
variations in the effective rates of
interest applicable to the student loans
after each transfer of additional student
loans to the trust and the remaining term of
the deferral and forbearance periods.
The seller currently makes available and may
in the future make available certain
incentive programs to borrowers. The effect
of these incentive programs may be to reduce
the yield on the initial pool of student
loans.
YOUR YIELD TO MATURITY MAY BE
REDUCED BY PREPAYMENTS,
DELINQUENCIES AND
DEFAULTS The pre-tax return on your investment is
uncertain and will depend on a number of
factors including the following:
- THE RATE OF RETURN OF PRINCIPAL IS
UNCERTAIN. The amount of distributions of
principal on the securities and the time
when you receive those distributions depends
on the amount and the times at which
borrowers make principal payments on the
student loans. Those principal payments may
be regularly scheduled payments or
unscheduled payments resulting from
prepayments, defaults or consolidations of
the student loans. In addition, as a result
of certain triggers required by the Rating
Agencies relating to losses on unguaranteed
and privately guaranteed student loans, you
may receive accelerated payments of
principal. You will bear any reinvestment
risk resulting from these accelerated
payments of principal.
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<PAGE> 16
- YOU MAY RECEIVE A LARGE PRINCIPAL
PREPAYMENT ON FEBRUARY 25, 2000. The trust
will allocate an identified portion of the
student loans to two separate subsequent
pools to be purchased by the trust from
funds on deposit in a related subaccount of
the pre-funding account. If the amount in
the applicable subaccounts of the
pre-funding account is not substantially
used to purchase subsequent pool 1 student
loans and subsequent pool 2 student loans by
December 24, 1999 you may receive a
principal prepayment. If the amount
remaining in these subaccounts on such date
is $10,000,000 or less, the indenture
trustee will distribute such amount on the
Class A-1 Notes; otherwise the indenture
trustee will distribute the amount on each
class of securities, pro rata, based on the
initial principal balance of each class of
securities.
- YOU MAY RECEIVE A PREPAYMENT OF PRINCIPAL
AT END OF FUNDING PERIOD. If the amount in
the applicable subaccount of the pre-funding
account is not fully used to purchase
student loans that are consolidation loans
or serial loans that are eligible to be
purchased by the trust by the end of the
funding period, you may receive a principal
prepayment. Any such amount will be
distributed on the next distribution date.
- YOU MAY NOT BE ABLE TO REINVEST
DISTRIBUTIONS IN COMPARABLE INVESTMENTS.
Asset backed securities, like the securities
offered hereby, usually produce more returns
of principal to investors when market
interest rates fall below the interest rates
on the student loans and produce less
returns of principal when market interest
rates are above the interest rates on the
student loans. As a result, you are likely
to receive more money to reinvest at a time
when other investments generally are
producing a lower yield than that on the
securities, and are likely to receive less
money to reinvest when other investments
generally are producing a higher yield than
that on the securities. You will bear the
risk that the timing and amount of
distributions on your securities will
prevent you from attaining your desired
yield.
- AN EARLY TERMINATION WILL SHORTEN THE LIFE
OF YOUR INVESTMENT WHICH MAY REDUCE YOUR
YIELD TO MATURITY. Your investment in the
securities may end before you desire if (1)
the indenture trustee successfully conducts
an auction
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<PAGE> 17
sale or (2) the seller exercises its option
to purchase all of the assets of the trust.
Because your securities will no longer be
outstanding, you will not receive the
additional interest payments that you would
have received had the securities remained
outstanding. In addition, you may not be
able to reinvest the principal you receive
at a rate comparable to that on your
securities.
YOU MAY NOT RECEIVE CURRENT
PAYMENTS AT THE APPLICABLE
INTEREST RATE You may not be paid interest at the related
note rate or certificate rate because
payments of interest are subject to the
maximum rate. The maximum rate may be
triggered as a result of:
- Due to market forces, the applicable index
used to calculate interest on the securities
(plus the applicable margin) becoming
greater than the indices used to calculate
interest on the student loans.
- The principal balance of the student loans
will initially be less than the aggregate
principal amount of the securities.
Consequently, the aggregate principal
balances of the student loans on which
interest will be collected will be less than
the principal amount of the securities.
- The maximum rate will be reduced as a
result of the trust's obligation to pay
certain amounts to the Department of
Education or to repay certain amounts to
borrowers.
Although the cap provider is obligated to
pay the difference between the applicable
note rate or certificate rate, as
applicable, and the maximum rate, the
obligations of the cap provider under the
interest rate cap are dependent on the cap
provider's ability to make the necessary
payments and are not rated by any rating
agency. If your interest rate is subject to
the maximum rate and the cap provider
defaults or the cap agreement is terminated,
you may receive interest not previously paid
because of the application of the maximum
rate on subsequent distribution dates on a
subordinated basis. We cannot assure you
that there will be sufficient funds
available for that purpose. If the note rate
or certificate rate is limited by the
maximum rate, the market value and liquidity
of your securities may decline. In addition,
there can be no assurance the cap agreement
will not terminate in accordance with its
terms
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<PAGE> 18
before the outstanding principal balance of
your class of notes or certificates is
reduced to zero.
RELIANCE ON SUB-SERVICERS
FOR SERVICING STUDENT
LOANS Although the master servicer is obligated to
cause the student loans to be serviced in
accordance with the terms of the transaction
agreements, the timing of payments will be
directly affected by the ability of the
sub-servicers to adequately service the
student loans. In addition, you will be
relying on each of the sub-servicers'
compliance with applicable, federal and
private program regulations to ensure that
the guarantors are obligated to maintain
guaranteed payments and that any reinsurance
by the Department of Education is
maintained. If a sub-servicer defaults on
its obligations and is terminated, you will
be relying on the ability of the master
servicer to find an alternative sub-servicer
to service the student loans and you may
suffer a delay in the timing of payments
until any transfer of servicing is completed
or effective.
NO PERFORMANCE HISTORY ON
UNGUARANTEED STUDENT LOANS The seller has only been originating
unguaranteed student loans for a limited
time and an immaterial number of these loans
have entered repayment status. As a result,
the seller does not have any meaningful
prepayment, loss or delinquency data on the
unguaranteed student loans. You will bear
the risk that the level of losses and
delinquencies on the unguaranteed student
loans will exceed the level of credit
enhancement and that prepayments on the
unguaranteed student loans are faster or
slower than you anticipated.
RISK OF DEFAULT OF UNGUARANTEED
STUDENT LOANS Approximately 25.45% of the initial student
loans and approximately 4.15% of the
subsequent pool 2 student loans are not
guaranteed or insured by any federal or
private guarantor, or by any other party or
governmental agency. In addition, these
student loans are generally dischargeable by
a borrower in bankruptcy unless it is
determined that such student loan has been
made under any program funded in whole or in
part by a governmental unit or non-profit
institution. You will bear any risk of loss
resulting from the default by any borrower
of a unguaranteed student loan
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<PAGE> 19
to the extent the amount of the default is
not covered by the limited credit
enhancement of the financing structure.
RISK OF DEFAULT BY PRIVATE
GUARANTORS Currently, except for The Educational
Resources Institute, Inc., none of the
private guarantors has an investment grade
credit rating by any national statistical
rating organization. If a private guarantor
defaults on its guarantee obligations, you
will rely solely on payments from the
related borrower for payments on the related
private guaranteed loan. In these
circumstances, you will bear the risk of
loss resulting from the failure of any
borrower of a private guaranteed student
loan to the extent this loss is not covered
by the limited credit enhancement of the
financing structure. In addition, these
student loans are generally dischargeable by
a borrower in bankruptcy unless it is
determined that such student loan has been
made under any program funded in whole or in
part by a governmental unit or non-profit
institution.
MASTER PROMISSORY NOTE For periods of enrollment beginning on or
after July 1, 1999, a master promissory note
may evidence any student loan made to a
borrower under the Federal Family Education
Loan program. Under the master promissory
note, each borrower executes only one
promissory note with each lender. Subsequent
student loans from that lender are evidenced
by a confirmation sent to the student.
Therefore, if a lender originates multiple
student loans to the same student, all the
student loans are evidenced by a single
promissory note.
Pursuant to the Higher Education Act of
1965, as amended, each student loan made
under a master promissory note may be sold
independently of any other student loan note
under the same master promissory note and
each such student loan is separately
enforceable on the basis of an original or
copy of the master promissory note. Also, a
security interest in such student loans may
be perfected either through the secured
party taking possession of the original or a
copy of the master promissory note, or the
filing of a financing statement. Prior to
the master promissory note, each student
loan made under the Federal Family Education
Loan program was evidenced by a
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<PAGE> 20
separate note. Delivery of the original note
was required to effect a transfer or
assignment.
Although none of the initial student loans
or subsequent pool student loans have been
originated under a master promissory note,
it is possible that serial loans or
consolidation loans purchased during the
funding period may be originated under a
master promissory note. If through
negligence or otherwise the master servicer
(or a sub-servicer on its behalf) were to
deliver a copy of the master promissory
note, in exchange for value, to a third
party that did not have knowledge of the
indenture trustee's lien, that third party
may also claim an interest in the such
student loan. Such third party's interest
may be prior to or on a parity with the
interest of the indenture trustee.
COMPUTER PROBLEMS IN THE
YEAR 2000 MAY RESULT IN
LOSSES Many computers and computer chips were not
programmed to recognize more than two digits
in a year of a date. As a result, in the
year 2000, those computers will not know
whether the '00 refers to the year 1900 or
the year 2000. To the extent that the
systems of the master servicer, any
sub-servicer, the administrator, any of the
guarantors, the eligible lender trustee or
the indenture trustee have such problems in
the year 2000 and later, the amount and
timing of distributions to noteholders and
certificateholders could be adversely
affected.
The Department of Education has undertaken a
year 2000 compliance project to address year
2000 issues. Information regarding the
Department of Education's year 2000 efforts
can be obtained at the Department of
Education's site on the World Wide Web at
http://www.ed.gov. Officials at the
Department of Education have indicated that
compliance for the Department of Education's
mission critical systems relating to the
Federal Family Education Loan Program
student loans was completed on March 8,
1999. Any failure by the Department of
Education to resolve any year 2000 issues or
any adverse effect on the Department of
Education caused by a party on which the
Department of Education relies as a result
of year 2000 issues may have a material
adverse effect on the Federal Family
Education Loan Program, the federal
guarantors and you.
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<PAGE> 21
WITHDRAWAL OR DOWNGRADING
OF INITIAL RATINGS WILL ADVERSELY
AFFECT THE PRICES FOR THE
SECURITIES A security rating is not a recommendation to
buy, sell or hold securities. Similar
ratings on different types of securities do
not necessarily mean the same thing. We
recommend that you analyze the significance
of each rating independently from any other
rating. Any rating agency may change its
rating of the securities after the
securities are issued if that rating agency
believes that circumstances have changed.
Any subsequent withdrawal or downgrading of
a rating will likely reduce the price that a
subsequent purchaser will be willing to pay
for the applicable securities. The ratings
do not address the likelihood of the
ultimate payment to you of any interest in
excess of the maximum rate, including
amounts required to be paid by the cap
provider.
THE SECURITIES ARE NOT
SUITABLE INVESTMENTS
FOR ALL INVESTORS The securities are not a suitable investment
if you require a regular or predictable
schedule of payments or payment on any
specific date. The securities are complex
investments that should be considered only
by investors who, either alone or with their
financial, tax and legal advisors, have the
expertise to analyze the prepayment,
reinvestment, default and market risk, the
tax consequences of an investment, and the
interaction of these factors.
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<PAGE> 22
FORMATION OF THE TRUST
THE TRUST
KeyCorp Student Loan Trust 1999-B (the "Trust") is a business trust
formed under the laws of the State of Delaware pursuant to the Trust Agreement,
dated as of September 1, 1999, as amended and restated by the Amended and
Restated Trust Agreement dated as of September 1, 1999 (as further amended and
supplemented from time to time, the "Trust Agreement") between Key Bank USA,
National Association (the "Seller") and Bank One, National Association, as
trustee (the "Eligible Lender Trustee") for the transactions described in this
Prospectus Supplement. A Certificate of Trust forming the Trust was filed with
the Delaware Secretary of State on September 28, 1999. The assets of the Trust
will include certain graduate and undergraduate student loans (collectively
"Student Loans"). Such Student Loans will be acquired by the trust from the
Seller on September 30, 1999 (the "Closing Date") and from time to time
thereafter (collectively, the "Financed Student Loans"). The Financed Student
Loans will consist of (i) Financed Student Loans that are reinsured by the
United States Department of Education (the "Department") (collectively,
"Financed Federal Loans"), (ii) Financed Student Loans that are not reinsured by
the Department or any other government agency but are guaranteed by a private
guarantor (collectively, "Guaranteed Private Loans"), and (iii) certain Financed
Student Loans that are not guaranteed by any party nor reinsured by the
Department (collectively "Non-Guaranteed Private Loans," and together with the
Guaranteed Private Loans, the "Financed Private Loans").
The Trust will not engage in any activity other than
- acquiring, holding and managing the Financed Student Loans and
the other assets of the Trust and proceeds therefrom
- issuing the Certificates and the Notes
- making payments thereon and
- engaging in other activities that are related to the activities
listed above.
The Trust will be initially capitalized with equity of approximately
$65,000,000 excluding amounts deposited in the Reserve Account in the name of
the Indenture Trustee by the Seller on the Closing Date, the initial principal
balance of the Floating Rate Asset Backed Certificates (the "Certificates").
Certificates with an original principal balance of at least $650,000 will be
sold to the Seller and the remaining Certificates will be sold to Credit Suisse
First Boston Corporation who initially proposes to offer such Certificates from
time to time at varying prices to be determined at the time of sale and expects
to sell some or all of such Certificates to the Seller or an affiliate of the
Seller. 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 Pool 1 Student Loans and Initial Pool 2 Student Loans
(collectively, the "Initial Financed Student Loans") from the Seller pursuant to
the Sale and Servicing Agreement dated as of September 1, 1999 among the Trust,
the Seller, the Administrator, the Master Servicer, and the Eligible Lender
Trustee (the "Sale and Servicing Agreement") and to fund the deposit of
approximately $235,202,525 (the "Pre-Funded Amount") into an account to be
maintained by the Indenture Trustee (the "Pre-Funding Account"). The Seller will
use a portion of the net proceeds it receives from the sale of the Initial
Financed
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<PAGE> 23
Student Loans to make a deposit of approximately $17,500,000 on the Closing Date
into the Reserve Account (the "Reserve Account Initial Deposit").
Upon the consummation of such transactions, the property of the Trust
will consist of
(a) a pool of Financed Student Loans, legal title to which is held
by the Eligible Lender Trustee on behalf of the Trust,
(b) all funds collected in respect thereof on or after the
applicable Cutoff Date,
(c) all Guarantee Agreements and other relevant rights under certain
collateral agreements with respect to the Guaranteed Private
Loans, to the extent guaranteed or insured by third parties, and
assigned to the Trust by the Seller (the "Assigned Rights"), and
(d) all moneys and investments on deposit in an account in the
name of the Indenture Trustee (the "Collection Account") which
on the Closing Date will be approximately $12,803,199 the
Pre-Funding Account, an account in the name of the Indenture
Trustee (the "Escrow Account") and the Reserve Account.
In addition, on the Closing Date a portion of the net proceeds from the
sale of the Initial Financed Student Loans will be paid to Key Bank USA,
National Association (the "Cap Provider") in consideration for the Cap Provider
to enter into the interest rate cap agreement with the Trust (the "Cap
Agreement") for the benefit of the holders of the Notes and Certificates.
To facilitate servicing and to minimize administrative burden and
expense, the Master Servicer will be appointed by the Eligible Lender Trustee as
the custodian, and the Master Servicer will then appoint the Sub-Servicers as
the custodians on its behalf, of the promissory notes representing the Financed
Student Loans that each services on behalf of the Master Servicer.
"Initial Pool 1 Student Loans" means the Student Loans identified as
such in the Sale and Servicing Agreement and transferred by the Seller as of the
Closing Date and having an aggregate principal balance of approximately
$452,594,255 as of the Statistical Cutoff Date.
"Initial Pool 2 Student Loans" means the Student Loans identified as
such in the Sale and Servicing Agreement and transferred by the Seller as of the
Closing Date and having an aggregate principal balance of approximately
$290,200,022 as of the Statistical Cutoff Date.
"Statistical Cutoff Date" means September 1, 1999 with respect to the
Initial Financed Student Loans and August 1, 1999 with respect to the Subsequent
Pool Student Loans.
ELIGIBLE LENDER TRUSTEE
Bank One, National Association is the Eligible Lender Trustee for the
Trust under the Trust Agreement pursuant to which the Eligible Lender Trustee
acts as holder of legal title to the Financed Student Loans on behalf of the
Trust. Bank One, National Association, principal offices are located at 1 Bank
One Plaza, Suite IL1-0126, Chicago, Illinois 60607 and its New York offices are
located at First Chicago Trust Company of New York, 14 Wall Street, New York,
New York 10005.
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<PAGE> 24
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 or comparable arrangement with each
of the Guarantors with respect to the Financed Student Loans that are guaranteed
or insured (each a "Guarantee Agreement" and collectively, the "Guarantee
Agreements"). The Eligible Lender Trustee qualifies as an eligible lender and
owner of all Student Loans that are reinsured by the Department (the "Federal
Loans") and all student loans that are not reinsured by the Department, whether
or not guaranteed by a private guarantor (the "Private Loans") for all purposes
under the Higher Education Act of 1965 (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 (as defined
in the Prospectus) from any of California Student Aid Commission ("CSAC"), New
York State Higher Education Services Corporation ("HESC") United Student Aid
Funds, Inc. ("USAF") Pennsylvania Higher Education Assistance Agency ("PHEAA"),
American Student Assistance ("ASA"), Nebraska Student Loan Program ("NSLP") or
Educational Credit Management Corporation ("ECMC") (collectively, the "Federal
Guarantors") and any Federal Assistance (as defined in the Prospectus) with
respect to such Financed Federal Loans. See "The Financed Student Loan
Pool--Insurance of Student Loans; Guarantors of Student Loans" herein.
The Eligible Lender Trustee's liability in connection with the issuance
and sale of the Floating Rate Class A-1 Asset Backed Notes (the "Class A-1
Notes"), Floating Rate Class A-2 Asset Backed Notes (the "Class A-2 Notes" and
together with the Class A-1 Notes, the "Class A Notes") and the Floating Rate
Class M Asset Backed Notes (the "Class M Notes" and together with the Class A
Notes, 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" herein. The Seller plans
to maintain normal commercial banking relations with the Eligible Lender
Trustee.
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, less the fee paid to the Cap Provider, will be paid by the Trust to
the Seller in consideration for the purchase by the Trust of the Initial
Financed Student Loans on the Closing Date. The Seller will use such proceeds
paid to it (x) to make the Reserve Account Initial Deposit and (y) to make an
initial deposit into the Collection Account (the "Closing Date Deposit").
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<PAGE> 25
THE MASTER SERVICER AND THE SUB-SERVICERS
KEY BANK USA, NATIONAL ASSOCIATION
Key Bank USA, National Association ("KBUSA"), in its capacity as Master
Servicer under the Sale and Servicing Agreement (the "Master Servicer"), will be
responsible for master servicing the Financed Student Loans. The Master Servicer
will arrange for and oversee the performance by PHEAA and Great Lakes
(collectively the "Sub-Servicers" and each a "Sub-Servicer") of their respective
servicing obligations with respect to the Financed Student Loans. The Master
Servicer will be entitled to receive the Master Servicing Fee, but will in turn
be solely responsible for all compensation due to the Sub-Servicers for the
performance of their respective obligations pursuant to the related
Sub-Servicing Agreements.
PHEAA
PHEAA is a body corporate and politic constituting a public corporation
and government instrumentality created pursuant to an act of the Pennsylvania
Legislature. 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. Its enabling
legislation also authorizes PHEAA to undertake the origination and servicing of
loans made by PHEAA and others. PHEAA's headquarters are located in Harrisburg,
Pennsylvania with regional offices located throughout Pennsylvania and
additional offices located in California, Delaware and West Virginia. As of June
30, 1999 it had approximately 2300 employees.
PHEAA has been guaranteeing student loans since 1964 and has guaranteed
a total of approximately $20.4 billion principal amount of Stafford Loans (as
defined in the Prospectus) and approximately $2.1 billion principal amount of
Parent Loans for Undergraduate Students ("PLUS Loans") and SLS Loans (as defined
in the Prospectus) under the Higher Education Act. In addition to guaranteeing
loans under the Higher Education Act, PHEAA also operates certain guarantee
programs for which it receives no federal reinsurance. PHEAA has outstanding
guarantee obligations of such loans in the amount of approximately $34.7 million
as of June 30, 1999.
Pursuant to a Sub-Servicing Agreement with the Master Servicer, PHEAA
has agreed to service, and perform all other related tasks with respect to,
certain of the Financed Student Loans. PHEAA is required to perform all services
and duties customary to the servicing of such Financed Student Loans in
compliance with all applicable standards and procedures. See "Description of the
Transfer and Servicing Agreements--Servicing Procedures."
The above information relating to PHEAA has been obtained from PHEAA
and neither KBUSA nor the Underwriters have conducted any independent
verification of such information. PHEAA has agreed that it will provide a copy
of its most recent audited financial statements to holders of Notes and
Certificates (collectively, "Securityholders") upon receipt of a written request
directed to Mr. Tim Guenther, Chief Financial Officer, Financial Management,
1200 North Seventh Street, Harrisburg, Pennsylvania 17102.
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GREAT LAKES
As of June 30, 1999, Great Lakes Educational Loan Services, Inc.
("Great Lakes") and its affiliates serviced 865,000 student and parental
accounts with an outstanding balance of $6.6 billion for 1,200 lenders
nationwide.
Pursuant to a Sub-Servicing Agreement with the Master Servicer, Great
Lakes has agreed to service, and perform all other related tasks with respect
to, certain of the Financed Student Loans. Great Lakes 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 Great Lakes has been obtained from
Great Lakes and neither KBUSA nor the Underwriters have conducted any
independent verification of such information. Great Lakes has agreed that it
will provide a copy of its most recent audited financial statements on receipt
of a written request directed to 2401 International Lane, Madison, Wisconsin
53704, Attention: Vice President and Chief Financial Officer.
SERVICES AND FEES OF MASTER SERVICER AND THE SUB-SERVICERS
Pursuant to the Sale and Servicing Agreement KBUSA will act as Master
Servicer and will enter into one or more sub-servicing agreements (each a
"Sub-Servicing Agreement") with each of PHEAA and Great Lakes with respect to,
all the Financed Student Loans acquired by the Eligible Lender Trustee on behalf
of the Trust. In accordance with the Sub-Servicing Agreements, each Sub-Servicer
will service and perform all related tasks with respect to the Financed Student
Loans on behalf of the Master Servicer and the Trust. The Trust will be an
intended third-party beneficiary of each Sub-Servicing Agreement. With respect
to the Financed Student Loans it is servicing for the Master Servicer and the
Trust, each Sub-Servicer is required to perform the services and duties
customary to the servicing of Student Loans it is required to service with
reasonable care and to do so in the same manner as such Sub-Servicer has
serviced Student Loans on behalf of the Seller or the Master Servicer, as
applicable, and otherwise in compliance with all applicable standards and
procedures. In addition, each Sub-Servicer is required to maintain its
eligibility as a third-party servicer, to the extent applicable, under the
Higher Education Act. See "Description of the Transfer and Servicing
Agreements--Servicing Procedures" herein.
In consideration for performing its obligations under the Sale and
Servicing Agreement, the Master Servicer will receive a monthly fee payable by
the Trust on or about the twenty-fifth day of each month (the "Monthly Servicing
Payment Date") equal to 0.50% on an annualized basis (the "Master Servicing Fee
Percentage") of the principal balance of the Financed Student Loans as of the
last day of the preceding calendar month together with late fees, administrative
fees and similar charges. In consideration for the Master Servicing Fee, the
Master Servicer will be solely responsible for the fees due to the Sub-Servicers
pursuant to the terms of the related Sub-Servicing Agreements except under
certain limited circumstances following an auction sale as described under
"Description of Transfer and Servicing Agreements--Termination" herein. See
"Description of Transfer and Servicing Agreements--Master Servicing
Compensation" herein.
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<PAGE> 27
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 applicable 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 Initial Financed Student Loans will consist of the Initial Pool 1
Student Loans and the Initial Pool 2 Student Loans. Although the Student Loans
in each Initial Pool have the same Statistical Cutoff Date, they have different
Cutoff Dates. The "Cutoff Date" for the Initial Pool 1 Student Loans is
September 1, 1999 and for the Initial Pool 2 Student Loans is September 27,
1999. Consequently, the Trust will be entitled to collections on and proceeds of
the Initial Pool 1 Student Loans on and after September 1, 1999 and for the
Initial Pool 2 Student Loans on and after September 27, 1999.
On or prior to December 24, 1999 the Trust is required to purchase the
Subsequent Pool 1 Student Loans and the Subsequent Pool 2 Student Loans from
funds on deposit in a subaccount of the Pre-Funding Account. The "Subsequent
Pool 1 Student Loans" are Student Loans currently owned by the Seller and
identified herein as Subsequent Pool 1 Student Loans having as of the
Statistical Cutoff Date, the characteristics described below under "--Subsequent
Pool Student Loans". The "Subsequent Pool 2 Student Loans" are the Student Loans
currently owned by the Seller and identified herein as Subsequent Pool 2 Student
Loans having as of the Statistical Cutoff Date, the characteristics described
below under "--Subsequent Pool Student Loans". The Subsequent Pool 1 Student
Loans and Subsequent Pool 2 Student Loans are collectively referred to herein as
the "Subsequent Pool Student Loans".
In addition to the Subsequent Pool Student Loans the Trust may acquire
with certain funds on deposit in the Pre-Funding Account certain other Student
Loans that are either Serial Loans or Consolidation Loans (collectively, the
"Other Subsequent Student Loans"). Other Subsequent Student Loans may be
acquired by the Trust any time prior to the end of the Funding Period. The term
"Additional Student Loans" refers collectively to the Subsequent Pool Student
Loans, Other Subsequent Student Loans and Fee Advances (as defined in the
Prospectus).
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:
1. Each Financed Student Loan
(a) was originated in the United States or its territories or
possessions under and in accordance with the Programs (as
defined in the Prospectus) (including, in the case of
borrowers of Financed Federal Loans, a financial need
analysis and, in the case of borrowers of Financed Private
Loans, a creditworthiness evaluation) to a borrower who (or
with respect to PLUS Loans to a parent of
S-25
<PAGE> 28
a student who), with respect to the Initial Financed Student
Loans and Subsequent Pool Student Loans, (i) with respect to
undergraduate loans, has graduated or otherwise left an
undergraduate institution or is expected to graduate or
otherwise leave an undergraduate institution by August 31,
1999, and (ii) with respect to graduate loans, has graduated
or otherwise left graduate school or is expected to graduate
or otherwise leave graduate school by August 31, 1999,
(b) contains terms in accordance with those required by the
Programs, the applicable Guarantee Agreements and other
applicable requirements, and
(c) with respect to the Initial Financed Student Loans and
Subsequent Pool Student Loans, is not more than 180 days
past due as of the Cutoff Date or, with respect to the Other
Subsequent Student Loans not more than 90 days past due as
of the applicable Subsequent Cutoff Date, as the case may
be.
2. As of the Statistical Cutoff Date, no Initial Financed Student
Loan and no Subsequent Pool Student Loan had a borrower who was
noted in the related records of the Master Servicer or a
Sub-Servicer as being currently involved in a bankruptcy
proceeding or deceased since the date the Trust was created. Any
Subsequent Pool 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.
3. No Initial Financed Student Loan as of the Statistical Cutoff
Date consists of, and no Subsequent Pool 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.
4. 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.
5. The Financed Student Loans do not and will not include any
non-prime or sub-prime Student Loans. Non-prime or sub-prime
Student Loans are Student Loans originated to individuals who
have previously defaulted on their Student Loans.
6. As of the Statistical Cutoff Date, none of the Initial Financed
Student Loans and none of the Subsequent Pool Student Loans are
non-performing Student Loans. Non-performing Student Loans are
Student Loans which are in default and the Seller expects to
write-off as a loss.
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
S-26
<PAGE> 29
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, a late fee will be assessed where applicable and 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 (as defined in the Prospectus) or Forbearance Periods (as
defined in the Prospectus), 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 and any accrued but unpaid interest on such Financed Student Loan.
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 Subsequent Pool Student Loans, Other Subsequent Student Loans or Fee Advances
(as defined in the Prospectus), in each case originated by the Seller in
accordance with the Programs and other applicable requirements. The Subsequent
Pool Student Loans are identified in this Prospectus Supplement. The Other
Subsequent Student Loans and 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"
herein.
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 Pool 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 Subsequent Pool Student Loans as of the
Statistical Cutoff Date. In addition, the distribution by weighted average
interest rate applicable to the Financed Student Loans on any date following the
Statistical Cutoff Date may vary significantly from that set forth in the
following tables as a result of variations in the effective rates of interest
applicable to the Financed Student Loans. Moreover, the remaining term to
maturity of the Initial Financed Student Loans and Subsequent Pool Student Loans
as of the Statistical Cutoff Date may vary significantly from the actual term to
maturity of any of the Financed Student Loans as a result of the granting of
Deferral Periods and Forbearance Periods with respect thereto.
S-27
<PAGE> 30
THE INITIAL FINANCED STUDENT LOANS
Set forth below in the following tables is a description of certain
additional characteristics of the Initial Pool 1 Student Loans, Initial Pool 2
Student Loans and collectively the Initial Financed Student Loans as of the
Statistical Cutoff Date. Unless otherwise specified, percentages are of the
initial pool principal balances (including certain interest accrued to be
capitalized).
COMPOSITION OF INITIAL POOLS AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
KEYCORP STUDENT LOAN TRUST INITIAL POOL 1 INITIAL POOL 2 TOTAL
- -------------------------- -------------- --------------- ---------------
<S> <C> <C> <C>
Aggregate Outstanding Balance(1) $ 1,254.69 $290,200,021.71 $742,794,276.40
Number of Borrowers 29,180 13,927 43,107
Average Outstanding Balance Per Borrower $ 15,510.43 $ 20,837.22 $ 17,231.41
Number of Loans 55,212 29,249 84,461
Average Outstanding Balance Per Loan $ 8,197.39 $ 9,921.71 $ 8,794.52
Weighted Average Remaining Term to Maturity(2) 184.20 mo. 189.28 mo. 186.18 mo.
Weighted Average Annual Borrower Interest Rate(3) 7.67% 7.49% 7.60%
</TABLE>
(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 $31,887,040.83 with respect to the Initial
Pool 1 Student Loans and $18,240,254.50, with respect to the Initial
Pool 2 Student Loans, in each case as of the Statistical Cutoff Date.
(2) Determined from the Statistical Cutoff Date, to the stated maturity
date of the applicable Initial Financed Student Loans, assuming
repayment commences promptly upon expiration of the typical grace
period following the expected graduation date and without giving effect
to any Deferral Periods or Forbearance Periods that may be granted in
the future. See "The Student Loan Financing Business" in the
Prospectus.
(3) Determined using the borrower interest rates exclusive of Special
Allowance Payments applicable to the Initial Pool 1 Student Loans and
the Initial Pool 2 Student Loans as of the Statistical Cutoff Date.
However, because all the Initial Pool 1 Student Loans and the Initial
Pool 2 Student Loans effectively bear interest at a variable rate per
annum, there can be no assurance that the foregoing rate will remain
applicable to the Initial Pool 1 Student Loans and the Initial Pool 2
Student Loans at any time after the Statistical Cutoff Date. See "The
Student Loan Financing Business" in the Prospectus. The weighted
average spread, with respect to the Initial Pool 1 Student Loans,
including Special Allowance Payments, to the 91-day Treasury Bill Rate
or 52-week Treasury Bill Rate, as applicable, was 2.90% as of the
Statistical Cutoff Date and would have been 3.14% if all of the Student
Loans were in repayment as of the Statistical Cutoff Date. The weighted
average spread, with respect to the Initial Pool 2 Student Loans,
including Special Allowance Payments, to the 91-day Treasury Bill Rate
or 52-week Treasury Bill Rate, as applicable, was 2.84% as of the
Statistical Cutoff Date and would have been 3.05% if all of the Student
Loans were in repayment as of the Statistical Cutoff Date.
S-28
<PAGE> 31
DISTRIBUTION OF INITIAL POOLS BY LOAN TYPE AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL 1 INITIAL POOL 2
---------------------------------------------- ---------------------------------------------
AGGREGATE AGGREGATE
OUTSTANDING PERCENT OF OUTSTANDING PERCENT OF
NUMBER OF PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL INITIAL POOL
LOAN TYPE LOANS BALANCE(1) 1 BALANCE LOANS BALANCE (2) 2 BALANCE
- -------------------------------- --------- ------------- ------------ --------- ------------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stafford Subsidized Loans 9,917 $77,209,890.79 17.06% 10,220 $76,092,760.31 26.22%
Stafford Unsubsidized Loans 9,229 94,122,552.20 20.80 8,444 86,834,212.00 29.92
Federal Consolidation Loans 894 23,824,811.29 5.26 1,135 29,458,665.47 10.15
SLS Loans 1 8,081.69 0.00 2 32,060.60 0.01
ADEAL Loans 3,704 36,656,753.76 8.10 2,081 21,348,437.95 7.36
Bar Examination Loans 626 4,074,981.54 0.90 472 2,987,015.08 1.03
Business Loans 96 721,678.01 0.16 75 662,750.19 0.23
Private Consolidation Loans 249 7,470,576.21 1.65 284 9,176,956.32 3.16
Dental Loans 174 2,771,258.76 0.61 92 1,501,792.54 0.52
Graduate Loans 692 6,385,212.48 1.41 397 3,484,072.55 1.20
Law Loans 6,515 61,174,223.41 13.52 4,178 38,683,827.95 13.33
Medical Loans 1,480 20,736,774.25 4.58 760 10,752,337.52 3.71
Residency Loans 2,026 16,596,416.36 3.67 1,109 9,185,133.23 3.17
Key Alternative Loans 19,609 100,841,043.94 22.28 0
Total 55,212 $452,594,254.69 100.00% 29,249 $290,200,021.71 100.00%
<CAPTION>
TOTAL
-------------------------------------------------
AGGREGATE
OUTSTANDING PERCENT OF
NUMBER OF PRINCIPAL INITIAL POOL
LOAN TYPE LOANS BALANCE BALANCE
- -------------------------------- ----------- ---------------- ------------
<S> <C> <C> <C>
Stafford Subsidized Loans 20,137 $153,302,651.10 20.64%
Stafford Unsubsidized Loans 17,673 180,956,764.20 24.36
Federal Consolidation Loans 2,029 53,283,476.76 7.17
SLS Loans 3 40,142.29 0.01
ADEAL Loans 5,785 58,005,191.71 7.81
Bar Examination Loans 1,098 7,061,996.62 0.95
Business Loans 171 1,384,428.20 0.19
Private Consolidation Loans 533 16,647,532.53 2.24
Dental Loans 266 4,273,051.30 0.58
Graduate Loans 1,089 9,869,285.03 1.33
Law Loans 10,693 99,858,051.36 13.44
Medical Loans 2,240 31,489,111.77 4.24
Residency Loans 3,135 25,781,549.59 3.47
Key Alternative Loans 19,609 100,841,043.94 13.58
Total 84,461 $742,794,276.40 100.00%
</TABLE>
(1) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $31,887,040.83 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 $18,240,254.50 as of the Statistical Cutoff Date.
S-29
<PAGE> 32
DISTRIBUTION OF INITIAL POOLS BY BORROWER INTEREST RATE AS OF THE
STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL 1 INITIAL POOL 2
------------------------------------------------ ---------------------------------------------------
AGGREGATE AGGREGATE
OUTSTANDING PERCENT OF OUTSTANDING PERCENT OF
NUMBER OF PRINCIPAL INITIAL POOL 1 NUMBER OF PRINCIPAL INITIAL POOL 2
INTEREST RATE LOANS BALANCE(2) BALANCE LOANS BALANCE (3) BALANCE
- ----------------- --------- ----------------- -------------- ---------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Less than 7.50%(1) 18,959 $178,626,520.96 39.47% 13,692 $128,863,643.37 44.41%
7.50% to 7.99% 8,974 89,551,775.95 19.79 10,184 96,040,436.57 33.09
8.00% to 8.49% 27,278 184,372,255.51 40.74 5,368 64,992,055.21 22.40
8.50% to 8.99% 0 0.00 0.00 0 0.00 0.00
9.00% and above 1 43,702.27 0.01 5 303,886.56 0.10
Total 55,212 $452,594,254.69 100.00% 29,249 $290,200,021.71 100.00%
<CAPTION>
TOTAL
----------------------------------------------------
AGGREGATE
OUTSTANDING PERCENT OF
NUMBER OF PRINCIPAL INITIAL POOL
INTEREST RATE LOANS BALANCE BALANCE
- ----------------- --------- ------------- ---------------
<S> <C> <C> <C>
Less than 7.50%(1) 32,651 $307,490,164.33 41.40%
7.50% to 7.99% 19,158 185,592,212.52 24.99
8.00% to 8.49% 32,646 249,364,310.72 33.57
8.50% to 8.99% 0 0.00 0.00
9.00% and above 6 347,588.83 0.05
Total 84,461 $742,794,276.40 100.00%
</TABLE>
(1) Determined using the interest rates applicable to the Initial Financed
Student Loans as of the Statistical Cutoff Date. However, because all
the Initial Financed Student Loans 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 at any time after the Statistical Cutoff Date. See "The Student
Loan Financing Business" in the Prospectus.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $ 31,887,040.83 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 $ 18,240,254.50 as of the Statistical Cutoff Date.
S-30
<PAGE> 33
DISTRIBUTION OF INITIAL POOLS BY OUTSTANDING PRINCIPAL BALANCE AS OF THE
STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL 1 INITIAL POOL 2
-------------------------------------------- ----------------------------------------------
AGGREGATE PERCENT OF PERCENT OF
OUTSTANDING INITIAL INITIAL
OUTSTANDING PRINCIPAL NUMBER OF PRINCIPAL POOL 1 NUMBER OF AGGREGATE OUTSTANDING POOL 2
BALANCE LOANS(1) BALANCE(2) BALANCE LOANS PRINCIPAL BALANCE (3) BALANCE
- ---------------------- ------------ ---------- ---------- ----------- ----------------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Less than $1,000.00 1,287 $540,950.74 0.12% 572 $387,867.40 0.13%
$1,000 to $1,999.99 2,949 4,414,573.37 0.98 1,111 1,567,207.58 0.54
$2,000 to $2,999.99 3,922 9,784,906.20 2.16 1,054 2,627,792.19 0.91
$3,000 to $3,999.99 3,870 13,512,449.00 2.99 1,077 3,733,292.88 1.29
$4,000 to $4,999.99 3,824 17,129,863.54 3.78 1,181 5,264,869.90 1.81
$5,000 to $5,999.99 4,448 24,450,085.29 5.40 1,349 7,406,321.96 2.55
$6,000 to $6,999.99 3,210 20,722,668.12 4.58 1,320 8,541,152.39 2.94
$7,000 to $7,999.99 3,236 24,442,246.63 5.40 1,735 13,098,573.37 4.51
$8,000 to $8,999.99 12,310 104,422,469.53 23.07 7,381 62,663,646.54 21.59
$9,000 to $9,999.99 2,774 26,067,680.10 5.76 2,238 21,114,206.16 7.28
$10,000 to $10,999.99 2,016 21,202,173.13 4.68 1,654 17,349,879.37 5.98
$11,000 to $11,999.99 3,322 37,952,276.21 8.39 2,219 25,411,813.71 8.76
$12,000 to $12,999.99 3,016 37,106,712.91 8.20 2,170 26,773,796.67 9.23
$13,000 to $13,999.99 719 9,667,922.32 2.14 674 9,055,826.30 3.12
$14,000 to $14,999.99 479 6,958,538.82 1.54 382 5,512,782.88 1.90
$15,000 to $15,999.99 333 5,154,722.75 1.14 223 3,453,081.46 1.19
$16,000 to $16,999.99 296 4,877,411.06 1.08 237 3,906,956.30 1.35
$17,000 to $17,999.99 336 5,863,647.03 1.30 238 4,157,279.48 1.43
$18,000 to $18,999.99 383 7,086,182.81 1.57 247 4,568,278.74 1.57
$19,000 to $19,999.99 280 5,465,110.72 1.21 226 4,409,849.46 1.52
$20,000 to $20,999.99 241 4,945,833.80 1.09 170 3,483,839.53 1.20
$21,000 to $21,999.99 203 4,356,345.42 0.96 153 3,279,694.23 1.13
$22,000 to $22,999.99 198 4,456,344.51 0.98 151 3,402,544.17 1.17
$23,000 to $23,999.99 114 2,676,863.11 0.59 102 2,400,638.22 0.83
$24,000 to $24,999.99 151 3,694,203.43 0.82 132 3,231,989.96 1.11
$25,000 to $25,999.99 137 3,496,420.70 0.77 122 3,110,271.60 1.07
$26,000 to $26,999.99 112 2,968,749.78 0.66 105 2,786,610.37 0.96
$27,000 to $27,999.99 111 3,050,060.42 0.67 98 2,692,973.38 0.93
$28,000 to $28,999.99 65 1,854,504.04 0.41 86 2,452,313.56 0.85
$29,000 to $29,999.99 76 2,244,294.05 0.50 84 2,482,770.81 0.86
$30,000 and above 794 32,028,045.15 7.08 758 29,871,901.14 10.29
Total 55,212 $452,594,254.69 100.00% 29,249 $290,200,021.71 100.00%
<CAPTION>
TOTAL
-------------------------------------------------
PERCENT OF
OUTSTANDING PRINCIPAL NUMBER OF AGGREGATE OUTSTANDING INITIAL POOL
BALANCE LOANS PRINCIPAL BALANCE BALANCE
- ---------------------- --------- --------------------- ------------
<S> <C> <C> <C>
Less than $1,000.00 1,859 $928,818.14 0.13%
$1,000 to $1,999.99 4,060 5,981,780.95 0.81
$2,000 to $2,999.99 4,976 12,412,698.39 1.67
$3,000 to $3,999.99 4,947 17,245,741.88 2.32
$4,000 to $4,999.99 5,005 22,394,733.44 3.01
$5,000 to $5,999.99 5,797 31,856,407.25 4.29
$6,000 to $6,999.99 4,530 29,263,820.51 3.94
$7,000 to $7,999.99 4,971 37,540,820.00 5.05
$8,000 to $8,999.99 19,691 167,086,116.07 22.49
$9,000 to $9,999.99 5,012 47,181,886.26 6.35
$10,000 to $10,999.99 3,670 38,552,052.50 5.19
$11,000 to $11,999.99 5,541 63,364,089.92 8.53
$12,000 to $12,999.99 5,186 63,880,509.58 8.60
$13,000 to $13,999.99 1,393 18,723,748.62 2.52
$14,000 to $14,999.99 861 12,471,321.70 1.68
$15,000 to $15,999.99 556 8,607,804.21 1.16
$16,000 to $16,999.99 533 8,784,367.36 1.18
$17,000 to $17,999.99 574 10,020,926.51 1.35
$18,000 to $18,999.99 630 11,654,461.55 1.57
$19,000 to $19,999.99 506 9,874,960.18 1.33
$20,000 to $20,999.99 411 8,429,673.33 1.13
$21,000 to $21,999.99 356 7,636,039.65 1.03
$22,000 to $22,999.99 349 7,858,888.68 1.06
$23,000 to $23,999.99 216 5,077,501.33 0.68
$24,000 to $24,999.99 283 6,926,193.39 0.93
$25,000 to $25,999.99 259 6,606,692.30 0.89
$26,000 to $26,999.99 217 5,755,360.15 0.77
$27,000 to $27,999.99 209 5,743,033.80 0.77
$28,000 to $28,999.99 151 4,306,817.60 0.58
$29,000 to $29,999.99 160 4,727,064.86 0.64
$30,000 and above 1,552 61,899,946.29 8.33
Total 84,461 $742,794,276.40 100.00%
</TABLE>
(1) Borrowers generally have more than one outstanding loan. The average
aggregate outstanding principal balance of loans per borrower is
$17,231.41, with respect to the Initial Financed Student Loans, as of
the Statistical Cutoff Date. Some borrowers have both loans which are
Initial Financed Student Loans. If both pools were combined, the number
of borrowers would be 34,958 and the average outstanding principal
balance per borrower would be $21,248.19.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $31,887,040.83 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 $18,240,254.50 as of the Statistical Cutoff Date.
S-31
<PAGE> 34
DISTRIBUTION OF INITIAL POOLS BY REMAINING TERM TO SCHEDULED MATURITY AS OF THE
STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL 1 INITIAL POOL 2
-------------------------------------------- ----------------------------------------------
AGGREGATE PERCENT OF PERCENT OF
OUTSTANDING INITIAL INITIAL
MONTHS TO NUMBER OF PRINCIPAL POOL 1 NUMBER OF AGGREGATE OUTSTANDING POOL 2
SCHEDULED MATURITY LOANS(1) BALANCE(2) BALANCE LOANS PRINCIPAL BALANCE (3) BALANCE
- ---------------------- ------------ ---------- ---------- ----------- ----------------------- ----------
<S> <C> <C> <C> <C> <C> <C>
24 and below(1) 450 $69,383.65 0.02% 62 $79,352.97 0.03%
25 to 48 91 191,779.60 0.04 143 275,994.71 0.10
49 to 60 59 192,075.91 0.04 83 320,783.25 0.11
61 to 72 72 181,628.96 0.04 86 341,128.67 0.12
73 to 84 91 264,074.18 0.06 164 672,014.51 0.23
85 to 96 803 2,986,515.51 0.66 653 3,523,637.21 1.21
97 to 108 2,833 11,879,765.23 2.62 1,744 12,879,405.85 4.44
109 to 120 8,740 48,482,374.57 10.71 3,659 31,622,127.40 10.90
121 to 180 24,737 198,715,219.66 43.91 12,646 116,774,566.62 40.24
181 to 240 3,038 28,030,323.93 6.19 1,250 14,668,334.57 5.05
241 and above 14,298 161,601,113.49 35.71 8,759 109,042,675.95 37.58
Total 55,212 $452,594,254.69 100.00% 29,249 $290,200,021.71 100.00%
<CAPTION>
TOTAL
--------------------------------------------------
PERCENT OF
MONTHS TO NUMBER OF AGGREGATE OUTSTANDING INITIAL POOL
SCHEDULED MATURITY LOANS PRINCIPAL BALANCE BALANCE
- ---------------------- ------------ ---------------------- --------------
<S> <C> <C> <C>
24 and below(1) 512 $148,736.62 0.02%
25 to 48 234 467,774.31 0.06
49 to 60 142 512,859.16 0.07
61 to 72 158 522,757.63 0.07
73 to 84 255 936,088.69 0.13
85 to 96 1,456 6,510,152.72 0.88
97 to 108 4,577 24,759,171.08 3.33
109 to 120 12,399 80,104,501.97 10.78
121 to 180 37,383 315,489,786.28 42.47
181 to 240 4,288 42,698,658.50 5.75
241 and above 23,057 270,643,789.44 36.44
Total 84,461 $742,794,276.40 100.00%
</TABLE>
(1) Determined from the Statistical Cutoff Date to the stated maturity date
of the applicable Initial Financed Student Loan, assuming repayment
commences promptly upon expiration of the typical grace period
following the expected graduation date and without giving effect to any
deferral or forbearance periods that may be granted in the future. See
"The Student Loan Financing Business" in the Prospectus.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $31,887,040.83 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 $18,240,254.50 as of the Statistical Cutoff Date.
S-32
<PAGE> 35
DISTRIBUTION OF INITIAL POOLS BY BORROWER PAYMENT STATUS AS OF THE
STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL 1 INITIAL POOL 2
------------------------------------------------- ------------------------------------------------
AGGREGATE PERCENT OF AGGREGATE PERCENT OF
NUMBER OF OUTSTANDING INITIAL POOL 1 NUMBER OF OUTSTANDING INITIAL POOL
PAYMENT STATUS LOANS PRINCIPAL BALANCE (2) BALANCE LOANS PRINCIPAL BALANCE (3) 2 BALANCE
- -------------- ---------- --------------------- ------------- ---------- --------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
In School(1) 1,646 $13,081,789.15 2.89% 244 $2,315,382.65 0.80%
Grace 31,428 268,513,599.03 59.33 15,850 148,967,651.10 51.33
Deferral 3,925 40,585,865.73 8.97 4,206 40,644,889.38 14.01
Forbearance 2,479 21,297,887.62 4.71 2,114 21,998,990.15 7.58
Repayment
First year in repayment 11,891 89,220,257.20 19.71 3,749 53,548,554.11 18.45
Second year in repayment 2,976 15,024,417.81 3.32 2,430 18,352,885.66 6.32
More than two years 867 4,870,438.15 1.08 656 4,371,668.66 1.51
in repayment
Total 55,212 $452,594,254.69 100.00% 29,249 $290,200,021.71 100.00%
<CAPTION>
TOTAL
----------------------------------------------
AGGREGATE
NUMBER OUTSTANDING PERCENT OF
PAYMENT STATUS OF LOANS PRINCIPAL BALANCE POOL BALANCE
- -------------- -------- ------------------- -------------
<S> <C> <C> <C>
In School(1) 1,890 $15,397,171.80 2.07%
Grace 47,278 417,481,250.13 56.20
Deferral 8,131 81,230,755.11 10.94
Forbearance 4,593 43,296,877.77 5.83
Repayment
First year in repayment 15,640 142,768,811.31 19.22
Second year in repayment 5,406 33,377,303.47 4.49
More than two years 1,523 9,242,106.81 1.24
in repayment
Total 84,461 $742,794,276.40 100.00%
</TABLE>
(1) Refers to the status of the borrower of each Initial Financed Student
Loan to be added, as of the Statistical Cutoff Date: such borrower may
still be attending an undergraduate institution or a graduate school
("In-School"), may be in a grace period prior to repayment commencing
("Grace"), may be repaying such loan ("Repayment") or may have
temporarily ceased repaying such loan through a deferral ("Deferral")
or a forbearance ("Forbearance") period. See "The Student Loan
Financing Business" in the Prospectus.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $31,887,040.83 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 $18,240,254.50 as of the Statistical Cutoff Date.
S-33
<PAGE> 36
INITIAL POOLS SCHEDULED WEIGHTED AVERAGE MONTHS REMAINING IN STATUS
BY CURRENT BORROWER PAYMENT STATUS AS OF THE
STATISTICAL CUTOFF DATE(1)
<TABLE>
<CAPTION>
INITIAL POOL 1 INITIAL POOL 2
- -------------- ------------------------------------------------------ -------------------------------------------- ---------
PAYMENT STATUS IN-SCHOOL GRACE DEFERRAL FORBEARANCE REPAYMENT IN-SCHOOL GRACE DEFERRAL FORBEARANCE REPAYMENT
- -------------- --------- ----- -------- ----------- --------- --------- ----- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
In-School 11.43 8.59 161.40 0.52 8.92 163.38
Grace 5.87 170.86 5.96 169.62
Deferral 12.36 223.61 9.54 177.26
Forbearance 4.87 168.07 5.18 173.56
Repayment 186.09 220.92
Total 11.43 6.00 12.36 4.87 178.86 0.52 6.01 9.54 5.18 184.42
<CAPTION>
TOTAL
- -------------- ------------------------------------------------------
PAYMENT STATUS IN-SCHOOL GRACE DEFERRAL FORBEARANCE REPAYMENT
- -------------- --------- ----- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
In-School 9.79 8.64 161.70
Grace 5.90 170.41
Deferral 10.95 200.42
Forbearance 5.03 170.86
Repayment 200.42
Total 9.79 6.00 10.95 5.03 181.03
</TABLE>
(1) Determined without giving effect to any Deferral Periods or Forbearance
Periods that may be granted in the future.
S-34
<PAGE> 37
INITIAL POOLS GEOGRAPHIC DISTRIBUTION OF STATES REPRESENTING MORE THAN 4%
OF THE AGGREGATE POOL BALANCE AS OF THE STATISTICAL CUTOFF DATE(1)
<TABLE>
<CAPTION>
INITIAL POOL 1 INITIAL POOL 2
---------------------------------------- ------------------------------------------
AGGREGATE PERCENT OF AGGREGATE PERCENT OF
OUTSTANDING INITIAL OUTSTANDING INITIAL
NUMBER PRINCIPAL POOL 1 NUMBER PRINCIPAL POOL 1
OF LOANS BALANCE (2) BALANCE OF LOANS BALANCE (2) BALANCE
-------- ------------ ---------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
New York 11,015 $86,454,550.69 19.10% New York 4,048 $43,709,905.38 15.06%
California 6,672 58,063,165.74 12.83 California 4,320 42,818,007.55 14.75
Ohio 3,715 25,230,144.97 5.57 Massachusetts 1,597 16,207,162.16 5.58
Florida 2,528 22,744,360.95 5.03 Florida 1,310 14,594,176.05 5.03
Massachusetts 2,623 22,274,823.22 4.92 New Jersey 1,362 13,866,073.27 4.78
New Jersey 2,181 20,743,268.61 4.58 Pennsylvania 1,397 13,726,894.97 4.73
Pennsylvania 2,446 20,162,945.16 4.45 Illinois 1,334 13,622,391.76 4.69
Illinois 1,923 18,810,878.48 4.16 Ohio 1,299 11,799,215.73 4.07
All Other States (4) 22,109 178,110,116.87 39.35 All Other 12,582 119,856,194.84 41.30
States(4)
Total 55,212 $452,594,254.69 100.00% Total 29,249 $290,200,021.71 100.00%
<CAPTION>
TOTAL
------------------------------------------
AGGREGATE PERCENT OF
OUTSTANDING INITIAL
NUMBER PRINCIPAL POOL 1
OF LOANS BALANCE (2) BALANCE
------------ ---------- -----------
<S> <C> <C> <C>
New York 15,063 $130,164,456.07 17.52%
California 10,992 100,881,173.29 13.58
Massachusetts 4,220 38,481,985.38 5.18
Florida 3,838 37,338,537.00 5.03
Ohio 5,014 37,029,360.70 4.99
New Jersey 3,543 34,609,341.88 4.66
Pennsylvania 3,843 33,889,840.13 4.56
Illinois 3,257 32,433,270.24 4.37
All Other States(4) 34,691 297,966,311.71 40.11
Total 84,461 $742,794,276.40 100.00%
</TABLE>
(1) Based on the permanent billing addresses of the borrowers of the
Initial Financed Student Loans shown on the Master Servicer's or a
Sub-Servicer's records as of the Statistical Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon of $31,887,040.83 as of the Statistical Cut-Off Date
to be capitalized upon commencement of repayment.
(3) Includes net principal balance due from borrowers, plus accrued
interest thereon of $18,240,254.50 as of the Statistical Cut-Off Date
to be capitalized upon commencement of repayment.
(4) Includes all other states, none of which exceeds 4% of the Initial Pool
Balance.
S-35
<PAGE> 38
DISTRIBUTION OF INITIAL POOLS BY LOAN REPAYMENT TERM AS OF THE STATISTICAL
CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL 1 INITIAL POOL 2
------------------------------------------------ ---------------------------------------------
AGGREGATE AGGREGATE
OUTSTANDING PERCENT OF OUTSTANDING PERCENT OF
LOAN NUMBER PRINCIPAL INITIAL POOL 1 NUMBER PRINCIPAL INITIAL POOL 2
REPAYMENT TERMS OF LOANS BALANCE(1) BALANCE OF LOANS BALANCE(2) BALANCE
-------- ---------- ------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Level Payment 39,274 $285,691,614.32 63.12% 19,487 $182,631,532.76 62.93%
Income Sensitive 0 0.00 0 36 292,025.86 0.10
Interest Only(3) 0 0.00 0 0 0.00 0.00
Graduated Payment(4) 1,024 18,951,389.78 4.19 1,208 21,529,757.99 7.42
Other (5) 14,914 147,951,250.59 32.69 8,518 85,746,705.10 29.55
Total 55,212 $452,594,254.69 100.00% 29,249 $290,200,021.71 100.00%
<CAPTION>
TOTAL
-----------------------------------------------
AGGREGATE
OUTSTANDING PERCENT OF
LOAN NUMBER PRINCIPAL INITIAL POOL
REPAYMENT TERMS OF LOANS BALANCE BALANCE
-------- ------- -------
<S> <C> <C> <C>
Level Payment 58,761 $468,323,147.08 63.05%
Income Sensitive 36 292,025.86 0.04
Interest Only(3) 0 0.00 0.00
Graduated Payment(4) 2,232 40,481,147.77 5.45
Other (5) 23,432 233,697,955.69 31.46
Total 84,461 $742,794,276.40 100.00%
</TABLE>
(1) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $31,887,040.83 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 $18,240,254.50 as of the Statistical Cutoff Date.
(3) Student Loans with interest only repayment terms require borrowers to
make payments of interest only for the first two years after entering
repayment and thereafter to make level payments (made up of both
principal and interest) which will amortize the then outstanding
principal balance of the loan over the then remaining term.
(4) Student Loans with graduated repayment terms require borrowers to make
payments of interest only for the first two years after entering
repayment which increase over the next three years to a level payment
amount which will amortize the then outstanding principal balance of
the loan over the then remaining term.
(5) Loan not yet in repayment status, but to enter repayment status upon
receipt of a repayment schedule.
S-36
<PAGE> 39
<TABLE>
<CAPTION>
INITIAL POOL 1 INITIAL POOL 2
--------------------------------------------- -------------------------------------------
AGGREGATE PERCENT OF AGGREGATE PERCENT OF
OUTSTANDING INITIAL OUTSTANDING INITIAL
NUMBER OF PRINCIPAL POOL 1 NUMBER OF PRINCIPAL POOL 2
DATE OF DISBURSEMENT(1) LOANS BALANCE(2) BALANCE LOANS BALANCE(3) BALANCE
- ----------------------- ----- ---------- ------- ----- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Pre October 1, 1993 73 $520,035.61 0.11% 673 $4,545,969.43 1.57%
October 1, 1993 to September 30, 1998 50,648 401,436,545.19 88.70 25,721 236,864,437.02 81.62
October 1, 1998 to Present 4,491 50,637,673.89 11.19 2,855 48,789,615.26 16.81
Total 55,212 $452,594,254.69 100.00% 29,249 $290,200,021.71 100.00%
<CAPTION>
TOTAL
--------------------------------------------
AGGREGATE PERCENT OF
OUTSTANDING INITIAL
NUMBER OF PRINCIPAL POOL
DATE OF DISBURSEMENT(1) LOANS BALANCE BALANCE
- ----------------------- ----- ------- -------
<S> <C> <C> <C>
Pre October 1, 1993 746 $5,066,005.04 0.68%
October 1, 1993 to September 30, 1998 76,369 638,300,982.21 85.93
October 1, 1998 to Present 7,346 99,427,289.15 13.39
Total 84,461 $742,794,276.40 100.00%
</TABLE>
(1) Federal Loans disbursed prior to October 1, 1993 are 100% guaranteed by
the applicable Federal Guarantor, and reinsured against default by the
Department up to 100% of the Guarantee Payments. Federal Loans
disbursed on or after October 1, 1993 (but before October 1, 1998) are
98% guaranteed by the applicable Federal Guarantor, and reinsured
against default by the Department up to a maximum of 98% of the
Guarantor Payments. Federal Loans first disbursed on or after October
1, 1998 are 98% guaranteed by the applicable Federal Guarantor, and
reinsured against default by the Department up to 95% of the Guarantee
Payments. See "The Student Loan Financing Business--Description of
Federal Loans Under the Programs" and "--Insurance of Student Loans;
Guarantors of Student Loans" in the Prospectus.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $31,887,040.83 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 $18,240,254.50 as of the Statistical Cutoff Date.
S-37
<PAGE> 40
DISTRIBUTION OF INITIAL POOLS BY
NUMBER OF DAYS OF DELINQUENCY AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL 1 INITIAL POOL 2
------------------------------------------------- -------------------------------------------------
AGGREGATE PERCENT OF AGGREGATE PERCENT OF
NUMBER OF OUTSTANDING INITIAL POOL 1 NUMBER OF OUTSTANDING INITIAL POOL 2
DAYS DELINQUENT LOANS PRINCIPAL BALANCE(1) BALANCE LOANS PRINCIPAL BALANCE(2) BALANCE
- --------------- ----- -------------------- ------- ----- -------------------- -------
<S> <C> <C> <C> <C> <C> <C>
Current 54,605 $446,938,695.70 98.75% 28,466 $283,031,802.42 97.53%
31-60 453 4,250,800.53 0.94 616 5,450,074.53 1.88
61-90 123 1,077,968.25 0.24 167 1,718,144.76 0.59
91 or more 31 326,790.21 0.07 0 0.00 0.00
Total 55,212 $452,594,254.69 100.00% 29,249 $290,200,021.71 100.00%
<CAPTION>
TOTAL
-------------------------------------------------
AGGREGATE PERCENT OF
NUMBER OF OUTSTANDING INITIAL POOL
DAYS DELINQUENT LOANS PRINCIPAL BALANCE BALANCE
- --------------- ----- ----------------- -------
<S> <C> <C> <C>
Current 83,071 $729,970,498.12 98.27%
31-60 1,069 9,700,875.06 1.31
61-90 290 2,796,113.01 0.38
91 or more 31 326,790.21 0.04
Total 84,461 $742,794,276.40 100.00%
</TABLE>
(1) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $31,887,040.83 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 $18,240,254.50 as of the Statistical Cutoff Date.
S-38
<PAGE> 41
SUBSEQUENT POOL STUDENT LOANS
Set forth below in the following tables is a description of certain
additional characteristics of the Subsequent Pool Student Loans as of the
Statistical Cutoff Date. Unless otherwise specified, percentages are of the
subsequent pool principal balances (including certain interest accrued to be
capitalized). Regularly scheduled payments and prepayments of such Subsequent
Pool Student Loans (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 Subsequent Pool Student Loans 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 Pool Student Loans 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 Pool
Student Loans will vary materially.
<TABLE>
<CAPTION>
COMPOSITION AS OF THE STATISTICAL CUTOFF DATE
KEYCORP STUDENT LOAN TRUST SUBSEQUENT POOL 1 SUBSEQUENT POOL 2
- -------------------------- ----------------- -----------------
<S> <C> <C>
Aggregate Outstanding Balance(1) $121,603,388.55 $53,599,136.40
Number of Borrowers
6,481 3,589
Average Outstanding Balance Per Borrower $ 18,763.06 $ 14,934.28
Number of Loans 9,101 6,074
Average Outstanding Balance Per Loan $ 13,361.54 $ 8,824.36
Weighted Average Remaining Term to Maturity(2) 169.30 mo. 178.91 mo.
Weighted Average Annual Borrower Interest Rate(3) 6.96% 7.59%
</TABLE>
(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 $2,504,709.33 with respect to the Subsequent Pool 1 Student
Loans and $3,415,701.51, with respect to the Subsequent Pool 2 Student
Loans, in each case as of the Statistical Cutoff Date.
(2) Determined from the Statistical Cutoff Date to the stated maturity date of
the applicable Subsequent Pool 1 Student Loans or Subsequent Pool 2 Student
Loans, assuming repayment commences promptly upon expiration of the typical
grace period following the expected graduation date and without giving
effect to any Deferral Periods or Forbearance Periods that may be granted
in the future. See "The Student Loan Financing Business" in the Prospectus.
(3) Determined using the borrower interest rates exclusive of Special Allowance
Payments applicable to the Subsequent Pool 1 Student Loans and the
Subsequent Pool 2 Student Loans as of the Statistical Cutoff Date. However,
because all the Subsequent Pool 1 Student Loans and the Subsequent Pool 2
Student Loans effectively bear interest at a variable rate per annum, there
can be no assurance that the foregoing rate will remain applicable to the
Subsequent Pool 1 Student Loans and the Subsequent Pool 2 Student Loans at
any time after the Statistical Cutoff Date. See "The Student Loan Financing
Business" in the Prospectus. The weighted average spread, with respect to
the Subsequent Pool 1 Student Loans, including Special Allowance Payments,
to the 91-day Treasury Bill Rate or 52-week Treasury Bill Rate, as
applicable, was 2.29% as of the Statistical Cutoff Date and would have been
2.60% if all of the Student Loans were in repayment as of the Statistical
Cutoff Date. The weighted average spread, with respect to the Subsequent
Pool 2 Student Loans, including Special Allowance Payments, to the 91-day
Treasury Bill Rate or 52-week Treasury Bill Rate, as applicable, was 2.87%
as of the Statistical Cutoff Date and would have been 3.14% if all of the
Student Loans were in repayment as of the Statistical Cutoff Date.
S-39
<PAGE> 42
DISTRIBUTION OF SUBSEQUENT POOLS BY LOAN TYPE AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
SUBSEQUENT POOL 1 SUBSEQUENT POOL 2
------------------------------------------------- ------------------------------------------------------
AGGREGATE PERCENT OF AGGREGATE PERCENT OF
OUTSTANDING SUBSEQUENT OUTSTANDING SUBSEQUENT
NUMBER OF PRINCIPAL POOL 1 NUMBER OF PRINCIPAL POOL 2
LOAN TYPE LOANS BALANCE (1) BALANCE LOANS BALANCE (2) BALANCE
- --------- --------- ----------- ----------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Stafford Loans 4,305 $72,343,930.10 59.49% 3,316 $29,125,172.71 54.34%
Private Loans 4,796 49,259,458.45 40.51 2,758 $24,473,963.69
45.66
Total 9,101 $121,603,388.55 100.00% 6,074 $53,599,136.40 100.00%
</TABLE>
(1) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$2,504,709.33 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
$3,415,701.51 as of the Statistical Cutoff Date.
S-40
<PAGE> 43
DISTRIBUTION OF SUBSEQUENT POOLS BY BORROWER
INTEREST RATE AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
SUBSEQUENT POOL 1 SUBSEQUENT POOL 2
------------------------------------------------- ------------------------------------------------------
AGGREGATE PERCENT OF AGGREGATE PERCENT OF
OUTSTANDING SUBSEQUENT OUTSTANDING SUBSEQUENT
INTEREST NUMBER OF PRINCIPAL POOL 1 NUMBER OF PRINCIPAL POOL 2
RATE LOANS BALANCE (2) BALANCE LOANS BALANCE (3) BALANCE
- -------- --------- ----------- ----------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
7.000% and less(1) 4,092 $69,004,051.26 56.75% 1,153 $11,582,428.31 21.61%
7.001% to 7.500% 216 3,155,805.49 2.60 1,341 10,857,114.45 20.26
7.501% to 8.000% 4,577 47,366,914.41 38.95 1,334 10,648,492.94 19.87
8.001% to 8.500% 216 2,076,617.39 1.71 2,246 20,511,100.70 38.27
Total 9,101 $121,603,388.55 100.00% 6,074 $53,599,136.40 100.00%
</TABLE>
(1) Determined using the interest rates applicable to the Subsequent Pool 1
Student Loans and the Subsequent Pool 2 Student Loans as of the Statistical
Cutoff Date. However, because all the Subsequent Pool 1 Student Loans and
the Subsequent Pool 2 Student Loans effectively bear interest at a variable
rate per annum, there can be no assurance that the foregoing information
will remain applicable to the Subsequent Pool 1 Student Loans or the
Subsequent Pool 2 Student Loans at any time after the Statistical Cutoff
Date. See "The Student Loan Financing Business" in the Prospectus.
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$2,504,709.33 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
$3,415,701.51 as of the Statistical Cutoff Date.
S-41
<PAGE> 44
<TABLE>
<CAPTION>
DISTRIBUTION OF SUBSEQUENT POOLS BY OUTSTANDING
PRINCIPAL BALANCE AS OF THE STATISTICAL CUTOFF DATE
SUBSEQUENT POOL 1 SUBSEQUENT POOL 2
------------------------------------------------- ------------------------------------------------------
AGGREGATE PERCENT OF AGGREGATE PERCENT OF
OUTSTANDING OUTSTANDING SUBSEQUENT OUTSTANDING SUBSEQUENT
PRINICPAL NUMBER OF PRINCIPAL POOL 1 NUMBER OF PRINCIPAL POOL 2
BALANCE LOANS(1) BALANCE (2) BALANCE LOANS BALANCE (3) BALANCE
- --------- -------------- ------------ ----------- --------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Less than $1,000.00 14 $ 11,180.87 0.01% 79 $ 48,626.07 0.09%
$1,000 to $1,999.99 74 109,410.12 0.09 180 272,075.75 0.51
$2,000 to $2,999.99 174 422,103.54 0.35 253 627,606.50 1.17
$3,000 to $3,999.99 225 773,443.73 0.64 301 1,054,705.59 1.97
$4,000 to $4,999.99 260 1,139,086.53 0.94 329 1,461,663.98 2.73
$5,000 to $5,999.99 414 2,220,397.47 1.83 435 2,390,438.90 4.46
$6,000 to $6,999.99 344 2,208,112.62 1.82 278 1,809,211.06 3.38
$7,000 to $7,999.99 309 2,316,367.31 1.90 313 2,364,642.67 4.41
$8,000 to $8,999.99 1,143 9,549,832.06 7.85 1,622 13,774,395.74 25.70
$9,000 to $9,999.99 302 2,864,812.67 2.36 233 2,198,023.38 4.10
$10,000 to $10,999.99 455 4,774,354.01 3.93 380 3,983,670.17 7.43
$11,000 to $11,999.99 244 2,804,761.00 2.31 940 10,610,253.16 19.80
$12,000 to $12,999.99 276 3,452,327.67 2.84 96 1,198,838.34 2.24
$13,000 to $13,999.99 248 3,354,350.31 2.76 91 1,232,168.14 2.30
$14,000 to $14,999.99 199 2,886,041.96 2.37 61 888,854.62 1.66
$15,000 to $15,999.99 286 4,468,529.01 3.67 54 836,637.33 1.56
$16,000 to $16,999.99 219 3,598,812.28 2.96 62 1,023,001.70 1.91
$17,000 to $17,999.99 146 2,557,385.71 2.10 85 1,471,844.86 2.75
$18,000 to $18,999.99 3,215 59,466,825.19 48.90 51 945,917.38 1.76
$19,000 or more 554 12,625,254.49 10.38 231 5,406,561.06 10.09
Total 9,101 $121,603,388.55 100.00% 6,074 $53,599,136.40 100.00%
</TABLE>
(1) Borrowers generally have more than one outstanding loan. The average
aggregate outstanding principal balance of loans per borrower is
$18,763.06, with respect to the Subsequent Pool 1 Student Loans, and
$14,934.28, with respect to the Subsequent Pool 2 Student Loans, in each
case as of the Statistical Cutoff Date. Some borrowers have both loans
which are Subsequent Pool 1 Student Loans and loans which are Subsequent
Pool 2 Student Loans. If both pools were combined, the number of borrowers
would be 8,651 and the average outstanding principal balance per borrower
would be $20,252.29.
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$2,504,709.33 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
$3,415,701.51 as of the Statistical Cutoff Date.
S-42
<PAGE> 45
DISTRIBUTION OF SUBSEQUENT POOLS BY REMAINING TERM
TO SCHEDULED MATURITY AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
SUBSEQUENT POOL 1 SUBSEQUENT POOL 2
------------------------------------------------- ------------------------------------------------------
AGGREGATE PERCENT OF AGGREGATE PERCENT OF
MONTHS TO OUTSTANDING SUBSEQUENT OUTSTANDING SUBSEQUENT
SCHEDULED NUMBER OF PRINCIPAL POOL 1 NUMBER OF PRINCIPAL POOL 2
MATURITY LOANS BALANCE (2) BALANCE LOANS BALANCE (3) BALANCE
- --------- --------- ----------- ----------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
12 and below(1) 0.00% 3 $ 989.64 0.00%
13 to 24 7 $ 6,422.58 0.01 8 6,369.03 0.01
25 to 36 26 27,249.51 0.02 9 12,308.43 0.02
37 to 48 45 80,842.70 0.07 7 12,441.43 0.02
49 to 60 59 162,920.89 0.13 12 22,360.41 0.04
61 to 72 58 148,840.57 0.12 9 18,656.42 0.03
73 to 84 67 217,150.94 0.18 13 35,465.46 0.07
85 to 96 91 329,219.94 0.27 9 26,781.23 0.05
97 to 108 63 240,476.86 0.20 33 117,588.91 0.22
109 to 120 2,050 33,036,220.40 27.17 818 6,724,163.27 12.55
121 to 180 2,517 40,315,703.89 33.15 2,484 22,489,135.86 41.96
181 to 240 341 1,968,728.51 1.62 370 3,349,159.53 6.25
241 and above 3,777 45,069,611.76 37.06 2,299 20,783,716.78 38.78
Total 9,101 $121,603,388.55 100.00% 6,074 $53,599,136.40 100.00%
</TABLE>
(1) Determined from the Statistical Cutoff Date to the stated maturity date of
the applicable Subsequent Pool 1 Student Loan or Subsequent Pool 2 Student
Loan, assuming repayment commences promptly upon expiration of the typical
grace period following the expected graduation date and without giving
effect to any deferral or forbearance periods that may be granted in the
future. See "The Student Loan Financing Business" in the Prospectus.
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$2,504,709.33 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
$3,415,701.51 as of the Statistical Cutoff Date.
S-43
<PAGE> 46
DISTRIBUTION OF SUBSEQUENT POOLS BY BORROWER
PAYMENT STATUS AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
SUBSEQUENT POOL 1 SUBSEQUENT POOL 2
------------------------------------------------- ------------------------------------------------------
AGGREGATE PERCENT OF AGGREGATE PERCENT OF
OUTSTANDING SUBSEQUENT OUTSTANDING SUBSEQUENT
PAYMENT NUMBER OF PRINCIPAL POOL 1 NUMBER OF PRINCIPAL POOL 2
STATUS LOANS BALANCE (2) BALANCE LOANS BALANCE (3) BALANCE
- -------------- --------- -------------- ----------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
In School(1) 0 0.00 0.00% 260 $ 2,367,705.75 4.42%
Grace 8,635 $115,982,082.43 95.38 4,377 39,450,324.00 73.60
Deferral 34 397,455.27 0.33 811,467.81 1.51
96
Forbearance 66 883,129.28 0.73 2,532,262.36 4.72
265
Repayment
First year
in repayment 366 4,340,721.57 3.57 1,040 8,311,540.13 15.51
Second year
in repayment 0 0.00 0.00 36 125,836.35 0.23
Total 9,101 $121,603,388.55 100.00% 6,074 $53,599,136.40 100.00%
</TABLE>
(1) Refers to the status of the borrower of each Subsequent Pool 1 Student Loan
or Subsequent Pool 2 Student Loan to be added, in each case, as of the
Statistical Cutoff Date: such borrower may still be attending an
undergraduate institution or a graduate school ("In-School"), may be in a
grace period prior to repayment commencing ("Grace"), may be repaying such
loan ("Repayment") or may have temporarily ceased repaying such loan
through a deferral ("Deferral") or a forbearance ("Forbearance") period.
See "The Student Loan Financing Business" in the Prospectus.
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$2,504,709.33 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
$3,415,701.51 as of the Statistical Cutoff Date.
S-44
<PAGE> 47
SUBSEQUENT POOL SCHEDULED WEIGHTED AVERAGE MONTHS REMAINING IN STATUS
BY CURRENT BORROWER PAYMENT STATUS AS OF THE
STATISTICAL CUTOFF DATE(1)
<TABLE>
<CAPTION>
SUBSEQUENT POOL 1 SUBSEQUENT POOL 2
---------------------------------------------------------- -------------------------------------------------------
PAYMENT
STATUS IN-SCHOOL GRACE DEFERRAL FORBEARANCE REPAYMENT IN-SCHOOL GRACE DEFERRAL FORBEARANCE REPAYMENT
- ------- ----------- ------- --------- ----------- ---------- --------- ------ -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
In-School 1.01 8.12 198.90
Grace 5.30 166.48 5.52 181.73
Deferral 7.71 113.30 16.48 118.39
Forbearance 7.56 115.63 4.20 147.53
Repayment 116.55 144.14
Total 5.30 7.71 7.56 164.16 1.01 5.67 16.48 4.20 174.00
</TABLE>
(1) Determined without giving effect to any Deferral Periods or Forbearance
Periods that may be granted in the future.
S-45
<PAGE> 48
SUBSEQUENT POOL GEOGRAPHIC DISTRIBUTION OF STATES REPRESENTING
MORE THAN 4% OF THE AGGREGATE POOL BALANCE
AS OF THE STATISTICAL CUTOFF DATE(1)
<TABLE>
<CAPTION>
SUBSEQUENT POOL 1 SUBSEQUENT POOL 2
---------------------------------------------- -------------------------------------------------
AGGREGATE PERCENT OF AGGREGATE PERCENT OF
OUTSTANDING INITIAL OUTSTANDING SUBSEQUENT
NUMBER OF PRINCIPAL POOL NUMBER OF PRINCIPAL POOL
LOANS BALANCE (2) BALANCE LOANS BALANCE (3) BALANCE
----------- ------------ -------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
New York 1,933 $ 29,248,278.03 24.05% New York 1,350 $ 12,931,225.12 24.13%
California 1,036 13,923,024.63 11.45 California 662 5,939,609.34 11.08
Massachusetts 517 6,755,174.88 5.56 Massachusetts 352 3,318,731.43 6.10
Pennsylvania 511 6,238,172.92 5.13 New Jersey 322 3,074,606.53 5.74
Illinois 452 6,078.785.29 5.00 Florida 245 2,387,982.09 4.46
New Jersey 413 5,858,487.81 4.82
Virginia 467 5,758,747.15 4.74
All Other States(4) 3,772 47,742,717.84 39.26 All other 3,143 25,946,981.89 48.41
States(4)
Total 9,101 $121,603,388.55 100.00 6,074 $53,599,136.40 100.00%
</TABLE>
(1) Based on the permanent billing addresses of the borrowers of the Subsequent
Pool 1 Student Loans and the Subsequent Pool 2 Student Loans shown on the
Master Servicer's or a Sub-Servicer's records as of the Statistical Cutoff
Date.
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon of $2,504,709.33 as of the Statistical Cut-Off Date to be
capitalized upon commencement of repayment.
(3) Includes net principal balance due from borrowers, plus accrued interest
thereon of $3,415,701.51 as of the Statistical Cut-Off Date to be
capitalized upon commencement of repayment.
(4) Includes all other states, none of which exceeds 4% of the Initial Pool
Balance.
S-46
<PAGE> 49
<TABLE>
<CAPTION>
SUBSEQUENT POOLS DISTRIBUTION BY LOAN REPAYMENT TERM AS OF THE STATISTICAL CUTOFF DATE
SUBSEQUENT POOL 1 SUBSEQUENT POOL 2
------------------------------------------------------- ----------------------------------------------------
AGGREGATE
LOAN REPAYMENT NUMBER AGGREGATE OUTSTANDING PERCENT OF SUBSEQUENT NUMBER OUTSTANDING PERCENT OF SUBSEQUENT
TERMS OF LOANS PRINCIPAL BALANCE(1) POOL 1 BALANCE OF LOANS PRINCIPAL BALANCE(2) POOL 2 BALANCE
- ----- -------- -------------------- -------------- -------- -------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Level Payment
Interest Only(3)
Graduated Payment(4)
Other(5) 9,101 $121,603,388.55 100.00% 6,074 $53,599,136.40 100.00%
Total 9,101 $121,603,388.55 100.00% 6,074 $53,599,136.40 100.00%
</TABLE>
(1) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $2,504,709.33 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 $3,415,701.51 as of the Statistical Cutoff Date.
(3) Student Loans with interest only repayment terms require borrowers to
make payments of interest only for the first two years after entering
repayment and thereafter to make level payments (made up of both
principal and interest) which will amortize the then outstanding
principal balance of the loan over the then remaining term.
(4) Student Loans with graduated repayment terms require borrowers to make
payments of interest only for the first two years after entering
repayment which increase over the next three years to a level payment
amount which will amortize the then outstanding principal balance of
the loan over the then remaining term.
(5) Loan not yet in repayment status, but to enter repayment status upon
receipt of a repayment schedule, or information is not available.
S-47
<PAGE> 50
SUBSEQUENT POOLS DISTRIBUTION OF FINANCED FEDERAL LOANS BY DATE OF DISBURSEMENT
AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
SUBSEQUENT POOL 1
AGGREGATE PERCENT OF
OUTSTANDING SUBSEQUENT POOL 1
DATE OF DISBURSEMENT(1) NUMBER OF LOANS PRINCIPAL BALANCE(2) BALANCE NUMBER OF LOANS
- ------------------------------------- --------------- ------------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Pre October 1, 1993 390 $ 5,086,072.66 4.18% 0
October 1, 1993 to September 30, 1998 7,274 99,987,634.53 82.22 5825
October 1, 1998 to Present 1,437 16,529,681.36 13.60 249
Total 9,101 $121,603,388.55 100.00% 6,074
<CAPTION>
SUBSEQUENT POOL 2
AGGREGATE PERCENT OF
OUTSTANDING SUBSEQUENT POOL 2
DATE OF DISBURSEMENT(1) PRINCIPAL BALANCE(3) BALANCE
- ------------------------------------- -------------------- ------------------
<S> <C> <C>
Pre October 1, 1993 $0.00 0.00%
October 1, 1993 to September 30, 1998 51,896,460.23 96.82
October 1, 1998 to Present 1,702,676.17 3.18
Total $53,599,136.40 100.00%
</TABLE>
(1) Federal Loans disbursed prior to October 1, 1993 are 100% guaranteed by
the applicable Federal Guarantor, and reinsured against default by the
Department up to 100% of the Guarantee Payments. Federal Loans
disbursed on or after October 1, 1993 (but before October 1, 1998) are
98% guaranteed by the applicable Federal Guarantor, and reinsured
against default by the Department up to a maximum of 98% of the
Guarantor Payments. Federal Loans first disbursed on or after October
1, 1998 are 98% guaranteed by the applicable Federal Guarantor, and
reinsured against default by the Department up to 95% of the Guarantee
Payments. See "The Student Loan Financing Business-Description of
Federal Loans Under the Programs" and "--Insurance of Student Loans;
Guarantors of Student Loans" in the Prospectus.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $2,504,709.33 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 $3,415,701.51 as of the Statistical Cutoff Date.
S-48
<PAGE> 51
DISTRIBUTION OF SUBSEQUENT POOL STUDENT LOANS BY
NUMBER OF DAYS OF DELINQUENCY AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
SUBSEQUENT POOL 1 SUBSEQUENT POOL 2
--------------------------------------------------------- ------------------------------------------------------
NUMBER AGGREGATE OUTSTANDING PERCENT OF SUBSEQUENT NUMBER AGGREGATE OUTSTANDING PERCENT OF SUBSEQUENT
DAYS DELINQUENT OF LOANS PRINCIPAL BALANCE(1) POOL 1 BALANCE OF LOANS PRINCIPAL BALANCE(2) POOL 2 BALANCE
- --------------- -------- -------------------- -------------- -------- -------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
0-30 9,101 $121,603,388.55 100.00% 6,074 $53,599,136.40 100%
31-60 - - - - - -
61-90 - - - - - -
91-120 - - - - - -
121-150 - - - - - -
151-180 - - - - - -
Total 9,101 $121,603,388.55 100.00% 6,074 $53,599,136.40 100%
</TABLE>
(1) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $2,504,709.33 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 $3,415,701.51 as of the Statistical Cutoff Date.
S-49
<PAGE> 52
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 (as defined in the
Prospectus), Federal Direct Consolidation Loans (as defined in the Prospectus)
or Private Consolidation Loans (as defined in the Prospectus) 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 those described below. In general, the rate
of prepayments may tend to increase to the extent that alternative financing
becomes available at prevailing interest rates which fall significantly below
the interest rates applicable to the Financed Student Loans. However, because
many of the Financed Student Loans bear interest at a rate that either actually
or effectively is floating, it is impossible to determine whether changes in
prevailing interest rates will be similar to or vary from changes in the
interest rates on the Financed Student Loans.
To the extent borrowers of Financed Student Loans elect to borrow
Consolidation Loans 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 (as defined in the Prospectus ) (and after the Notes have been paid
in full, Certificateholders (as defined in the Prospectus )) will collectively
receive as a prepayment of principal the aggregate principal amount of such
Financed Student Loans. 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 during the Funding Period, 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 Loans)
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 will be 98% with
respect to any Federal Consolidation Loan disbursed on or after October 1, 1993
even if the Underlying Federal Loans (as defined in the Prospectus) were 100%
guaranteed. See "The Student Loan Financing Business--Description of Federal
Loans Under the Programs--Federal Consolidation Loans" in the Prospectus. 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 after the
end of the Funding Period or by another lender at any time.
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 with respect to any Financed Student Loan that has the benefit of a
Guarantee Agreement, any such breach that does not affect any Guarantor's
obligation to guarantee payment of such Financed Student Loan will not be
S-50
<PAGE> 53
considered to have a material adverse effect for this purpose). See "Description
of the Transfer and Servicing Agreements--Sale of Student Loans; Representations
and Warranties" and "--Servicer Covenants" in the Prospectus. See also
"Description of the Transfer and Servicing Agreements--Additional Fundings"
herein and in the Prospectus regarding the prepayment of principal to
Noteholders and Certificateholders if as of December 24, 1999 (the "Special
Determination Date") the Subsequent Pool Pre-Funded Amount has not been reduced
to zero 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. See also, "--Termination" herein and in the Prospectus 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 Adjusted Initial Pool Balance and the
auction of the Financed Student Loans to occur on or after the November 2009
Distribution Date. Any reinvestment risk from such accelerated payment of
principal will be borne by the holders of Notes and Certificates receiving such
prepayment.
On the other hand, scheduled payments with respect to, and maturities
of, the Financed Student Loans may be extended, including pursuant to Grace
Periods (as defined in the Prospectus, each a "Grace Period"), 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
prior to the end of 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 Dates of the Notes and the Certificates.
The rate of prepayment on the Financed Student Loans cannot be
predicted. You will bear any reinvestment risks resulting from a faster or
slower incidence of prepayment of Financed Student Loans. Reinvestment risks may
include the risk that interest rates and the relevant spreads above particular
interest rate bases are lower at the time you receive payments from the Trust
than the interest rates and the spreads that would otherwise have been had
prepayments not been made or had prepayments been made at a different time.
The "Adjusted Initial Pool Balance" will equal approximately
$742,794,276 plus the aggregate increase in the Pool Balance during the Funding
Period (by the Special Determination Date) occurring as a result of the purchase
of Subsequent Pool Student Loans.
S-51
<PAGE> 54
INSURANCE OF STUDENT LOANS; GUARANTORS OF STUDENT LOANS
Each Financed Federal Loan will be required to be guaranteed by one of
the Federal Guarantors and reinsured by the Department under the Higher
Education Act and must be eligible for Special Allowance Payments (as defined in
the Prospectus) and, with respect to each Financed Federal Loan that is a
Stafford Loan (excluding any Unsubsidized Stafford Loan (as defined in the
Prospectus, each an Unsubsidized Stafford Loan ) or Consolidation Loan where
none of the Underlying Federal Loans were Unsubsidized Stafford Loans, must be
eligible for Interest Subsidy Payments (as defined in the Prospectus) paid by
the Department. As of the Statistical Cutoff Date, approximately 52.13% (by
aggregate principal balance) of the Initial Financed Student Loans,
approximately 59.49% of the Subsequent Pool 1 Student Loans and approximately
54.34% of the Subsequent Pool 2 Student Loans will be Financed Federal Loans. As
of the Statistical Cutoff Date, approximately 22.42% (by aggregate principal
balance) of the Initial Financed Student Loans, approximately 40.51% of the
Subsequent Pool 1 Student Loans and approximately 41.51% of the Subsequent Pool
2 Student Loans will be Guaranteed Private Loans that are required to be
guaranteed or insured as to principal and interest by The Educational Resources
Institute, Inc. ("TERI") or HEMAR Insurance Corporation of America ("HICA" and
together with TERI, the "Private Guarantors"). As of the Statistical Cutoff
Date, approximately 25.45% (by aggregate principal balance) of the Initial
Financed Student Loans are, approximately 0% of the Subsequent Pool 1 Student
Loans and approximately 4.15% of the Subsequent Pool 2 Student Loans will be
Non-Guaranteed Private Loans.
S-52
<PAGE> 55
The following tables provide information with respect to the portion of
the Financed Student Loans guaranteed by each Guarantor:
DISTRIBUTION BY GUARANTORS AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
------------------------------------------------------ --------------------------------------------------
AGGREGATE AGGREGATE PERCENT OF
NUMBER OUTSTANDING PERCENT OF OUTSTANDING SUBSEQUENT
OF PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL POOL
LOANS BALANCE(1) BALANCE(3) LOANS BALANCE(2) BALANCE(3)
--------- ----------------- ------------ ---------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASA 9,653 $100,603,751.23 13.54% 3,916 $52,697,688.51 30.08%
CSAC 43 211,822.13 0.03 1,789 30,587,778.23 17.46
ECMC 78 592,710.61 0.08
HICA 3,159 34,672,489.04 4.67
PHEAA 15,507 157,473,147.50 21.20 1,648 14,137,974.21 8.07
NSLP 14,439 128,107,096.51 17.25
TERI 12,959 131,845,801.01 17.75 7,237 71,510,585.39 40.82
USAF 26 181,545.29 0.02 218 3,179,875.61 1.81
HESC 6 48,229.58 0.01 50 865,786.25 0.49
USAF-ME 1 4,871.45 0.00
Unguaranteed 28,590 189,052,812.05 25.45 317 2,222,836.75 1.27
Total(3) 84,461 $742,794,276.40 100.00% 15,175 175,202,524.95 100.00%
<CAPTION>
TOTAL
--------------- --------------------------------------------------
AGGREGATE
NUMBER OUTSTANDING PERCENT OF
OF NUMBER OF PRINCIPAL TOTAL POOL
LOANS LOANS BALANCE BALANCE(3)
--------- ----------- ------------------- --------------
<S> <C> <C> <C> <C>
ASA 9,653 13,569 $153,301,439.74 16.70%
CSAC 43 1,832 30,799,600.36 3.36
ECMC 78 78 592,710.61 0.06
HICA 3,159 3,159 34,672,489.04 3.78
PHEAA 15,507 17,155 171,611,121.71 18.69
NSLP 14,439 14,439 128,107,096.51 13.96
TERI 12,959 20,196 203,356,386.40 22.15
USAF 26 244 3,361,420.90 0.37
HESC 6 56 914,015.83 0.10
USAF-ME 1 1 4,871.45 0.00
Unguaranteed 28,590 28,907 191,275,648.80 20.84
Total(3) 84,461 99,636 $917,996,801.35 100.00%
</TABLE>
(1) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $50,127,295.33 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 $5,920,410.84 as of the Statistical Cutoff Date.
(3) May not equal 100% due to the Non-Guaranteed Private Loans in the pool
of Financed Student Loans.
S-53
<PAGE> 56
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 up to 100% for amounts paid under its
Guarantee Agreement. The amount of such reimbursement is subject to reduction.
See "The Student Loan Financing Business--Insurance of Student Loans; Guarantors
of Student Loans" in the Prospectus for a description of the federal reinsurance
program and factors affecting the Federal Guarantors.
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, CSAC, HESC, USAF, NSLP and ECMC by which each such Federal
Guarantor has agreed to serve as Guarantor for certain Financed Federal Loans.
PHEAA is the designated Student Loan guarantor for Pennsylvania, West Virginia
and Delaware, and has an established operating center in Harrisburg,
Pennsylvania. For more information concerning PHEAA, see "The Master Servicer
and the Sub-Servicers--PHEAA" herein. ASA is the designated Student Loan
guarantor for Massachusetts and the District of Columbia and has an established
operating center in Boston, Massachusetts. CSAC is the designated Student Loan
guarantor for California, Arizona and Washington and has established an
operating center in Rancho Cordova, California. HESC is the designated guarantor
for New York, and has established an operating center in Albany, New York. USAF
is the designated Student Loan guarantor for Indiana, Kansas, Alaska, Nevada,
Wyoming, Maryland, Hawaii and Mississippi and has established an operating
center in Fishers, Indiana. NSLP is the designated Student Loan guarantor for
Nebraska and has established an operating center in Lincoln, Nebraska. ECMC is
the designated Student Loan guarantor for Virginia and has established operating
centers in St. Paul, Minnesota and Richmond, Virginia. As of the Statistical
Cutoff Date, approximately 21.20%, 13.54%, 0.03%, 0.01%, 0.03%, 17.25% and 0.08%
of the aggregate outstanding principal balance of the Initial Financed Student
Loans which are Financed Federal Loans, approximately 0%, 31.01%, 25.15%, 0.71%,
2.61%, 0%, and 0% of the Subsequent Pool 1 Student Loans and approximately
26.38%, 27.96%, 0%, 0%, 0%, 0% and 0% of the Subsequent Pool 2 Student Loans
which are Financed Federal Loans were guaranteed by PHEAA, ASA, CSAC, HESC,
USAF, NSLP and ECMC, respectively.
Pursuant to its respective Guarantee Agreement, each Federal Guarantor
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:
S-54
<PAGE> 57
(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 (or
270 days with respect to Financed Federal Loans for which the
first date of delinquency occurs on or after October 7, 1998)
(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 Bankruptcy Code (as
defined in the Prospectus);
(c) the closure of, or false certification of borrower eligibility
by, the school;
(d) the death of the borrower thereof;
(e) the total and permanent disability of the borrower thereof to
work and earn money or attend school, as certified by a
qualified physician; or
(f) the failure of the borrower's school to pay a refund owed to
the borrower, to the extent of the amount of the refund that
is allocable to the loan.
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 each Federal Guarantor pursuant to their respective
Guarantee Agreements are obligations solely of each such Federal Guarantor
respectively, and are not supported by the full faith and credit of any state
government.
Each of the Federal Guarantors' 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:
- the origination and servicing of such Financed Federal Loan
being performed in accordance with the Programs, the Higher
Education Act and other applicable requirements,
- the timely payment to the applicable Federal Guarantor, as the
case may be, of the guarantee fee payable with respect to such
Financed Federal Loan,
- the timely submission to the applicable Federal Guarantor, as
the case may be, of all required pre-claim delinquency status
notifications and of the claim with respect to such Financed
Federal Loan, and
- 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 respective Guarantee Agreement with
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<PAGE> 58
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" herein.
Set forth below is certain current and historical information with
respect to PHEAA, ASA and NSLP as of the Statistical Cutoff Date. No such
information is provided with respect to CSAC, HESC, USAF and ECMC because the
aggregate principal amount of Financed Student Loans guaranteed by each of CSAC,
HESC, USAF and ECMC respectively is less than 5% of the sum of the Initial
Financed Student Loans and the Subsequent Pool Student Loans.
Guaranty Volume. The following table sets forth the approximate
aggregate principal amount of federally reinsured education loans (including
loans under the Parent Loans for Undergraduate Students program but excluding
Federal Consolidation Loans) that have first become guaranteed by PHEAA, ASA and
NSLP) and by all federal guarantors in each of the last five federal fiscal
years:*
STAFFORD, SLS AND PLUS LOANS GUARANTEED
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FEDERAL FISCAL YEAR PHEAA ASA NSLP
- ------------------- --------- --------- ---------
<S> <C> <C> <C>
1994 $ 1,747 $ 1,100 $ 378
1995 1,808 906 351
1996 1,794 716 316
1997 1,869 682 397
1998 1,784 667 629
</TABLE>
<TABLE>
<CAPTION>
FEDERAL FISCAL YEAR ALL GUARANTORS
------------------- --------------
<S> <C>
1994 $23,053
1995 20,951
1996 19,728
1997 21,409
1998 22,300
</TABLE>
* The information set forth in the table above for all guarantors has
been obtained from the Department of Education's Federal Student Loan
Programs Data Books and the Department of Education's Quarterly Volume
Updates (each, a "DOE Data Book"). Information for each Federal
Guarantor was provided by such Federal Guarantor.
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<PAGE> 59
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 (a) sources of funds (including insurance
premiums, state appropriations, federal advances, federal reinsurance payments,
administrative cost allowances, collections on claims paid and investment
earnings) minus (b) 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 (x) the original principal amount of loans
canceled, claims paid, loans paid in full and loan guarantees transferred from
such Federal Guarantor to other guarantors, plus (y) the original principal
amount of loan guarantees transferred to such Federal Guarantor from other
guarantors. ECMC has advised the Seller that ECMC's Agreements with the
Department require that on an annual basis, ECMC calculate the amount of reserve
funds and the amount of its expenses during the fiscal year in accordance with
directions of the Secretary. Unless the Secretary directs otherwise, if the
amount of ECMC's reserve funds exceeds 60 percent of the expenses, ECMC shall
return the excess reserves to the Secretary at the time of submitting the annual
report. The following tables set forth for PHEAA, ASA and NSLP, their respective
cumulative cash reserves and corresponding reserve ratios and the national
average reserve ratio for all federal guarantors for the last five federal
fiscal years:*
<TABLE>
<CAPTION>
PHEAA ASA NSLP
------------------------------- ------------------------- -------------------------------
FEDERAL CUMULATIVE RESERVE CUMULATIVE RESERVE CUMULATIVE RESERVE NATIONAL
FISCAL YEAR CASH RESERVES RATIO CASH RESERVES RATIO CASH RESERVES RATIO AVERAGE
- ----------- ------------- ----- ------------- ----- ------------- ----- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
1994 $ 133.63 1.3 $ 38.16 0.7 $ 16.44 1.3 1.4
1995 166.31 1.5 43.06 0.8 18.53 1.3 1.6
1996 214.74 1.6 51.08 0.9 21.17 1.3 1.6
1997 189.35 1.4 39.29 0.7 24.07 1.2 1.5
1998 190.65 1.3 39.02 0.6 30.99 1.3 **
</TABLE>
* The information set forth in the tables above with respect to each
Federal Guarantor has been obtained from such Federal Guarantor,
respectively, and the information with respect to the national average
has been obtained from the DOE Data Books.
** Not Available.
Recovery Rates. A Federal Guarantor's recovery rate, which provides a
measure of the effectiveness of the collection efforts against defaulting
borrowers after the guarantee claim has been satisfied, is determined by
dividing the amount recovered from borrowers by the Federal Guarantor by the
aggregate amount of default claims paid by the Federal Guarantor during the
applicable federal fiscal year with respect to borrowers. The table below sets
forth the recovery rates for PHEAA, ASA and NSLP for the last five federal
fiscal years:*
S-57
<PAGE> 60
<TABLE>
<CAPTION>
RECOVERY RATE
-----------------------------------------
FEDERAL FISCAL YEAR PHEAA ASA NSLP
- -------------------- ------------------------------------------
<S> <C> <C> <C>
1994 52.9 43.3 19.8
1995 53.3 43.4 21.3
1996 55.0 41.3 26.6
1997 54.8 42.7 31.5
1998 59.2 49.0 38.4
</TABLE>
* The information set forth in the tables above with respect to each
Federal Guarantor was provided by such Federal Guarantor.
Loan Loss Reserve. 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. Because federal guarantors are no longer reinsured by the Department
at 100% (98% for loans disbursed between October 1, 1993 and September 30, 1998
and 95% for loans disbursed on and after October 1, 1998), many federal
guarantors have begun to maintain reserves for the 2% to 5% "risk-sharing"
associated with these guarantees. In general, the Federal Guarantors use
historical default and recovery rates to attempt to predict the reserves that
should be maintained for this purpose. As of June 30, 1999, PHEAA has not
specifically provided for this risk. PHEAA does have deferred guaranty fees of
$32.5 million and cash reserves of $163.2 million to cover this risk. As of June
30, 1999 ASA has a loan loss reserve in the amount of $7.9 million and as of
June 30, 1999, NSLP maintains a reserve of $3.96 million.
Claims Rate. For the past five federal fiscal years, none of PHEAA's,
ASA's, NSLP's, CSAC's, HESC's, USAF's or ECMC's claims rate has exceeded 5.0%,
and as a result, all claims of PHEAA, ASA, NSLP, CSAC, HESC, USAF and ECMC have
been reimbursed by the Department at the maximum reinsurance rate permitted by
the Higher Education Act. See "--Federal Reinsurance" above. The most recent
national default rate reported by the Department of Education was 9.6% for the
federal fiscal year 1996. As recently as federal fiscal year 1990 this national
default rate was over 22%. This trend, coupled with the claims and recovery
information listed in this section, shows improvement in the repayment of
Student Loans by borrowers. While, the Seller is not currently aware of any
circumstances which would cause the reimbursement levels for these Federal
Guarantors to be less than the maximum levels permitted, nevertheless, there can
be no assurance that any Federal Guarantor will continue to receive such maximum
reimbursement for such claims. The following table sets forth the claims rates
of PHEAA, ASA and NSLP for each of the last five federal fiscal years:*
S-58
<PAGE> 61
CLAIMS RATE
<TABLE>
<CAPTION>
-----------------------
FEDERAL FISCAL YEAR PHEAA ASA NSLP
- ------------------- ----- --- ----
<S> <C> <C> <C>
1994 2.2 3.5 3.0
1995 2.0 3.5 4.1
1996 1.6 3.1 3.1
1997 1.9 3.5 3.2
1998 2.0 2.8 3.2
</TABLE>
* The information set forth in the tables above with respect to each Federal
Guarantor was provided by such Federal Guarantor.
Guarantors for the Guaranteed Private Loans. The Eligible Lender
Trustee will enter into a Guarantee Agreement with TERI and the Seller will
assign to the Eligible Lender Trustee, on behalf of the Trust, its rights under
surety bonds issued by HICA applicable to the Financed Student Loans insured by
HICA. As a result TERI and HICA, respectively, will agree to guarantee or insure
a portion of the Guaranteed Private Loans.
Pursuant to its respective Guarantee Agreement, each of TERI and HICA
guarantees or insures payment of 100% of the principal (including any interest
or fees capitalized from time to time) and accrued interest for each Guaranteed
Private Loan guaranteed or insured 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 Guaranteed Private Loan when due,
provided such failure continues for a period of 120 days (150
days for HICA);
(b) with respect to HICA, any filing by or against the borrower
thereof of a petition, and with respect to TERI, the discharge
of the related student loan debt of a borrower as part of any
proceedings, in bankruptcy pursuant to any chapter of the
Bankruptcy Code, (with respect to the Guaranteed Private Loans
insured by HICA, subject to the restrictions contained in the
HICA Surety Bonds);
(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, (with respect to the Guaranteed Private
Loans insured by HICA, subject to the restrictions contained
in the HICA Surety Bonds).
TERI's and HICA's guarantee/insurance obligation with respect to any
Guaranteed Private Loan is conditioned upon the satisfaction of all the
conditions set forth in its respective Guarantee Agreement. These conditions
include, but are not limited to, the following:
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<PAGE> 62
- the origination and servicing of such Guaranteed Private Loan
being performed in accordance with the Programs and other
applicable requirements,
- the timely payment to TERI or HICA, as the case may be, of all
guarantee fees or premiums payable wit h respect to such
Guaranteed Private Loan,
- the timely submission to TERI or HICA, as the case may be, of all
required pre-claim delinquency status notifications and of the
claim with respect to such Guaranteed Private Loan, and
- the transfer and endorsement of the promissory note evidencing
such Guaranteed Private Loan to TERI or HICA, as the case may be,
upon and in connection with making a claim to receive Guarantee
Payments thereon.
Failure to comply with any of the applicable conditions, including the
foregoing, may result in the refusal of TERI or HICA, as the case may be, to
honor its Guarantee Agreement with respect to such Guaranteed Private Loan. In
addition, in the event that any Guaranteed Private Loan is determined to be
unenforceable because the terms of such Guaranteed 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% and HICA's
insurance obligation is reduced to 0% of principal (including capitalized
interest and fees) and accrued interest with respect to such Guaranteed 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 Guaranteed Private Loan or
of the Master Servicer to purchase such Guaranteed Private Loan. See
"Description of the Transfer and Servicing Agreements--Sale of Financed Student
Loans; Representations and Warranties" and "--Master Servicer Covenants" herein.
TERI and HICA, as Guarantors of Private Loans, are not entitled to any
federal reinsurance or assistance from the Department or any other governmental
entity. Although each Private Guarantor maintains a loan loss reserve intended
to absorb losses arising from its guarantee/insurance commitments, there can be
no assurance that the amount of such reserve will be sufficient to cover the
obligations of TERI or HICA over the term of the Guaranteed Private Loan.
Certain organizational and summary financial information with respect
to each of TERI and HICA in its capacity as a Guarantor is set forth below. The
information set forth below relating to TERI and HICA is not guaranteed as to
accuracy or completeness and is not to be construed as a representation by the
Seller, the Master Servicer, any of the Underwriters, or any of their respective
affiliates:
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<PAGE> 63
TERI
TERI was incorporated in 1985 to guarantee Student Loans and is not an
insurance company. TERI is a Massachusetts non-profit corporation headquartered
in Boston, Massachusetts and employs approximately 175 people, as of June 30,
1999.
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; such
information is not guaranteed as to accuracy or completeness and is not to be
construed as a representation by the Seller, the Master Servicer, any of the
Underwriters or any of their respective affiliates:
<TABLE>
<CAPTION>
CALENDAR YEAR PRIVATE LOANS GUARANTEED BY YEAR
- -------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) (UNAUDITED)
<S> <C>
1994 $ 292.2
1995 303.4
1996 339.7
1997 332.6
1998 380.4
1999* 181.9
</TABLE>
- ---------
* For the six-month period ending June 30, 1999.
Proprietary School 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 Amounts Available To Meet Guarantee Commitments" by
the "total loans outstanding." TERI defines "Total Amounts Available to Meet
Guarantee Commitments" 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 Programs Guaranteed by TERI").
TERI 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. The following
table sets forth TERI's reserve ratio as of December 31 for the five calendar
years and the six-month period referred to below; such information is not
guaranteed as to accuracy or completeness and is not to be construed as a
representation by the Seller, the Master Servicer, any of the Underwriters, or
any of their respective affiliates:
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<PAGE> 64
<TABLE>
<CAPTION>
AMOUNTS AVAILABLE TO MEET GUARANTEE
CALENDAR YEAR COMMITMENTS RESERVES RATIO
- ------------- ----------------------------------- --------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C>
1994 $ 73,624 5.9%
1995 83,937 5.9%
1996 96,362 5.6%
1997 102,201 5.4%
1998 104,170 5.0%
1999* 103,945 4.7%
</TABLE>
- ----------------
* For the six-month period ending June 30, 1999.
Amounts Available To Meet Guarantee Commitments. As part of guarantee
agreements with lending institutions, with certain such agreements being revised
in 1997, TERI has agreed to hold as security for its guarantees a percentage of
the amount of unpaid principal on outstanding loans which ranges from 0.0% to
4.5% in total TERI funds available as security for the performance of TERI
obligations. At June 30, 1999, December 31, 1998, and December 31, 1997 the
balance of loans outstanding guaranteed directly by TERI amounted to
approximately $2.2 billion, $2.1 billion and $1.9 billion, respectively. At June
30, 1999, TERI was required to have approximately $100.3 million in reserves
(consisting of loan loss reserves, deferred revenue and unrestricted and/or
board designated unrestricted net assets) available as security for TERI's
performance as guarantor.
As of the end of each of the five calendar years and the six-month
period referred to below, TERI had available the following funds and reserves to
meet its loan guarantee commitments; such information is not guaranteed as to
accuracy or completeness and is not to be construed as a representation by the
Seller, the Master Servicer, any of the Underwriters or any of their respective
affiliates:
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, JUNE 30,
------------------------------------- -----------
(DOLLARS IN THOUSANDS) (UNAUDITED)
1994 1995 1996 1997 1998 1999
---------- ---------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Deferred Guarantee Fees $ 5,269 $ 5,234 $ 5,140 $ 5,032 $ 4,899 $ 4,337
Loan Loss Reserve 29,629 29,092 57,006 56,999 54,186 52,853
Unrestricted--Board Designated 33,151 46,063 31,169 33,951 33,929 33,858
Unrestricted--Undesignated 5,579 3,548 3,047 6,219 11,156 12,897
---------- ---------- ---------- ---------- --------- --------
Total Amounts Available To Meet
Guarantee Commitments $ 73,624 $ 83,937 $ 96,362 $ 102,201 $104,170 $103,945
========== ========== ========== ========== ======== ========
</TABLE>
Subject to the minimum restrictions imposed by lending institutions and
the segregated reserves discussed below under "Segregated Reserves for
Private Loans Under the Programs Guaranteed by TERI," TERI establishes its loan
loss reserve based on its management's estimates of probable losses arising
from its guarantee commitments, based on the historical experience of TERI
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<PAGE> 65
and those of other lending institutions and programs, and based on the results
of a semi-annual actuarial study provided by an independent third party. TERI
has advised the Seller that it is currently in compliance with all operating
reserves requirements contained in guarantee agreements TERI has in place with
other student loan lenders and other trustees under prior securitizations of
student loans. However, there can be no assurance that such compliance will
continue.
Recovery Rate. Unlike the Federal Guarantors' 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, 1999, with respect to loans defaulting in each of the five
calendar years and the six-month period referred to below are as follows; such
information is not guaranteed as to accuracy or completeness and is not to be
construed as a representation by the Seller, the Master Servicer, any of the
Underwriters or any of their respective affiliates:
<TABLE>
<CAPTION>
PERIOD OF DEFAULT CUMULATIVE CASH RECOVERY RATE (UNAUDITED)
- ----------------- -----------------------------------------
<S> <C>
1994 49% (January 1, 1994--June 30, 1999)
1995 46% (January 1, 1995--June 30, 1999)
1996 37% (January 1, 1996--June 30, 1999)
1997 36% (January 1, 1997--June 30, 1999)
1998 25% (January 1, 1998--June 30, 1999)
1999* 6% (January 1, 1999--June 30, 1999)
</TABLE>
- ----------
* For the six-month period ending June 30, 1999
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 Guarantors' 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 (net 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 loans guaranteed, total defaults paid (net of recoveries) and the net
cohort default rate as of December 31, for each of the five calendar years and
the six-month period referred to below; such information is not guaranteed as to
accuracy or completeness and is not to be construed as a representation by the
Seller, the Master Servicer, any of the Underwriters or any of their respective
affiliates:
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<PAGE> 66
<TABLE>
<CAPTION>
TOTAL NET DEFAULTS PAID
TOTAL LOANS GUARANTEED FOR LOANS GUARANTEED IN NET COHORT
COHORT YEAR IN COHORT YEAR COHORT YEAR DEFAULT RATE
- ----------- ---------------------- ------------------------ ------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C>
1994 $ 292,289 $ 15,030 5.14%
1995 303,369 12,810 4.22%
1996 339,675 6,693 1.97%
1997 332,530 1,717 0.52%
1998 380,357 223 0.06%
1999* 181,907 0 0.00%
</TABLE>
- -------------
* For the six-month period ending June 30, 1999
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. 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.
Segregated Reserves for Private Loans Under the Programs Guaranteed by
TERI. A portion of the reserves described above that are maintained by TERI have
been segregated solely to support its guarantee obligations under the Programs.
These segregated reserves, which are not available to cover TERI guaranteed
loans outside of the Programs, are equally available to all holders of TERI
guaranteed Private Loans made under the Programs since 1990-1991, which include
both the Seller and third-party purchasers of the Seller's TERI guaranteed
Private Loans under the Programs, including but not limited to the Eligible
Lender Trustee on behalf of the Trust. Draws on such segregated reserves will be
paid in the order received, to the extent of amounts remaining in the segregated
reserve account. Consequently, there may be one or more owners of such 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 Guaranteed Private Loans made
under the aforementioned Programs, or that such amounts, if available, will be
sufficient to satisfy all existing Guarantee Payments due with respect to
Guaranteed Private Loans. The Seller will assign the portion of its rights under
the agreement implementing these segregated reserves that is attributable to
such Guaranteed 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 its Chief Financial Officer, 330 Stuart Street, Suite 500, Boston,
Massachusetts 02116.
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<PAGE> 67
HICA
The Eligible Lender Trustee will take an assignment of Surety Bonds by
which HICA has insured certain Guaranteed Private Loans. HICA was incorporated
in 1986 to provide insurance coverage to lenders against credit losses on
education-related, non-federally insured loans to students attending
post-secondary educational institutions. HICA is a licensed, regulated insurance
company incorporated in South Dakota and headquartered in Sioux Falls, and
employs approximately 29 people as of June 30, 1999. HICA is an indirect
subsidiary of SLM Holding Corporation.
Insurance Volume. The following table sets forth the amount of loans
that have first become insured by HICA in each of the five calendar years and
the six-month period referred to below; such information is not guaranteed as to
accuracy or completeness and is not to be construed as a representation by the
Seller, the Master Servicer, any of the Underwriters or any of their respective
affiliates:
CALENDAR YEAR PRIVATE LOANS INSURED BY YEAR
- ------------- -----------------------------
(DOLLARS IN MILLIONS)
1994 $ 161
1995 173
1996 256
1997 286
1998 267
1999* 113
* For six-month period ending June 30, 1999.
HICA 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. Mark Bielen, Treasurer, 3900 West Technology Circle, Suite 7,
Sioux Falls, South Dakota 57106.
NON-GUARANTEED PRIVATE LOANS
As of the Statistical Cutoff Date, approximately 25.45% of the Initial
Financed Student Loans are, approximately 0% of the Subsequent Pool 1 Student
Loans and approximately 4.15% of the Subsequent Pool 2 Student Loans will be,
Non-Guaranteed Private Loans. The Non-Guaranteed Private Loans were originated
in accordance with the criteria set forth in the Prospectus under "The Student
Loan Financing Business--Description of the Private Loans Under the Programs."
See also the discussion of the Key Alternative Loan Program in the Prospectus
under "The Student Loan Financing Business--Description of the Private Loans
Under the Programs."
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<PAGE> 68
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" herein.
GENERAL
The Notes will be issued pursuant to the terms of the Indenture, dated
as of September 1, 1999, between the Trust and the Indenture Trustee (the
"Indenture"). The Class A-1 Notes and the Class A-2 Notes will collectively
possess the controlling rights granted to the specified senior classes of Notes
under the Indenture. (See, "Description of the Notes--The Indenture" and
"Description of the Transfer and Servicing Agreements" in the Prospectus) . The
Certificates will be issued pursuant to the terms of the Trust Agreement. The
following information supplements the summary of the material terms of the
Notes, the Certificates, the Indenture and the Trust Agreement set forth in the
Prospectus. 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, the Class M Notes and the
Certificates (each a "Class" and collectively, the "Securities") will initially
be represented by one or more Notes and Certificates, respectively, in each case
registered in the name of the nominee of the Depository Trust Company ("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 of $1,000 in excess
thereof in book-entry form only. The Trust has been informed by DTC that DTC's
nominee will be Cede & Co. ("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
"Certain Information Regarding the Securities--Book-Entry Registration" and
"--Definitive Securities" in the Prospectus.
THE NOTES
Distributions of Interest. Interest will accrue on the principal
balance of each Class of Notes at a rate per annum equal to the lesser of the
Formula Rate for such Notes and the Student Loan Rate (each such interest rate
being a "Note Interest Rate"). 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
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equal to interest on such amount at the applicable 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 and, under certain
limited circumstances, the Pre-Funding Account remaining after the distribution
of the Master Servicing Fee for each of the two immediately preceding Monthly
Servicing Payment Dates and of the Master Servicing Fee, the Administration Fee
and, in the case of the Class M Notes, distribution of interest on the Class A
Notes for each Distribution Date. See "Description of the Transfer and Servicing
Agreements -- Distributions" and "--Credit Enhancement" herein. If such sources
are insufficient to pay the Noteholders' Interest Distribution Amount with
respect to the Class A Notes for such Distribution Date, such shortfall will be
allocated pro rata to the Class A Noteholders (based upon the total amount of
interest then due on each Class of Class A Notes).
"Collection Period" means each period of three calendar months from and
including the date following the end of the preceding Collection Period (or,
with respect to the first Collection Period, the period beginning on September
1, 1999 and ending on January 31, 2000).
"Formula Rate" means for any Class of Securities, the applicable
Investor Index plus the applicable Margin.
"Investor Index" means (x) in the case of the Treasury Bill Indexed
Securities, the daily weighted average of the 91-day Treasury Bill Rates within
such Interest Period (determined as described under "--Determination of the
91-day Treasury Bill Rate" below) or (y) in the case of the LIBOR Indexed
Securities, Three Month LIBOR (determined as described under "--Determination of
LIBOR" below).
In the case of any LIBOR Indexed Securities and the initial Interest
Period, interest will accrue for the period from the Closing Date to but
excluding November 26, 1999 based on Three Month LIBOR as determined on the
initial LIBOR Determination Date and for the period from November 26, 1999 to
but excluding February 25, 2000 based on Three Month LIBOR as determined on the
second Business Day prior to November 26, 1999. See "--Determination of LIBOR"
below.
The "Margin" for each Class of Securities is 0.28% for the Class A-1
Notes, 0.43% for the Class A-2 Notes, 0.70% for the Class M Notes and 0.90% for
the Certificates.
The "Student Loan Rate" for any Class of Securities for any Interest
Period will equal the product of (a) the quotient obtained by dividing (x) 365
(or 366 in a leap year) by (y) the actual number of days elapsed in such
Interest Period and (b) the percentage equivalent of a fraction, the numerator
of which is equal to Expected Interest Collections for the Collection Period
relating to such Interest Period less the Master Servicing Fees and the
Administration Fee payable on the related Distribution Date and any Master
Servicing Fees paid on the two preceding Monthly Servicing Payment Dates during
the related Collection Period and the denominator of which is the outstanding
principal balance of the Securities as of the first day of such Interest Period.
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"Expected Interest Collections" means, with respect to any Collection Period,
the sum of
- 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),
- 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
- Investment Earnings for such Collection Period.
To the extent for any Interest Period the rate for any Class of Notes
calculated on the basis of the Formula Rate exceeds the Student Loan Rate, the
Cap Provider will be obligated under the Cap Agreement to pay the amount of the
excess (the "Noteholder's Interest Index Carryover"). If the Cap Provider
defaults on its obligation under the Cap Agreement or the Cap Agreement is
terminated in accordance with its terms, any Noteholders' Interest Index
Carryover (together with the unpaid portion of any such Noteholders' Interest
Index Carryover from prior Distribution Dates and interest accrued thereon at
(1) in the case of the Class A Notes, the weighted average of the Formula Rate
for the Class A Notes and (2) in the case of the Class M Notes, the Formula Rate
for the Class M Notes) will be paid on such Distribution Date or any subsequent
Distribution Date on a subordinated basis only to the extent funds are allocated
and available therefor after making all required prior allocations and
distributions on such Distribution Date, as described under "Description of the
Transfer and Servicing Agreements-- Distributions" herein. Any Noteholders'
Interest Index Carryover due with respect to the Class A Notes as a result of
such default or termination, as the case may be, that may exist on any
Distribution Date following a default by the Cap Provider or a termination of
the Cap Agreement, as applicable, will be payable to holders of the Class A
Notes on that Distribution Date on a pro rata basis, based on the amount of the
Noteholders' Interest Index Carryover then owing with respect to the Class A
Notes, and on any succeeding Distribution Dates, solely out of the amount of
Available Funds remaining on any such Distribution Date after distribution of
the amounts having a more senior payment priority as described under
"Description of the Transfer and Servicing Agreements--Distributions" herein.
Any Noteholders' Interest Index Carryover due on the Class M Notes that may
exist on any Distribution Date following a default by the Cap Provider or
termination of the Cap Agreement, as applicable, will be payable to the holders
of the Class M Notes on that Distribution Date and on any succeeding
Distribution Dates, solely out of the amount of Available Funds remaining on any
such Distribution Date after distribution of any Noteholders' Interest Index
Carryover on the Class A Notes on such Distribution Date. No amounts on deposit
in the Reserve Account or the Pre-Funding Account will be available to pay any
Noteholders' Interest Index Carryover. Any amount of Noteholders' Interest Index
Carryover due with respect to the Notes remaining after distribution of all
Available Funds on the applicable Final Maturity Date will never become due and
payable and will be discharged on such date.
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Distributions of Principal. Principal payments will be made to the
holders of the Notes 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 remaining after the
distribution of the amounts set forth in "Description of the Transfer and
Servicing Agreements--Distributions" herein. However, on the second consecutive
Distribution Date that the principal balance of the Notes has exceeded the Note
Collateralization Amount, an amount equal to the Noteholders' Priority Principal
Distribution Amount will be distributed to Noteholders prior to any payments to
Certificateholders. Any such amounts will be distributed to the Noteholders in
the same order of priority as principal (i.e., first to the Class A-1
Noteholders, second, to the Class A-2 Noteholders and third, to the Class M
Noteholders, in each case until the outstanding principal balance of such Notes
has been reduced to zero). Moreover, on the second consecutive Distribution Date
that the aggregate principal balance of the Class A Notes has exceeded the Note
Collateralization Amount, an amount equal to the Noteholders' Priority
Distribution Amount will be distributed to the Class A Noteholders prior to any
payments to the Class M Noteholders. Any such amounts will be distributed first,
to the Class A-1 Noteholders and then to the Class A-2 Noteholders until the
outstanding principal balance of such Class of Notes have been reduced to zero.
If the remaining amount of Available Funds is insufficient to pay the
Noteholders' Priority Principal Distribution Amount for any Distribution Date,
the remaining shortfall will be distributable to the applicable Noteholders on
subsequent Distribution Dates and (except with respect to the Final Maturity
Date for such Classes of Notes), the remaining shortfall will not constitute an
Event of Default (as defined in the Prospectus). 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 November, 2009
Distribution Date, the Specified Collateral Balance will be reduced to zero and
all amounts on deposit in the Collection Account (after giving effect to all
prior distributions on such Distribution Date including the reinstatement of the
balance of the Reserve Account to the Specified Reserve Account Balance on such
Distribution Date) will be distributed first, to the Class A-1 Noteholders,
second, to the Class A-2 Noteholders, third, to the Class M Noteholders and
fourth to the Certificateholders as principal until the outstanding principal
balance of the Notes and Certificates has been reduced to zero. See "Description
of the Transfer and Servicing Agreements--Termination" herein.
Principal payments on the Notes will be applied on each Distribution
Date, first, to the principal balance of the Class A-1 Notes until the principal
balance is reduced to zero, then to the principal balance of the Class A-2 Notes
until the principal balance is reduced to zero and then to the Class M Notes
until the principal balance is reduced to zero. The aggregate outstanding
principal amount of each Class of Notes will be payable in full on the Final
Maturity Date for that Class of Notes. The dates on which the Final Maturity
Dates occur for each Class of Notes are set forth on the cover page. On the
Final Maturity Date for each Class of Notes, amounts on deposit in the Reserve
Account, if any, will be available, if necessary, to be applied to reduce the
principal balance of the Notes to zero. Although the maturity of many of the
Financed Student Loans will extend well beyond the Final Maturity Dates, the
actual date on which the aggregate outstanding principal and accrued interest of
any Class of Notes are paid
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may be earlier than the Final Maturity Date for the related Class of Notes,
based on a variety of factors. See "The Financed Student Loan Pool--Maturity and
Prepayment Assumptions" herein. In addition, prior to the Distribution Date on
which the principal balance of the Notes and Certificates equals the sum of the
Pool Balance and amounts on deposit in the Pre-Funding Account as of the last
day of the related Collection Period (the "Parity Date"), the amount on deposit
in the Reserve Account will be used to pay principal on the Notes only to the
extent the amount by which the Pool Balance as of the last day of the second
preceding Collection Period (or in the case of the first Distribution Date as of
the Cutoff Date) minus the Pool Balance as of the last day of the related
Collection Period exceeds the Available Funds remaining to be distributed on the
Notes as principal as set forth in "Description of the Transfer and Servicing
Agreements--Distributions" herein. On and after the Parity Date, amounts on
deposit in the Reserve Account will be used to pay principal to the extent that
any Available Funds remaining to be distributed on the Notes as principal as set
forth in "Description of the Transfer and Servicing Agreements--Distributions"
herein is less than the Noteholders' Principal Distribution Amount for such
Distribution Date.
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, if greater than $10,000,000 will be
distributed on the first Distribution Date thereafter 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 Certificate Balance of
the Certificates. If the remaining Subsequent Pool Pre-Funded Amount is
$10,000,000 or less, it will be distributed on the first Distribution Date
thereafter only to holders of the Class A-1 Notes.
Subordination of the Class M Notes. The rights of the holders of the
Class M Notes to receive payments of interest are subordinated to the rights of
the holders of the Class A Notes to receive payments of interest (and in certain
circumstances, principal) and the rights of the holders of the Class M Notes to
receive payments of principal are subordinated to the rights of the holders of
the Class A Notes to receive payments of interest and principal. Consequently,
amounts on deposit in the Collection Account and to the extent necessary, the
Reserve Account and, during the Funding Period, the Other Additional Pre-Funding
Subaccount, will be applied to the payment of interest on the Class A Notes
before payment of interest on the Class M Notes. Moreover, the holders of the
Class M Notes will not be entitled to any payments of principal until the Class
A Notes are paid in full. Additionally, on the second consecutive Distribution
Date that the outstanding principal balance of the Class A Notes (prior to
giving effect to distributions on such Distribution Date) is in excess of the
Note Collateralization Amount, principal will be payable to the holders of the
Class A Notes in the amount of such excess to the extent of funds available
before any amounts are payable to the holders of the Class M Notes. If amounts
otherwise allocable to the Class M Notes are used to fund payments of interest
or principal on the Class A Notes, distributions with respect to the Class M
Notes may be delayed or reduced.
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.
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THE CERTIFICATES
Distributions of Interest. Interest will accrue on the Certificate
Balance at a rate per annum equal to the lesser of the Formula Rate for the
Certificates and the Student Loan Rate (such interest rate being the
"Certificate Rate"). Interest on the Certificates will be distributable
quarterly on each Distribution Date. 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 any Distribution Date will generally be funded from the portion
of the Available Funds and the amounts on deposit in the Reserve Account and,
under certain limited circumstances, the Pre-Funding Account remaining after
distribution of the amounts set forth in "Description of the Transfer and
Servicing Agreements--Distributions" herein for such Distribution Date. See
"Description of the Transfer and Servicing Agreements--Distributions, " Credit
Enhancement--Reserve Account" and "--Additional Fundings" herein.
To the extent that for any Interest Period the rate for the
Certificates calculated on the basis of the Formula Rate exceeds the Student
Loan Rate, the Cap Provider will be obligated under the Cap Agreement to pay the
amount of the excess (the "Certificateholders' Interest Index Carryover"). If
the Cap Provider defaults on its obligation under the Cap Agreement or the Cap
Agreement terminates in accordance with its terms, any Certificateholders'
Interest Index Carryover (together with the unpaid portion of any such excess
from prior Distribution Dates and interest accrued thereon at the Formula Rate
for the Certificates) 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" herein. To the extent funds are available
therefor, the Certificateholders' Interest Index Carryover may be paid prior to
the time that the outstanding principal balance of the Notes is paid in full. No
amounts on deposit in the Reserve Account or Pre-Funding Account will be
available to pay any Certificateholders' Interest Index Carryover. Any amount of
Certificateholders' Interest Index Carryover due on the Certificates remaining
after distribution of all Available Funds on the Final Maturity Date for the
Certificates will never become due and payable and will be discharged on such
date.
Distributions of Principal. The Certificates 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 remaining after distribution of the amounts set forth
in "Description of the Transfer and Servicing Agreements--Distributions" herein.
See "Description of the Transfer and Servicing Agreements--Distributions" and
"--Credit Enhancement--Reserve Account" herein.
The outstanding Certificate Balance will be payable in full on the
Final Maturity Date for the Certificates. The Final Maturity Date for the
Certificates is set forth on the cover page. On the Final Maturity Date for the
Certificates, amounts on deposit in the Reserve Account, if any, will be
available, if necessary, to be applied to reduce the Certificate Balance to
zero. The actual date on which the aggregate outstanding Certificate Balance and
accrued interest of the Certificates will be
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paid may be earlier than the Final Maturity Date for the Certificates, however,
based on a variety of factors. See "The Financed Student Loan Pool--Maturity and
Prepayment Assumptions" herein. In addition, prior to the Parity Date, amounts
in deposit in the Reserve Account will be used to pay principal on the
Certificates only if the outstanding principal balances of the Notes have been
reduced to zero and only to the extent the amount by which the Pool Balance as
of the last day of the second preceding Collection Period (or, in the case of
the first Distribution Date, as of the Cutoff Date) minus the Pool Balance as of
the last day of the related Collection Period exceeds Available Funds remaining
to be distributed on the Certificates as principal as set forth in "Description
of the Transfer and Servicing Agreements--Distributions" herein. On and after
the Parity Date and the date on which the Notes have been paid in full, amounts
on deposit in the Reserve Account will be used to pay principal of the
Certificates to the extent Available Funds remaining to be distributed on the
Certificates as principal as set forth in "Description of the Transfer and
Servicing Agreements--Distributions" herein is less than the Certificateholders'
Principal Distribution Amount for such Distribution Date.
Subordination of the Certificates. The rights of the holders of the
Certificates to receive payments of interest are subordinated to the rights of
the holders of the Notes to receive payments of interest (and in certain
circumstances, principal) and the rights of the holders of the Certificates to
receive payments of principal are subordinated to the rights of the holders of
the Notes to receive payments of interest and principal. Consequently, amounts
on deposit in the Collection Account and to the extent necessary, the Reserve
Account and, during the Funding Period, the Other Additional Pre-Funding
Subaccount, will be applied to the payment of interest on the Notes before
payment of interest on the Certificates. Moreover, the holders of the
Certificates will not be entitled to any payments of principal until the Notes
are paid in full. In addition, upon the occurrence and during the continuation
of certain Events of Default under the Indenture and the Notes have been
accelerated, all amounts due on the Notes will be payable before any amounts are
payable on the Certificates. Additionally, on the second consecutive
Distribution Date that the outstanding principal balance of the Notes (prior to
giving effect to distributions on such Distribution Date) is in excess of the
Note Collateralization Amount, principal will be payable to the holders of the
Notes in the amount of such excess to the extent of funds available before any
amounts are payable to the holders of the Certificates. If amounts otherwise
allocable to the Certificates are used to fund payments of interest or principal
on the Notes, distributions with respect to the Certificates may be delayed or
reduced.
INDENTURE
Events of Default; Rights upon Event of Default. Subject to the
following paragraph, upon an Event of Default under the Indenture, the
Noteholders will have the rights set forth in the Prospectus under "Description
of the Notes--The Indenture--Events of Default; Rights Upon Event of Default."
The Indenture Trustee may sell the Financed Student Loans subject to certain
conditions set forth in the Indenture following an Event of Default, including a
default in the payment of any principal when due of or a default for five days
or more in the payment of any interest on any Note (to the extent described in
the following paragraph). (See "Description of the Notes--The Indenture--Events
of Default; Rights Upon Event of Default" in the Prospectus).
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Notwithstanding the description of Events of Default and resulting
rights of Noteholders in the Prospectus under the caption "Description of the
Notes--The Indenture--Events of Default; Rights Upon Event of Default," until
the Class A Notes have been paid in full, the failure to pay interest due on the
Class M Notes will not be an Event of Default. Pursuant to the Trust Indenture
Act of 1939, as amended, the Indenture Trustee may be deemed to have a conflict
of interest and be required to resign as trustee for either the Class A Notes or
the Class M Notes, as the case may be, if a default occurs under the Indenture.
In these circumstances, the Indenture will provide for one or more successor
indenture trustees to be appointed for the Class A Notes or the Class M Notes,
in order that there be separate indenture trustees for each such Class of Notes.
So long as any amounts remain unpaid with respect to the Class A Notes, only the
indenture trustee for the Class A Noteholders will have the right to exercise
remedies under the Indenture (but the Class M Noteholders will be entitled to
their respective shares of any proceeds of enforcement, subject to the
subordination of the Class M to the Class A Notes as described herein), and only
the Class A Noteholders will have the right to waive Events of Default, Master
Servicer Defaults or Administrator Defaults or direct or consent to any action
to be taken, including sale of the Financed Student Loans, until the Class A
Notes are paid in full. Upon repayment of the Class A Notes in full, all rights
to exercise remedies under the Indenture will transfer to the indenture trustee
for the Class M Notes and the Class M Noteholders will have the right to waive
Events of Default, Master Servicer Defaults or Administrator Defaults or direct
or consent to any action to be taken, including sale of the Financed Student
Loans until the Class M Notes are paid in full. Any resignation of the original
Indenture Trustee as described above with respect to any Class of Notes will
become effective only upon the appointment of a successor indenture trustee for
such Class of Notes and such successor's acceptance of such appointment.
Each Class M Noteholder, by accepting its respective interest in a
Class M Note, will be deemed to have consented to any such delay in payment of
interest on the Class M Notes and to have waived its right to institute suit for
enforcement of any such payment, in each case in the circumstances and to the
extent described above.
IN ADDITION, THE FAILURE TO PAY THE NOTEHOLDERS' PRINCIPAL DISTRIBUTION
AMOUNT ON ANY DISTRIBUTION DATE SHALL 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, THE CLASS A-2 FINAL MATURITY DATE, IN THE CASE OF THE CLASS A-2 NOTES OR
THE CLASS M FINAL MATURITY DATE, IN THE CASE OF THE CLASS M NOTES (EACH AS SET
FORTH ON THE COVER PAGE HERETO). FURTHERMORE, THE FAILURE TO PAY THE
NOTEHOLDERS' INTEREST INDEX CARRYOVER OR THE CERTIFICATEHOLDERS' INTEREST INDEX
CARRYOVER AS A RESULT OF INSUFFICIENT AVAILABLE FUNDS WILL NOT RESULT IN THE
OCCURRENCE OF AN EVENT OF DEFAULT.
DETERMINATION OF THE TREASURY BILL RATE
"91-day Treasury 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
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91-day Treasury 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 91-day Treasury Bill Rate will be subject to a Lock-In
Period of six business days.
"Lock-In Period" means the number of days preceding any Distribution
Date during which the Note Interest 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 any Class of Notes (and the Certificates) which are
Treasury Bill Indexed Securities 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 the Notes
(or the Certificate Balance) by an "accrued interest factor." This factor is
calculated by adding the interest rates applicable to each day on which each
Note has been outstanding since the Closing Date or the preceding Distribution
Date, as applicable, and dividing the sum by 365 (or by 366 in the case of
accrued interest which is payable on a Distribution Date in a leap year) and
rounding the resulting number to nine decimal places.
The following table sets forth the accrued interest factors that would
have been applicable to any Notes which are Treasury Bill Indexed Securities
bearing interest at the indicated rates, assuming a 365-day year:
ASSUMED INTEREST
-------------------------------------------
SETTLEMENT DATE DAYS OUTSTANDING RATE ON THE NOTES INTEREST FACTOR
- --------------- ------------------ --------------------------------------------
1st 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).
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 which are
Treasury Bill Indexed Securities. A similar factor calculated in the same manner
is applicable to the return on Certificates which are Treasury Bill Indexed
Securities.
The Administrator makes information concerning the current 91-day
Treasury Bill Rate and the accrued interest factor available through Bloomberg
L.P.
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DETERMINATION OF LIBOR
Pursuant to the Sale and Servicing Agreement, the Administrator, in its
capacity as calculation agent, will determine Three-Month LIBOR for purposes of
calculating the interest due on the Notes and Certificates which are LIBOR
Indexed Securities and the Noteholders' Interest Index Carryover and the
Certificateholders' Interest Index Carryover, in each case, for each given
Interest Period on (x) the second business day prior to the commencement of each
Interest Period and (y) with respect to the initial Interest Period, as
determined pursuant to clause (x) for the period from the Closing Date to but
excluding November 26, 1999 and as determined on the second business day prior
to November 26, 1999 for the period from November 26, 1999 to but excluding
February 25, 2000 (each, a "LIBOR Determination Date"). For purposes of
calculating Three-Month LIBOR, a business day is any day on which banks in
London and New York City are open for the transaction of business. Interest due
for any Interest Period will be determined based on the actual number of days in
such Interest Period over a 360-day year.
"Three-Month LIBOR" means the London interbank offered rate ("LIBOR")
for deposits in U.S. dollars having a maturity of three months commencing on the
related LIBOR Determination Date (the "Index Maturity") which appears on
Telerate Page 3750 as of 11:00 a.m., London time, on such LIBOR Determination
Date. If such rate does not appear on Telerate Page 3750, the rate for that day
will be determined on the basis of the rates at which deposits in U.S. dollars,
having the Index Maturity and in a principal amount of not less than U.S.
$1,000,000, are offered at approximately 11:00 a.m., London time, on such LIBOR
Determination Date to prime banks in the London interbank market by the
Reference Banks. The Administrator will request the principal London office of
each of such Reference Banks to provide a quotation of its rate. If at least two
such quotations are provided, the rate for that day will be the arithmetic mean
of the quotations. If fewer than two quotations are provided, the rate for that
day will be the arithmetic mean of the rates quoted by major banks in New York
City, selected by the Administrator, at approximately 11:00 a.m., New York City
time, on such LIBOR Determination Date for loans in U.S. dollars to leading
European banks having the Index Maturity and in a principal amount equal to an
amount of not less than U.S. $1,000,000; provided that if the banks selected as
aforesaid are not quoting as mentioned in this sentence, Three-Month LIBOR in
effect for the applicable reset period will be Three-Month LIBOR in effect for
the previous reset period.
"Telerate Page 3750" means the display page so designated on the Bridge
Telerate Service (or such other page as may replace that page on that service
for the purpose of displaying comparable rates or prices) or such comparable
page on a comparable service.
"Reference Bank" means a leading bank (a) engaged in transactions in
Eurodollar deposits in the international Eurocurrency market, (b) not
controlling, controlled by or under common control with the Administrator and
(c) having an established place of business in London.
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DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
GENERAL
The following information supplements the summary set forth in the
Prospectus of the material 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 (or will cause the Sub-Servicers to service) and
the Administrator will perform certain administrative functions with respect to
the Financed Student Loans; the Administration Agreement, dated as of September
1, 1999 among the Administrator, the Trust and the Indenture Trustee (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"). 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 the Cutoff Date 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 and the Reserve Account Initial Deposit to the Reserve
Account. See "--Additional Fundings" below 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 and will
have certain cure, repurchase and reimbursement obligations with respect to any
breaches. See "Description of the Transfer and Servicing Agreements" in the
Prospectus.
The "Purchase Price" of any Financed Student Loan will be (1) in the
case of Initial Financed Student Loans, an amount equal to 100% of the aggregate
principal balance of such Initial Financed Student Loan as of the Statistical
Cutoff Date, (2) in the case of Subsequent Pool 1 Student Loans, an amount equal
to 100% of the aggregate principal balance thereof as of the related Subsequent
Cutoff Date, (3) in the case of Subsequent Pool 2 Student Loans 100% of the
aggregate principal balance thereof as of the Subsequent Cutoff Date and (4) in
the case of Other Subsequent Student Loans, an amount equal to 100% of the
aggregate principal balance thereof as of its Subsequent Cutoff Date. For
purposes of the foregoing calculations, the aggregate principal balance of each
Financed Student Loan includes accrued interest thereon from the date
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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 entry into
repayment and any lost Interest Subsidy Payments and Special Allowance Payments
with respect thereto.
To assure uniform quality in servicing and to reduce administrative
costs, each Sub-Servicer will be appointed custodian of the promissory notes
representing the Financed Student Loans which such Sub-Servicer is servicing on
behalf of the Master Servicer and with respect to the Trust. The Seller's, the
Master Servicer's and the each Sub-Servicers' 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 four separate segregated
accounts as follows: the "Collection Account", the "Pre-Funding Account", the
"Escrow Account" and the "Reserve Account." Each such account will be
established 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 and the Reserve Account (collectively, the "Trust Accounts") will be
invested as provided in the Sale and Servicing Agreement in Eligible
Investments. "Eligible Investments" are generally limited to short-term U.S.
government backed securities, certain highly rated commercial paper and money
market funds and other investments acceptable to the Rating Agencies as being
consistent with the rating of the Notes. Subject to certain conditions, Eligible
Investments may include securities or other obligations issued by the Seller or
its affiliates, or trusts originated by the Seller or its affiliates, or shares
of investment companies for which the Seller or its affiliates may serve as the
investment advisor. Eligible Investments are limited to obligations or
securities that mature not later than the business day immediately preceding the
next Distribution Date. Investment earnings on funds deposited in the Trust
Accounts, net of losses and investment expenses (collectively, "Investment
Earnings"), will be deposited in the Collection Account on each Distribution
Date and will be treated as collections of interest on the Financed Student
Loans.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in such account, so long as any of the
securities of such depository institution have a credit rating from each Rating
Agency in one of its generic rating categories which signifies investment grade.
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,
without limitation, the Seller 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
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thereof or the District of Columbia (or any domestic branch of a foreign bank)
which has a long-term unsecured debt rating and/or a short-term unsecured debt
rating acceptable to the two nationally recognized rating agencies rating the
Securities and the deposits of which are insured by the Federal Deposit
Insurance Corporation ("FDIC").
ADDITIONAL FUNDINGS
The Trust may make expenditures (each, an "Additional Funding") from
the Pre-Funding Account and the Escrow Account on Transfer Dates during the
Funding Period consisting of amounts paid to the Seller to acquire Subsequent
Pool Student Loans and Other Subsequent Student Loans as of the applicable
Subsequent Cutoff Dates, to pay capitalized interest on the Financed Student
Loans and to pay Fee Advances as provided in the Sale and Servicing Agreement.
On the Closing Date, the Seller will deposit approximately $235,202,525
(the "Initial Pre-Funded Amount") into the Pre-Funding Account from the proceeds
of the sale of the Securities. For administrative convenience, a portion of the
Initial Pre-Funded Amount equal to approximately $175,202,525 (the "Subsequent
Pool Pre-Funded Amount") will be allocated to an administrative subaccount of
the Pre-Funding Account (the "Subsequent Pool Pre-Funding Subaccount"). The
remaining portion of the Initial Pre-Funded Amount equal to approximately
$60,000,000 (the "Other Additional Pre-Funded Amount") will be allocated to an
administrative subaccount of the Pre-Funding Account (the "Other Additional
Pre-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 Subsequent Pool Student Loans. The Subsequent Pool Pre-Funded Amount will
be reduced on each date Subsequent Pool Student Loans are transferred to the
Trust by the aggregate Purchase Price of such Subsequent Pool Student Loans
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 Pool Student Loans. In the event that the Subsequent Pool
Pre-Funded Amount is insufficient to pay the Purchase Price of the Subsequent
Pool Student Loans, then the amount of such deficiency may be withdrawn from the
Other Additional Pre-Funding Subaccount.
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 during the Funding Period, Other Subsequent Student Loans having an
aggregate principal balance (net of the aggregate principal balance of the
Financed Student Loans repaid by any Other Subsequent Student Loans that are
Consolidation Loans) of not less than approximately $60,000,000 (less the amount
thereof, if any, used by the Trust to fund shortfalls in the payment of interest
and principal on the Securities as described herein) to the extent that such
Other Subsequent Student Loans are available. Funds on deposit in the Other
Additional Pre-Funding Subaccount will be used from time to time during the
Funding Period, subject to certain limitations described below, 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), Other Subsequent
Student Loans 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 or Subsequent Pool Student Loans as of the related
Subsequent Cutoff Date, to pay
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capitalized interest on any Financed Student Loan and to pay Fee Advances. See
"The Student Loan Financing Business--Description of Federal Loans Under the
Programs--Federal Consolidation Loans" and "--Description of Private Loans Under
the Programs--Private Consolidation Loans" in the Prospectus. In addition, funds
on deposit in the Other Additional Pre-Funding Subaccount may be used prior to
the Special Determination Date to fund the purchase by the Trust of Subsequent
Pool Student Loans to the extent that amounts on deposit in the Subsequent Pool
Pre-Funding Subaccount are insufficient for such purpose.
The Seller expects that the total amount of Additional Fundings from
the Pre-Funding Account will approximate 100% of the Initial Pre-Funded Amount
by the last day of the Collection Period preceding the November 2001
Distribution Date; however, there can be no assurance that a sufficient amount
of Additional Fundings will be made during such time. If, on the Special
Determination Date, the Subsequent Pool Pre-Funded Amount has not been reduced
to zero, then such amounts will be distributed to Securityholders as described
in "Description of the Securities--The Notes--Mandatory Redemption" herein. 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 deposited into
the Collection Account for distribution on the immediately following
Distribution Date. Such reduction in the Pre-Funded Amount will result in a
corresponding increase in the amount of principal distributable to the
Securities on such Distribution Date.
The Other Additional Pre-Funded Amount will also be available on each
Monthly Servicing Payment Date to cover any shortfalls in payments of the Master
Servicing Fee and on each Distribution Date to fund Interest and Expense Draws
and Realized Loss Draws to the extent funds on deposit in the Reserve Account
are insufficient to cover such amounts; provided, however, that the Other
Additional Pre-Funded Amount will only be available to cover shortfalls in
payments on the Certificates to the extent that the Note Collateralization
Amount (after giving effect to such reductions in the Other Additional
Pre-Funded Amount) would not be less than the outstanding principal balance of
the Notes and will only be available to cover shortfalls in interest payments on
the Class M Notes to the extent that the Note Collateralization Amount (after
giving effect to such reductions in the Other Additional Pre-Funded Amount)
would not be less than the principal balance of the Class A Notes. Amounts
withdrawn from the Pre-Funding Account for the purposes described in this
paragraph will not be replenished with future available funds.
In addition to the conditions set forth under "The Financed Student
Loan Pool--General" herein, the obligation to purchase any Additional Student
Loan (including a Subsequent Pool Student Loan) by the Eligible Lender Trustee
on behalf of the Trust is subject to the following conditions, among others:
(a) such Additional Student Loan must satisfy all applicable
origination requirements and all other requirements specified
in the Sale and Servicing Agreement or related agreements;
(b) the Seller will not select such Additional Student Loan in a
manner that it believes is adverse to the interests of the
Securityholders; and
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(c) 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 Consolidation Loan will be transferred to the Trust
unless at least one underlying Student Loan was held by the Eligible Lender
Trustee on behalf of the Trust at the time of consolidation and (b) no Serial
Loan will be transferred to the Trust unless the borrower of such loan is the
borrower for one or more Financed Student Loans already owned by the Trust.
On the fifteenth day (or, if such day is not a business day, the next
succeeding business day) of each month or on 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 Subsequent Student Loans made or,
with respect to Subsequent Pool Student Loans, owned during the period preceding
the applicable 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 applicable 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 such 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 with respect to Subsequent Pool
Student Loans and Other Subsequent Student Loans, during the Funding Period,
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 Subsequent Pool
Student Loan.
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 (each as defined under "The Student Loan Financing Business" in the
Prospectus, the "Underlying Federal Loans" and the "Underlying Private Loans,"
respectively), 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, plus accrued interest thereon to the
date of such conveyance. Each purchase of a Serial Loan will be funded by means
of a transfer during the Funding Period, 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" above) 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
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Account on the 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.
For purposes of the foregoing, the following terms have the respective
meanings set forth below:
The "Funding Period" means the period from the Closing Date
until the first to occur of:
(1) an Event of Default occurring under the Indenture, a Master
Servicer Default (as defined in the Prospectus) occurring
under the Sale and Servicing Agreement or an Administrator
Default occurring under the Sale and Servicing Agreement or
the Administration Agreement;
(2) certain events of insolvency with respect to the Seller;
(3) the date on which the amounts on deposit in the Pre-Funding
Account would be reduced to zero after giving effect to
purchases of Other Subsequent Student Loans on such date; or
(4) the last day of the Collection Period preceding the November
2001 Distribution Date.
"Other Subsequent Student Loans means Consolidation Loans and
Serial Loans made to a borrower which is also a borrower under at least
one outstanding Financed Student Loan which the Trust is obligated to
purchase from the Seller during the Funding Period with funds on
deposit in the Escrow Account and funds on deposit in the Pre-Funding
Account and allocated to the Other Additional Pre-Funding Subaccount.
"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 Pool Student Loan.
"Subsequent Pool Student Loans" means the Student Loans
included in the Subsequent Pools.
"Subsequent Pool 1" and "Subsequent Pool 2" means the pools of
Student Loans currently owned by the Seller and having, as of the
Statistical Cutoff Date, the characteristics described herein under
"The Financed Student Loan Pool--Subsequent Pool Student Loans," to be
purchased from funds on deposit in the Subsequent Pool Pre-Funding
Subaccount.
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SERVICING PROCEDURES
Pursuant to the Sale and Servicing Agreement, the Master Servicer has
agreed to service and perform all other related tasks (or to cause the
Sub-Servicers to service and perform all other related tasks) with respect to
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 Master
Servicer (or a Sub-Servicer on its behalf) will hold, as custodian 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 (or shall cause a Sub-Servicer) to perform all services and duties
customary to the servicing of Student Loans (including all collection practices)
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 responsibilities of the Master
Servicer under the Sale and Servicing Agreement (or of a Sub-Servicer pursuant
to a Sub-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 the
Master Servicer (or a Sub-Servicer) is servicing, including claiming and
obtaining any Guarantee Payments (subject to the Maximum TERI Payments Amount)
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" below),
responding to inquiries from borrowers on such Financed Student Loans,
investigating delinquencies and sending out statements, payment coupons and tax
reporting information to borrowers. In addition, the Master Servicer will (or
will cause each Sub-Servicer to) keep ongoing records with respect to such
Financed Student Loans and collections thereon and will furnish periodic
statements to the Administrator with respect to such information, in accordance
with the Master Servicer's (or such Sub-Servicer's) customary practices with
respect to the Seller and as otherwise required in the Sale and Servicing
Agreement. Without being released from its obligations under the Sale and the
Servicing Agreement, the Master Servicer may cause the Sub-Servicers to perform
some or all of its duties listed above on its behalf pursuant to the
Sub-Servicing Agreements, and in the event that any such duties require
consents, approvals or licenses under the Higher Education Act or otherwise, the
Master Servicer shall appoint one or more Sub-Servicer that possesses such
consents, approvals and licenses to act on its behalf; provided, however, that
the Master Servicer shall remain responsible for the failure of any Sub-Servicer
to perform these activities. In its capacity as a Sub-Servicer, PHEAA will from
time to time be required on behalf of the Trust to file claims against, and
pursue the receipt of Guarantee Payments from, itself as a Federal Guarantor.
PAYMENTS ON FINANCED STUDENT LOANS
Except as provided below, the Master Servicer or a Sub-Servicer, as
applicable, will deposit all payments on Financed Student Loans (from whatever
source), and all proceeds of Financed Student Loans collected by it during each
Collection Period into the Collection Account within two business days of
receipt thereof. Except as provided below, the Eligible Lender Trustee will
deposit all Interest Subsidy Payments and all Special Allowance Payments with
respect to the
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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 KBUSA 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 KBUSA is the
Administrator and provided that (x) there exists no Administrator Default (as
described below) and (y) each other condition to making quarterly deposits as
may be specified by the rating agencies is satisfied, the Master Servicer, each
Sub-Servicer and the Eligible Lender Trustee will pay all the amounts referred
to in the preceding paragraph that would otherwise be deposited into the
Collection Account to the Administrator, and the Administrator will not be
required to deposit such amounts into the Collection Account until on or before
the business day immediately preceding each Monthly Servicing Payment Date (to
the extent of the Master 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 or will cause each Sub-Servicer to duly satisfy all
obligations on its part to be fulfilled under or in connection
with the Financed Student Loans the Master Servicer or a
Sub-Servicer is servicing, maintain in effect all
qualifications required in order to service such Financed
Student Loans and comply in all material respects with all
requirements of law in connection with servicing such 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 nor permit a Sub-Servicer to permit any
rescission or cancellation of a Financed Student Loan the
Master Servicer or a Sub-Servicer is servicing 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 nor permit a Sub-Servicer to impair the
rights of the Certificateholders and the Noteholders in such
Financed Student Loans; and
(d) it will not nor permit a Sub-Servicer to reschedule, revise,
defer or otherwise compromise with respect to payments due on
any such 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 Programs requirements.
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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 (or covenants made by the Master Servicer relating to either
of the Sub-Servicers), set forth above has not been complied with by the Master
Servicer (or a Sub-Servicer) 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 in the case of any Financed Federal Loan
any such breach that does not affect any Guarantor's obligation to guarantee or
insure 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.
INCENTIVE PROGRAMS
Certain incentive programs currently or hereafter made available by the
Seller to borrowers may also be made available by the Master Servicer or a
Sub-Servicer to borrowers with Financed Student Loans. Except for Financed
Student Loans eligible for the "Keys2Repay Program," which allows certain
borrowers to choose repayment terms of 10, 15 or 25 years at interest rates that
vary in accordance with the selected term, any incentive program that
effectively reduces borrower payments on Financed Student Loans and, with
respect to Financed Federal Loans, 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 or a Sub-Servicer receives payment on behalf of the Trust
from the Seller in an amount sufficient to offset such effective yield
reductions. See "The Student Loan Financing Business -- Incentive Programs" in
the Prospectus.
SERVICING COMPENSATION
The Master Servicer will be entitled to receive, subject to the
limitations set forth in the following paragraph, the Master Servicing Fee
monthly in an amount equal to the Master Servicing Fee Percentage of the Pool
Balance as of the last day of the immediately preceding calendar month together
with applicable administrative fees, late fees and similar charges, as
compensation for performing the functions as master servicer for the Trust
described above. The Master Servicing Fee Percentage 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 with respect to the Master Servicer or a
Sub-Servicer. The Master Servicing Fee (together with any portion of the Master
Servicing Fee that remains unpaid
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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. In return for
receiving the Master Servicing Fee, the Sub-Servicers will be paid solely by the
Master Servicer, pursuant to the Sub-Servicing Agreements.
The Master Servicing Fee will compensate the Master Servicer for
performing (or for arranging the performance by the Sub-Servicers of) the
functions of a third party servicer of student loans as 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 Master Servicing Fee also will reimburse the Master Servicer
for certain taxes, accounting fees, outside auditor fees, data processing costs
and other costs incurred in connection with administering the Financed Student
Loans.
DISTRIBUTIONS
Deposits to Collection Account. On or 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) (x) any
Guaranteed Payments made by TERI in excess of the Maximum TERI Payments Amount
and (y) a portion of the amount of the Available Funds equal to the Master
Servicing Fee, payable on such date to be deposited into the Collection Account
for payment to the Seller in the case of such excess Guarantee Payments and to
the Master Servicer in the case of the Master 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:
(1) all collections received by Master Servicer (or the
Sub-Servicers) on the Financed Student Loans (including any
Guarantee Payments (subject to the Maximum TERI Payments
Amount) received with respect to such Financed Student Loans)
but net of (x) any Federal Origination Fee (as defined in the
Prospectus) and Federal Consolidation Loan Rebate (as defined
in the Prospectus) payable to the Department on Federal
Consolidation Loans disbursed after October 1, 1993, (y) any
applicable administrative fees, late fees or similar fees
received from a borrower, and (z) 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;
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(2) any Interest Subsidy Payments and Special Allowance Payments
received by the Eligible Lender Trustee during the then
elapsed portion of such Collection Period with respect to the
Financed Federal Loans;
(3) all proceeds of the Financed Student Loans which were
liquidated ("Liquidated Student Loans") during the then
elapsed portion of such Collection Period in accordance with
the Master Servicer's (or the Sub-Servicers') respective
customary servicing procedures, net of expenses incurred by
the Master Servicer (or the Sub-Servicers) in connection with
such liquidation and any amounts required by law to be
remitted to the borrower on such Liquidated Student Loans (and
not including any Guarantee Payments received with respect
thereto) ("Liquidation Proceeds"), and all Recoveries in
respect of Liquidated Student Loans which were written off in
prior Collection Periods or prior months of such Collection
Period;
(4) 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 the
elapsed portion of such Collection Period;
(5) the aggregate amounts, if any, received from the Seller or the
Master Servicer (or a Sub-Servicer), as the case may be, as
reimbursement of non-guaranteed interest amounts, or lost
Interest Subsidy Payments and Special Allowance Payments;
(6) amounts deposited by the Seller into the Collection Account in
connection with the making of Consolidation Loans;
(7) with respect to the first Distribution Date, the Closing Date
Deposit;
(8) Investment Earnings for such Distribution Date;
(9) amounts withdrawn from the Reserve Account in excess of the
Specified Reserve Account Balance and deposited into the
Collection Account;
(10) amounts withdrawn from the Escrow Account and deposited into
the Collection Account; and
(11) with respect to the Distribution Date on or immediately after
the end of the Funding Period, the amount transferred from the
Pre-Funding Account to the Collection Account;
Available Funds 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 Distribution Date. If on
any Distribution Date there would not be sufficient funds, after application of
Available Funds amounts available from the Reserve Account and the Pre-Funding
Account (x) to pay any of the items specified in clauses (1) through (3),
respectively, under "--Distributions from the Collection Account" below for such
Distribution Date, (y) if the principal balance of the Class A Notes (after
giving effect to any distributions thereon on such Distribution Date) is less
than or equal to the Note Collateralization Amount, to pay the Noteholders'
Interest
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Distribution Amount with respect to the Class M Notes for such Distribution Date
or (z) if the principal balance of the Notes (after giving effect to any
distributions thereon on such Distribution Date) is less than or equal to the
Note Collateralization Amount, to pay the Certificateholders' Interest
Distribution Amount for such Distribution Date, then Available Funds for such
Distribution Date will include, in addition to the Available Funds on deposit in
the Collection Account on the Determination Date relating to such Distribution
Date which would have constituted Available Funds for the Distribution Date
succeeding such Distribution Date up to the amount necessary to pay, (1) in the
case of clause (x) above such items specified in clauses (1) through (3)
respectively, (2) in the case of clause (y) above, the Noteholders' Interest
Distribution Amount with respect to the Class M Notes and (3) in the case of
clause (z) above, the Certificateholders' Interest Distribution Amount, and the
Available Funds for such succeeding Distribution Date will be adjusted
accordingly.
In addition, if there is any Noteholders' Interest Index Carryover
or Certificateholders' Interest Index Carryover with respect to any Interest
Period, the Cap Provider will be obligated under the Cap Agreement to pay to the
Indenture Trustee an amount equal to such Noteholders' Interest Index Carryover
or Certificateholders' Interest Index Carryover for distribution to the
applicable Notes and Certificates, respectively, on the related Distribution
Date.
Distributions from the Collection Account. On each Monthly Servicing
Payment Date that is not a Distribution Date, the Administrator will instruct
the Indenture Trustee to pay to (a) the Seller, any amounts on deposit in the
Collection Account which consist of Guarantee Payments made by TERI in excess of
the Maximum TERI Payments Amount and (b) the Master Servicer, the Master
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 Available
Funds for the related Collection Period:
(1) to the Seller, any amounts on deposit in the Collection
Account which consist of Guarantee Payments made by TERI in
excess of the Maximum TERI Payments Amount;
(2) to the Master Servicer, the Master Servicing Fee due on such
Distribution Date and all prior unpaid Master Servicing Fees;
(3) to the Administrator, the Administration Fee and all unpaid
Administration Fees from prior Collection Periods;
(4) to the holders of the Class A Notes, the Noteholders' Interest
Distribution Amount for the Class A Notes;
(5) to the holders of the Class M Notes, the Noteholders' Interest
Distribution Amount for the Class M Notes;
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(6) to the holders of the Certificates, the Certificateholders'
Interest Distribution Amount;
(7) to the Reserve Account, an amount, up to the amount, if any,
necessary to reinstate the balance of the Reserve Account to
the Specified Reserve Account Balance;
(8) to the holders of the Class A Notes, the applicable
Noteholders' Principal Distribution Amount, first to the Class
A-1 Notes, until their outstanding principal balance has been
reduced to zero and then to the Class A-2 Notes, until their
outstanding principal balance has been reduced to zero;
(9) on each Distribution Date on and after which the Class A Notes
have been paid in full, to the holders of the Class M Notes,
the applicable Noteholders' Principal Distribution Amount;
(10) on each Distribution Date on and after which the Notes have
been paid in full, to the holders of the Certificates, the
Certificateholders' Principal Distribution Amount;
(11) to the holders of the Class A Notes on a pro rata basis, based
on the amount of the Noteholders' Interest Index Carryover
owing on each such Class of Notes, the aggregate unpaid amount
of the Noteholders' Interest Index Carryover, if any, but only
to the extent not paid by the Cap Provider under the Cap
Agreement;
(12) to the holders of the Class M Notes, the aggregate unpaid
amount of the Noteholders' Interest Index Carryover relating
to the Class M Notes, if any, but only to the extent not paid
by the Cap Provider under the Cap Agreement;
(13) to the holders of the Certificates, the aggregate unpaid
amount of the Certificateholders' Interest Index Carryover, if
any, but only to the extent not paid by the Cap Provider under
the Cap Agreement;
(14) to the Cap Provider, an amount sufficient to reimburse the Cap
Provider for all previous payments under the Cap Agreement and
any other amounts due to the Cap Provider under the Cap
Agreement; and
(15) to the Seller, any remaining amounts after application of
clauses (1) through (14).
Additionally, on the second consecutive Distribution Date that the
outstanding principal balance of the Notes (after giving effect to distributions
on such Distribution Date) is in excess of the Note Collateralization Amount,
principal will be payable to the Noteholders in the amount of the Noteholders'
Priority Principal Distribution Amount to the extent of funds available before
any amounts are payable to the holders of the Certificates. On the second
consecutive Distribution Date that the outstanding principal balance of the
Class A Notes (after giving effect to distributions on such Distribution Date)
is in excess of the Note Collateralization Amount, principal will be payable to
the Class A Noteholders sequentially (i.e. first, to the Class A-1 Notes and
then to the Class A-2 Notes) in the amount of the Noteholders' Priority
Principal Distribution Amount to the extent of funds available before any
amounts are payable to the holders of the Class M Notes.
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Notwithstanding the foregoing, following the occurrence and during the
continuation of an Event of Default and the acceleration of the Notes following
the failure by the Trust to pay interest or principal on the Notes when due or
the occurrence of certain events of insolvency relating to the Trust, no amounts
will be distributed to the holders of the Certificates until the Noteholders
have received all accrued and unpaid interest on the Notes (other than any
Noteholders' Interest Index Carryover) and the outstanding principal balance of
the Notes has been reduced to zero.
Upon any distribution to the Seller of any amounts included as
Available Funds, neither the Noteholders nor the Certificateholders will have
any rights in, or claims to, such amounts.
For purposes hereof, the following terms have the following meanings:
"Certificate Balance" equals $65,000,000 as of the Closing
Date and thereafter, equals the initial Certificate Balance, reduced by
all amounts allocable to principal subsequently distributed to the
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 (x) the sum of the
Certificateholders' Interest Distribution Amount on the preceding
Distribution Date over (y) the amount of interest actually distributed
to the holders of the Certificates on such preceding Distribution Date,
plus interest on the amount of such excess interest due to the holders
of the Certificates, 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 (a) 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 holders of the Certificates on such Distribution Date (or,
in the case of the first Distribution Date, on the Closing Date) and
(b) the Certificateholders' Interest Carryover Shortfall for such
Distribution Date; provided, that the Certificateholders' Interest
Distribution Amount will not include any Certificateholders' Interest
Index Carryover.
"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 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 the holders
of the Notes on such Distribution Date); provided that the
Certificateholders' Principal Distribution Amount will in no event
exceed the Certificate Balance. In addition, on the Final Maturity Date
for the
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Certificates, the principal required to be distributed to the
holders of the Certificates will include the amount required to reduce
the outstanding Certificate Balance to zero.
"Maximum TERI Payments Amount" means 19% of the Adjusted
Initial Pool Balance.
"Monthly Servicing Payment Date" means the 25th day of each
month (or if such day is not a Business Day, the next succeeding
Business Day).
"Net Government Receivable" means, with respect to any
Distribution Date, the sum of the amount of Interest Subsidy Payments
and Special Allowance Payments due from the Department less the amount
owed to the Department for Federal Origination Fee and Federal
Consolidation Loan Rebate as of the end of the related Collection
Period.
"Note Collateralization Amount" means, with respect to any
Distribution Date, the sum of:
(a) the Pool Balance as of the end of the related Collection
Period;
(b) the Pre-Funded Amount, as of the end of the related Collection
Period; and
(c) the Net Government Receivable.
"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 and any Class of Notes, the excess of
(x) the sum of the Noteholders' Interest Distribution Amount for such
Class of Notes on the preceding Distribution Date over (y) the amount
of interest actually distributed to the holders of such Class of Notes
on such preceding Distribution Date, plus interest on the amount of
such excess interest due to the holders of such Class of Notes, to the
extent permitted by law, at (1) the weighted average of the applicable
Note Interest Rates, in the case of the Class A Notes and (2) the Note
Interest Rate for the Class M Notes, in the case of the Class M Notes,
in each case from such preceding Distribution Date to the current
Distribution Date.
"Noteholders' Interest Distribution Amount" means, with
respect to any Distribution Date and any Class of Notes, the sum of (a)
the aggregate amount of interest accrued at the respective Note
Interest Rate for the related Interest Period on the outstanding
principal balance of such Class of the Notes on the immediately
preceding Distribution Date after giving effect to all principal
distributions to such Noteholders on such date (or, in the case of the
first Distribution Date, on the Closing Date) and (b) the Noteholders'
Interest Carryover Shortfall for such Class and such Distribution Date;
provided, that the Noteholders' Interest Distribution Amount will not
include any Noteholders' Interest Index Carryover for such Class.
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"Noteholders' Principal Distribution Amount" means, with
respect to any Distribution Date, the Principal Distribution Amount for
such Distribution Date; provided, however, that the Noteholders'
Principal Distribution Amount will not exceed the outstanding principal
balance of the Notes. In addition, (a) on the Final Maturity Date for
each Class of Notes, the principal required to be distributed to the
Class of Notes will include the amount required to reduce the
outstanding principal balance of such Class of Notes to zero, and (b)
on the related Distribution Date following a sale of the Financed
Student Loans in the manner described under "--Termination" below, the
principal required to be distributed to the holders of Class A-2 Notes
and Class M Notes will include the amount required to reduce the
outstanding principal balance of such Class A-2 Notes and Class M Notes
to zero. In the event that on two consecutive Distribution Dates the
outstanding balance of the Notes is in excess of the Note
Collateralization Amount, the Noteholders' Principal Distribution
Amount for the Notes will be reduced by the amount of any Noteholders'
Priority Principal Distribution Amount.
"Noteholders' Priority Principal Distribution Amount" means,
with respect to any Distribution Date, the excess of (x) the aggregate
outstanding principal balance of such Notes (after giving effect to any
distributions on such Distribution Date) over (y) the Note
Collateralization Amount.
"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), after giving effect to the following
without duplication:
- all payments received by the Trust related to the Financed
Student Loans during such Collection Period from or on behalf
of borrowers, Guarantors (except with respect to any guarantee
payments made by TERI in excess of the Maximum TERI Payments
Amount) and, with respect to certain payments on certain
Financed Federal Loans, the Department (collectively,
"Obligors"),
- all Purchase Amounts received by the Trust related to the
Financed Student Loans for such Collection Period from the
Seller, the Master Servicer or the Sub-Servicers,
- all Additional Fundings made from the Escrow Account and the
Pre-Funding Account with respect to such Collection Period,
and
- all losses realized on Financed Student Loans liquidated
during such Collection Period.
"Principal Distribution Amount" means, with respect to any
Distribution Date, the amount by which the sum of the outstanding
principal balance of the Notes and the Certificate Balance exceeds the
Specified Collateral Balance for such Distribution Date.
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"Specified Collateral Balance" means, with respect to any
Distribution Date, the sum of (a) the Pool Balance as of the last day
of the related Collection Period plus (b) the Pre-Funded Amount as of
the last day of the related Collection Period for such Distribution
Date. In the event that (1) the Financed Student Loans are not sold
pursuant to the auction process described under "--Termination" below,
with respect to any Distribution Date occurring on or after the
November 2009 Distribution Date, or (2) a Trigger Event has occurred
and is continuing, the Specified Collateral Balance will be zero.
A "Trigger Event" shall occur, on any Distribution Date, when:
(1) a Non-Guaranteed Private Undergraduate Loan Trigger Event has
occurred, or (2) a Private Graduate Loan Trigger Event has occurred;
provided, however, that if all three Ratings Agencies consent in
writing, no Trigger Event shall have occurred with respect to such
Distribution Date.
A "Non-Guaranteed Private Undergraduate Loan Trigger Event"
shall have occurred, on any Distribution Date, when cumulative Realized
Losses net of subsequent Recoveries with respect to the Non-Guaranteed
Undergraduate Private Loans exceeds 15% of the Initial Financed Student
Loan Pool Balance with respect to all Non-Guaranteed Undergraduate
Private Loans.
"Non-Guaranteed Undergraduate Private Loans" are
Non-Guaranteed Private Loans that have been made to undergraduate
students.
"Initial Financed Student Loan Pool Balance" means at any
time, the Pool Balance of the Financed Student Loans, or specified
subset thereof, as of the related Cutoff Date (in the case of the
Initial Financed Student Loans, or specified subset thereof) or the
related Subsequent Cutoff Date (with respect to Additional Student
Loans or specified subset thereof).
"Recoveries" means, with respect to any Liquidated Student
Loan, moneys collected in respect thereof, from whatever source, during
any Collection Period following the Collection Period in which such
Financed Student Loan became a Liquidated Student Loan, net of the sum
of any amounts expended by the Master Servicer (or any Sub-Servicer
acting on its behalf) for the account of any related borrower on such
Financed Student Loan and any amounts required by law to be remitted to
such borrower on such Financed Student Loan.
A "Private Graduate Loan Trigger Event" shall have occurred,
on any Distribution Date, when: (1) a TERI Trigger Event, (2) a HICA
Trigger Event, or (3) a Non-Guaranteed Private Graduate Loan Trigger
Event shall have occurred.
A "TERI Trigger Event" shall have occurred when, on any
Distribution Date, the cumulative Realized Losses on any of the
Guaranteed Private Loans that are guaranteed by TERI exceeds 20% of the
Initial Financed Student Loan Pool Balance consisting of all Guaranteed
Private Loans that are guaranteed by TERI; provided, however, that a
TERI
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Trigger Event shall not have occurred if TERI is continuing to pay
claims with respect to all Guaranteed Private Loans guaranteed by
TERI.
A "HICA Trigger Event" shall have occurred when, on any
Distribution Date, the cumulative Realized Losses on any of the
Guaranteed Private Loans that are guaranteed by HICA exceeds 20% of the
Initial Financed Student Loan Pool Balance consisting of all Guaranteed
Private Loans that are guaranteed by HICA; provided, however, that a
HICA Trigger Event shall not have occurred if HICA is continuing to pay
claims with respect to all Guaranteed Private Loans guaranteed by HICA.
A "Non-Guaranteed Private Graduate Loan Trigger Event" shall
have occurred on any Distribution Date when, the cumulative Realized
Losses on the Non-Guaranteed Graduate Private Loans exceeds 20% of the
Initial Financed Student Loan Pool Balance consisting of all
Non-Guaranteed Graduate Private Loans.
"Non-Guaranteed Graduate Private Loans" are Non-Guaranteed
Private Loans that have been made to graduate students.
CREDIT ENHANCEMENT
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 approximately
$17,500,000 (the "Reserve Account Initial Deposit"). On the Closing Date, the
Reserve Account Initial Deposit will equal the Specified Reserve Account Balance
as of the Closing Date. The amounts on deposit in the Reserve Account to the
extent used will be replenished up to the Specified Reserve Account Balance on
each Distribution Date by deposit therein of the amount, if any, necessary to
reinstate the balance of the Reserve Account to the Specified Reserve Account
Balance from the amount of Available Funds remaining after payment of the prior
amounts set forth under "--Distributions" above, all for such Distribution Date.
"Specified Reserve Account Balance" means, with respect to any
Distribution Date will be equal to the greater of (x) 1.75% of the aggregate
outstanding principal amount of the Notes and the Certificate Balance on such
Distribution Date before giving effect to any distribution on such Distribution
Date, and (y) $2 million; provided, however, that 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 Reserve Account may be
used to fund Interest and Expense Draws and Realized Loss Draws.
Funds will be withdrawn from the Reserve Account to the extent that the
amount of available funds is insufficient to pay the Master Servicing Fee on any
Monthly Servicing Payment Date and any of the items specified in clauses (2)
through (6) under "--Distributions--Distributions from Collection Account" above
on any Distribution Date (such amount, the "Interest and Expense Draw");
provided that amounts on deposit in the Reserve Account shall only be available
to cover shortfalls in interest payments on (1) the Certificates to the extent
that the Note Collateralization Amount (after giving effect to such withdrawals
from the Reserve Account) is not less than the outstanding principal balance of
the Notes and (2) the Class M Notes, to the extent that the Note
Collateralization Amount (after giving effect to such withdrawal from the
Reserve Account) is not less than the
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outstanding principal balance of the Class A Notes. 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 (2) through (6) on a Distribution
Date. In addition, on the Final Maturity Dates for the Securities, amounts on
deposit in the Reserve Account, if any, will be available, if necessary, to be
applied to reduce the principal balance of the Securities to zero. Amounts on
deposit in the Reserve Account will not be available to cover any reimbursement
for Noteholders' Interest Index Carryover or Certificateholders' Interest Index
Carryover.
In addition, if on any Distribution Date prior to the Parity Date to
the extent the amount by which the Pool Balance as of the last day of the second
preceding Collection Period (or in the case of the first Distribution Date, as
of the Cutoff Date) minus the Pool Balance as of the last day of the related
Collection Period exceeds the amount remaining to be distributed as Noteholders'
Principal Distribution Amount or, after the Notes have been paid in full, the
Certificateholders' Principal Distribution Amount will be withdrawn from the
Reserve Account and deposited in the Collection Account and distributed by the
Indenture Trustee as a payment in respect of the Noteholders' Principal
Distribution Amount (and distributed among the Notes in the order of priority as
set forth under "-- Distributions--Distributions from the Collection Account")
or, if the Notes have been paid in full, the Certificateholders' Principal
Distribution Amount. If on any Distribution Date on or after the Parity Date,
the amount available to be distributed as Noteholders' Principal Distribution
Amount or, after the Notes have been paid in full, the Certificateholders'
Principal Distribution Amount, is less than the Noteholders' Principal
Distribution Amount or Certificateholders' Principal Distribution Amount for
such Distribution Date, such amount will be withdrawn from the Reserve Account
and deposited in the Collection Account and distributed as a payment in respect
of the Noteholders' Principal Distribution Amount (and distributed among the
Notes in the order of priority as set forth under "--
Distributions--Distributions from the Collection Account") or, if the Notes have
been paid in full, the Certificateholders' Principal Distribution Amount. Any
amounts withdrawn from the Reserve Account and applied as a payment of principal
of the Notes or Certificates is referred to herein as a "Realized Loss Draw."
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, subject to certain limitations, the Administrator will
instruct the Indenture Trustee to deposit the amount of the excess into the
Collection Account for distribution as Available Funds on such Distribution
Date. Upon any distribution to the Seller of any amounts included as Available
Funds, 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.
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The Reserve Account is intended to enhance the likelihood of timely
receipt by the holders of Notes and the holders of Certificates of the full
amount of interest due them and to decrease the likelihood that such holders
will experience losses. In certain circumstances, however, the Reserve Account
could be depleted.
Subordination of the Class M Notes and the Certificates. The Class M
Noteholders are generally subordinate in right of payment to the rights of the
Class A Noteholders and the Certificateholders are generally subordinate in
right of payment to the rights of the Class A and Class M Noteholders. See
"Description of the Securities--The Notes--Subordination of the Class M Notes"
and "--The Certificates--Subordination of the Certificates."
INTEREST RATE CAP AGREEMENT
Payments Under the Cap Agreement. On the Closing Date, the Trust will
enter into the Cap Agreement with Key Bank USA, as the Cap Provider. The Cap
Agreement will be documented according to a 1992 ISDA Master Agreement
(Multicurrency-Cross Border) (the "ISDA Master Agreement"), modified to reflect
the terms of the Notes, the Certificates, the Indenture, the Sale and Servicing
Agreement and the Cap Agreement. The Cap Agreement will terminate on the date
that is the earliest to occur of the Distribution Date in November 2009, the
date on which the Notes and the Certificates have been paid in full, the
occurrence and continuation of an Event of Default resulting in a liquidation of
the Financed Student Loans and the date on which the Cap Agreement is terminated
in accordance with its terms pursuant to an early termination.
In accordance with the terms of the Cap Agreement, the Cap Provider
will pay to the Trust on each Distribution Date, any Noteholders' Interest Index
Carryover and/or Certificateholders' Interest Index Carryover created on such
Distribution Date. In consideration for entering into the Cap Agreement, the Cap
Provider will be entitled to an upfront fee on the Closing Date and to
reimbursement for all sums paid to Noteholders as Noteholders' Interest Index
Carryover and to Certificateholders as Certificateholders' Interest Index
Carryover on each Distribution Date, but on a subordinated basis and only to the
extent funds are available therefor on subsequent Distribution Dates after
making all prior distributions on such Distribution Date in accordance with the
payment priorities set forth above under "--Distributions--Distributions from
the Collection Account."
Defaults Under the Cap Agreement. "Events of Default" under the Cap
Agreement are limited to: (i) failure of the Cap Provider or the Trust to pay
any amount when due under the Cap Agreement; provided, however, that in the case
of the Trust, the Trust has Available Funds remaining to pay such obligations on
any Distribution Date after making all other required distributions with more
senior payment priorities in accordance with the priorities set forth above
under "--Distributions--Distributions from the Collection Account;" and (ii)
certain events of insolvency or bankruptcy of the Cap Provider.
Termination Event. A "Termination Event" under the Cap Agreement
consists of the following event under the ISDA Master Agreement: "Illegality,"
which generally relates to changes in law causing it to become unlawful for a
party to perform its obligations under the Cap Agreement.
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Payments Upon Termination. In the event the Cap Agreement is terminated
due to a Termination Event or an Event of Default, the Cap Provider shall pay to
the Trust as liquidated damages an amount equal to the fee it received on the
Closing Date. The amount of liquidated damages is not expected to be sufficient
to find a replacement interest rate cap and there is no obligation of the Trust,
the Seller, the Indenture Trustee, the Administrator, the Cap Provider or any
other person to find a replacement interest rate cap provider if the Cap
Agreement is terminated. Prospective Noteholders and Certificateholders should
note that the amount of such fee may be insufficient to offset any Noteholders'
Interest Index Carryover and/or Certificateholders' Interest Index Carryover on
future Distribution Dates. In the event that the Cap Agreement is terminated and
the Cap Provider is owed any sums for amounts previously paid to the Trust under
the Cap Agreement, the Cap Provider shall be entitled to reimbursement from the
Trust for all such sums, but only to the extent Available Funds are available
therefor on subsequent Distribution Dates after making all other required
distributions with more senior priorities in accordance with the payment
priorities set forth above under "--Distributions--Distributions from the
Collection Account."
STATEMENTS TO INDENTURE TRUSTEE AND TRUST
Prior to each Distribution Date, the Administrator (based on the
periodic statements and other information provided to it by the Master Servicer
or the Sub-Servicers) 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:
(1) the amount of the distribution allocable to principal of each
Class of Securities;
(2) the amount of the distribution allocable to interest on each
Class of Securities, together with the interest rates
applicable with respect thereto (indicating whether such
interest rates are based on the Formula 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 Investor Index for such
Interest Period is 100 basis points greater than the Investor
Index of the preceding Determination Date or, with respect to
Treasury Bill Indexed Securities only, the 52-week Treasury
Bill Rate is 100 basis points less than the 91-day Treasury
Bill Rate as of such Determination Date);
(3) 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;
(4) 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 (1) above;
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(5) the aggregate outstanding principal balance of each Class 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 (1) above;
(6) the amount of the Master Servicing Fee paid to the Master
Servicer and the amount of the Administration Fee paid to the
Administrator with respect to such Collection Period, and the
amount, if any, of the Master Servicing Fee remaining unpaid
after giving effect to any such payments;
(7) 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;
(8) the balance of the Reserve Account on such Distribution Date,
after giving effect to changes therein on such Distribution
Date;
(9) the amount of any Interest and Expense Draw on such
Distribution Date and the amount of any Realized Loss Draw on
such Distribution Date;
(10) 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;
(11) for the first Distribution Date, the amount, if any, of the
Subsequent Pool Pre-Funded Amount remaining in the Subsequent
Pool Pre-Funding Subaccount that has not been used to acquire
Subsequent Pool Student Loans and is being paid out to the
Noteholders and Certificateholders;
(12) 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 the Noteholders;
(13) the aggregate amount of TERI's Guarantee Payments deposited
into the Collection Account (net of any amounts paid to the
Seller under clause (1) of "--Distributions from the
Collection Account" above) expressed as a percentage of the
Adjusted Initial Pool Balance; and
(14) the amount of any payments made under the Cap Agreement on
such Distribution Date and the aggregate amount owing to the
Cap Provider for previous payments under the Cap Agreement.
"Realized Losses" means, the excess of the principal balance
of the Liquidated Student Loans over the Liquidation Proceeds to the
extent allocable to principal.
"52-week Treasury 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.
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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 (a) 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 (b) the
payment to the holders of Notes and the holders of Certificates 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 than the Adjusted 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 holders of Notes and holders
of Certificates 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 November 2009 Distribution Date will
be offered for sale by the Indenture Trustee. KeyCorp, its affiliates and
unrelated third parties may offer bids to purchase such Financed Student Loans
on such Distribution Date. The Administrator shall, subject to the satisfaction
of certain conditions set forth in and to assure compliance with the Sale and
Servicing Agreement, direct the Indenture Trustee to auction the Financed
Student Loans in the aggregate or in two separate pools. No assurance can be
given that the method selected by the Administrator will result in the highest
possible sale price for the Financed Student Loans or that one bid for all the
Financed Student Loans, or a combination bids for two pools comprising the
Financed Student Loans, will be equal to or in excess of the Minimum Purchase
Amount. If at least two bids are received either for the whole pool or any
separate pool of Financed Student Loans, the Indenture Trustee will solicit and
resolicit bids from all participating bidders until only one bid for each such
pool remains or the remaining bidders decline to resubmit bids. The Indenture
Trustee will accept the highest of such remaining bids (or the combination of
the highest bid for each pool if two pools of Financed Student Loans are being
sold separately), if any single bid (or the sum of the two highest bids) are
equal to or in excess of an amount (the "Minimum Purchase Amount") equal to the
greatest of
(1) the Auction Purchase Amount;
(2) the fair market value of such Financed Student Loans as of the
end of the Collection Period immediately preceding such
Distribution Date; and
(3) 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 (other than any Noteholders' Interest Index
Carryover and Certificateholders' Interest Index Carryover).
S-98
<PAGE> 101
If at least two bids are not received or the highest bid for all the
Financed Student Loans (or combination of the two highest bids for two separate
pools of Financed Student Loans) 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. In addition to the foregoing, the
Indenture Trustee shall not accept any bid from a prospective purchaser, unless
such prospective purchaser agrees to pay all, if any, deconversion fees owed to
a Sub-Servicer if such purchaser's bid is accepted and it chooses to replace a
Sub-Servicer as the servicer of the Financed Student Loans it is purchasing. In
connection with the determination of the Minimum Purchase Amount, the Indenture
Trustee may consult and, at the direction of the Seller, shall consult, with a
financial advisor, including the Underwriters 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 November 2009 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 November 2009
Distribution Date the Specified Collateral Balance shall be reduced to zero and
all Available Funds remaining after applying such amounts to pay the Master
Servicing Fee, the Administration Fee, the Noteholders' Interest Distribution
Amount, the Noteholders' Priority Principal Distribution Amount, if any, and the
Certificateholders' Interest Distribution Amount will be paid as principal to
the holders of Notes and then to the holders of Certificates until the
outstanding principal balance of the Notes and the Certificates has been reduced
to zero.
"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 for such date.
ADMINISTRATOR
The Seller, 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. For a description of the Administrator's duties, see
"Description of the Transfer and Servicing Agreements - Administrator" in the
Prospectus.
As compensation for the performance of the Administrator's obligations
under the Administration Agreement and the Sale and Servicing Agreement and as
reimbursement for its expenses related thereto, the Administrator will be
entitled to an administration fee in an amount equal to $3,000 per quarter (the
"Administration Fee").
S-99
<PAGE> 102
INCOME TAX CONSEQUENCES
Thompson Hine & Flory LLP, federal tax counsel to the Trust ("Federal
Tax Counsel"), is of the opinion that the Trust will not be classified as an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes and that the Notes will be characterized as debt for
federal income tax purposes.
Kirkpatrick & Lockhart LLP, Pennsylvania tax counsel ("Pennsylvania Tax
Counsel") is of the opinion that the same characterizations of the Notes and the
Trust would apply for Pennsylvania state income tax purposes as for federal
income tax purposes.
The Seller and the Master Servicer will agree, and the
Certificateholders will agree by their purchase of Certificates, to treat the
Trust as a partnership for purposes of federal, state and local income and
franchise tax with the assets of the partnership being the assets held by the
Trust, the partners of the partnership being the Certificateholders (including
the Seller both in its capacity as owner of Certificates and as recipient of
distributions from the Reserve Account), and the Notes being debt of the
partnership.
If the Trust were held to be an association (or publicly traded
partnership) 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 available to make payments on the Notes and the Certificates
(and the Certificateholders could be liable for any such tax that is unpaid by
the Trust).
We recommend that investors carefully review the information under the
caption "Income Tax Consequences" in the Prospectus.
ERISA CONSIDERATIONS
Section 406 of ERISA, and/or Section 4975 of the Internal Revenue Code
of 1986, as amended (the "Code"), prohibit a pension, profit-sharing or other
employee benefit plan, as well as individual retirement accounts, and certain
types of Keogh Plans, and other plans subject to Section 4975 of the Code (each
a "Benefit Plan") from engaging in certain transactions with persons that are
"parties in interest" under ERISA or "disqualified persons" under the Code with
respect to such Benefit Plan. A violation of these "prohibited transaction"
rules may result in an excise tax or other penalties and liabilities under ERISA
and the Code for such persons. Title I of ERISA also requires that fiduciaries
of a Benefit Plan subject to ERISA make investments that are prudent,
diversified (except if prudent not to do so) and in accordance with governing
plan documents.
Certain transactions involving the purchase, holding or transfer of the
Notes might be deemed to constitute prohibited transactions under ERISA and the
Code if assets of the Trust were deemed to be assets of a Benefit Plan. Under a
regulation issued by the United States Department of Labor (the "Plan Assets
Regulation"), the assets of the Trust would be treated as plan assets of a
Benefit Plan for the purposes of ERISA and the Code only if the Benefit Plan
acquires an "Equity Interest" in the Trust and none of the exceptions contained
in the Plan Assets Regulation is
S-100
<PAGE> 103
applicable. An equity interest is defined under the Plan Assets Regulation as
an interest other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features. The Notes
should be treated as indebtedness without substantial equity features for
purposes of the Plan Assets Regulation. However, without regard to whether the
Notes are treated as an Equity Interest for such purposes, the acquisition or
holding of Notes by or on behalf of a Benefit Plan could be considered to give
rise to a prohibited transaction if the Trust, the Trustee or the Indenture
Trustee, the Seller, the owner of collateral, or any of their respective
affiliates is or becomes a party in interest or a disqualified person with
respect to such Benefit Plan. In such case, certain exemptions from the
prohibited transaction rules could be applicable depending on the type and
circumstances of the plan fiduciary making the decision to acquire a Note.
Included among these exemptions are: Prohibited Transaction Class Exemption
("PTCE") 90-1, regarding investments by insurance company pooled separate
accounts; PTCE 95-60, regarding investments by insurance company general
accounts; PTCE 91-38, regarding investments by bank collective investment funds;
PTCE 96-23, regarding transactions effected by in-house asset managers; and PTCE
84-14, regarding transactions effected by "qualified professional asset
managers."
Employee benefit plans that are governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA) are not subject to ERISA requirements.
A plan fiduciary considering the purchase of Notes should consult its
tax and/or legal advisors regarding whether the assets of the Trust would be
considered plan assets, the possibility of exemptive relief from the prohibited
transaction rules and other issues and their potential consequences.
No Certificates may be purchased for, or on behalf of, any Benefit Plan
or any entity whose underlying assets are deemed to be plan assets of such
Benefit Plan.
The purchaser of a Certificate is deemed to have represented that it is
not acquiring the Certificates directly or indirectly for, or on behalf of, a
Benefit Plan or any entity whose underlying assets are deemed to be plan assets
of such Benefit Plan. The purchaser of Notes is deemed to have represented that
either: (A) the purchaser is not acquiring the Notes directly or indirectly for,
or on behalf of, a Benefit Plan or any entity whose underlying assets are deemed
to be plan assets of such Benefit Plan, or (B) the acquisition and holding of
the Notes by the purchaser qualifies for prohibited transaction exemptive relief
under PTCE 95-60, PTCE 96-23, PTCE 91-38, PTCE 90-1, PTCE 84-14 or some other
applicable exemption.
S-101
<PAGE> 104
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 and
Class A-2 Notes set forth opposite its name:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT PRINCIPAL AMOUNT
UNDERWRITER OF CLASS A-1 NOTES OF CLASS A-2 NOTES TOTAL
- ------------------------- ------------------ ------------------ ------------
<S> <C> <C> <C>
Credit Suisse First Boston $184,800,000 $412,500,000 $597,300,000
Corporation
McDonald Investments $ 95,200,000 $212,500,000 $307,700,000
</TABLE>
In the respective Underwriting Agreements, the Underwriters have
agreed, subject to the terms and conditions set forth therein, to purchase (x)
all the Notes offered hereby if any of the Notes are purchased and (y) 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 cover page of this Prospectus Supplement, and to certain dealers at
such prices less a concession not in excess of 0.1110% per Class A-1 Note and
0.2100% per Class A-2 Note. The Underwriters may allow and such dealers may
reallow to other dealers a discount not in excess of 0.0925% per Class A-1 Note
and 0.1750% per Class A-2 Note. After the initial public offering, such public
offering prices, concessions and reallowances may be changed.
Credit Suisse First Boston Corporation will be the sole underwriter
with respect to the Class M Notes and the Certificates. Credit Suisse First
Boston Corporation initially proposes to offer the Class M Notes and the
Certificates from time to time in negotiated transactions or otherwise, at
varying prices to be determined at the time of sale. Credit Suisse First Boston
Corporation expects to sell some or all of the Class M Notes and/or the
Certificates to the Seller or an affiliate of the Seller, which then may be
subsequently offered by the Seller or its affiliates from time to time directly
or through underwriters or agents (either of which may include McDonald
Investments, an affiliate of the Seller, the Administrator, and the Master
Servicer) in one or more negotiated transactions, or otherwise, at varying
prices to be determined at the time of sale, in one or more separate
transactions at prices to be negotiated at the time of each sale. Any
underwriters or agents that participate in the distribution of the Class M Notes
and the Certificates may be deemed to be "underwriters" within the meaning of
the Securities Act of 1933, as amended (the "Securities Act") and any profit on
the sale of the Class M Notes or the Certificates by them and any discounts,
commissions, concessions or other compensation received by any of them may be
deemed to be underwriting discounts and commissions under the Securities Act.
S-102
<PAGE> 105
The representative, on behalf of the underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bides in accordance with Regulation M under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the representative to reclaim a selling concession from a
syndicate member when the Securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Securities to be higher than it would
otherwise be in the absence of such transactions. These transactions, if
commenced, may be discontinued at any time.
The Seller does not intend to apply for listing of the Securities on a
national securities exchange, but has been advised by Credit Suisse First Boston
that it intends to, and by McDonald Investments Inc. ("McDonald Investments")
that it may, make a market in the Securities. The Underwriters are not
obligated, however, to make a market in the Securities and may discontinue
market-making at any time without notice. No assurance can be given as to the
liquidity of the trading market for the Securities.
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.
Credit Suisse First Boston Corporation is engaged from time to time by
KeyCorp, the parent corporation of the Seller, to provide investment banking
services.
After the initial distribution of the Securities by the Underwriters,
this Prospectus Supplement may be used by McDonald Investments, a wholly-owned
subsidiary of KeyCorp and an affiliate of the Seller, the Administrator and the
Master Servicer, or its successors, in connection with offers and sales relating
to market-making transactions in the Securities. McDonald Investments may act as
principal or agent in such transactions, but has no obligation to do so.
McDonald Investments is a member of the New York Stock Exchange, Inc. Such
transactions will be at prices related to prevailing market prices at the time
of sale.
Pursuant to an Agreement and Plan of Merger dated as of June 15, 1998
between KeyCorp and McDonald & Company Investment, Inc. ("McDonald"), a
full-service investment banking and securities brokerage company headquartered
in Cleveland, Ohio, on October 23, 1998, McDonald
S-103
<PAGE> 106
was merged with and into KeyCorp. On November 9, 1998, the merger of Key Capital
Markets, Inc., a wholly-owned broker-dealer subsidiary of KeyCorp, into McDonald
& Company Securities, Inc. (a wholly-owned subsidiary of the former McDonald)
was completed and the surviving entity was renamed McDonald Investments Inc.
McDonald Investments may engage in market-making transactions as described
above.
The Seller has also agreed to pay the Underwriters a structuring fee
equal to $914,500.00.
EXPERTS
The balance sheet of KeyCorp Student Loan Trust 1999-B, as of September
28, 1999, has been audited by Ernst & Young LLP, independent certified public
accountants, as set forth in their report appearing elsewhere in this Prospectus
Supplement and incorporated by reference in the Registration Statement (as
defined in the Prospectus), and has been included in reliance on their report
given on their authority as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters relating to the Securities will be passed upon
for the Trust, the Seller and the Administrator by Forrest F. Stanley, Esq.,
General Counsel and Assistant Secretary of the Seller, as counsel for the
Seller, and by Thompson Hine & Flory LLP, Cleveland, Ohio and for the
Underwriters by Stroock & Stroock & Lavan LLP, New York, New York. Certain
federal income tax and other matters will be passed upon for the Trust by
Thompson Hine & Flory LLP. Certain Pennsylvania state income tax matters will be
passed upon for the Trust by Kirkpatrick & Lockhart LLP.
S-104
<PAGE> 107
INDEX OF PRINCIPAL TERMS
Set forth below is a list of the defined terms used in this Prospectus
Supplement and the pages on which the definitions of such terms may be found
herein.
PAGE
52-week Treasury Bill Rate....................................S-97
91-day Treasury Bill Rate.....................................S-73
accrued interest factor.......................................S-74
Additional Funding............................................S-78
Additional Student Loans......................................S-25
Adjusted Initial Pool Balance.................................S-51
Administration Agreement......................................S-76
Administration Fee............................................S-99
ASA...........................................................S-22
Assigned Rights...............................................S-21
Auction Purchase Amount.......................................S-99
Available Funds...............................................S-85
Bankruptcy Code...............................................S-55
Benefit Plan.................................................S-100
Cap Agreement.................................................S-21
Cap Provider..................................................S-21
Cede..........................................................S-66
Certificate Balance...........................................S-89
Certificate Rate..............................................S-71
Certificateholders............................................S-50
Certificateholders' Distribution Amount.......................S-89
Certificateholders' Interest Carryover Shortfall..............S-89
Certificateholders' Interest Distribution Amount..............S-89
Certificateholders' Interest Index Carryover..................S-71
Certificateholders' Principal Distribution Amount.............S-89
Certificates..................................................S-20
Class.........................................................S-66
Class A Notes.................................................S-22
Class A-1 Notes...............................................S-22
Class A-2 Notes...............................................S-22
Class M Notes.................................................S-22
Closing Date..................................................S-20
Closing Date Deposit..........................................S-22
Code.........................................................S-100
Cohort Default Rate...........................................S-63
Collection Account............................................S-21
Collection Period.............................................S-67
CSAC..........................................................S-22
cumulative cash reserves......................................S-57
S-105
<PAGE> 108
Cutoff Date...................................................S-25
Deferral Period...............................................S-27
Department....................................................S-20
Depository....................................................S-66
Determination Date............................................S-85
disqualified persons.........................................S-100
Distribution Dates.............................................S-3
DOE Data Book.................................................S-56
DTC...........................................................S-66
ECMC..........................................................S-22
Eligible Deposit Account......................................S-77
Eligible Institution..........................................S-77
Eligible Investments..........................................S-77
Eligible Lender Trustee.......................................S-20
Equity Interest..............................................S-100
ERISA..........................................................S-8
Escrow Account................................................S-21
Event of Default..............................................S-69
Exchange Act.................................................S-103
Expected Interest Collections.................................S-68
FDIC..........................................................S-78
Federal Assistance............................................S-22
Federal Consolidation Loan....................................S-50
Federal Consolidation Loan Rebate.............................S-85
Federal Direct Consolidation Loans............................S-50
Federal Guarantors............................................S-22
Federal Loans.................................................S-22
Federal Origination Fee.......................................S-85
Federal Tax Counsel..........................................S-100
Fee Advances..................................................S-27
Final Maturity Dates...........................................S-5
Financed Federal Loans........................................S-20
Financed Private Loans........................................S-20
Financed Student Loans........................................S-20
Forbearance Periods...........................................S-27
Formula Rate..................................................S-67
Funding Period................................................S-81
Grace Period..................................................S-51
Great Lakes...................................................S-24
Guarantee Agreement...........................................S-22
Guarantee Agreements..........................................S-22
Guarantee Payments............................................S-22
Guaranteed Private Loans......................................S-20
Guarantors.....................................................S-3
HESC..........................................................S-22
S-106
<PAGE> 109
HICA..........................................................S-52
HICA Trigger Event............................................S-93
Higher Education Act..........................................S-22
Indenture.....................................................S-66
Indenture Trustee..............................................S-3
Index Maturity................................................S-75
Initial Financed Student Loan Pool Balance....................S-92
Initial Financed Student Loans................................S-20
Initial Pool 1 Student Loans..................................S-21
Initial Pool 2 Student Loans..................................S-21
Initial Pre-Funded Amount.....................................S-78
Interest and Expense Draw.....................................S-93
Interest Period...............................................S-66
Interest Subsidy Payments.....................................S-52
Investment Earnings...........................................S-77
Investor Index................................................S-67
KBUSA.........................................................S-23
Keys2Repay Program............................................S-84
LIBOR.........................................................S-75
LIBOR Determination Date......................................S-75
LIBOR Indexed Securities.......................................S-4
Liquidated Student Loans......................................S-86
Liquidation Proceeds..........................................S-86
Lock-In Period................................................S-74
Margin........................................................S-67
Master Servicer...............................................S-23
Master Servicer Default.......................................S-81
Master Servicing Fee Percentage...............................S-24
Maximum TERI Payments Amount..................................S-90
McDonald.....................................................S-103
McDonald Investments.........................................S-103
Minimum Purchase Amount.......................................S-98
Monthly Servicing Payment Date................................S-24
Net Government Receivable.....................................S-90
Non-Guaranteed Graduate Private Loans.........................S-93
Non-Guaranteed Private Graduate Loan Trigger Event............S-93
Non-Guaranteed Private Loans..................................S-20
Non-Guaranteed Private Undergraduate Loan Trigger Event.......S-92
Non-Guaranteed Undergraduate Private Loans....................S-92
Note Collateralization Amount.................................S-90
Note Interest Rate............................................S-66
Noteholders...................................................S-50
Noteholders' Distribution Amount..............................S-90
Noteholders' Interest Carryover Shortfall.....................S-90
Noteholders' Interest Distribution Amount.....................S-90
S-107
<PAGE> 110
Noteholder's Interest Index Carryover.........................S-68
Noteholders' Principal Distribution Amount....................S-91
Noteholders' Priority Principal Distribution Amount...........S-91
Notes.........................................................S-22
NSLP..........................................................S-22
Obligors......................................................S-91
Other Additional Pre-Funded Amount............................S-78
Other Additional Pre-Funding Subaccount.......................S-78
Other Subsequent Student Loans................................S-25
Parity Date...................................................S-70
Participants..................................................S-66
parties in interest..........................................S-100
Pennsylvania Tax Counsel.....................................S-100
PHEAA.........................................................S-22
Plan Assets Regulation.......................................S-100
PLUS Loans....................................................S-23
Pool Balance..................................................S-91
Pre-Funded Amount.............................................S-20
Pre-Funding Account...........................................S-20
Principal Distribution Amount.................................S-91
Private Consolidation Loans...................................S-50
Private Graduate Loan Trigger Event...........................S-92
Private Guarantors............................................S-52
Private Loans.................................................S-22
Programs......................................................S-25
prohibited transaction.......................................S-100
Prospectus....................................................S-10
Prospectus Supplement.........................................S-10
PTCE ........................................................S-101
Purchase Price................................................S-76
Rating Agencies................................................S-9
Rating Agency..................................................S-9
Realized Loss Draw............................................S-94
Realized Losses...............................................S-97
Recoveries....................................................S-92
Reference Bank................................................S-75
Reserve Account................................................S-8
Reserve Account Initial Deposit...............................S-21
Sale and Servicing Agreement..................................S-20
Securities....................................................S-66
Securities Act...............................................S-102
Securityholders...............................................S-23
Seller........................................................S-20
Serial Loans..................................................S-81
SLS Loans.....................................................S-23
S-108
<PAGE> 111
Special Allowance Payments....................................S-52
Special Determination Date....................................S-51
Specified Collateral Balance..................................S-92
Specified Reserve Account Balance.............................S-93
Stafford Loans................................................S-23
Statistical Cutoff Date.......................................S-21
Student Loan Rate.............................................S-67
Student Loans.................................................S-20
Subsequent Cutoff Date........................................S-80
Subsequent Pool 1.............................................S-81
Subsequent Pool 1 Student Loans...............................S-25
Subsequent Pool 2.............................................S-81
Subsequent Pool 2 Student Loans...............................S-25
Subsequent Pool Pre-Funded Amount.............................S-78
Subsequent Pool Pre-Funding Subaccount........................S-78
Subsequent Pool Student Loans.................................S-81
Sub-Servicer..................................................S-23
Sub-Servicers.................................................S-23
Sub-Servicing Agreement.......................................S-24
Telerate Page 3750............................................S-75
TERI..........................................................S-52
TERI Trigger Event............................................S-92
Three-Month LIBOR.............................................S-75
total loans outstanding.......................................S-61
Transfer Agreement............................................S-80
Transfer and Servicing Agreements.............................S-76
Transfer Date.................................................S-80
Treasury Bill Indexed Securities...............................S-4
Trigger Event.................................................S-92
Trust.........................................................S-20
Trust Accounts................................................S-77
Trust Agreement...............................................S-20
Underlying Federal Loans......................................S-50
Underlying Private Loans......................................S-80
Underwriters.................................................S-102
Underwriting Agreements......................................S-102
Unsubsidized Stafford Loan....................................S-52
USAF..........................................................S-22
S-109
<PAGE> 112
APPENDIX I
REPORT OF INDEPENDENT AUDITORS
Bank One, National Association, and
Bank One Delaware, Inc.
as Trustees of the KeyCorp Student Loan Trust 1999-B
We have audited the accompanying balance sheet of KeyCorp Student Loan Trust
1999-B (the "Trust") as of September 28 1999. This balance sheet is the
responsibility of the Trustees for the Trust. Our responsibility is to express
an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by the Trustees on
behalf of the Trust, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of the Trust at September 28, 1999, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Cleveland, Ohio
September 28, 1999
A-1
<PAGE> 113
KEYCORP STUDENT LOAN TRUST 1999-B
BALANCE SHEET
SEPTEMBER 28, 1999
ASSETS
Cash $ 10
-------------
Total Assets $ 10
-------------
EQUITY
Equity of the Trust $ 10
-------------
Total Equity $ 10
-------------
See accompanying notes to the balance sheet
A-2
<PAGE> 114
KEYCORP STUDENT LOAN TRUST 1999-B
NOTES TO BALANCE SHEET
SEPTEMBER 28, 1999
ORGANIZATION AND OPERATION
KeyCorp Student Loan Trust 1999-B (the "Trust"), is a Delaware statutory
business trust formed on September 28, 1999, with Bank One, National Association
as Eligible Lender Trustee and Bank One Delaware, Inc. as Delaware Trustee. The
Trust was organized to exclusively acquire certain graduate and undergraduate
student loans; to issue and sell securities collateralized by such loans; and to
engage in other transactions, including entering agreements that are incidental
and necessary, suitable and convenient to the foregoing and permitted under
Delaware law.
At September 28, 1999, the Trust had not commenced operations except for the
conduct of organizational matters and activities relating to the public offering
of notes.
Key Bank USA, National Association, as Initial Beneficiary of the Trust, bears
administrative expenses on its behalf.
ACCOUNTING POLICIES
Cash, the only asset of the Trust at September 28, 1999, is stated at the amount
held on behalf of the Trust by Bank One, National Association.
A-3
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PROSPECTUS
KEYCORP STUDENT LOAN TRUSTS
Issuer
KEY BANK USA, NATIONAL ASSOCIATION
Seller and Master Servicer
Asset Backed Notes
Asset Backed Certificates
SECURITIES OFFERED --------------------------------
- asset backed notes and asset backed You should carefully consider
certificates the risk factors beginning on
- rated in one of four highest rating page 6.
categories by at least one
nationally recognized rating The securities are not bank
organization deposits and are not insured
- not listed on any trading exchange by the Federal Deposit
- obligations only of the related trust Insurance Corporation.
ASSETS This prospectus must be
- student loans accompanied by a prospectus
- may include one or more forms of supplement for the particular
credit enhancement series.
--------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. MAKING ANY CONTRARY REPRESENTATION IS A
CRIMINAL OFFENSE.
The seller may offer securities through underwriters or by other methods
described under the caption "Plan of Distribution."
The date of this Prospectus is September 20, 1999
<PAGE> 116
TABLE OF CONTENTS
<TABLE>
<S> <C>
RISK FACTORS ............................................................. 6
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE .......................... 13
FORMATION OF THE TRUSTS .................................................. 13
The Trusts ......................................................... 13
Eligible Lender Trustee ............................................ 14
USE OF PROCEEDS .......................................................... 15
THE SELLER, THE ADMINISTRATOR, THE MASTER SERVICER AND THE SUB-SERVICERS . 15
The Seller, Administrator and Master Servicer ...................... 15
General ...................................................... 15
Services and Fees of Administrator .......................... 15
Master Servicer .............................................. 15
The Sub-Servicers .................................................. 17
THE STUDENT LOAN POOLS ................................................... 18
General ............................................................ 18
THE STUDENT LOAN FINANCING BUSINESS.19
Programs Offered by the Seller.19
Description of Federal Loans Under the Programs .................... 20
General ...................................................... 20
Stafford Loan Program ........................................ 21
(1) Eligibility Requirements ................................. 22
(2) Loan Limits .............................................. 22
(3) Interest ................................................. 23
(4) Repayment ................................................ 24
(5) Grace Periods, Deferral Periods, Forbearance Periods ..... 25
(6) Interest Subsidy Payments ................................ 25
(7) Special Allowance Payments ............................... 26
SLS Loan Program ............................................. 27
PLUS Loan Program ............................................ 28
Federal Consolidation Loan Program ........................... 29
Undergraduate Federal Loans .................................. 31
Graduate Federal Loans ....................................... 32
Description of Private Loans Under the Programs .................... 33
General ...................................................... 33
Private Undergraduate Loans .................................. 34
Eligibility Requirements.34
Loan Limits .................................................. 35
</TABLE>
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<TABLE>
<S> <C>
Interest ..................................................... 35
Repayment .................................................... 35
Grace Periods Deferral Periods, Forbearance Periods .......... 35
Private Graduate Loans ....................................... 35
Payment Terms ................................................ 37
Private Consolidation Loans .................................. 39
Insurance of Student Loans; Guarantors of Student Loans ............ 40
Federal Guarantors ........................................... 40
Federal Insurance and Reinsurance of Federal Guarantors ...... 41
Private Guarantors ........................................... 44
Claims and Recovery Rates .......................................... 44
Origination Process ................................................ 44
Servicing and Collections Process .................................. 46
Incentive Programs ................................................. 47
WEIGHTED AVERAGE LIVES OF THE SECURITIES ................................. 47
POOL FACTORS AND TRADING INFORMATION ..................................... 50
DESCRIPTION OF THE NOTES ................................................. 50
General ............................................................ 50
Principal of and Interest on the Notes ............................. 51
The Indenture ...................................................... 52
Modification of Indenture .................................... 52
Events of Default; Rights upon Event of Default .............. 53
Certain Covenants ............................................ 57
Annual Compliance Statement .................................. 58
Indenture Trustee's Annual Report ............................ 58
Satisfaction and Discharge of Indenture ...................... 58
The Indenture Trustee ........................................ 58
DESCRIPTION OF THE CERTIFICATES .......................................... 59
General ............................................................ 59
Principal and Interest in Respect of the Certificates .............. 60
CERTAIN INFORMATION REGARDING THE SECURITIES ............................. 60
Fixed Rate Securities .............................................. 60
Floating Rate Securities ........................................... 61
Book-Entry Registration ............................................ 61
Definitive Securities .............................................. 66
List of Securityholders ............................................ 67
Reports to Securityholders ......................................... 67
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS ..................... 68
General ............................................................ 68
Sale of Student Loans; Representations and Warranties .............. 69
</TABLE>
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<TABLE>
<S> <C>
Additional Fundings ................................................ 70
Accounts ........................................................... 70
Servicing Procedures ............................................... 71
Payments on Student Loans .......................................... 72
Master Servicer Covenants .......................................... 73
Master Servicing Compensation ...................................... 74
Distributions ...................................................... 75
Credit and Cash Flow Enhancement ................................... 75
General ...................................................... 75
Reserve Account .............................................. 76
Statements to Indenture Trustee and Trust .......................... 76
Evidence as to Compliance .......................................... 78
Certain Matters Regarding the Master Servicer and
the Sub-Servicers ................................................ 79
Master Servicer Default; Administrator Default ..................... 80
Rights Upon Master Servicer Default and Administrator Default ...... 81
Waiver of Past Defaults ............................................ 82
Insolvency Event ................................................... 82
Amendment .......................................................... 83
Payment of Notes ................................................... 84
Seller Liability ................................................... 84
Termination ........................................................ 84
Administrator ...................................................... 85
CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS ............................... 87
Transfer of Student Loans .......................................... 87
Certain Matters Relating to Receivership ........................... 88
Consumer Protection Laws ........................................... 89
Loan Origination and Servicing Procedures Applicable to
Student Loans .................................................... 89
Failure to Comply with Third-Party Servicer Regulations
May Adversely Affect Loan Servicing .............................. 90
Bankruptcy Considerations .......................................... 91
Recent Developments ................................................ 91
Emergency Student Loan Consolidation Act of 1997 ............. 91
FY 1998 Budget ............................................... 91
1998 Amendment ............................................... 92
1998 Reauthorization Bill .................................... 92
INCOME TAX CONSEQUENCES .................................................. 94
FEDERAL TAX CONSEQUENCES FOR TRUSTS FOR WHICH A PARTNERSHIP ELECTION
IS MADE ................................................................ 95
Tax Characterization of the Trust .................................. 95
Tax Consequences to Holders of the Notes ........................... 95
Treatment of the Notes as Indebtedness ....................... 95
</TABLE>
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<TABLE>
<S> <C>
Original Issue Discount ...................................... 95
Interest Income on the Notes ................................. 95
Sale or Other Disposition .................................... 96
Foreign Holders .............................................. 96
Backup Withholding ........................................... 97
Possible Alternative Treatments of the Notes ................. 98
FASITs ............................................................. 98
Tax Consequences to Holders of the Certificates .................... 98
Classification as a Partnership .................................... 99
Treatment of the Trust as a Partnership ...................... 99
Partnership Taxation ......................................... 99
Guaranteed Payments .......................................... 99
Allocation of Tax Items ...................................... 100
Computation of Income ........................................ 101
Section 708 Termination ...................................... 101
Discount and Premium ......................................... 101
Disposition of Certificates .................................. 102
Allocations Between Transferors and Transferees .............. 102
Section 754 Election ......................................... 103
Administrative Matters ....................................... 103
Tax Consequences to Foreign Certificateholders ............... 104
Backup Withholding ........................................... 105
FEDERAL TAX CONSEQUENCES FOR TRUSTS IN WHICH ALL CERTIFICATES ARE
RETAINED BY THE SELLER ................................................. 105
Tax Characterization of the Trust .................................. 105
Tax Consequences to Holders of the Notes ........................... 105
Treatment of the Notes as Indebtedness ....................... 105
PENNSYLVANIA STATE TAX CONSEQUENCES ...................................... 105
Pennsylvania Income and Franchise Tax Consequences with
Respect to the Notes ............................................. 105
Pennsylvania Income and Franchise Tax Consequences with
Respect to the Certificates ...................................... 106
ERISA CONSIDERATIONS ..................................................... 106
The Notes .......................................................... 107
The Certificates ................................................... 108
PLAN OF DISTRIBUTION ..................................................... 109
LEGAL MATTERS ............................................................ 110
INDEX OF PRINCIPAL TERMS ................................................. 111
</TABLE>
5
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RISK FACTORS
We recommend that you consider the following factors and the additional
factors described under "Risk Factors" in the related prospectus supplement
before purchasing the securities.
CREDIT ENHANCEMENT
MAY NOT PROTECT YOU
FROM ALL LOSSES Although every trust will include some form of credit
enhancement, that credit enhancement may not cover
every class of securities issued by a trust. In
addition, every form of credit enhancement will have
certain limitations on, and exclusions from coverage.
As a result, there is always a risk that you may not
recover the full amount of your investment.
GUARANTEES OF STUDENT
LOANS MAY NOT PREVENT
LOSSES A significant number of the student loans in a trust
will be guaranteed by either a federal or a private
guarantor. However, those guarantees may not protect
you against all losses for several reasons,
including:
- federal guarantees are generally limited to
98% of the principal amount of the student
loan;
- if Key Bank USA, National Association fails
to follow prescribed origination procedures
or if the master servicer or any
sub-servicers fail to follow required
servicing procedures, the applicable
guarantors may refuse to make guarantee
payments to the applicable trust and if the
loans are federally insured, the Department
may refuse to make reinsurance payments to
the applicable federal guarantors or to make
interest subsidy or special allowance
payments to the trust; and
- private guarantors are not reinsured by or
entitled to any assistance from the
Department. If the loan loss reserves of a
private guarantor are not sufficient, that
private guarantor may not be able to honor
its obligations to make guarantee payments.
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DEFAULTS ON STUDENT
LOANS WITHOUT
GUARANTEES MAY
RESULT IN LOSSES A trust may include student loans that are not
guaranteed by any federal or private guarantor, or by
any other party or governmental agency. Since all
student loans, whether guaranteed or not, are
unsecured, if a borrower under one of these student
loans defaults, the applicable trust may suffer a
loss.
THE FINANCIAL CONDITION
OF FEDERAL GUARANTORS
MAY BE ADVERSELY
AFFECTED BY SEVERAL
FACTORS The financial condition of the federal guarantors may
be adversely affected by a number of factors
including:
- the amount of claims made against such
federal guarantor as a result of borrower
defaults;
- the amount of claims reimbursed to such
federal guarantor from the Department;
- changes in legislation that may reduce
expenditures from the Department that
support federal guarantors or that may
require federal guarantors to pay more of
their reserves to the Department;
- loss of reinsurance benefits due to the
master servicer's or a sub-servicer's
failure to follow required servicing
procedures; and
- expansion of the federal direct student loan
program.
If the financial status of the guarantors
deteriorates, the guarantors may fail to make
guarantee payments to the trustee. In such event, you
may suffer delays in the payment of principal and
interest on your securities.
REINSURANCE OF FEDERAL
GUARANTORS MAY NOT
PREVENT DELAYS OR
LOSSES If a federal guarantor fails to make guarantee
payments, the applicable trust may submit claims
directly to the Department. However, the Department
may determine that the federal guarantor is able to
meet its obligations, and the Department will not
make those payments. Even if the Department
determines to make those payments, there may
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<PAGE> 122
be delays in making the necessary determination. Loss
or delay of any such guarantee payments, interest
subsidy payments or special allowance payments could
adversely affect the related trust's ability to pay
timely interest and principal. In such event, you may
suffer a loss on your investment.
THE TRUST IS DEPENDENT
UPON THE PERFORMANCE
BY VARIOUS PARTIES
OF THEIR OBLIGATIONS The trust is relying, and the performance of the
securities depends, on the performance of the seller,
the master servicer and the sub-servicers of their
respective obligations. Any failure to perform could
have material adverse consequences as follows:
- FAILURE TO HONOR PURCHASE OBLIGATIONS MAY
CAUSE LOSSES. Key Bank USA, National
Association, as seller and master servicer,
or the applicable sub-servicer, will be
obligated to purchase student loans from a
trust with respect to which it materially
breaches representations, warranties or
covenants. You can not be assured, however,
that Key Bank USA, National Association, or
the applicable sub-servicer, will have the
financial resources to purchase such student
loans. The failure to so purchase a student
loan would not constitute an event of
default under the related indenture or
permit the exercise of remedies thereunder.
However, the breach of such representations,
warranties or covenants may cause you to
suffer a loss on your investment.
- FAILURE TO COMPLY WITH THIRD-PARTY SERVICER
REGULATIONS MAY ADVERSELY AFFECT LOAN
SERVICING. The Department regulates each
servicer of federal student loans. Under
certain of these regulations, a third-party
servicer (such as one of the sub-servicers)
is jointly and severally liable with its
client lenders for liabilities to the
Department arising from the sub-servicer's
violation of applicable requirements. In
addition, if a sub-servicer fails to meet
standards of financial responsibility or
administrative capability included in the
regulations, or violates other requirements,
the Department may fine the sub-servicer
and/or limit, suspend, or terminate such
sub-servicer's eligibility to contract to
service federal student loans. If a
sub-servicer were so fined or held
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liable, or its eligibility were limited,
suspended, or terminated, its ability to
properly service the federal loans and to
satisfy its obligation to purchase federal
loans with respect to which it breaches its
representations, warranties or covenants
could be adversely affected. Moreover, if
the Department terminates a sub-servicer's
eligibility, a servicing transfer will take
place and there will be delays in
collections and temporary disruptions in
servicing. Any servicing transfer will at
least temporarily adversely affect payments
to you.
- THE TRUST'S INTEREST IN ITS STUDENT LOANS
COULD BE DEFEATED BY ACTIONS OF THE
SUB-SERVICERS AS CUSTODIANS. The applicable
sub-servicer, as custodian on behalf of the
master servicer with respect to each trust,
will have custody of the promissory notes
evidencing the student loans it services.
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 student loans will not be
physically segregated, stamped or otherwise
marked to indicate that such student loans
have been sold to the eligible lender
trustee. If, through inadvertence or
otherwise, any of the 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 student loans in
the ordinary course of its business and took
possession of such student loans, then the
purchaser (or secured party) would acquire
an interest in the student loans superior to
the interest of the eligible lender trustee,
if the purchaser (or secured party) acquired
such student loans without knowledge of the
eligible lender trustee's interest.
- INSOLVENCY OF THE MASTER SERVICER, A
SUB-SERVICER OR THE ADMINISTRATOR MAY CAUSE
LOSSES. In the event of default by the
master servicer, a sub-servicer or the
administrator resulting solely from certain
events of insolvency or bankruptcy, 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,
or prevent the master servicer from
appointing a new sub-servicer,
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<PAGE> 124
as the case may be, and delays in
collections in respect of the student loans
may occur. Any delay in the collections of
student loans may delay or reduce payments
to you.
CHANGES IN LEGISLATION
MAY ADVERSELY AFFECT
STUDENT LOANS AND
FEDERAL GUARANTORS You can not be certain that the Higher Education Act
or other relevant federal or state laws, rules and
regulations will not be amended or modified in the
future in a manner that will adversely affect the
federal student loan programs described in this
prospectus, the student loans made thereunder or the
financial condition of the federal guarantors.
In addition, if the direct student loan program
expands, the sub-servicers may experience increased
costs due to reduced economies of scale or other
adverse effects on their business to the extent the
volume of loans serviced by the sub-servicers is
reduced. Such cost increases could reduce the ability
of the sub-servicers to satisfy their obligations to
service the student loans or to purchase student
loans in the event of certain breaches of its
covenants.
CERTAIN POLICIES OF THE
DEPARTMENT MAY REDUCE
AMOUNTS AVAILABLE
FOR PAYMENTS ON
YOUR SECURITIES Each trust will be obligated to pay to the Department
a monthly rebate at an annualized rate of generally
1.05% of the outstanding principal balance on each
federal consolidation loan which is a part of the
related trust. This rebate will be payable prior to
distributions made to you. In addition, the trust
must pay to the Department a 0.50% origination fee on
the initial principal balance of each student loan
which is originated on its behalf by the eligible
lender trustee after the applicable closing date.
This fee will be deducted by the Department out of
interest subsidy payments and special allowance
payments otherwise payable to the trust(s). In such
event the amount available to be distributed to you
will be reduced. Under certain circumstances, the
related trust is obligated to pay any portion of the
unpaid fee from other assets of that trust prior to
making distributions to you. As a result, the payment
of the rebate fee and origination fee to the
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<PAGE> 125
Department will affect the rate and timing of
payments to you. Moreover, if the origination fee is
deducted from interest subsidy payments and special
allowance payments the interest rate payable on your
securities may be capped at a lower rate. In such
event, the value of your investment may be impaired.
Due to a Department policy limiting the granting of
new lender identification numbers, all of the trusts
established by the seller to securitize federal
student loans may use a common Department lender
identification number. The Department regards the
eligible lender trustee as the party primarily
responsible to the Department for any liabilities
owed to the Department or federal guarantors
resulting from the eligible lender trustee's
activities in the federal student loan program. If
the Department or a federal guarantor determines such
a liability exists in connection with a trust using
the shared lender identification number, the
Department or such federal guarantor may collect that
liability or offset such liability from amounts due
the eligible lender trustee under the shared lender
identification number.
Because the servicing agreements for the trusts
established by the seller, which share a lender
identification number, will require the eligible
lender trustee or the master servicer to allocate to
the proper trust shortfalls or an offset by the
Department or a federal guarantor arising from the
student loans held by the eligible lender trustee on
each trust's behalf, if the amount available for
indemnification by one trust to another trust is
insufficient, you may suffer a loss on your
investment as a result of the performance of another
trust.
NOTEHOLDERS' RIGHT TO
CONTROL UPON CERTAIN
DEFAULTS MAY ADVERSELY
AFFECT
CERTIFICATEHOLDERS In the event of a default by the master servicer or
the administrator, the indenture trustee or the
noteholders, 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. In addition, the noteholders have
the ability, with certain specified exceptions, to
waive defaults by the master servicer or the
administrator, including defaults that could
materially adversely affect the certificateholders.
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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.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Key Bank USA, National Association, as originator of each 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 pursuant to this
prospectus. The Registration Statement, contains information which is not
contained in this prospectus. Prospective investors may read the Registration
Statement and make copies of it at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; and at the
Commission's regional offices at Seven World Trade Center, New York, New York
10048, and 500 West Madison Street, 14th Floor, Chicago, Illinois 60661. Copies
of the Registration Statement may be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission maintains a Web site at http://www.sec.gov
containing registration statements and other information regarding registrants,
including Key Bank USA, National Association, that file electronically with the
Commission.
All documents filed by Key Bank USA, National Association, as
originator of any trust, pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), subsequent to
the date of this prospectus and prior to the termination of the offering of the
securities shall be deemed to be incorporated by reference in this prospectus.
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 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.
Key Bank USA, National Association will provide without charge to each
person, including any beneficial owner of securities, 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 or in any related
prospectus supplement by reference, except the exhibits to such documents
(unless such exhibits are specifically incorporated by reference in such
documents). Requests for such copies should be directed to Key Bank USA,
National Association, Education Resources, 800 Superior Avenue, 4th Floor,
Cleveland, Ohio 44114, Attention: Education Loan Trust Administrator (Telephone:
(800) 523-7248).
FORMATION OF THE TRUSTS
THE TRUSTS
With respect to each series of Securities, the Seller will establish a
separate trust (each a "Trust") pursuant to the respective trust agreement (each
a "Trust Agreement"), for the transactions described herein and in the related
Prospectus Supplement. The property of each Trust will consist of
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(a) a pool of undergraduate loans and/or graduate school student
loans (the "Student Loans"), legal title to which is held by
the related eligible lender trustee (the "Eligible Lender
Trustee") on behalf of each Trust,
(b) all funds collected or to be collected in respect thereof
(including any Guarantee Payments with respect thereto) on or
after the applicable date specified in the related Prospectus
Supplement (the "Cutoff Date"),
(c) any other rights under certain collateral agreements with
respect to certain Private Graduate Loans to the extent
assigned to each Trust by the Seller, and
(d) all moneys and investments on deposit in any Collection
Account, any Pre-Funding Account, any Escrow Account, any
Negative Carry Account, any Reserve Account and any other
trust accounts or any other form of credit or cash flow
enhancement that may be obtained for the benefit of holders of
one or more classes of such Securities. To the extent provided
in the applicable Prospectus Supplement, the Notes will be
collateralized by the property of the related Trust. To
facilitate servicing and to minimize administrative burden and
expense, the Master Servicer will be appointed by the Eligible
Lender Trustee as the custodian, and the Master Servicer will
then appoint the Sub-Servicers as the custodians on its
behalf, of the promissory notes representing the Student Loans
that each services.
The principal offices of each Trust and the related Eligible Lender
Trustee will be specified in the applicable Prospectus Supplement.
If specified in a Prospectus Supplement, an election may be made to
treat a Trust as a "financial asset securitization improvement trust" (a
"FASIT") for federal income tax purposes. See "Federal Tax Consequences For
Trusts For Which a Partnership Election is Made--FASITs" herein.
ELIGIBLE LENDER TRUSTEE
The Eligible Lender Trustee for each Trust will be such entity as is
specified in the related Prospectus Supplement. The Eligible Lender Trustee on
behalf of the related Trust will acquire legal title to all the related Student
Loans acquired pursuant to the related Sale and Servicing Agreement and will
enter into a Guarantee Agreement or comparable arrangement, if applicable, with
each of the Guarantors with respect to the Student Loans which are guaranteed or
insured. Each Eligible Lender Trustee will qualify 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 Federal Loans to be
owned by an eligible lender would result in the loss of any Federal Guarantee
Payments from any Federal Guarantor and any Federal Assistance with respect to
such Federal Loans. See "The Student Loan Financing Business--Description of
Federal Loans Under the Programs." An 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
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<PAGE> 129
Lender Trustee as set forth in the related Trust Agreement and the related Sale
and Servicing Agreement. See "Description of the Transfer and Servicing
Agreements." The Seller plans to maintain normal commercial banking relations
with the Eligible Lender Trustee.
USE OF PROCEEDS
The net proceeds from the sale of Securities of a given series will be
used by the applicable Trust to purchase the related Student Loans on the
Closing Date from the Seller and to make the initial deposit into the Reserve
Account, Pre-Funding Account or Negative Carry Account, if any. The Seller will
use such net proceeds paid to it with respect to any such Trust for general
corporate purposes.
THE SELLER, THE ADMINISTRATOR, THE MASTER SERVICER
AND THE SUB-SERVICERS
THE SELLER, ADMINISTRATOR AND MASTER SERVICER
General. Key Bank USA, National Association ("KBUSA"), will act as
seller (the "Seller") and as master servicer (the "Master Servicer"), pursuant
to the related Sale and Servicing Agreement, and as administrator (the
"Administrator") pursuant to the related Administration Agreement. KBUSA, a
wholly owned subsidiary of KeyCorp, is a national banking association providing
consumer financial services nationwide, including credit cards, student loans,
home equity loans, and indirect automobile, marine and recreational vehicle
loans.
As of June 30, 1999, KBUSA had total assets of approximately $5.829
billion, total liabilities of approximately $4.788 billion and approximately
$1.040 billion in stockholder's equity. The principal executive offices of KBUSA
are located at Key Tower, 127 Public Square, Cleveland, Ohio 44114 and its
telephone number is (216) 689-6300.
Services and Fees of Administrator. Pursuant to the related
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 United States
Department of Education (the "Department") and is required to provide notices
and reports and to perform other administrative obligations required by the
related Indenture, the Trust Agreement and the Sale and Servicing Agreement. See
"Description of the Transfer and Servicing Agreements--Administrator."
Master Servicer. KBUSA, in its capacity as Master Servicer will be
responsible for master servicing the Student Loans. The Master Servicer will
arrange for and oversee the performance of each Sub-Servicer of its respective
servicing obligations with respect to the Student Loans. In consideration for
performing its obligations under the applicable Sale and Servicing Agreement,
the Master Servicer will receive in the aggregate, subject to certain
limitations described herein, a monthly fee payable by each Trust as specified
in the related Prospectus Supplement and certain one-time fixed fees for each
Student Loan for which a forbearance period was granted or renewed
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or for which a guarantee claim was filed, in each case subject to certain
adjustments, together with other administrative fees and similar charges. The
Master Servicer will in turn be solely responsible for all compensation due to
the Sub-Servicers for the performance of their respective obligations pursuant
to the related Sub-Servicing Agreements. See "Description of Transfer and
Servicing Agreements--Servicing Compensation."
Year 2000. The Year 2000 ("Year 2000") issue refers to the fact that
many computer systems were originally programmed using two digits rather than
four digits to identify the applicable year. When the year 2000 occurs, these
systems could interpret the year as 1900 rather than 2000. Unless hardware,
system software and applications are corrected to be Year 2000 compliant,
computers and the devices they control could generate miscalculations and create
operational problems. Various systems could be affected ranging from complex
computer systems to telephone systems, automatic teller machines ("ATMs") and
elevators.
To address this issue, KeyCorp ("KeyCorp"), the parent of KBUSA, for
the operations of KBUSA, as well as its other operating subsidiaries, developed
an extensive plan in 1995, including the formation of a team consisting of
internal resources and third-party experts. The plan, has been in implementation
since that time and consists of five major phases: awareness--ensuring a common
understanding of the issue throughout KeyCorp; assessment--identifying and
prioritizing the systems and third parties with whom KeyCorp has exposure to
Year 2000 issues; renovation--enhancing, replacing or retiring hardware,
software and systems applications; validation--testing modifications made; and
implementation--certifying Year 2000 compliance and user understanding and
acceptance. The awareness and assessment phases have been completed. The
remaining phases are substantially complete. As of June 30, 1999, KeyCorp had
completed all phases of Year 2000 readiness testing for its mission critical
systems and is well along in completing the remaining steps for which regulatory
deadlines have been established.
As a financial institution, KeyCorp may experience increases in problem
loans and credit losses in the event that borrowers fail to properly respond to
this issue. In addition, financial institutions may incur higher funding costs
if consumers react to publicity about the issue by withdrawing deposits. They
also could be impacted if third parties they deal with in conducting their
business, such as foreign banks, governmental agencies, clearing houses,
telephone companies, and other service providers, fail to properly address this
issue.
Accordingly, KeyCorp has formed a separate internal team charged with
the task of identifying critical business interfaces; assessing potential
problems relating to credit, liquidity and counterparty risk; and where
appropriate, developing contingency plans. This team has been surveying
significant credit clients to determine their Year 2000 readiness and to
evaluate the level of potential credit risk to KeyCorp. Based on the information
obtained, specific follow-up programs have been established and the adequacy of
the allowance for loan losses is being assessed on an ongoing basis. The results
of the assessment will be reflected in the assignment of an appropriate risk
rating in KeyCorp's loan grading system. On an ongoing basis, KeyCorp is also
contacting other significant parties with which it conducts business to
determine the status of their Year 2000 compliance efforts.
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Despite the actions taken by KeyCorp, there can be no assurance that
significant clients or other critical parties will adequately address their Year
2000 issues. Consequently, KeyCorp has developed contingency plans to help
mitigate the risks associated with potential delays in completing the
renovation, validation and implementation phases of its Year 2000 plan, as well
as the potential failure of external parties to adequately address their Year
2000 issues. In accordance with regulatory guidelines, these plans had been
completed as of June 30, 1999 and address primarily contingency solutions for
KeyCorp's core systems and the identification of alternative business partners.
In addition, during the first half of 1999, KeyCorp increased its borrowing
capacity with the Federal Reserve Bank to address the potential need for
additional funding as the Year 2000 approaches. Because the Year 2000 issue has
never occurred, it is not possible to foresee or quantify the possible overall
financial and operational impact and/or to determine whether it will be material
to the financial condition or operations of KeyCorp.
As of June 30, 1999, KeyCorp has recognized approximately $47 million
of its total estimated project cost of up to $50 million. It is currently
expected that the estimated remaining cost of up to $3 million will be
recognized in 1999 and the first half of 2000. The total cost of the project is
being funded through operating cash flows of KeyCorp and its affiliates.
THE SUB-SERVICERS
The sub-servicers (the "Sub-Servicers") under each Sale and Servicing
Agreement will be the entity or entities specified in the related Prospectus
Supplement.
With respect to the Student Loans it is servicing on behalf of the
Master Servicer and with respect to each Trust, each Sub-Servicer will be
required by the related sub-servicing agreement between such Sub-Servicer and
the Master Servicer (each a "Sub-Servicing Agreement") to perform the services
and duties customary to the servicing of Student Loans it is required to service
and to do so in the same manner as such Sub-Servicer has serviced Student Loans
on behalf of the Seller and/or the Master Servicer and otherwise in compliance
with all applicable standards and procedures. In addition, each Sub-Servicer is
required to maintain its eligibility as a third-party servicer under the Higher
Education Act. See "Description of the Transfer and Servicing
Agreements--Servicing Procedures." Each Sub-Servicer will be paid directly by
the Master Servicer for its services rendered under each Sub-Servicing
Agreement. The Trust will be an intended third-party beneficiary of each
Sub-Servicing Agreement. See "Description of the Transfer and Servicing
Agreements--Master Servicer Default; Administrator Default."
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THE STUDENT LOAN POOLS
GENERAL
The Student Loans to be sold by the Seller to the Eligible Lender
Trustee on behalf of a Trust pursuant to the related Sale and Servicing
Agreement will be selected from the Seller's portfolio of Student Loans by
several criteria, including that each Student Loan:
- was originated in the United States or its territories or
possessions under and in accordance with the 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);
- contains terms in accordance with those required by the
Programs, the Guarantee Agreements (with respect to those
Student Loans that are guaranteed or insured) and other
applicable requirements;
- no selection procedures believed by the Seller to be adverse
to the Securityholders of any series will be used in selecting
the related Student Loans; and
- satisfies the other criteria, if any, set forth in the related
Prospectus Supplement.
The Student Loans that comprise assets of each Trust will be held by
the related Eligible Lender Trustee, as trustee on behalf of such Trust. The
Eligible Lender Trustee will also enter into, on behalf of such Trust (with
respect to those Student Loans that are guaranteed or insured), Guarantee
Agreements with the Guarantors pursuant to which each of such Student Loans will
be guaranteed by one of such Guarantors. See "Formation of the Trusts--Eligible
Lender Trustee."
Information with respect to each pool of Student Loans for a given
Trust will be set forth in the related Prospectus Supplement, including, to the
extent appropriate, the composition, the distribution by loan type, loan payment
status, and states of borrowers' residence and the portion of such Student Loans
guaranteed by the specified Guarantors.
In the case of each series for which the related Trust may acquire
Student Loans from the Seller after the related Cutoff Date ("Additional
Fundings"), information with respect to the Student Loans eligible to be
acquired by the related Trust will be set forth in the related Prospectus
Supplement as will information regarding the duration and conditions of any
related funding period (a "Funding Period") or revolving period (a "Revolving
Period"), the circumstances under which Additional Fundings will be made during
such period, and, if Additional Fundings may continue to be made after such
period, the circumstances under which such Additional Fundings will be made.
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Each of the Student Loans provides or will provide for the amortization
of the outstanding principal balance of such 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
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
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, a late fee, where applicable, will be assessed and the portion of the
payment allocable to the late fee and 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 and any accrued but unpaid
interest on such Student Loan.
THE STUDENT LOAN FINANCING BUSINESS
PROGRAMS OFFERED BY THE SELLER
The Student Loans to be sold by the Seller to the Eligible Lender
Trustee on behalf of a Trust pursuant to the related Sale and Servicing
Agreement will be selected from Student Loans originated or acquired by the
Seller under various loan programs (the "Programs"). The proceeds of the loans
are used to finance a portion of the costs of
(1) undergraduate education ("Undergraduate Loans"),
(2) graduate education ("Graduate Loans") or
(3) post-graduate activities such as studying for bar exams or
participating in residency programs ("Post-Graduate Loans").
Undergraduate Loans and Graduate Loans may be originated through the
Federal Family Education Loan Program ("FFELP"). As described herein and in the
related Prospectus Supplement, substantially all payments of principal and
interest with respect to loans originated through FFELP (collectively, the
"Federal Loans") will be guaranteed against default, death, bankruptcy or
disability of the applicable borrower, and a closing of or a false certification
by such borrower's school, by certain federal guarantors pursuant to a guarantee
agreement to be entered into between such federal guarantors specified in the
related Prospectus Supplement (each a
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"Federal Guarantor" and collectively, the "Federal Guarantors") and the
applicable Eligible Lender Trustee (such agreements, each as amended or
supplemented from time to time, the "Federal Guarantee Agreements"). Each of the
Federal Guarantors is entitled, subject to certain conditions, to be reimbursed
by the Department for 75% to 100% of all Guarantee Payments it makes pursuant to
a program of federal reinsurance under the Higher Education Act of 1965, as
amended (such act, together with all rules and regulations promulgated
thereunder by the Department and/or the Federal Guarantors, the "Higher
Education Act"). In addition, each Eligible Lender Trustee, as a holder of the
Federal Loans on behalf of the related Trust, is entitled to receive from the
Department certain Interest Subsidy Payments and Special Allowance Payments with
respect to certain of such Federal Loans as described herein. See "--Description
of Federal Loans Under the Programs" below.
Payments of principal and interest with respect to the Private Loans
may be (1) unguaranteed by any federal or private guarantor, or by any other
party or governmental agency ("Private Unguaranteed Loans") or (2) guaranteed
against default, death, bankruptcy or disability of the applicable borrower
("Private Guaranteed Loans") by certain private guarantors pursuant to a
guarantee agreement to be entered into among private guarantors specified in the
related Prospectus Supplement (each a "Private Guarantor" and collectively,
"Private Guarantors," and together with the Federal Guarantors, the "Guarantors"
or individually a "Guarantor"), the Seller and the Eligible Lender Trustee, or
by Private Guarantors pursuant to surety bonds issued to the Seller and assigned
to each Eligible Lender Trustee on behalf of the related Trust (such agreement
and surety bonds, each as amended or supplemented from time to time, the
"Private Guarantee Agreements" and, together with the Federal Guarantee
Agreements, the "Guarantee Agreements"). Payments under the Private Guarantee
Agreements are referred to as "Private Guarantee Payments" and payments under
Federal Guarantee Agreements are referred to as "Federal Guarantee Payments."
Private Guarantee Payments and Federal Guarantee Payments are together referred
to as "Guarantee Payments." See "--Description of Private Loans Under the
Programs" below.
DESCRIPTION OF FEDERAL LOANS UNDER THE PROGRAMS
General. The following descriptions of Federal Stafford Loan Program
(the "Stafford Loan Program"), Federal Supplemental Loans for Students Program
(the "SLS Loan Program"), the Federal Parental Loans For Undergraduate Students
Loan Program (the "PLUS Loan Program"), and Federal Consolidation Loan Program
(the "Federal Consolidation Loan Program") (such programs being collectively
referred to herein as the "Federal Programs") as authorized under the Higher
Education Act are qualified in their entirety by reference to the Higher
Education Act. Since its original enactment in 1965, the Higher Education Act
has been amended and reauthorized several times, including by the Higher
Education Amendments of 1992 (the "1992 Amendments") and the Higher Education
Amendments of 1998 (the "1998 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), and the 1998 Amendments further extended the principal provisions of
the Federal Programs through June 30, 2003.
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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, the
related Prospectus Supplement and the student loans made thereunder, including
the Student Loans, or the Guarantors. In addition, future measures to reduce any
future 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 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
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 related
Prospectus Supplement.
The Stafford Loan Program. "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, the amount 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:
1. a guarantee of the payment of principal and interest
with respect to such Stafford Loans by a guarantee agency (the Federal
Guarantors in the case of the Federal Loans), which guarantee will be
supported by federal reinsurance of all or most of such guaranteed
amounts as described herein;
2. 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
3. federal special allowance payments, in varying
amounts, during the term of such Stafford Loans to ensure that interest
payable on such Stafford Loans approximates current market interest
rates, together with interest on any such amounts not paid by the
Department when due ("Special Allowance Payments"), (such federal
reinsurance obligations, together with those obligations referred to in
clauses (2) and (3) above, being collectively referred to herein as
"Federal Assistance").
Certain Stafford Loans 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
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the extent that, the borrower's need for a Stafford Loan, as calculated pursuant
to the Higher Education Act, is more than the maximum subsidized 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. "Eligible Students" are students that
are:
1. enrolled in, or admitted for enrollment in, an approved or
accredited undergraduate or graduate school;
2. enrolled in, or admitted for enrollment in, an acceptable
degree program;
3. attending at least half-time;
4. making satisfactory progress toward the completion of that
program according to the standards of the school;
5. U.S. citizens, U.S. nationals or eligible non-citizens;
6. not borrowers under Federal Loans, including the requested
loan, that exceed the applicable annual and aggregate limits;
and
7. not in default on any education loan or not required to refund
an educational grant.
Each Stafford Loan:
- must be unsecured;
- 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
- 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 assistance under the Stafford
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.
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The following chart sets forth the current and historic loan limits.
<TABLE>
<CAPTION>
ALL STUDENTS (1) INDEPENDENT STUDENTS(1)
---------------- -----------------------------
BASE AMOUNT ADDITIONAL
SUBSIDIZED SUBSIDIZED AND UNSUBSIDIZED MAXIMUM
SUBSIDIZED ON OR UNSUBSIDIZED ON ONLY ON OR AGGREGATE
BEFORE AFTER OR AFTER AFTER TOTAL
BORROWER'S ACADEMIC LEVEL 1/1/87 1/1/87 10/1/93(2) 7/1/94(3) AMOUNT IN
- ------------------------- ---------- ---------- ---------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Undergraduate (per year)
1st year $ 2,500 $ 2,625 $ 2,625 $ 4,000 $ 6,625
2nd year $ 2,500 $ 2,625 $ 3,500 $ 4,000 $ 7,500
3rd year and above $ 2,500 $ 4,000 $ 5,500 $ 5,000 $10,500
Graduate (per year) $ 5,000 $ 7,500 $ 8,500 $10,000 $18,500
Aggregate Limit;
Undergraduate $12,500 $17,250 $23,000 $23,000 $46,000
Graduate (including
undergraduate) $25,000 $54,750 $65,500 $73,000 $138,500
</TABLE>
(1) The loan limits are inclusive of both Stafford Loans and Student Loans.
(2) These amounts represent the combined maximum loan amount per year for
Stafford Loans and unsubsidized Stafford Loans. Accordingly, the
maximum amount that a student may borrow under an Unsubsidized Stafford
Loan is the difference between the combined maximum loan amount and the
amount the student received in the form of a Stafford Loan.
(3) Independent undergraduate students, graduate students or professional
students may borrow these additional amounts. In addition, dependent
undergraduate students may also receive these additional loan amounts
if the parents of such students are unable to provide the family
contribution amount and it is unlikely that the student's parents will
qualify for a PLUS Loan.
The annual loan limits are reduced in some instances where the student
is enrolled in a program that is less than one academic year or has less than a
full academic year remaining in his or her program. The Department has
discretion to raise these limits to accommodate highly specialized or
exceptionally expensive course of study.
(3) Interest. The borrower's interest rate on a Stafford Loan may
be fixed or variable. Stafford Loan interest rates are summarized in the chart
below.
<TABLE>
<CAPTION>
TRIGGER DATE(1) BORROWER RATE(2) MAXIMUM RATE INTEREST RATE MARGIN
- -------------------- ------------------------- ------------------ ----------------------------
<S> <C> <C> <C>
Prior to 01/01/81 7% 7% N/A
01/01/81-09/12/83 9% 9% N/A
09/13/83-06/30/88 8% 8% N/A
07/01/88-09/30/92 8% for 48 months; 8% for 48 months, 3.25%
thereafter, 91-Day then 10%
Treasury + Interest Rate
Margin
10/01/92-06/30/94 91-Day Treasury + 9% 3.10%
Interest Rate Margin
07/01/94-06/30/95 91-Day Treasury + 8.25% 3.10%
Interest Rate Margin
07/01/95-06/30/98 91-Day Treasury + 8.25% 2.50% (In-School, Grace or
Interest Deferment); 3.10% (in
Rate Margin repayment)
On or after 07/01/98 91-Day Treasury + 8.25% 1.70% (In-School, Grace or
Interest Rate Margin Deferment); 2.30% (in
repayment)
</TABLE>
(1) The Trigger Date for Stafford Loans made before October 1, 1992 is the
first day of enrollment period for which a borrower's first Stafford
Loan in made and for Stafford Loans made on October 1, 1992 and after
the Trigger Date is the date of the disbursement of a borrower's first
Stafford Loan.
(2) 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 or (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.
The 1992 Amendments provide that, for fixed rate loans made on or after
July 23, 1992 and for certain loans made to new borrowers on or after July 1,
1988, the lender must have
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converted by January 1, 1995 the interest rate on such loans to an annual
interest rate adjusted each July 1 equal to (a) for certain loans made between
July 1, 1988 and July 23, 1992, the 91-day Treasury Bill rate at the final
auction prior to the preceding June 1 plus 3.25%, (b) for loans made on or after
July 23, 1992 and prior to July 1, 1998, the 91-day Treasury Bill rate at the
final auction prior to the preceding June 1 plus 3.10%, and (c) for loans made
on or after July 1, 1998, the 91-day Treasury Bill rate at the final auction
prior to the preceding June 1 plus 2.2% (during-school, grace or deferment) or
2.8% (in repayment) in each case capped at the applicable interest rate for such
loan existing prior to the conversion. The variable interest rate does not apply
to loans made prior to July 23, 1992 during the first 48 months of repayment.
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 Subsidized Stafford Loans 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"
below.
"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 Bills 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. New borrowers on or after October 7, 1998 who accumulate outstanding
loans under the Student Assistance General Provisions and FFELP totaling more
than $30,000, are entitled to extended repayment schedules of up to 25 years
subject to certain minimum repayment amounts. 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
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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 Federal 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 subsidized 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 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"; "Formation of the
Trusts--Eligible Lender Trustee" and "Description of the Transfer and Servicing
Agreements--Servicing Procedures." The Seller expects that each of the
subsidized Stafford Loans that are part of a pool of Student Loans will be
eligible to receive Interest Subsidy Payments.
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<PAGE> 140
(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 Federal Loan
for a quarter will be equal to the excess, if any, of (1) the amount of interest
that would be payable on such loan at a rate per annum equal to the average bond
equivalent rates of (x) 91-day Treasury Bills auctioned for such quarter plus
3.25% (3.10% for loans first disbursed on or after October 1, 1992) or (y) for
loans first disbursed on or after July 1, 1998, 91-day Treasury Bills auctioned
for such quarter plus 2.2% while borrowers are in-school, grace or deferment
status, or 2.8% while borrowers are in the repayment period, over (2) 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;" "Formation of the Trusts--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 a pool of
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. For each Trust, the related Administrator will agree to prepare and
file with the Department all such claims forms and any other required documents
or filings on behalf of the applicable Eligible Lender Trustee as owner of the
related Federal Loans on behalf of such Trust. The Administrator will also agree
to assist the Eligible Lender Trustee in monitoring, pursuing and obtaining such
Interest Subsidy Payments and Special Allowance Payments, if any, with respect
to such Federal Loans. Except under certain conditions described herein, each
Eligible Lender Trustee will be required to remit Interest Subsidy Payments and
Special Allowance Payments it receives with respect to the Federal Loans within
two business days of receipt thereof to the related Collection Account.
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<PAGE> 141
The SLS Loan Program. In addition to the Stafford Loan Program, the
Higher Education Act provides a separate program to facilitate additional loans
to graduate and professional students and independent undergraduate students.
This program is referred to as the "Supplemental Loans for Students Program"
(the "SLS Loan Program"). As of July 1, 1994, the SLS Loan Program was
discontinued and SLS Loans are no longer made. The basic framework and principal
provisions of the Stafford Loan Program as described above are similar in many
respects to those that are applicable to loans under the SLS Loan 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 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 Stafford 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
(1) the bond equivalent rate of 52-week Treasury Bills auctioned
at the final auction held prior to the preceding June 1; and
(2) 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, 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"
above.
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<PAGE> 142
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.
The PLUS Loan Program The Higher Education Act authorizes Federal
Parental Loans For Undergraduate Students Loans ("PLUS Loans") to be made to
parents of eligible dependent students (the "PLUS Loan Program"). After July 1,
1993, only parents who do not have an adverse credit history or who can secure
an endorser without an adverse credit history are eligible for PLUS Loans. The
basic provisions applicable to Federal PLUS Loans are similar to those of
Stafford Loans with respect to the federal insurance and reinsurance on the
loans. However, PLUS Loans differ from Stafford Loans, particularly because
Interest Subsidy Payments are not available under the PLUS Loan Program and in
some instances Special Allowance Payments are more restricted.
PLUS Loans disbursed prior to July 1, 1993 are limited to $4,000 per
academic year with a maximum aggregate amount of $20,000. The only limit on the
annual and aggregate amounts of PLUS Loans first disbursed on or after July 1,
1993 is the cost of the student's education less other financial aid received,
including scholarship, grants and other student loans.
The interest rate determination for a PLUS Loan is dependent on when
the PLUS Loan was originally made and disbursed and the period of enrollment.
The interest rates for PLUS Loans are summarized in the following chart.
<TABLE>
<CAPTION>
INTEREST
TRIGGER DATE(1) BORROWER RATE(2) MAXIMUM RATE RATE MARGIN
- -------------------------- --------------------------------------- ------------ -----------
<S> <C> <C> <C>
Prior to 10/01/81......... 9% 9% N/A
10/01/81-10/30/82......... 14% 14% N/A
11/01/82-06/30/87......... 12% 12% N/A
07/01/87-09/30/92......... 52-Week Treasury + Interest Rate Margin 12% 3.25%
10/01/92-06/30/94......... 52-Week Treasury + Interest Rate Margin 10% 3.10%
07/01/94-06/30/98......... 52-Week Treasury + Interest Rate Margin 9% 3.10%
After 6/30/98............. 91-Day Treasury + Interest Rate Margin 9% 3.10%
</TABLE>
(1) The Trigger Date for PLUS Loans made before October 1, 1992 is the
first day of enrollment period for which the PLUS Loan is made, and for
PLUS Loans made on October 1, 1992 and after the Trigger Date is the
date of the disbursement of the PLUS Loan, respectively.
(2) For PLUS Loans that carry a variable rate, the rate is set annually for
12-month periods beginning on July 1 and ending on June 30 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 52-week
Treasury Bills (or 91-day Treasury Bills in the case of loans made or
disbursed on or after June 30, 1998) auctioned at the final auction
held prior to such June 1 and (ii) the applicable Interest Rate Margin.
A holder of a PLUS Loan is eligible to receive Special Allowance
Payments during any quarter if (a) the sum of (i) the average of the bond
equivalent rates of 91-day Treasury Bills auctioned during such quarter and (ii)
the Interest Rate Margin exceeds (b) the Maximum Rate.
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<PAGE> 143
Repayment of principal of a PLUS Loan is required to commence no later
than 60 days after the date of disbursement of such loan, subject to certain
deferral and forbearance provisions. The deferral provisions which apply are
more limited than those which apply to Stafford Loans and although Interest
Subsidy Payments are not available for such deferments, interest may be
capitalized during such periods upon agreement of the lender and borrower during
certain periods of educational enrollments and periods of unemployment or
hardship as specified under the Higher Education Act. Maximum loan repayment
periods and minimum payment amounts are the same as for Stafford Loans.
A borrower may refinance all outstanding PLUS Loans under a single
repayment schedule for principal and interest, with the new repayment period
calculated from the date of repayment of the most recent included loan. The
interest rate of such refinanced loan shall be the weighted average of the rates
of all PLUS Loans being refinanced. A second type of refinancing enables an
eligible lender to reissue a PLUS Loan which was initially originated at a fixed
rate prior to July 1, 1987 in order to permit the borrower to obtain the
variable interest rate available on PLUS Loans on and after July 1, 1987. If a
lender is unwilling to refinance the original PLUS Loan, the borrower may obtain
a loan from another lender for the purpose of discharging the loan and obtaining
a variable interest rate.
The Federal Consolidation Loan Program. 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 Underlying 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 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
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<PAGE> 144
various lenders of the respective Underlying Federal Loans and other loans being
consolidated thereby. The 1998 Amendments allows lenders to make Federal
Consolidation Loans to borrowers with multiple holders even if the lender does
not own an Underlying Federal Loan.
The Federal Direct Consolidation Loan Program (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. Borrowers generally make smaller
payments based on their earnings than in the standard ten-year plan, and the
government forgives loans that are not repaid in twenty-five years. For
applications received after October 1, 1998 and before January 31, 1999, the
Federal Direct Consolidation Loan Program established borrower rates at levels
lower than the statutory rate established by the 1998 Reauthorization Bill under
the Federal Family Education Loan Program. The 1998 Reauthorization Bill also
reduced the lender paid monthly fee on Federal Consolidation Loans from 1.05% to
0.62% per annum for loans made pursuant to applications received on or after
October 1, 1998 and on or before January 31, 1999. The lower rate applies only
to borrowers who applied before February 1, 1999. The availability of such
lower-rate, income-contingent loans may decrease the likelihood that the Seller
would be the originator of a Federal Consolidation Loan, as well as increase the
likelihood that a Federal Loan in a Trust will be prepaid through the issuance
of a Federal Direct Consolidation Loan (a "Federal Direct Consolidation Loan").
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. However, Federal
Consolidation Loans made on or after November 13, 1997 through September 30,
1998 will bear interest at the annual variable rate applicable to Stafford Loans
capped at 8.25%. Federal Consolidation Loans for which the application is
received on or after October 1, 1998 bear interest at a rate equal to the
weighted average interest rate of the loans consolidated, rounded up to the
nearest one-eighth percent and capped at 8.25%. Interest on Federal
Consolidation Loans accrues and, for applications received prior to January 1,
1993, is to be paid without Interest Subsidy Payments by the Department. For
Federal Consolidation Loans received on or after January 1, 1993, all interest
of the borrower is paid during all Deferral Periods. However, Federal
Consolidation Loan applications received on or after August 10, 1993 will only
be subsidized if all of the underlying loans being consolidated were subsidized
Stafford Loans; provided that, in the case of Federal Consolidation Loans made
on or after November 13, 1997, that portion of the Federal Consolidation Loan
that is comprised of subsidized Stafford Loans will retain its subsidy benefits
during Deferral Periods. 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
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<PAGE> 145
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. Special Allowance Payments are
made on Federal Consolidation Loans whenever the rate charged the borrower is
limited by the applicable fixed percentage rate cap. However, for applications
received on or after October 1, 1998, Special Allowance Payments are paid in
order to afford the lender a yield equal to the 91-day Treasury Bill Rate plus
3.1% whenever that formula exceeds the borrower's interest rate.
The Omnibus Budget Reconciliation Act of 1993 made a number of changes
to the Federal Consolidation Loan Program, including (i) 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 (the "Federal Consolidation Loan Rebate"), (ii) requiring lenders of
Federal Consolidation Loans made on or after July 1, 1994, to offer borrowers
income-sensitive repayment schedules, (iii) repealing the $7,500 minimum
indebtedness requirement, and (iv) 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 related
Trust, the related 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 applicable 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 applicable Trust would be obligated to pay any remaining fee from
other assets of that Trust prior to making distributions to Noteholders or
Certificateholders.
Undergraduate Federal Loans. The Seller originates or acquires Stafford
Loans and Federal Consolidation Loans for students attending eligible schools.
Eligible schools include institutions of higher education and
proprietary institutions. Institutions of higher education must meet certain
standards, which generally provide that the institution
- only admits persons who have a high school diploma or its
equivalent,
- is legally authorized to operate within a state,
- provides not less than a two-year program with credit
acceptable toward a bachelor's degree,
- is a public or non-profit institution and
- is credited by a nationally recognized accrediting agency or
is determined by the Department to meet the standards of an
accredited institution.
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<PAGE> 146
Eligible proprietary institutions of higher education include business,
trade and vocational schools meeting standards which provide that the
institution
- only admits persons who have a high school diploma or its
equivalent, or persons who are beyond the age of compulsory
school attendance and have the ability to benefit from the
training offered (as defined in the Higher Education Act),
- is authorized by a state to provide a program of vocational
education designed to fit individuals for useful employment in
recognized occupations,
- has been in existence for at least two years,
- provides at least a six-month training program to prepare
students for gainful employment in a recognized occupation and
- is accredited by a nationally recognized accrediting agency or
is specially accredited by the Department.
With specified exceptions, institutions are excluded from consideration
as educational institutions if the institution
- offers more than 50 percent of its courses by correspondence,
- enrolls 50 percent or more of its students in correspondence
courses,
- has a student enrollment in which more than 25 percent of the
students are incarcerated or
- has a student enrollment in which more than 50 percent of the
students are admitted without a high school diploma or its
equivalent on the basis of their ability to benefit from the
education provided (as defined by statute and regulation).
Further, schools are specifically excluded from participation if
- the educational institution has filed for bankruptcy,
- the owner, or its chief executive officer, has been convicted
or pleaded "nolo contendere" or "guilty" to a crime involving
the acquisition, use or expenditure of federal student aid
funds, or has been judicially determined to have committed
fraud involving funds under the student aid program or
- the educational institution has a cohort default rate in
excess of the rate prescribed by the Act. In order to
participate in the program, the eligibility of a school must
be approved by the Department under standards established by
regulation.
Graduate Federal Loans. The Seller originates or acquires Federal Loans
under loan programs (the "Federal Graduate Programs") to provide educational
financing to graduate and professional students enrolled in or recently
graduated from approved or accredited law schools, medical schools, dental
schools, graduate business schools and other graduate schools. The Federal
Graduate Programs originally targeted law school students but have been expanded
over the years to include virtually all graduate level fields of study. The
Seller (or its predecessors) has been originating loans under the Federal
Graduate Programs since 1990.
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<PAGE> 147
The following table sets forth the approved or accredited schools and
the acceptable degree programs for each graduate field of study:
<TABLE>
<CAPTION>
FIELD OF STUDY APPROVED/ACCREDITED SCHOOLS ACCEPTABLE DEGREE PROGRAMS
- -------------- --------------------------- --------------------------
<S> <C> <C>
Law American Bar Association approved law schools that are Juris Doctor of Law or other
members of LSAC joint degree program
Medical Liaison Committee on Medical Education or American Medical Doctor or Doctor of
Osteopathic Association accredited graduate medical schools Osteopathy
Dental American Dental Association accredited dental schools Graduate dental program
Business American Assembly of Collegiate Schools of Business Graduate business program
("AACSB") accredited graduate business schools; or AACSB
candidate schools accredited by the New England
Association of Schools and Colleges, the Middle States
Association of Colleges and Schools, the North Central
Association of Colleges and Schools, the Southern
Association of Colleges and Schools, the Western
Association of Schools and Colleges, or the North West
Association of Schools and Colleges
Graduate Schools accredited by the New England Association of Graduate level certificate or
Schools and Colleges, the Middle States Association of degree program
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>
DESCRIPTION OF PRIVATE LOANS UNDER THE PROGRAMS
General. In addition to the Federal Loans originated under the Higher
Education Act, the Seller has developed student loan programs that are not
federally guaranteed for undergraduate students and/or their parents ("Private
Undergraduate Loans") and graduate students ("Private Graduate Loans"), that can
be used by borrowers to supplement their Federal Loans in situations where the
Federal Loans do not cover the cost of education. In addition, a law student may
also receive a bar examination loan (a "Bar Exam Loan") to finance the costs of
preparing for and taking one or more state bar examinations if such student has
applied for the loan within a limited period before or after graduation. A
medical or dental student may also receive a residency loan (a "Residency Loan")
to finance the cost of participating in one or more medical or dental residency
programs if such student has applied for the loan within a limited period or
after graduation.
The Private Undergraduate Loans, Private Graduate Loans, Bar Exam Loans
and Residency Loans are sometimes referred to collectively as the "Private
Loans." The holders of Private Loans are not entitled to receive any Federal
Assistance with respect thereto.
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<PAGE> 148
Private Undergraduate Loans. The Seller originates Key Alternative
Loans ("Key Alternative Loans"). Key Alternative Loans provide undergraduate
students supplemental fundings that allows such students the opportunity to
share the responsibility of education financing with or without a cosigner. Key
Alternative Loans were introduced to students in 1995 and are serviced on behalf
of the Seller by Great Lakes Educational Loan Services Inc. ("Great Lakes"). Key
Alternative Loans are not guaranteed by any federal or private guarantor, or by
any other party or governmental agency.
(1) Eligibility Requirements. In order to qualify for a Key
Alternative Loan, the borrower must meet the following eligibility
requirements:
- At least half-time undergraduate student at a Title IV
eligible institution (Prior to the 1998-1999 program year, the
borrower had to be a full-time student.)
- U.S. citizen/national or an eligible non-citizen
- Must meet the following credit criteria:
(a) No account has been 90 or more days delinquent in the
past two years.
(b) No record of bankruptcy, foreclosure, repossession,
skips or wages garnishment.
(c) No record of unpaid collections, charged-off accounts
or written-off accounts.
(d) No record of an open judgment or suit, unsatisfied
tax lien, unpaid prior educational loan default or
other negative public record items in the past seven
years.
(e) Applicant can be approved without cosigner if the
applicant meets credit criteria, has acceptable
credit bureau score and sufficient credit history.
(f) If applicant does not meet the criteria applicant
will be declined.
(g) If applicant meets the criteria but has unacceptable
credit bureau score, a creditworthy cosigner will be
required for approval.
(h) Cosigner, if any, must pass the credit review process
that considers the above criteria and must score well
compared with other applicants.
(i) The credit bureau score requirements apply to both
applicant and cosigner.
A creditworthy cosigner may be required if the borrower has
insufficient credit history and/or is not a US citizen.
If a cosigner is required, the cosigner must also be a US
citizen/national or permanent resident and meet minimum credit criteria. The
cosigner does not have to be the borrower's parent or guardian.
(2) Loan Limits. The minimum annual loan amount for a Key
Alternative Loan is $1,000. The annual and aggregate maximum loan
limits are as follows:
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<PAGE> 149
<TABLE>
<CAPTION>
PROGRAM YEAR YEAR IN SCHOOL ANNUAL MAXIMUM AGGREGATE MAXIMUM
- ------------ -------------- -------------- -----------------
<S> <C> <C> <C>
1995-1996
through First year $5,000 $35,000
1997-1998 Second - Fifth years $7,500
1998-1999 First year $7,500 $47,500
Second - Fifth years $10,000
</TABLE>
(3) Interest. Interest is payable by on each Key Alternative Loan
on a monthly basis until the principal amount is repaid in full. The
interest rate is calculated based on the 52-week Treasury Bill rate
plus a margin in the range of 2.85% to 3.10% during the interim period
and a margin in the range of 3.25% to 3.50% during the repayment
period. (The interest rate for the 1995-1996 program year was
calculated based on the 91-Day Treasury Bill Rate plus 3.50% during the
interim period and 3.65% during the repayment period). The rate varies
quarterly and is determined based on the most recent Treasury Bill
auction prior to each January, April, July, and October. Borrowers may
defer interest payments during the interim period. The deferred
interest will be capitalized once on the last day of the interim
period. (For loans originated during the 1995-1996 program year,
deferred interest was capitalized once annually every November 30th and
once on the last day of the interim period.)
(4) Repayment. In general, borrowers must repay each Key
Alternative Loan in monthly installments until the loan is paid in
full. The repayment term is 10 years if the balance at repayment is
less than $15,000 or 15 years if the balance at repayment is $15,000 or
more. There is a minimum payment amount of $50 per month and there is
no prepayment penalty.
(5) Grace Periods Deferral Periods, Forbearance Periods. The
repayment period on a Key Alternative Loan generally begins after the
Grace Period, defined as six months after the student graduates or
ceases to be enrolled at least half-time at an accredited institution
or five years from the date of the first Key Alternative Loan
disbursement. In general, deferral periods are not permitted other than
during the in school and grace periods, when the borrower is still
responsible for the capitalization of the deferred interest. Borrowers
may request periods of forbearance related to the following areas:
unemployment, underemployment, hardship, practical and graduate school
enrollment. Forbearances are generally granted in 6 month increments
except for graduate school forbearance which is granted in 12 month
increments.
Private Graduate Loans. The Seller originates or acquires Private
Graduate Loans to provide educational financing to help pay for the costs of:
- attending law, medical, dental, graduate, business, or other
graduate school,
- taking/passing one or more state bar examinations upon
graduation from law school, or
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<PAGE> 150
- participating in one or more medical or dental residency
programs upon graduating from medical or dental school.
Private Graduate Loans consist of loans associated with the
above-mentioned fields of study (including Bar Exam and Residency Loans) and
Private Consolidation Loans. Subject to the satisfaction of the conditions
imposed by the applicable Program and the applicable Guarantee Agreement, the
Private Graduate Loans that are Private Guaranteed Loans are fully guaranteed
against nonpayment of principal and interest as a result of a borrower's
default, death, disability or bankruptcy by the Private Guarantors. These
Private Guarantors are not reinsured by the Department or any other governmental
entity. In order to qualify for the guarantee from the Private Guarantors, such
Private Graduate Loans may not be made to a single borrower in excess of the
annual and aggregate limits imposed by the applicable loan Program and may only
be made to Eligible Students who qualify pursuant to credit underwriting
standards established by the Seller and approved by the Private Guarantors. The
following table summarizes the annual, aggregate and cumulative loan limits for
each Private Graduate Loan:
<TABLE>
<CAPTION>
ANNUAL AGGREGATE CUMULATIVE
PROGRAM YEAR TYPE OF LOAN MAXIMUM MAXIMUM MAXIMUM(2)
- ------------ ------------ ------- --------- ----------
<S> <C> <C> <C> <C>
1991-1992 Law Loan $14,500 $43,500 $ 78,000
Bar Exam Loan $ 5,000 $ 5,000 $ 83,000
1992-1993 Law Loan $15,000 $45,000 $ 79,500
Bar Exam Loan $ 5,000 $ 5,000 $ 84,500
1993-1994 Law Loan $15,000 $45,000 $ 87,500
Bar Exam Loan $ 5,000 $ 5,000 $ 87,500
1994-1995 Law Loan $15,000 $45,000 $ 92,000
Bar Exam Loan $ 5,000 $ 5,000 $ 92,000
1995-1996 through
1997-1998 Law Loan Up to the cost of attendance N/A $120,000
Business Loan Up to the cost of attendance(1) N/A $120,000
Dental Loan Up to the cost of attendance N/A $135,000
Graduate Loan Up to the cost of attendance N/A $120,000
Medical Loan Up to the cost of attendance N/A $165,000
Bar Exam Loan $ 5,000 $ 5,000 $ 5,000
Residency Loan $ 8,000 $ 8,000 $ 8,000
1998-1999 Law Loan Up to the cost of attendance N/A $130,000
Business Loan Up to the cost of attendance N/A $130,000
Dental Loan Up to the cost of attendance N/A $175,000;
$200,000
(post-doctoral)
Graduate Loan Up to the cost of attendance N/A $130,000
Medical Loan Up to the cost of attendance N/A None
Bar Exam Loan $ 7,500 $ 7,500 $ 7,500
Residency Loan $ 8,000 $ 8,000 $ 8,000
</TABLE>
(1) Students enrolled less than half-time can borrow a maximum annual
amount of the combined cost of tuition, fees, and a maximum of $500 for
books and supplies.
(2) Including graduate and undergraduate debt.
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Payment Terms. Each Private Graduate Loan earns interest at a rate per
annum, reset quarterly, equal to the 91-day Treasury Bill Rate plus a margin,
depending on the type of loan. The following table sets forth the applicable
interest rate for each type of Private Graduate Loan:
<TABLE>
<CAPTION>
INTEREST MARGIN
OVER 91-DAY
PROGRAM YEAR TYPE OF LOAN TREASURY BILL RATE
- ------------ ------------ ----------- -------------
Interim (1) Repayment (2)
<S> <C> <C> <C>
1991-1992 Law & Bar Exam Loans 3.25% 3.25%
1992-1993 Law & Bar Exam Loans 3.25% 3.40%
1993-1994 Law & Bar Exam Loans 3.25% 3.40%
1994-1995 Law & Bar Exam Loans 3.25% 3.40%
1995-1996 through
1997-1998 Law Loan 3.25% 3.40%
Medical Loan 2.50% 2.75%
Dental Loan 2.50% 3.00%
Business Loan 3.25% 3.40%
Graduate Loan 3.25% 3.40%
Bar Exam Loan 3.25% 3.40%
Residency Loan 2.50% 2.75%
1998-1999(3) Law Loan 2.90%-3.25% 2.50%-3.25%
Medical Loan 2.50% 2.25%-2.85%
Dental Loan 2.50%-2.75% 2.25%-3.00%
Business Loan 3.25%-3.00% 2.50%-3.25%
Graduate Loan 3.25%-3.40% 2.50%-3.40%
Bar Exam Loan 2.90%-3.25% 2.50%-3.25%
Residency Loan 2.50% 2.25%-2.85%
Dental Residency Loan 2.50%-2.75% 2.25%-3.00%
</TABLE>
(1) "Interim" represents any period while the borrower is attending school
or during a specified grace period.
(2) "Repayment" represents the period after the specified grace period, in
which the borrower is required to make payments or enter into some type
of deferment or forbearance period.
(3) For 1998-1999, two separate loan programs apply. In one program, the
margin is determined based on the borrower's choice of repayment terms,
which range from 10 to 25 years (the "Keys2Repay Program"). The other
program has one margin regardless of interim, repayment period, or
repayment term.
Interest accrues on the outstanding principal amount of each Private
Graduate Loan from the date the lender makes such Private Graduate Loan and is
payable monthly by each borrower commencing a certain number of months after the
borrower graduates or otherwise ceases to be enrolled at least half-time in an
approved institution (the "Private Loan Repayment Commencement Date"). In the
case of Private Graduate Loans made during the 1990-1991 program year that
period is approximately six months. For all other Private Graduate Loans, the
period is approximately nine months, except that in the case of Medical or
Residency Loans, the period, generally, is extended to nine months after the
borrower completes any required residency (generally, up to a maximum of 57
months after graduation), subject to deferral or forbearance as discussed below.
Subject to certain conditions, borrowers of Private Graduate 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
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such Private Graduate Loans. In addition, borrowers of Private Graduate 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 the Private Guarantors if applicable), for periods of
forbearance because of temporary financial hardship, during which borrowers may
defer or make reduced principal payments on such Private Graduate Loans.
Interest on each Private Graduate 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 Graduate Loan on that date. Each student with outstanding Private
Graduate 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 Graduate Loan in full
over a period not to exceed 15 years (or, with respect to each Private Graduate
Loan made since the commencement of the 1990-1991 program year, 20 years, except
with respect to Private Graduate Loans made under the Keys2Repay Program, where
the repayment term can be 10, 15 or 25 years at the borrower's option) after the
Private Loan Repayment Commencement Date with respect to such Private Graduate
Loan. Repayment of principal and interest on Business Loans commences no later
than 36 months after the date of the first disbursement of the first Business
Loan to a specific borrower. 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. Private Graduate Loans
presently require a minimum annual principal and interest payment 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 Graduate Loans entering
repayment on or after October 1, 1995, borrowers may choose among several
repayment options, including the option to make interest only payments for
limited periods.
With respect to each Private Loan (other than Private Consolidation
Loans) made to a student since the commencement of the 1992-1993 program year, a
fee equal to a percentage of the original principal amount of such Private
Graduate Loan is charged to such student on the last day preceding the
applicable Private Loan Repayment Commencement Date.
Unless the student pays such fee, the Seller will make an additional
loan (a "Fee Advance") to such student in an amount equal to such fee, which
will be added to the principal balance of such Private Graduate 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 Fee
Advance to the related Trust.
<TABLE>
<CAPTION>
PROGRAM YEAR TYPE OF LOAN SUPPLEMENTAL FEE
<S> <C> <C>
1990-1991 through
1995-1996 Law Loan 2%
Bar Exam Loan 2%
1996-1997 Law Loan 4%
Medical Loan 2%
Dental Loan 2%
Business Loan 2%
Graduate Loan 3%
</TABLE>
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<TABLE>
<S> <C> <C>
Bar Exam Loan 3%
Residency Loan 2%
1997-1998 Law Loan 1.5%-6.9%
Medical Loan 1.5%-6.9%
Dental Loan 1.5%-6.9%
Business Loan 1.5%-6.9%
Graduate Loan 1.5%-6.9%
Bar Exam Loan 1.5%-6.9%
Residency Loan 1.5%-2.0%
1998-1999(1) Law Loan 1.5%-6.9%
Medical Loan 1.5%-2.0%
Dental Loan 1.5%-6.9%
Business Loan 1.5%-6.9%
Graduate Loan 1.5%-6.9%
Bar Exam Loan 1.5%-6.9%
Residency Loan 1.5%-2.0%
Dental Residency Loan 1.5%-6.9%
</TABLE>
(1) For 1998-1999, two separate loan programs apply. One program determines
the fee based on the loan type. The other program determines the fee
based on the borrower's past credit behavior, except the Medical and
Residency Loans, which are 1.5%.
Private Consolidation Loans. The Seller has established a private
consolidation loan program (the "Private Consolidation Loan Program") to
facilitate the ability of eligible borrowers of Private Graduate Loans
("Underlying Private Graduate Loans") to consolidate such Underlying Private
Graduate Loans into a single loan (a "Private Consolidation Loan"; together with
Federal Consolidation Loans, sometimes referred to herein as "Consolidation
Loans"). The Private Consolidation Loan Program commenced in November, 1994.
Subject to the satisfaction of certain conditions set forth in the programs
relating to Private Graduate Loans, 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 Graduate Loans of any borrower, each
holder of a Private Consolidation Loan will be entitled to substantially the
same guarantee arrangements, if any, as are available on the Underlying Private
Graduate Loans. Currently, all of the Underlying Private Graduate Loans that are
consolidated under the Private Consolidation Program are Private Graduate Loans
that were guaranteed by TERI against default, death, bankruptcy or disability of
the applicable borrower, and the resulting Private Consolidation Loan is
similarly guaranteed by TERI. Under this program, an eligible borrower of a
Private Consolidation Loan guaranteed by TERI means a borrower (i) with
outstanding Underlying Private Graduate 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 Graduate Loan. A borrower of a guaranteed Private
Consolidation Loan must consolidate all of his or her eligible loans and in
doing so will generally forgo all opportunities for deferment or forbearance.
Private Consolidation Loans that are guaranteed will bear interest at
the rate applicable to the type of Underlying Graduate Loan for which the
greatest principal amount of Underlying Graduate Loans to be consolidated is
outstanding. Such Private Consolidation Loans made prior to May 1, 1997 are
repayable over a period of 15-25 years and such Private Consolidation Loans
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made on or after May 1, 1997 are or will be repayable over a period of 25 to 30
years, in each case, 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 repayment options similar to those available for other
Private Graduate Loans. With respect to each such Private Consolidation Loan, a
fee equal to 1% of the amount paid to discharge the Underlying Private Graduate
Loans will be charged to the borrower and included in the original principal
amount of such Private Consolidation Loan (a "Private Consolidation Fee
Advance").
The Seller currently intends to expand the Private Consolidation Loan
Program to allow the consolidation of unguaranteed Underlying Private Graduate
Loans, and/or other unguaranteed private undergraduate and graduate student loan
debt and any other education related debt (excluding credit card debt) used for
education purposes, into a single Private Consolidation Loan that is similarly
not guaranteed by any federal or private guarantor, or by any other party or
governmental agency. The Seller anticipates that it will commence such expanded
Program on or about January 1, 2000. Borrowers of such unguaranteed Private
Consolidation Loans will be required to satisfy certain conditions, including
limitations on the timing and payment of principal and interest with respect to
such Private Consolidation Loans and a requirement that the proceeds of the
Private Consolidation Loan be used to repay all the Underlying Private Graduate
Loans and any other student or education loans of the borrower that were
consolidated.
To be eligible for an unguaranteed Private Consolidation Loan, the
borrower must (i) have outstanding Underlying Private Graduate Loans or other
private undergraduate and/or graduate student loan debt and/or other education
related debt (excluding credit card debt) used for education purposes, (ii) have
begun repaying and is not more than 45 days delinquent in required payments on
any such student loan, and (iii) meet credit eligibility requirements similar to
those applicable to Private Graduate Loans. A borrower of an unguaranteed
Private Consolidation Loan must consolidate all of his or her eligible
Underlying Private Graduate Loans and in doing so will generally forego all
opportunities for deferment or forbearance.
INSURANCE OF STUDENT LOANS; GUARANTORS OF STUDENT LOANS
Federal Guarantors. The Higher Education Act authorizes Federal
Guarantors to support education financing and credit needs of students at
post-secondary schools. The Higher Education Act encourages every state either
to establish its own agency or to designate another Federal Guarantor in
cooperation with the Secretary. Under various programs throughout the United
States of America, Federal Guarantors insure and sometimes service guaranteed
student loans. The Federal Guarantors are reinsured by the federal government
for from 80% to 100% of each default claim paid, depending on their claims
experience, for loans disbursed prior to October 1, 1993, from 78% to 98% of
each default claim paid for loans disbursed on or after October 1, 1993 and
prior to October 1, 1998, and from 75% to 95% of each default claim paid for
loans disbursed on or after October 1, 1998. Federal Guarantors are reinsured by
the federal government for 100% of death, disability, bankruptcy, closed school
and false certification claims
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paid. Loans guaranteed under the lender of last resort provisions of the Higher
Education Act are also 100% guaranteed and reinsured. See"--Federal Insurance
and Reinsurance of Federal Guarantors" below.
Federal Guarantors collect a one-time insurance premium ranging from 0%
to 3% of the principal amount of each guaranteed loan, depending on the Federal
Guarantor. Federal Guarantors are prohibited from charging insurance premiums on
loans made under the Unsubsidized Stafford Loan Program (the "Unsubsidized
Stafford Loan Program") prior to July 1, 1994. On such loans made prior to July
1, 1994, the Higher Education Act requires that a 6.5% combined loan origination
fee and insurance premium be paid by the borrower on Unsubsidized Stafford
Loans. This fee is passed through to the Department by the originating lender.
Effective July 1, 1994, the maximum insurance premium and origination fee for
Stafford Loans and Unsubsidized Stafford Loans are 1% and 3%, respectively.
Each Federal Loan to be sold to an Eligible Lender Trustee on behalf of
a Trust will be guaranteed as to principal and interest by a Federal Guarantor
pursuant to a Federal Guarantee Agreement between such Federal Guarantor and the
applicable Eligible Lender Trustee. The applicable Prospectus Supplement for
each Trust will identify each related Federal Guarantor for the Federal Loans
held by such Trust as of the applicable Closing Date and the amount of such
Federal Loans it is guaranteeing for such Trust.
Federal Insurance and Reinsurance of Federal Guarantors. A Federal Loan
is considered to be in default for purposes of the Higher Education Act when the
borrower fails to make an installment payment when due or to comply with other
terms of the loan, and if the failure persists for 270 days in the case of a
loan repayable in monthly installments or for 330 days in the case of a loan
repayable in less frequent installments. Under certain circumstances a loan
deemed ineligible for federal reinsurance may be restored to eligibility.
Procedures for such restoration of eligibility are discussed below.
If the loan in default is covered by federal loan insurance in
accordance with the provisions of the Higher Education Act, the Department is to
pay the applicable Federal Guarantor, as insurance beneficiary, the amount of
the loss sustained thereby, upon notice and determination of such amount, within
90 days of such notification, subject to reduction as described below.
If the loan is guaranteed by a Federal Guarantor, the eligible lender
is reimbursed by the Federal Guarantor for 100% (or not less than 98% for loans
disbursed on or after October 1, 1993) of the unpaid principal balance of the
defaulted loan plus accrued and unpaid interest thereon so long as the eligible
lender has properly originated and serviced such loan. Under the Higher
Education Act, the Department enters into a guarantee agreement with each
Federal Guarantor, which provides for federal reinsurance for amounts paid to
eligible lenders by the Federal Guarantor with respect to defaulted loans.
Pursuant to such agreements, the Department also agrees to reimburse a
Federal Guarantor for 100% of the amounts expended in connection with a claim
resulting from the death, bankruptcy, total and permanent disability of a
borrower, the death of a student whose parent is
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the borrower of a PLUS Loan or claims by borrowers who received loans on or
after January 1, 1986 and who are unable to complete the programs in which they
are enrolled due to school closure or borrowers whose borrowing eligibility was
falsely certified by the eligible institution; such claims are not included in
calculating a Federal Guarantor's claims rate experience for federal reinsurance
purposes. The Department also agrees to reimburse a Federal Guarantor for 100%
of the amounts expended in connection with claims on loans made under the lender
of last resort provisions. The Department is also required to repay the unpaid
balance of any loan if the borrower files for relief under Chapter 12 or 13 of
the Bankruptcy Code or files for relief under Chapter 7 or 11 of the Bankruptcy
Code and has been in repayment for more than 7 years or commences an action for
a determination of dischargeability under Section 523(a)(8)(b) of the Bankruptcy
Code, and is authorized to acquire the loans of borrowers who are at high risk
of default and who request an alternative repayment option from the Department.
See, "Certain Legal Aspects of the Student Loans - Bankruptcy Considerations"
herein.
The amount of such reinsurance payment to the Federal Guarantor for
default claims is subject to reduction based upon the annual default claims rate
of the Federal Guarantor, calculated to equal the amount of federal reinsurance
claims paid by the Department to the Federal Guarantor during any fiscal year as
a percentage of the original principal amount of guaranteed loans in repayment
at the end of the prior federal fiscal year. The formula is summarized as
follows:
<TABLE>
<CAPTION>
CLAIMS RATE OF FEDERAL GUARANTORS REIMBURSEMENT BY THE DEPARTMENT OF EDUCATION (1)
- --------------------------------- ------------------------------------------------
<S> <C>
0% to and including 5% 98%
Greater than 5% to and including 9% 98% of claims to and including 5%; 88% of claims greater than 5%
Greater than 9% 98% of claims to and including 5%; 88% of claims greater than 5% to
and including 9%; and 78% of claims greater than 9%
</TABLE>
(1) Each of the reimbursement percentages listed above is increased by two
percentage points for a loan made prior to October 1, 1993 and
decreased by three percentage points for a loan made on or after
October 1, 1998.
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 (the "1993 Act"), 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
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is necessary 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. These various changes create a 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 a Trust's ability to pay principal and interest on the related
Notes and Certificates, 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 related Student Loans. In addition, this legislation sought to
greatly expand the loan volume under the direct lending program (the "Federal
Direct Student Loan Program") to a target of approximately 60% of student loan
demand in academic year 1998-1999, although only about 35% of such loan demand
is currently being met by the direct lending program. The expansion of this
program in the future could result in increasing reductions in the volume of
Federal Loans made by the Seller. 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 Federal Loans. See "Risk Factors--Changes in Legislation May
Adversely Affect Student Loans and Federal Guarantors." The 1998 Reauthorization
Bill created additional risks that the resources available to the Federal
Guarantors to meet their guarantee obligations will be further reduced in the
future, by mandating additional recall of guarantor reserves and reducing
reinsurance to guarantors from 98% to 95%.
Pursuant to the 1992 Amendments and additional changes made in 1997 and
1998, each Federal Guarantor is required to maintain a current minimum reserve
level of at least .25% of the aggregate principal amount of all outstanding
Federal Loans guaranteed by such Federal Guarantor. 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 5% 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
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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.
Private Guarantors. Private Loans are not entitled to any federal
reinsurance or assistance from the Department or any other governmental entity.
Although each Private Guarantor 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 such
Private Guarantor over the term of the related Private Loans.
CLAIMS AND RECOVERY RATES
Certain historical information concerning guarantee claims and recovery
rates of the Guarantors for the Student Loans held by the related Trust as of
the applicable Closing Date with respect to each series of Securities will be
set forth in each Prospectus Supplement. There can be no assurance that the
claim and recovery experience on any pool of Student Loans with respect to a
given Trust will be comparable to prior experience or to any such information.
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.
With respect to all Student Loans, whether Federal Loans or Private
Loans (other than Consolidation Loans and Key Alternative Loans discussed
below), the Seller forwards each application for such Student Loans (which
should include an executed promissory note) to either a marketing agent or the
Seller's origination department. On behalf of the Seller, either the marketing
agent or the origination department 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 applicable Program. In
addition, a credit report of each applicant for Private Graduate Loans is
obtained from an authorized credit reporting service, which the Seller then uses
to determine, in consultation with the Private Guarantors, if applicable,
whether such applicant satisfies certain specified credit underwriting criteria.
The credit-underwriting criteria for Private Guaranteed Loans are as follows:
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- No account that has been 90 or more days delinquent in the
past two years, and no more than one account is currently more
than 60 days delinquent.
- No record of bankruptcy, foreclosure, repossession, skips or
wages garnishment.
- No record of unpaid collections, charged-off accounts or
written-off accounts.
- No record of an open judgment or suit, unsatisfied tax lien,
unpaid prior educational loan default or other negative public
record items in the past six years.
- No record of bankruptcy in the past seven years.
- Credit criteria for the 1993-1994 program year also includes
the requirement that no account has been delinquent 90 or more
days in the past two years.
- Credit criteria for the 1994-1995 and subsequent program years
also include requirements that no account has been delinquent
90 or more days in the past five years (or two years with
respect to any borrower who obtained a loan in 1993-1994), and
there have been no more than three inquiries and none with
respect to any previous borrower to an authorized credit
reporting agency in the past six months.
- Credit criteria for the 1995-1996 and subsequent program years
include the additional requirement that no more than two
accounts have been more than 60 days delinquent in the past
two years.
The credit-underwriting criteria for Private Unguaranteed Loans are as follows:
1. No more than 3 accounts rated 30 days are more delinquent in
the past 2 years.
2. No more than one account is currently rated 60 days or more
delinquent.
3. No more than 2 accounts rated 60 or more days delinquent in
the past 2 years.
4. No account more than 90 days delinquent in the past five
years.
5. No record of bankruptcy discharge in the past 7 years.
6. No record of foreclosure, repossession, open judgment or suit,
unsatisfied tax lien, unpaid prior educational loan default or
other negative public credit in the past 6 years.
7. No record of unpaid collections, charged-off accounts or
written-off accounts.
8. No more than 3 authorized inquiries in the past 6 months.
9. Applicants with no credit history will be approved.
10. Applicants who meet the criteria 2-8, but do not meet the
minimum credit score determined by the Seller must obtain a
co-signer to be eligible.
11. Applicants with credit card balances greater than $20,000 must
have a credit worthy co-signer.
12. No single or combination of paid charged-off or paid
collection accounts totaling more than $100 reported within
last 2 years.
13. If revolving credit balances are greater than $8,000, total
credit card usage cannot exceed 75% (a negative decision can
be overridden if applicant has minimum credit bureau score).
14. A credit bureau score may be used to enhance applicants
position for all other criteria.
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The origination of Federal Loans must comply with the provisions of the
Higher Education Act, and therefore does not consider the creditworthiness of
borrowers applying for Stafford Loans.
Any borrower inquiries concerning Federal Consolidation Loans or
Private Consolidation Loans are forwarded to the appropriate Sub-Servicer, who
contacts the borrower, prepares and sends to the borrower an application (which
includes a promissory note) for a Consolidation Loan for the borrower's review
and signature. Each Sub-Servicer is required to obtain certifications from the
lenders of the loans to be consolidated and to review the loan application and
the certifications to confirm that the borrower is eligible for a Federal
Consolidation Loan or Private Consolidation Loan, as the case may be. Upon
approval of an application for a Consolidation Loan, 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, a Sub-Servicer retains
the completed loan application and executed promissory note as custodian.
Applications for Key Alternative Loans are entered into the processing
system and are checked for completeness. If the borrower is ineligible for the
loan due to a processing denial reason an ineligibility letter is sent to the
borrower. Great Lakes sends an electronic transmission of applicant information
on each complete application to the Seller's system for credit review. Approved
applications are transmitted back to Great Lakes on a daily basis, where an
approval letter is generated and sent to the applicant, cosigner and the school.
Denied applicants are sent an adverse action letter from the credit department
the day the application is denied. If an applicant feels they have been denied
based on inaccurate or incomplete information contained in a credit report, they
can request a review (within 60 days of initial denial). Denied applicants may
have their loan reconsidered with a written request and supporting
documentation. A credit representative will review denied loan applicants
documentation and approve or deny the request. Each appeal is handled based on
its individual merits.
SERVICING AND COLLECTIONS PROCESS
The Higher Education Act, the programs relating to Private Loans 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. Each
Sub-Servicer performs such procedures on behalf of the Seller and the Master
Servicer and will agree, pursuant to the related Sub-Servicing Agreement, to
perform specified and detailed servicing and collection procedures with respect
to the Student Loans on behalf of the related 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 each Sub-Servicer's loan file for the
borrower. Each Sub-Servicer also will be required to perform skip tracing
procedures on delinquent borrowers
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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 applicable Eligible Lender Trustee, as
holder of legal title to the applicable Student Loans on behalf of the related
Trust, to realize the benefits of any Guarantee Agreement or to receive the
benefits of Federal Assistance from the Department with respect thereto. Failure
to comply with certain of the established procedures with respect to a Federal
Loan may also result in the denial of coverage under a Guarantee Agreement for
certain accrued interest amounts, in circumstances where such failure has not
caused the loss of the guarantee of the principal of such Federal Loan.
At prescribed times prior to submitting a claim for payment under a
Guarantee Agreement for a delinquent Student Loan, each Sub-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 made prior to the enactment date of the 1998 Reauthorization Bill), 270
days (in the case of Federal Loans made on or after October 7, 1998), or 150
days (in the case of Private Guaranteed Loans), the applicable Sub-Servicer may
file a default claim with the respective Guarantor. Failure to file a claim
within 270 days (in the case of Federal Loans made prior to the enactment date
of the 1998 Reauthorization Bill), 360 days (in the case of Federal Loans made
on or after October 7, 1998), or 180 days (in the case of Private Guaranteed
Loans) of delinquency may result in denial of the guarantee claim with respect
to such loan. A Sub-Servicer's failure to file a guarantee claim in a timely
fashion would constitute a breach of its covenants and create an obligation of
such Sub-Servicer to purchase the applicable Student Loan. See "Description of
the Transfer and Servicing Agreements--Master Servicer Covenants."
INCENTIVE PROGRAMS
The Seller has offered, and may continue to offer, incentive programs
to certain Student Loan borrowers. If any incentive programs are applicable to
the Student Loans in a Trust, such incentive programs will be described in the
related Prospectus Supplement Any incentive program not in existence as of the
date of such Prospectus Supplement, or not described in the related Prospectus
Supplement, that effectively reduces borrower payments on Financed Student Loans
and, with respect to Financed Federal Loans, is not required by the Higher
Education Act, will be applicable to the Financed Student Loans only if and to
the extent that the applicable Trust receives payment from the Seller (or the
Seller deposits or causes a deposit to be made into the related Collection
Account) in an amount sufficient to offset such effective yield reductions.
WEIGHTED AVERAGE LIVES OF THE SECURITIES
The rate of payment of principal of the Notes and the Certificates of
any series and the yield on the Notes and the Certificates of any series will be
affected by prepayments of the Student Loans that may occur as described below.
All the Student Loans are prepayable in whole or in part by the borrowers at any
time (including by means of Federal Consolidation Loans, Private Consolidation
Loans or consolidation loans made under the Federal Direct Student Loan
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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 those described below. In general, the rate of prepayments may tend to
increase to the extent that alternative financing becomes available at
prevailing interest rates which fall significantly below the interest rates
applicable to the Student Loans. However, because many of the 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 Student Loans.
To the extent borrowers of Student Loans elect to borrow Consolidation
Loans with respect to such Student Loans:
(1) from the Seller, after the Funding Period but not beyond the
end of the Revolving Period, and collections on the Student
Loans are not available to purchase such Consolidation Loans,
(2) from the Seller, after the end of the Revolving Period, or
(3) from another lender at any time,
Noteholders of a series (and after the Notes have been paid in full,
Certificateholders of such series) will collectively receive as a prepayment of
principal the aggregate principal amount of such Student Loans. Any such
prepayments will result in a more rapid amortization of the Securities of a
series then would otherwise be the case. The volume of existing loans that may
be repaid in this fashion is not determinable at this time. However, if the
Seller makes any such Consolidation Loan during a Funding Period or prior to the
end of the Revolving Period (in which event the Seller will then sell that
Consolidation Loan to the applicable Eligible Lender Trustee, to the extent that
funds are available in the applicable Escrow Account and during the Funding
Period, the Pre-Funding Account or following the Funding Period but prior to the
end of the Revolving Period, the applicable Collection Account from amounts
which constitute available loan purchase funds, for the purchase thereof), the
aggregate outstanding principal balance of Student Loans (after giving effect to
the addition of such Consolidation Loans) 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 will be 98% with respect to any Federal Consolidation
Loan made on or after October 1, 1993, even if the Underlying Federal Loans were
100% guaranteed. See "The Student Loan Financing Business--Description of
Federal Loans Under the Programs--Federal Consolidation Loans." There can be no
assurance that borrowers with Student Loans will not seek to obtain
Consolidation Loans with respect to such Student Loans or, if they do so, that
such Consolidation Loans will not be made by the Seller after the end of a
Funding Period when collections on the Student Loans are not available to
purchase such Consolidation Loans, on or after the end of the Revolving Period
or by another lender at any time.
In addition, the Seller will be obligated to repurchase any Student
Loan pursuant to the applicable Sale and Servicing Agreement as a result of a
breach of any of its representations and
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warranties, and the Master Servicer will be obligated to purchase any Student
Loan pursuant to the Sale and Servicing Agreement as a result of a breach of
certain covenants with respect to such Student Loan, in each case where such
breach materially adversely affects the interests of the Certificateholders or
the Noteholders of a series in that 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 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 Student Loans;
Representations and Warranties" and "--Servicer Covenants." See also
"Description of the Transfer and Servicing Agreements---Additional Fundings"
regarding the prepayment of principal to Noteholders and Certificateholders of a
series if as of the date specified in the applicable Prospectus Supplement the
amount on deposit in the related Pre-Funding Account has not been reduced to
zero and the prepayment of principal to Noteholders of a series 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 Student Loans if
a Seller Insolvency Event occurs and "--Termination" regarding the Seller's
option to purchase the Student Loans when the aggregate Pool Balance is less
than or equal to 5% of the initial Pool Balance of a series and the auction of
the Student Loans occurs on or after the date specified in the related
Prospectus Supplement.
On the other hand, scheduled payments with respect to, and maturities
of, the Student Loans may be extended, including pursuant to Grace Periods,
Deferral Periods and, under certain circumstances, Forbearance Periods prior to
the end of the Revolving Period or of refinancings through Consolidation Loans
to the extent such Consolidation Loans are sold to an Eligible Lender Trustee on
behalf of a Trust as described above. In that event, the fact that such
Consolidation Loans will likely have longer maturities than the Student Loans
they are replacing may lengthen the remaining term of the Student Loans and the
average life of the Notes and the Certificates of a series. The rate of payment
of principal of the Notes and the Certificates of a series and the yield on the
Notes and the Certificates of a series 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 Student Loans will
extend well beyond the final scheduled Distribution Dates of the Notes and the
Certificates of a series.
The rate of prepayment on the Student Loans cannot be predicted, and
any reinvestment risks resulting from a faster or slower incidence of prepayment
of Student Loans will be borne entirely by the Securityholders of a series. 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 of a series receive payments from the related 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.
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POOL FACTORS AND TRADING INFORMATION
Each of the "Note Pool Factor" for each class of Notes and the
"Certificate Pool Factor" for each class of Certificates (each, a "Pool Factor")
will be a seven-digit decimal which the Administrator will compute for each
Distribution Date indicating the remaining outstanding principal amount of such
class of Notes or the remaining principal balance for such class of Certificates
(the "Certificate Balance"), respectively, as of that Distribution Date (after
giving effect to distributions to be made on such Distribution Date), as a
fraction of the initial outstanding principal amount of such class of the Notes
or the initial Certificate Balance for such class of Certificates, respectively.
Each Pool Factor will be 1.0000000 as of the Closing Date, and thereafter will
decline to reflect reductions in the outstanding principal amount of the
applicable class of Notes or reductions of the Certificate Balance of the
applicable class of Certificates, as applicable. A Securityholder's portion of
the aggregate outstanding principal amount of the related class of Notes or of
the aggregate outstanding Certificate Balance for the related class of
Certificates, as applicable, is the product of (x) the original denomination of
that Securityholder's Note or Certificate and (y) the applicable Pool Factor.
Pursuant to the related Indenture and the related Trust Agreement, the
Securityholders will receive reports on or about each Distribution Date
concerning the payments received on the Student Loans, the Pool Balance (as such
term is defined in the related Prospectus Supplement, 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 "Certain
Information Regarding the Securities--Reports to Securityholders."
DESCRIPTION OF THE NOTES
GENERAL
With respect to each Trust, one or more classes of notes (the "Notes")
of a given series will be issued pursuant to the terms of an indenture (an
"Indenture") between the Trust and the trustee under such Indenture (the
"Indenture Trustee"), a form of which has been filed as an exhibit to the
Registration Statement of which this Prospectus (this "Prospectus") is a part.
The following summary describes the material terms of the Notes and the
Indenture. The summary does not purport to be complete and is qualified in its
entirety by reference to all the provisions of the Notes and the Indenture.
Unless otherwise specified in the related Prospectus Supplement (each a
"Prospectus Supplement"), each class of Notes will initially be represented by
one or more Notes, in each case registered in the name of the nominee of The
Depository Trust Company ("DTC") (together with any successor depository
selected by the Administrator, the "Depository") except as set forth below.
Unless otherwise specified in the related Prospectus Supplement, the Notes 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 & Co.
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("Cede"), unless another nominee is specified in the related Prospectus
Supplement. Accordingly, such nominee is expected to be the holder of record of
the Notes of each class. Unless and until Definitive Notes are issued under the
limited circumstances described herein, no Noteholder will be entitled to
receive a physical certificate representing a Note. All references herein and in
the related Prospectus Supplement to actions by Noteholders of Notes held in
book-entry form refer to actions taken by DTC upon instructions from its
participating organizations (the "Participants") and all references herein to
distributions, notices, reports and statements to Noteholders refer to
distributions, notices, reports and statements to DTC or its nominee, as the
case may be, as the registered holder of the Notes for distribution to
Noteholders in accordance with DTC's procedures with respect thereto. See
"Certain Information Regarding the Securities--Book-Entry Registration"
and"--Definitive Securities."
PRINCIPAL OF AND INTEREST ON THE NOTES
The timing and priority of payment, seniority, allocations of losses,
interest as a per annum interest rate (the "Interest Rate") and amount of or
method of determining payments of principal and interest on each class of Notes
of a given series will be described in the related Prospectus Supplement. The
right of holders of any class of Notes to receive payments of principal and
interest may be senior or subordinate to the rights of holders of any other
class or classes of Notes of such series, as described in the related Prospectus
Supplement. Payments of interest on the Notes of such series will be made prior
to payments of principal thereon. Each class of Notes may have a different
Interest Rate, which may be a fixed, variable or adjustable Interest Rate or any
combination of the foregoing. The related Prospectus Supplement will specify the
Interest Rate for each class of Notes of a given series or the method for
determining such Interest Rate See also "Certain Information Regarding the
Securities--Fixed Rate Securities" and "--Floating Rate Securities". One or more
classes of the Notes of a series may be redeemable in whole or in part under the
circumstances specified in the related Prospectus Supplement, including as a
result of the exercise by the Seller, or such other party as may be named in the
related Prospectus Supplement, of its option to purchase the related Student
Loans.
Unless otherwise specified in the related Prospectus Supplement,
Noteholders of all classes within a series will have the same priority with
respect to payments of interest. Under certain circumstances, the amount
available for such payments could be less than the amount of interest payable on
the Notes on any of the dates specified for payments in the related Prospectus
Supplement (each, a "Distribution Date"), in which case each class of
Noteholders will receive its ratable share (based upon the aggregate amount of
interest due to such class of Noteholders) of the aggregate amount available to
be distributed in respect of interest on the Notes of such series. See
"Description of the Transfer and Servicing Agreements--Distributions" and
"--Credit and Cash Flow Enhancement."
In the case of a series of Notes which includes two or more classes of
Notes, the sequential order and priority of payment in respect of principal and
interest, and any schedule or formula or other provisions applicable to the
determination thereof, of each such class will be set forth in the related
Prospectus Supplement. Payments in respect of principal and interest of any
class of Notes will be made on a pro rata basis among all the Noteholders of
such class.
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In the case of a series of Notes relating to a Trust having a
Pre-Funding Account or Escrow Account, the Notes of such series will be redeemed
in part on the Distribution Date on or immediately following the last day of the
related Funding Period or Revolving Period, respectively, in the event that any
amount remains on deposit in the applicable account after giving effect to all
Additional Fundings on or prior to such date, in an aggregate principal amount
described in the related Prospectus Supplement.
See "Description of the Transfer and Servicing Agreements--Credit and
Cash Flow Enhancement--Reserve Account" for a description of the Reserve Account
and the distribution of amounts in excess of the Specified Reserve Account
Balance (as defined in the related Prospectus Supplement, the "Specified Reserve
Account Balance").
THE INDENTURE
Modification of Indenture. With respect to each Trust, with the consent
of the holders of a majority of the specified senior class(es) of outstanding
Notes of the related series, the Indenture Trustee and the Trust may execute a
supplemental indenture to add provisions to, or change in any manner or
eliminate any provisions of, the Indenture with respect to the Notes, or to
modify (except as provided below) in any manner the rights of the related
Noteholders.
Unless otherwise specified in the related Prospectus Supplement with
respect to a series of Notes, however, without the consent of the holder of each
such outstanding Note affected thereby, no supplemental indenture will:
(1) change the due date of any installment of principal of or
interest on any such 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 such Note or any
interest thereon is payable,
(2) impair the right to institute suit for the enforcement of
certain provisions of the related Indenture regarding payment,
(3) reduce the percentage of the aggregate amount of the
outstanding Notes of such series, the consent of the holders
of which is required for any such supplemental indenture or
the consent of the holders of which is required for any waiver
of compliance with certain provisions of the related Indenture
or of certain defaults thereunder and their consequences as
provided for in such Indenture,
(4) modify or alter the provisions of the related Indenture
regarding the voting of Notes held by the applicable Trust,
the Seller, an affiliate of either of them or any obligor on
such Notes,
(5) reduce the percentage of the aggregate outstanding amount of
such Notes, the consent of the holders of which is required to
direct the related Eligible Lender
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Trustee on behalf of the applicable Trust to sell or liquidate
the 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 of such series,
(6) decrease the percentage of the aggregate principal amount of
such Notes required to amend the sections of the related
Indenture which specify the applicable percentage of aggregate
principal amount of such Notes necessary to amend the related
Indenture or certain other related agreements, or
(7) permit the creation of any lien ranking prior to or on a
parity with the lien of the related Indenture with respect to
any of the collateral for the Notes of such series or, except
as otherwise permitted or contemplated in such Indenture,
terminate the lien of such Indenture on any such collateral or
deprive the holder of any Note of the security afforded by the
lien of such Indenture.
The applicable Trust and the related Indenture Trustee may also enter
into supplemental indentures without obtaining the consent of Noteholders of
such series, for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the related Indenture or of
modifying in any manner the rights of Noteholders of such series so long as such
action will not, in the opinion of counsel satisfactory to the applicable
Indenture Trustee, materially and adversely affect the interest of any
Noteholder of such series.
Events of Default; Rights upon Event of Default. With respect to the
Notes of a given series, an "Event of Default" under the related Indenture will
include the following:
(a) a default for five days or more in the payment of any interest
on any such Note after the same becomes due and payable;
(b) a default in the payment of the principal of or any
installment of the principal of any such Note when the same
becomes due and payable;
(c) a default in the observance or performance of any covenant or
agreement of the applicable Trust made in the related
Indenture and the continuation of any such default for a
period of 30 days after notice thereof is given to the
applicable Trust by the applicable Indenture Trustee or to the
applicable Trust and the applicable Indenture Trustee by the
holders of at least 25% in principal amount of such Notes then
outstanding;
(d) any representation or warranty made by the applicable Trust in
the related 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 is not
cured within 30 days after notice thereof is given to such
Trust by the applicable Indenture Trustee or to such Trust and
the applicable Indenture Trustee by the holders of at least
25% in principal amount of the Notes of such series then
outstanding; or
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(e) certain events of bankruptcy, insolvency, receivership or
liquidation of such Trust.
However, the amount of principal required to be distributed to
Noteholders of such series under the related Indenture on any Distribution Date
will generally be limited to amounts available after payment of all prior
obligations of such Trust. Therefore, the failure to pay principal on a class of
Notes generally will not result in the occurrence of an Event of Default until
the final scheduled Distribution Date for such class of Notes.
If, with respect to any series of Notes, interest is paid at a variable
rate based on an index, the related Prospectus Supplement may provide that, in
the event that, for any Distribution Date, the Interest Rate as calculated based
on the index is less than an alternate rate calculated for such Distribution
Date based on interest collections on the Student Loans (the amount of such
difference, the "Interest Index Carryover"), the Interest Rate for such
Distribution Date will be such alternate rate and the Interest Index Carryover
shall be payable as described in such Prospectus Supplement. Payment of the
Interest Index Carryover generally will be lower in priority than payment of
interest on the Notes at the Interest Rate (whether the Interest Rate is based
on the index or such alternate rate) and, accordingly, the nonpayment of the
Interest Index Carryover on any Distribution Date will not generally constitute
a default in the payment of interest on such Notes.
If an Event of Default should occur and be continuing with respect to
the Notes of any series, the related Indenture Trustee or holders of a majority
in principal amount of the specified senior class(es) of such Notes then
outstanding may declare the principal of such Notes to be immediately due and
payable. Unless otherwise specified in the related Prospectus Supplement, such
declaration may be rescinded by the holders of a majority in principal amount of
the specified senior class(es) of such Notes then outstanding if (x) the related
Trust has paid or deposited with the Indenture Trustee a sum equal to all
amounts then due with respect to the Notes (without giving effect to such
acceleration) and (y) all Events of Default, other than the nonpayment of the
principal of the Notes that has become due solely by such acceleration, have
been cured or, under the circumstances described below, waived.
If the Notes of any series have been declared to be due and payable
following an Event of Default with respect thereto, the related Indenture
Trustee may, in its discretion, exercise remedies as a secured party, require
the related Eligible Lender Trustee to sell the Student Loans or elect to have
the related Eligible Lender Trustee maintain possession of the Student Loans and
continue to apply collections with respect to such Student Loans as if there had
been no declaration of acceleration. Unless otherwise specified in the related
Prospectus Supplement, however, the related Indenture Trustee is prohibited from
directing the related Eligible Lender Trustee to sell the 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 with respect to any series, unless:
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(1) the holders of all such outstanding Notes consent to such
sale;
(2) the proceeds of such sale are sufficient to pay in full the
principal of and the accrued interest on such outstanding
Notes at the date of such sale; or
(3) the related Indenture Trustee determines that the collections
on the Student Loans would not be sufficient on an ongoing
basis to make all payments on such Notes as such payments
would have become due if such obligations had not been
declared due and payable, and the related Indenture Trustee
obtains the consent of the holders of 66 2/3% of the aggregate
principal amount of such Notes then outstanding;
provided, that the Indenture Trustee may not sell or otherwise liquidate the
Student Loans following an Event of Default, other than a default in the payment
of any principal on the final scheduled Distribution Date for a class of Notes
or a default of five days or more on the payment of any interest on any Note
when due, unless:
(a) the proceeds of the sale or liquidation of the Student Loans
distributable to the Certificateholders are sufficient to pay
to the Certificateholders the outstanding Certificate Balance
plus accrued and unpaid interest thereon; or
(b) after receipt of notice from the Eligible Lender Trustee that
the proceeds of such sale or liquidation distributable to the
Certificateholders would not be sufficient to pay to the
Certificateholders the outstanding Certificate Balance plus
accrued and unpaid interest thereon, the Certificateholders of
at least a majority of the outstanding Certificate Balance
consent thereto;
provided, further that the Indenture Trustee may not sell or otherwise liquidate
the Student Loans following an Event of Default, other than a default in the
payment of any principal on the final scheduled Distribution Date for a class of
Notes or a default of five days or more on the payment of any interest on any
Note when due unless:
(x) proceeds of the sale or liquidation of the Student Loans
distributable from such sale are sufficient (1) to pay to
Noteholders, the outstanding principal balance of the Notes
(other than the Noteholders' Interest Carryover Shortfall (as
defined in each Prospectus Supplement)) and (2) to pay to
Certificateholders, the outstanding Certificate Balance plus
accrued and unpaid interest thereon (other than the
Certificateholders' Interest Carryover Shortfall (as defined
in each Prospectus Supplement)); or
(y) after receipt of notice from the Eligible Lender Trustee that
the proceeds of such sale or liquidation would not be
sufficient (1) to pay to Noteholders, the outstanding
principal balance of the Notes (other than the Noteholders'
Interest Carryover Shortfall) and (2) to pay to
Certificateholders the outstanding
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Certificate Balance plus accrued and unpaid interest thereon
(other than the Certificateholders' Interest Carryover
Shortfall).
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 Notes on a pro rata basis, based on the amount
then owing on each class of Notes.
Subject to the provisions of the applicable Indenture relating to the
duties of the related Indenture Trustee, if an Event of Default should occur and
be continuing with respect to a series of Notes, the related Indenture Trustee
will be under no obligation to exercise any of the rights or powers under the
applicable Indenture at the request or direction of any of the holders of such
Notes, if such 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 related Indenture, the
holders of a majority in principal amount of the specified senior class(es) of
outstanding Notes of a given series will have the right to direct the time,
method and place of conducting any proceeding or any remedy available to such
Indenture Trustee and the holders of a majority in principal amount of the
specified senior class(es) of such 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
applicable Indenture that cannot be modified without the waiver or consent of
all the holders of such outstanding Notes or more junior class of Notes.
Unless otherwise specified in the related Prospectus Supplement, no
holder of Notes of any series will have the right to institute any proceeding
with respect to the related Indenture, unless:
(a) such holder previously has given to the applicable Indenture
Trustee written notice of a continuing Event of Default,
(b) the holders of not less than 25% in principal amount of such
outstanding Notes have requested in writing that such
Indenture Trustee institute such proceeding in its own name as
Indenture Trustee,
(c) such holder or holders have offered such Indenture Trustee
reasonable indemnity,
(d) such Indenture Trustee has for 60 days failed to institute
such proceeding, and
(e) no direction inconsistent with such written request has been
given to such Indenture Trustee during such 60-day period by
the holders of a majority of the specified senior class(es) of
outstanding Notes of such outstanding Notes.
In addition, each Indenture Trustee and the related Noteholders will
covenant that they will not at any time institute against the applicable Trust
any bankruptcy, reorganization or other proceeding under any federal or state
bankruptcy or similar law.
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With respect to any Trust, none of the related Indenture Trustee, the
Seller, the Administrator, the Master Servicer, the Sub-Servicers or the
Eligible Lender Trustee in its individual capacity, or any holder of a
Certificate representing an ownership interest in the applicable Trust, or 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. Each Indenture will provide that the related Trust
may not consolidate with or merge into any other entity, unless:
(a) the entity formed by or surviving such consolidation or merger
is organized under the laws of the United States of America,
any state thereof or the District of Columbia,
(b) such entity expressly assumes such Trust's obligation to make
due and punctual payments upon the Notes of the related series
and the performance or observance of every agreement and
covenant of such Trust under the related Indenture,
(c) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation,
(d) such Trust has been advised that the ratings of the Notes and
the Certificates of the related series would not be reduced or
withdrawn by the Rating Agencies (as such term is defined in
the related Prospectus Supplement, each a "Rating Agency" and
collectively, the "Rating Agencies") as a result of such
merger or consolidation, and
(e) such 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 such
Trust or to any Certificateholder or Noteholder of the related
series.
Each Trust will not, among other things:
- - except as expressly permitted by the applicable Indenture, the
applicable Transfer and Servicing Agreements or certain related
documents (collectively, the "Related Documents"), sell, transfer,
exchange or otherwise dispose of any of the assets of such Trust,
- - claim any credit on or make any deduction from the principal and
interest payable in respect of the Notes of the related series
(other than amounts withheld under the Code or applicable state
law) or assert any claim against any present or former holder of
such Notes because of the payment of taxes levied or assessed upon
such Trust,
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- - except as contemplated by the Related Documents, dissolve or
liquidate in whole or in part,
- - permit the validity or effectiveness of the applicable Indenture
to be impaired or permit any person to be released from any
covenants or obligations with respect to such Notes under the
applicable Indenture except as may be expressly permitted thereby,
or
- - 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.
No Trust may engage in any activity other than financing, purchasing,
owning, selling and managing 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. No Trust will incur, assume
or guarantee any indebtedness other than indebtedness incurred pursuant to the
Notes of the related series and the applicable Indenture or otherwise in
accordance with the Related Documents.
Annual Compliance Statement. Each Trust will be required to file
annually with the applicable Indenture Trustee a written statement as to the
fulfillment of its obligations under the related Indenture.
Indenture Trustee's Annual Report. Each Indenture Trustee will be
required to mail each year to all related Noteholders a brief report relating
to, among other things, its eligibility and qualification to continue as such
Indenture Trustee under the applicable Indenture, any amounts advanced by it
under the Indenture, the amount, interest rate and maturity date of certain
indebtedness owing by such Trust to the applicable Indenture Trustee in its
individual capacity, the property and funds physically held by the applicable
Indenture Trustee as such and any action taken by it that materially affects the
related Notes and that has not been previously reported.
Satisfaction and Discharge of Indenture. An Indenture will be
discharged with respect to the collateral securing the related Notes upon the
delivery to the related Indenture Trustee for cancellation of all such Notes or,
with certain limitations, upon deposit with such Indenture Trustee of funds
sufficient for the payment in full of all such Notes.
The Indenture Trustee. The Indenture Trustee for a series of Notes will
be specified in the related Prospectus Supplement. The Indenture Trustee for any
series may resign at any time, in which event the Trust will be obligated to
appoint a successor trustee for such series. The Trust may also remove any such
Indenture Trustee if such Indenture Trustee ceases to be eligible to continue as
such under the related Indenture or if such Indenture Trustee becomes insolvent.
In such circumstances, the Trust will be obligated to appoint a successor
trustee for the applicable series of Notes. Any resignation or removal of the
Indenture Trustee and appointment of a
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successor trustee for any series of Notes does not become effective until
acceptance of the appointment by the successor trustee for such series.
DESCRIPTION OF THE CERTIFICATES
GENERAL
With respect to each Trust, one or more classes of certificates
("Certificates" and together with the Notes, the "Securities") of a given series
will, unless otherwise specified in the related Prospectus Supplement, be issued
pursuant to the terms of a Trust Agreement, a form of which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
following summary describes the material terms of the Certificates and the Trust
Agreement. The summary does not purport to be complete and is qualified in its
entirety by reference to all the provisions of the Certificates and the Trust
Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
class of Certificates will initially be represented by a single Certificate
registered in the name of the Depository, except as set forth below. Unless
otherwise specified in the related Prospectus Supplement and except for the
Certificates of a given series purchased by the Seller or an affiliate of the
Seller specified in the related Prospectus Supplement, the Certificates will be
available for purchase in minimum denominations of $1,000 and integral multiples
of $1,000 in excess thereof in book-entry form only. The Seller has been
informed by DTC that DTC's nominee will be Cede, unless another nominee is
specified in the related Prospectus Supplement. Accordingly, such nominee is
expected to be the holder of record of the Certificates of any series that are
not purchased by the Seller or an affiliate of the Seller. Unless and until
Definitive Certificates are issued under the limited circumstances described
herein or in the related Prospectus Supplement, no Certificateholder (other than
the Seller or an affiliate of the Seller) will be entitled to receive a physical
certificate representing a Certificate. All references herein and in the related
Prospectus Supplement to actions by Certificateholders (other than the Seller or
an affiliate of the Seller) refer to actions taken by DTC upon instructions from
the Participants and all references herein and in the related Prospectus
Supplement to distributions, notices, reports and statements to
Certificateholders (other than the Seller or an affiliate of the Seller) refer
to distributions, notices, reports and statements to DTC or its nominee, as the
case may be, as the registered holder of the Certificates, for distribution to
Certificateholders in accordance with DTC's procedures with respect thereto. See
"Certain Information Regarding the Securities--Book-Entry Registration" and
"--Definitive Securities." Unless otherwise specified in the related Prospectus
Supplement, Certificates of a given series owned by the Seller or its affiliates
will be entitled to equal and proportionate benefits under the applicable Trust
Agreement, except that, assuming that all Certificates of a given series are not
all owned by the Seller and its affiliates, the Certificates owned by the Seller
and its affiliates will be deemed not to be outstanding for the purpose of
determining whether the requisite percentage of Certificateholders has given any
request, demand, authorization, direction, notice, consent or other action under
the Related Documents (other than the commencement by the related Trust of a
voluntary proceeding in bankruptcy as described under "Description of the
Transfer and Servicing Agreements--Insolvency Event").
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PRINCIPAL AND INTEREST IN RESPECT OF THE CERTIFICATES
The timing and priority of distributions, seniority, allocations of
losses, interest at a per annum interest rate (the "Pass-Through Rate") and
amount of or method of determining distributions with respect to principal and
interest of each class of Certificates of a given series will be described in
the related Prospectus Supplement. Distributions of interest on such
Certificates will be made on each Distribution Date and will be made prior to
distributions with respect to principal of such Certificates. Each class of
Certificates may have a different Pass-Through Rate, which may be a fixed,
variable or adjustable Pass-Through Rate or any combination of the foregoing.
The related Prospectus Supplement will specify the Pass-Through Rate for each
class of Certificates of a given series or the method for determining such
Pass-Through Rate. See also "Certain Information Regarding the Securities--Fixed
Rate Securities" and "--Floating Rate Securities." Distributions in respect of
the Certificates of a given series may be subordinate to payments in respect of
the Notes of such series as more fully described in the related Prospectus
Supplement. Distributions in respect of interest on and principal of any class
of Certificates will be made on a pro rata basis among all the
Certificateholders of such class.
In the case of a series of Certificates which includes two or more
classes of Certificates, the timing, sequential order, priority of payment or
amount of distributions in respect of interest and principal, and any schedule
or formula or other provisions applicable to the determination thereof, of each
such class shall be as set forth in the related Prospectus Supplement.
See "Description of the Transfer and Servicing Agreements--Credit and
Cash Flow Enhancement--Reserve Account" for a description of the Reserve Account
and the distribution of amounts in excess of the Specified Reserve Account
Balance.
CERTAIN INFORMATION REGARDING THE SECURITIES
FIXED RATE SECURITIES
Each class of Securities may bear interest at a fixed rate per annum
("Fixed Rate Securities") or at a variable or adjustable rate per annum
("Floating Rate Securities"), as more fully described below and in the
applicable Prospectus Supplement. Each class of Fixed Rate Securities will bear
interest at the applicable per annum Interest Rate or Pass-Through Rate, as the
case may be, specified in the applicable Prospectus Supplement. Interest on each
class of Fixed Rate Securities will be computed on the basis of a 360-day year
of twelve 30-day months. See "Description of the Notes--Principal of and
Interest on the Notes" and "Description of the Certificates--Principal and
Interest in Respect of the Certificates."
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FLOATING RATE SECURITIES
Each class of Floating Rate Securities will bear interest for each
applicable Interest Reset Period (as such term is defined in the related
Prospectus Supplement with respect to a class of Floating Rate Securities,
"Interest Reset Period") at a rate per annum determined by reference to an
interest rate basis (the "Base Rate"), plus or minus the Spread, if any, or
multiplied by the Spread Multiplier, if any, in each case as specified in the
related Prospectus Supplement. The "Spread" is the number of basis points (one
basis point equals one one-hundredth of a percentage point) that may be
specified in the applicable Prospectus Supplement as being applicable to such
class, and the "Spread Multiplier" is the percentage that may be specified in
the applicable Prospectus Supplement as being applicable to such class.
The applicable Prospectus Supplement will designate a Base Rate for a
given Floating Rate Security based on the London interbank offered rate
("LIBOR"), commercial paper rates, Federal funds rates, U.S. Government treasury
securities rates, negotiable certificates of deposit rates or another rate or
rates as set forth in such Prospectus Supplement.
As specified in the applicable Prospectus Supplement, Floating Rate
Securities of a given class may also have either or both of the following (in
each case expressed as a rate per annum): (a) a maximum limitation, or ceiling,
on the rate at which interest may accrue during any interest period and (b) a
minimum limitation, or floor, on the rate at which interest may accrue during
any interest period. In addition to any maximum interest rate that may be
applicable to any class of Floating Rate Securities, the interest rate
applicable to any class of Floating Rate Securities will in no event be higher
than the maximum rate permitted by applicable law, as the same may be modified
by United States law of general application.
Each Trust with respect to which a class of Floating Rate Securities
will be issued will appoint, and enter into agreements with, a calculation agent
(each, a "Calculation Agent") to calculate interest rates on each such class of
Floating Rate Securities issued with respect thereto. The applicable Prospectus
Supplement will set forth the identity of the Calculation Agent for each such
class of Floating Rate Securities of a given series, which may be the
Administrator, the Eligible Lender Trustee or the Indenture Trustee with respect
to such series. All determinations of interest by the Calculation Agent shall,
in the absence of manifest error, be conclusive for all purposes and binding on
the holders of Floating Rate Securities of a given class. Unless otherwise
specified in the applicable Prospectus Supplement, all percentages resulting
from any calculation of the rate of interest on a Floating Rate Security will be
rounded, if necessary, to the nearest 1/100,000 of 1% (.0000001), with five
one-millionths of a percentage point rounded upward.
BOOK-ENTRY REGISTRATION
Persons acquiring beneficial ownership interests in the Notes may hold
their interests through DTC in the United States or Cedelbank ("Cedel") or The
Euroclear System ("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.
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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 "Depositories") which
in turn will hold such positions in customers' securities accounts in the
Depositories' names on the books of DTC.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the UCC and a "clearing agency" registered
pursuant to Section 17A of the Exchange Act. DTC was created to hold securities
for its 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").
Noteholders and Certificateholders (collectively, "Securityholders")
that are not Participants or Indirect Participants but desire to purchase, sell
or otherwise transfer ownership of, or other interests in, Securities held
through DTC may do so only through Participants and Indirect Participants. In
addition, Securityholders will receive all distributions of principal and
interest from the related Indenture Trustee or the related 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 DTC's nominee. DTC will forward such payments to
its Participants, which thereafter will forward them to Indirect Participants or
Securityholders. Except for the Seller or an affiliate of the Seller with
respect to any series of Securities, it is anticipated that the only
"Securityholder," "Certificateholder" and "Noteholder" will be DTC's nominee.
Securityholders will not be recognized by the Applicable Trustee as Noteholders
or Certificateholders, as such terms are used in each Indenture and each 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 Participants 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 Participant will be received with
value on the DTC settlement date but
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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 Depository; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
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, which 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.
Management of DTC is aware that some computer applications, systems and
the like for processing data ("Systems") that are dependent upon calendar dates,
including dates before, on, and after January 1, 2000, may encounter "Year 2000
problems" DTC has informed Participants and Indirect Participants and other
members of the financial community (the "Industry") that it has developed and is
implementing a program so that its Systems, as the same relate to the timely
payment of distributions (including principal and interest payments) to
securityholders, book-entry deliveries, and settlement of trades within DTC
("Depository Services"), continue to function appropriately. This program
includes a technical assessment and a remediation plan, each of which is
complete. Additionally, DTC's plan includes a testing phase, which is expected
to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including, but not limited to, issuers and their
agents, as well as DTC's Participants and Indirect Participants, third party
vendors from whom DTC licenses software and hardware, and
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third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to: (i)
impress upon them the importance of such services being Year 2000 compliant; and
(ii) determine the extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services. In addition, DTC is in the process of
developing such contingency plans as it deems appropriate.
Appropriate to DTC, the information in the preceding two paragraphs
with respect to DTC has been provided to the Industry for informational purposes
only and is not intended to serve as a representation, warranty, or contract
modification of any kind.
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 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"), 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
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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 Depository. 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 Depository'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 related Indenture or the
related 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, ANY SUB-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
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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 OF 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
Except with respect to the Certificates of a given series that may be
purchased by the Seller or an affiliate of the Seller, the Notes and the
Certificates of a given series 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:
(a) the related 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,
(b) the Administrator, at its option, elects to terminate the
book-entry system through DTC, or
(c) after the occurrence of an Event of Default or a Master
Servicer Default, Securityholders representing at least a
majority of the outstanding principal amount of the applicable
class of Notes or the Certificates, as the case may be, of
such series 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 the Notes of such
class or Certificates of such series 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 of a given series through Participants of the availability of
Definitive Securities. Upon surrender by DTC of the Definitive Securities
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 related Indenture or the related 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
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applicable Record Date which will be the business day preceding each
Distribution Date, unless otherwise specified in the related Prospectus
Supplement (the "Record Date") specified for such Securities in the related
Prospectus Supplement. 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 applicable
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 Notes or one or more holders of Notes
evidencing not less than 25% of the aggregate outstanding principal balance of
such Notes may, by written request to the related Indenture Trustee, obtain
access to the list of all Noteholders maintained by such Indenture Trustee for
the purpose of communicating with other Noteholders with respect to their rights
under the related Indenture or such Notes. Such 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 of such series.
Three or more Certificateholders of such series or one or more holders
of such Certificates evidencing not less than 25% of the Certificate Balance of
such Certificates may, by written request to the related 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 related Trust Agreement or under such Certificates.
REPORTS TO SECURITYHOLDERS
With respect to each series of Securities, 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 periodic report provided to the related
Indenture Trustee and the related Trust described under "Description of the
Transfer and Servicing Agreements--Statements to Indenture Trustee and Trust".
Such statements will be filed with the Commission during the period required by
Rule 15d-1 under the Exchange Act and will not be filed with the Commission
thereafter. The statements provided to Securityholders will not constitute
financial statements prepared in accordance with generally accepted accounting
principles.
Unless and until Definitive Notes or Definitive Certificates are
issued, quarterly and annual unaudited reports containing information concerning
the Student Loans will be prepared by Key
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Bank USA, National Association and sent on behalf of the related Trust only to
Cede, as nominee of DTC and registered holder of the Notes and the Certificates,
but will not be sent to any beneficial holder of the Securities.
Within the prescribed period of time for tax reporting purposes after
the end of each calendar year during the term of each Trust, the Applicable
Trustee will mail to each person who at any time during such calendar year was a
Securityholder with respect to such Trust and received any payment thereon, a
statement containing certain information for the purposes of such
Securityholder's preparation of federal income tax returns. See "Income Tax
Consequences."
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
GENERAL
The following is a summary of the material terms of each Sale and
Servicing Agreement (each a "Sale and Servicing Agreement"), pursuant to which
the related Eligible Lender Trustee on behalf of a Trust will purchase Student
Loans from the Seller and the Master Servicer will (or will cause the related
Sub-Servicers to) service the same; each Administration Agreement, pursuant to
which the Administrator will undertake certain administrative duties with
respect to a Trust and the Student Loans; and each Trust Agreement, pursuant to
which a Trust will be created and the related Certificates will be issued
(collectively, the "Transfer and Servicing Agreements"). Forms of each of the
Transfer and Servicing Agreements have been filed as exhibits to the
Registration Statement of which this Prospectus is a part. However, this summary
does not purport to be complete and is qualified in its entirety by reference to
all of the provisions of the Transfer and Servicing Agreements.
In addition, and if so provided in the related Prospectus Supplement,
the Master Servicer may directly assume servicing responsibilities for some or
all of a pool of Financed Student Loans without a sub-servicer, or the related
Trust may contract directly with one or more Sub-Servicers, pursuant to the
related Sale and Servicing Agreement, to perform all of the requisite servicing
responsibilities with respect to the related pool of Financed Student Loans
without the appointment of a master servicer, on the terms and conditions set
forth herein and therein.
Notwithstanding the foregoing, and if so provided in the related
Prospectus Supplement, KBUSA may also choose not to act as Master Servicer with
respect to a Trust. In such instance, the related Sub-Servicer (or
Sub-Servicers) will enter into the Sale and Servicing Agreement, as servicer (or
servicers), with the related Trust directly and will undertake to perform all of
the obligations and responsibilities of the Master Servicer set forth herein and
in the related Prospectus Supplement with respect to the Student Loans it is
responsible for servicing on the terms and conditions set forth in the related
Prospectus Supplement and such Sale and Servicing Agreement.
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SALE OF STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
On or prior to the Closing Date specified with respect to any given
Trust in the related Prospectus Supplement (the "Closing Date"), the Seller will
sell and assign to the related Eligible Lender Trustee on behalf of such Trust,
without recourse, except as provided in the Sale and Servicing Agreement, its
entire interest in the Student Loans, all collections received and to be
received with respect thereto for the period on and after the Cutoff Date and
all the Assigned Rights pursuant to the Sale and Servicing Agreement. Each
Student Loan will be identified in a schedule appearing as an exhibit to such
Sale and Servicing Agreement. Each Eligible Lender Trustee will, concurrently
with such sale and assignment, execute, authenticate and deliver the related
Certificates and Notes. The net proceeds received from the sale of the related
Notes and Certificates will be applied to the purchase of the Student Loans.
In each Sale and Servicing Agreement, the Seller will make certain
representations and warranties with respect to the Student Loans to a Trust for
the benefit of the Certificateholders and the Noteholders of a given series,
including, among other things, that:
- each Student Loan, on the date on which it is transferred to
such Trust, is free and clear of all security interests,
liens, charges and encumbrances and no offsets, defenses or
counterclaims with respect thereto have been asserted or
threatened;
- the information provided with respect to the Student Loans is
true and correct as of the Cutoff Date; and
- each Student Loan, at the time it was originated, complied
and, at the Closing Date, complies in all material respects
with applicable federal and state laws (including, without
limitation, the Higher Education Act) and applicable
restrictions imposed by the Programs or any Guarantee
Agreement.
Following the discovery by or notice to the Seller of a breach of any
representation or warranty with respect to any Student Loan that materially and
adversely affects the interests of the related Certificateholders or the
Noteholders in such Student Loan (it being understood that any such breach that
does not affect any Guarantor's obligation to guarantee payment of such 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 Student Loan
from the related 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 (as such term
is defined in the related Prospectus Supplement, the "Collection Period") at a
price equal to the unpaid principal balance owed by the applicable borrower plus
accrued interest thereon to the day of repurchase (the "Purchase Amount"). In
addition, the Seller will reimburse the related Trust with respect to a 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 related Trust, the
Certificateholders or the Noteholders for any
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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 Master Servicer will appoint each Sub-Servicer the custodian of the
promissory notes representing the Student Loans which such Sub-Servicer is
servicing and any other related documents on behalf of the Master Servicer with
respect to each Trust. The Seller's, the Master Servicer's and the
Sub-Servicers' records and computer systems will reflect the sale and assignment
by the Seller of the Student Loans to the related Eligible Lender Trustee on
behalf of the related Trust, and UCC financing statements reflecting such sale
and assignment will be filed.
ADDITIONAL FUNDINGS
In the case of a Trust having a Pre-Funding Account or an Escrow
Account, such Trust will use funds on deposit in such account from time to time
during the related Funding Period or Revolving Period, respectively, (x) to make
interest payments to Noteholders and Certificateholders in lieu of collections
of interest on certain of the Student Loans to the extent such interest is not
paid currently but is capitalized and added to the principal balance of such
Student Loans and (y) to fund the addition of Student Loans to the Trust under
the circumstances and having the characteristics described in the related
Prospectus Supplement ("Additional Fundings"). Such additional Student Loans may
be purchased by the Trust from the Seller or may be originated by the Trust, if
and to the extent specified in the related Prospectus Supplement.
There can be no assurance that substantially all of the amounts on
deposit in any Pre-Funding Account or Escrow Account will be expended during the
related Funding Period or Revolving Period, respectively. If the amount
initially deposited into a Pre-Funding Account or an Escrow Account for a series
has not been reduced to zero by the end of the related Funding Period or
Revolving Period, respectively, the amounts remaining on deposit therein will be
distributed to the related Securityholders in the amounts described in the
related Prospectus Supplement.
If and to the extent specified in the related Prospectus Supplement,
the related Trust may use distributions on the Student Loans, or may exchange
Student Loans with the Seller, in order to pay for Additional Fundings after any
Funding Period or Revolving Period.
ACCOUNTS
With respect to each Trust, and to the extent provided in the related
Prospectus Supplement, the Administrator will establish and maintain one or more
accounts entitled the "Collection Account", the "Pre-Funding Account", the
"Escrow Account", the "Negative Carry Account" and the "Reserve Account"
(collectively, the "Trust Accounts"), in the name of the Indenture Trustee on
behalf of the Noteholders and the Certificateholders.
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For any series of Securities funds in the Trust Accounts will be
invested as provided in the related Sale and Servicing Agreement in Eligible
Investments. "Eligible Investments" are generally limited to short-term U.S.
government backed securities, certain highly rated commercial paper and money
market funds and other investments acceptable to the Rating Agencies as being
consistent with the rating of the Securities. 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 related 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,
without limitation, the Seller 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), which has a long-term unsecured debt rating
acceptable and/or a short-term unsecured debt rating or certificate of deposit
rating acceptable to the Rating Agencies, and the deposits of which are insured
by the Federal Deposit Insurance Corporation (the "FDIC").
SERVICING PROCEDURES
Pursuant to each Sale and Servicing Agreement, the Master Servicer will
agree to service, and perform all other related tasks with respect to, all the
Student Loans acquired from time to time on behalf of each Trust. So long as no
claim is being made against a Guarantor for any Student Loan, the Master
Servicer will designate the related Sub-Servicer to hold as custodian on its
behalf and on behalf of the Trust, the notes evidencing, and other documents
relating to, that Student Loan. Pursuant to the related Sale and Servicing
Agreement, the Master Servicer is responsible for performing all services and
duties customary to the servicing of Student Loans (including all collection
practices), and to do so (or to cause the Sub-Servicers to do so) with
reasonable care and in compliance with, and to otherwise comply with, all
standards and procedures provided for in the Higher Education Act, the Guarantee
Agreements and all other applicable federal and state laws. Notwithstanding the
foregoing, the Master Servicer may designate one or more Sub-Servicers to
perform some or all of the requisite duties listed above; provided, however,
that irrespective of the performance or non-performance by a Sub-Servicer,
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the Master Servicer shall not be relieved of its responsibilities and
obligations under the Sale and Servicing Agreement.
Without limiting the foregoing, the duties of the Master Servicer (any
or all of which may be delegated by the Master Servicer to a Sub-Servicer) with
respect to each Trust under the related Sale and Servicing Agreement will
include, but not be limited to, the following: collecting and depositing into
the Collection Account (or in the event that daily deposits are not required,
paying to the Administrator) all payments, including claiming and obtaining any
Guarantee Payments, but excluding such tasks with respect to any Interest
Subsidy Payments and Special Allowance Payments with respect to the Student
Loans (as to which the Administrator and the Eligible Lender Trustee will
perform, see "--Administrator" below, responding to inquiries from borrowers
under the Student Loans, investigating delinquencies and sending out statements,
payment coupons and tax reporting information to borrowers. Notwithstanding the
foregoing, if any of the foregoing activities requires any consents, approvals
or licenses under the Higher Education Act or otherwise, the Master Servicer
shall designate one or more Sub-Servicers that possess such required consents,
approvals and licenses to perform some or all of the requisite duties listed
above; provided, however, that irrespective of the performance or
non-performance by such Sub-Servicer, the Master Servicer shall be responsible
for any failure of a Sub-Servicer to perform such activities. In addition, the
Master Servicer will (or will cause each Sub-Servicer to) keep ongoing records
with respect to such Student Loans and collections thereon and will furnish
quarterly and annual statements with respect to such information to the
Administrator, in accordance with the Master Servicer's or such Sub-Servicer's
customary servicing practices, as applicable, with respect to Student Loans and
as otherwise required in the related Sale and Servicing Agreement.
PAYMENTS ON STUDENT LOANS
With respect to each Trust, except as provided below, the Master
Servicer will (or will cause each Sub-Servicer to) deposit all payments on
Student Loans (from whatever source), and all proceeds of 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 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 KBUSA satisfies certain requirements for
quarterly remittances and the Rating Agencies affirm their ratings of the Notes
and the Certificates of each series at the initial level, then so long as KBUSA
is the Administrator and provided that (x) there exists no Administrator Default
and (y) each other condition to making quarterly deposits as may be specified by
the Rating Agencies is satisfied, the Eligible Lender Trustee and the Master
Servicer will (and the Master Servicer will cause each Sub-Servicer to) 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 (as such term is defined in the related Prospectus
Supplement, the
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"Monthly Servicing Payment Date") (to the extent of the Master 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 each
Student Loans repurchased by the Seller and purchased by the Master Servicer (or
a Sub-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
With respect to each Trust, the Master Servicer will covenant in the
related Sale and Servicing Agreement that:
(a) it will (or will cause each Sub-Servicer to) duly satisfy all
obligations on its part to be fulfilled under or in connection
with the Student Loans, maintain in effect all qualifications
required in order to service the Student Loans and comply in
all material respects with all requirements of law in
connection with servicing the Student Loans, the failure to
comply with which would have a materially adverse effect on
the related Certificateholders or Noteholders;
(b) it will not permit (nor will it allow any Sub-Servicer to
permit) any rescission or cancellation of a Student Loan
except as ordered by a court of competent jurisdiction or
other government authority or as otherwise consented to by the
related Eligible Lender Trustee and the related Indenture
Trustee;
(c) it will do nothing to (nor will it permit any Sub-Servicer to)
impair the rights of the related Certificateholders and the
related Noteholders in the Student Loans; and
(d) it will not (nor will it permit any Sub-Servicer to)
reschedule, revise, defer or otherwise compromise with respect
to payments due on any Student Loan except pursuant to any
applicable deferral or forbearance periods or otherwise in
accordance with its guidelines for servicing student loans in
general and those of the Seller in particular and any
applicable Program requirements.
If specified in the related Prospectus Supplement, certain incentive
programs currently or hereafter made available by the Seller to borrowers may
also be made available by the Master Servicer (or a Sub-Servicer) to borrowers
with Financed Student Loans and if an incentive program is not in existence as
of the date of the related Prospectus Supplement or not described in such
Prospectus Supplement, then any such incentive program that effectively reduces
borrower payments on Financed Student Loans and, with respect to Financed
Federal Loans, 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
(or a Sub-Servicer) receives payment on behalf of the Trust from the Seller in
an amount sufficient to offset such effective yield reductions. See "The Student
Loan Financing Business--Incentive Programs" herein.
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Under the terms of the related Sale and Servicing Agreement, unless
otherwise specified in the related Prospectus Supplement, if the Seller or the
Master Servicer discovers, or receives written notice, that any covenant of
Master Servicer set forth above has not been complied with by the Master
Servicer 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 related Certificateholders or Noteholders in any Student Loan (it being
understood that any such breach that does not affect any Guarantor's obligation
to guarantee payment of such Student Loan will not be considered to have such a
material adverse effect), unless such breach is cured, the Master Servicer will
purchase such 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 Student Loan and the related Trust's
interest in any such purchased Student Loan will be automatically assigned to
the Master Servicer. In addition, the Master Servicer will reimburse the related
Trust with respect to any 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.
MASTER SERVICING COMPENSATION
With respect to any Trust, the Master Servicer will be entitled to
receive a servicing fee monthly in an amount in the aggregate equal to a
specified amount per annum of the Pool Balance as of the last day of the
preceding calendar month as set forth in the related Prospectus Supplement and,
if applicable, certain one-time fixed fees for each Student Loan, together with
other administrative fees, late fees and similar charges specified in the
related Prospectus Supplement as compensation for performing the functions as
servicers for the related Trust described above (the "Master Servicing Fee").
The Master Servicing Fee (together with any portion of the Master Servicing Fee
that remains unpaid from prior Distribution Dates) will be paid as specified in
the applicable Prospectus Supplement.
The Master Servicing Fee will compensate the Master Servicer for
performing (or causing the Sub-Servicers to perform) the functions of third
party servicers of student loans as agents for their beneficial owner, including
collecting and posting all payments, responding to inquiries of borrowers on the
Student Loans, investigating delinquencies, pursuing, filing and collecting any
Guarantee Payments, accounting for collections and furnishing monthly and annual
statements to the Administrator. The Master Servicing Fee also will reimburse
the Master Servicer for certain taxes, accounting fees, outside auditor fees,
data processing costs and other costs incurred by the Master Servicer or the
Sub-Servicers in connection with administering the Student Loans. The monthly
fees of the Sub-Servicers will be paid solely by the Master Servicer pursuant to
the terms of the applicable Sub-Servicing Agreement.
If provided in the related Prospects Supplement, in the event of (x)
any sale of the Student Loans on behalf of the Trust to any person (other than
the Seller, the Master Servicer, the Administrator, or the Sub-Servicers) in
which the purchaser elects to deconvert the Student Loans
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and not retain the applicable Sub-Servicer as the servicer of such Student
Loans, or (y) any termination of the applicable Sub-Servicer of the Student
Loans, except for any termination for cause or as a result of any unremedied
defaults by the applicable Sub-Servicer, the Trust shall pay to the Master
Servicer, as a part of the Master Servicing Fee, a deconversion fee per loan
based on the status of the loan at the time of deconversion, in the amount set
forth in the related Prospectus Supplement, but only to the extent that the
Master Servicer is so obligated to the applicable Sub-Servicer.
DISTRIBUTIONS
With respect to each series of Securities, beginning on the
Distribution Date specified in the related Prospectus Supplement, distributions
of principal and interest on each class of such Securities entitled thereto will
be made by the applicable Trustee to the Noteholders and the Certificateholders
of such series. The timing, calculation, allocation, order, source, priorities
of and requirements for all payments to each class of Noteholders and all
distributions to each class of Certificateholders of such series will be set
forth in the related Prospectus Supplement.
With respect to each Trust, collections on the related Student Loans
will be distributed from the Collection Account on each Distribution Date to
Noteholders and Certificateholders to the extent provided in the related
Prospectus Supplement. Credit and cash flow enhancement, such as a Reserve
Account, will be available to cover any shortfalls in the amount available for
distribution on such date to the extent specified in the related Prospectus
Supplement. As more fully described in the related Prospectus Supplement, and
unless otherwise specified therein, distributions in respect of principal and/or
interest of a class of Securities of a given series will be subordinate to
distributions in respect of interest on one or more other classes of such
series, and distributions in respect of the Certificates of such series may be
subordinate to payments in respect of the Notes of such series.
CREDIT AND CASH FLOW ENHANCEMENT
General. The amounts and types of credit enhancement arrangements and
the provider thereof, if applicable, with respect to each class of Securities of
a given series, if any, will be set forth in the related Prospectus Supplement.
If and to the extent provided in the related Prospectus Supplement, credit
enhancement may be in the form of subordination of one or more classes of
Securities, Reserve Accounts, over-collateralization, letters of credit, credit
or liquidity facilities, surety bonds, guaranteed investment contracts,
repurchase obligations, interest rate swaps, interest rate caps, interest rate
floors, currency swaps, other agreements with respect to third party payments or
other support, cash deposits or such other arrangements as may be described in
the related Prospectus Supplement or any combination of two or more of the
foregoing. If specified in the applicable Prospectus Supplement, credit
enhancement for a class of Securities may cover one or more other classes of
Securities of the same series, and credit enhancement for a series of Securities
may cover one or more other series of Securities.
The presence of a Reserve Account and other forms of credit enhancement
for the benefit of any class or series of Securities is intended to enhance the
likelihood of receipt by the
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Securityholders of such class or series of the full amount of principal and
interest due thereon and to decrease the likelihood that such Securityholders
will experience losses. The credit enhancement for a class or series of
Securities generally will not provide protection against all risks of loss and
will not guarantee repayment of the entire principal balance and interest
thereon. If losses occur which exceed the amount covered by any credit
enhancement or which are not covered by any credit enhancement, Securityholders
of any class or series will bear their allocable share of deficiencies, as
described in the related Prospectus Supplement. In addition, if a form of credit
enhancement covers more than one series of Securities, Securityholders of any
such series will be subject to the risk that such credit enhancement will be
exhausted by the claims of Securityholders of other series.
Reserve Account. If so provided in the related Prospectus Supplement,
pursuant to the related Sale and Servicing Agreement, the Seller will establish
for a series or class of Securities a Reserve Account, as specified in the
related Prospectus Supplement, which will be maintained in the name of the
applicable Indenture Trustee. Unless otherwise provided in the related
Prospectus Supplement, the Reserve Account will be funded by an initial deposit
by the Seller on the Closing Date in the amount set forth in the related
Prospectus Supplement. As further described in the related Prospectus
Supplement, the amount on deposit in the Reserve Account will be increased on
each Distribution Date thereafter up to the Specified Reserve Account Balance by
the deposit therein of the amount of collections on the related Student Loans
remaining on each such Distribution Date after the payment of all other required
payments and distributions on such date. Amounts in the Reserve Account will be
available to cover shortfalls in amounts due to the holders of those classes of
Securities specified in the related Prospectus Supplement in the manner and
under the circumstances specified therein. The related Prospectus Supplement
will also specify to whom and the manner and circumstances under which amounts
on deposit in the Reserve Account (after giving effect to all other required
distributions to be made by the applicable Trust) in excess of the Specified
Reserve Account Balance will be distributed.
The Reserve Account is intended to enhance the likelihood of timely
receipt by the holders of Notes and the holders of Certificates of the full
amount of interest due them and to decrease the likelihood that such holders
will experience losses. In certain circumstances, however, the Reserve Account
could be depleted.
STATEMENTS TO INDENTURE TRUSTEE AND TRUST
Prior to each Distribution Date with respect to each series of
Securities, the Administrator (based on the periodic statements and other
information provided to it by the Master Servicer or the Sub-Servicers) 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 (and any other information so specified in the related
Prospectus Supplement) with respect to such Distribution Date or the preceding
Collection Period as to the Notes and the Certificates of such series, to the
extent applicable:
1. the amount of the distribution allocable to principal of
each class of Securities;
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2. the amount of the distribution allocable to interest on
each class of Securities;
3. the amount of the distribution, if any, allocable to any
Interest Index Carryover together with the outstanding amount, if any,
thereof after giving effect to any such distribution;
4. 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 (1.) above;
5. the aggregate outstanding principal balance of each class
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 (1.) above;
6. the amount of the Master Servicing Fee and any Excess
Master Servicing Fee paid to the Master Servicer and the amount of the
Administration Fee paid to the Administrator with respect to such
Collection Period;
7. the Interest Rate or Pass-Through Rate applicable for any
class of Notes or Certificates of such series with variable or
adjustable rates;
8. the amount of the aggregate realized losses, if any, for
such Collection Period and the balance of Student Loans that are
delinquent in each delinquency period as of the end of such Collection
Period;
9. the Certificateholders' Index Carryover Shortfall, the
Noteholders' Index Carryover Shortfall, the Noteholders' Interest
Carryover Shortfall, the Noteholders' Principal Carryover Shortfall,
the Certificateholders' Interest Carryover Shortfall and the
Certificateholders' Principal Carryover Shortfall (each as defined in
the related Prospectus Supplement), if any, in each case as applicable
to each class of Securities, and the change in such amounts from the
preceding statement;
10. the aggregate Purchase Amounts for Student Loans, if any,
that were purchased in such Collection Period;
11. the balance of the Reserve Account (if any) on such
Distribution Date, after giving effect to changes therein on such
Distribution Date;
12. for Distribution Dates during the Funding Period (if any),
the remaining Pre-Funded Amount (as such term is defined in the related
Prospectus Supplement, the "Pre-Funded Amount") on such Distribution
Date, after giving effect to changes therein during the related
Collection Period or for each Distribution date during the Revolving
Period (if any), the amount on deposit in the Escrow Account; and
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13. the aggregate amount of TERI Guarantee Payments deposited
into the Collection Account (net of certain specified amounts)
expressed as a percentage of the Initial Pool Balance.
Each amount set forth pursuant to subclauses (1), (2) (5) and (6) with respect
to the Notes or the Certificates of any series will be expressed as a dollar
amount per $1,000 of the initial principal amount of such Notes or the initial
Certificate Balance of such Certificates, as applicable.
EVIDENCE AS TO COMPLIANCE
Each 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 and
the Sub-Servicers during the preceding calendar year (or, in the case of the
first such certificate, the period from the applicable Closing Date) with
certain standards under the related Sale and Servicing Agreement relating to the
servicing of the Student Loans.
Each 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 calendar year (or, in the case of the first such certificate, the
period from the applicable Closing Date) with all applicable standards under the
related Sale and Servicing Agreement and the Administration Agreement relating
to the administration of the Trust and the Student Loans.
Each 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 calendar year (or, in the case of the first such certificate, the
period from the applicable Closing Date) or, if there has been a default in the
fulfillment of any such obligation, describing each such default. Each of the
Master Servicer, the Administrator and the Sub-Servicers will agree to give the
Indenture Trustee and the Eligible Lender Trustee notice of certain Master
Servicer Defaults and Administrator Defaults 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.
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CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE SUB-SERVICERS
Each 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. No such resignation will become
effective until the related Indenture Trustee or a successor servicer has
assumed such Master Servicer's servicing obligations and duties under the Sale
and Servicing Agreement.
Each Sub-Servicing Agreement will provide that the Sub-Servicer may not
resign from its obligations and duties as Sub-Servicer thereunder without the
consent of the Master Servicer, except upon determination that a Sub-Servicer's
performance of such duties is no longer permissible under applicable law. No
such resignation will become effective until the Master Servicer, the related
Indenture Trustee or a successor servicer has assumed such Sub-Servicer's
servicing obligations and duties under the Sub-Servicing Agreement. The Master
Servicer may remove a Sub-Servicer at its discretion and either may undertake
such servicing responsibilities itself or substitute one or more new
Sub-Servicers, with the consent, but only to the extent provided in the related
Prospectus Supplement and required by the related Sale and Servicing Agreement,
of the Eligible Lender Trustee and each Rating Agency; provided, however, the
Master Servicer shall be solely responsible for any termination payments due to
such removed Sub-Servicer.
Each 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 related Trust or the related Noteholders or
Certificateholders for taking any action or for refraining from taking any
action pursuant to the related Sale and Servicing Agreement, or for errors in
judgment; provided, however, that, unless otherwise limited in the related
Prospectus Supplement, 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 the Master
Servicer's duties thereunder or by reason of reckless disregard of its
obligations and duties thereunder. In addition, each 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 such Sale and Servicing Agreement and that, in
its opinion, may cause it to incur any expense or liability.
Under the circumstances specified in each 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 such Sale and Servicing Agreement; and under the circumstances specified
in each Sub-Servicing Agreement, any entity into which a Sub-Servicer may be
merged or consolidated, or any entity resulting from any merger or consolidation
to which the Sub-Servicer is a party, or any entity succeeding to the business
of the Sub-Servicer, which corporation or other entity in each of the
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foregoing cases assumes the obligations of the Sub-Servicer, will be the
successor of the Sub-Servicer under such Sub-Servicing Agreement.
MASTER SERVICER DEFAULT; ADMINISTRATOR DEFAULT
Except as otherwise provided in the related Prospectus Supplement, a
"Master Servicer Default" under each Sale and Servicing Agreement will consist
of:
(1) any failure by the Master Servicer to deliver (or to cause a
Sub-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 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;
(2) any failure by the Master Servicer to duly observe or perform
in any material respect any other covenant or agreement in the
related 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 (x) to the
Master Servicer by the Indenture Trustee, the Eligible Lender
Trustee, the Master Servicer or the Administrator or (y) 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;
(3) certain events of insolvency, readjustment of debt, marshaling
of assets and liabilities, or similar proceedings with respect
to the Master Servicer and certain actions by the Master
Servicer indicating its insolvency, reorganization pursuant to
bankruptcy proceedings or inability to pay its obligations;
and
(4) failure by the Master Servicer to comply with any requirements
under the Higher Education Act resulting in a loss of its
eligibility as a third-party servicer.
Except as otherwise provided in the related Prospectus Supplement,
"Administrator Default" under each Sale and Servicing Agreement or each
Administration Agreement will consist of
(1) (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
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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;
(2) any failure by the Administrator duly to observe or perform in
any material respect any other covenant or agreement in each
Administration Agreement or each 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 (x) to the Administrator by the Indenture Trustee
or the Eligible Lender Trustee or (y) to the Administrator,
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; and
(3) certain events of insolvency, readjustment of debt, marshaling
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 a Sale and Servicing
Agreement or an Administrator Default under a Sale and Servicing Agreement or an
Administration Agreement, as the case may be, remains unremedied, the Indenture
Trustee or holders of the specified senior class(es) of Notes evidencing not
less than 25% in aggregate outstanding principal amount of such specified senior
class(es) of Notes may terminate all the rights and obligations of the Master
Servicer under such Sale and Servicing Agreement and/or the Administrator under
such Sale and Servicing Agreement or such Administration Agreement, as the case
may be, whereupon a successor servicer or administrator appointed by the related
Indenture Trustee, or such Indenture Trustee, will succeed to all of the
responsibilities, duties and liabilities of the applicable Master Servicer under
such Sale and Servicing Agreement or the Administrator under such Sale and
Servicing Agreement and such 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, as applicable, and no Master Servicer Default or Administrator
Default, as the case may be, other than such appointment has occurred, such
trustee or official may have the power to prevent the Indenture Trustee or the
such specified senior Noteholders from effecting such a transfer. In the event
that such 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 such Sale and Servicing Agreement
or the Administrator under such Sale and Servicing Agreement and such
Administration Agreement, as
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the case may be, unless such compensation arrangements will result in a
downgrading of any related class of Notes or Certificates by any Rating Agency.
In the event a Master Servicer Default or an Administrator Default, as the case
may be, occurs and is continuing, such Indenture Trustee or the holders of such
specified senior class(es) of Notes, as described above, may cause the removal
of the Master Servicer or the Administrator, as the case may be, without the
consent of the related Eligible Lender Trustee or any of the holders of any
other class(es) of Notes or Certificates. Moreover, only the Indenture Trustee
or the holders of the specified senior class(es) of Notes, and not the Eligible
Lender Trustee or the holders of any other class(es) of Notes or Certificates,
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, as the case
may be, occurs and is continuing.
WAIVER OF PAST DEFAULTS
With respect to each Trust, the holders of Notes evidencing at least a
majority in principal amount of the then specified senior class(es) of
outstanding Notes (or the holders of a more junior class of Notes evidencing not
less than a majority of the outstanding principal balance of such class of
Notes, in the case of any Master Servicer Default which does not adversely
affect the Indenture Trustee or the Noteholders of each more senior class of
Notes of the related series, or the holders of Certificates evidencing not less
than a majority of the outstanding Certificate Balance, in the case of any
Master Servicer Default which does not adversely affect the Indenture Trustee or
the Noteholders of any class of the related series), may, on behalf of all
Noteholders and Certificateholders, waive any default by the Master Servicer, in
the performance of its obligations under the related Sale and Servicing
Agreement, or any default by the Administrator of its obligations under the
related Sale and Servicing Agreement and the related 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 such Sale and
Servicing Agreement. Therefore, the Noteholders have the ability, except as
noted above, to waive defaults by the Master Servicer or the Administrator, as
the case may be, 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.
INSOLVENCY EVENT
If set forth in a related Prospectus Supplement, if any of certain
events of insolvency or receivership, readjustment of debt, marshaling of assets
and liabilities, or similar proceedings with respect to the Seller or a special
purpose affiliate of the Seller or certain actions by the Seller or
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such affiliate indicating its insolvency or inability to pay its obligations
(each, a "Seller Insolvency Event") occurs, the Student Loans will be liquidated
and the related 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 Student Loans and termination of the related Trust.
Promptly after the occurrence of any Seller Insolvency Event, notice thereof is
required to be given to Noteholders and Certificateholders; provided that any
failure to give such required notice will not prevent or delay termination of
the related Trust. Upon termination of the related Trust, the Eligible Lender
Trustee will direct the Indenture Trustee promptly to sell the assets of the
related Trust (other than the Trust Accounts) in a commercially reasonable
manner and on commercially reasonable terms. Each of the Guarantors and certain
other unrelated third parties will be given the opportunity, upon 30 days' prior
notice of any such proposed sale, to bid to purchase the Student Loans and, if
any such entity is the highest bidder, the Student Loans must be sold to that
entity. The proceeds from any such sale, disposition or liquidation of the
Student Loans will be treated as collections thereon and deposited in the
Collection Account. If the proceeds from the liquidation of the Student Loans
and any amounts on deposit in the Reserve Account (if any) are not sufficient to
pay the Notes in full, the amount of principal returned to the holders of Notes
will be delayed and the holders of Notes 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 holders of Certificates will be delayed and the
holders of Certificates will incur a loss.
Each Trust Agreement will provide 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 holders of Certificates
and the delivery to the Eligible Lender Trustee by each holder of Certificates
of a certificate certifying that such holder reasonably believes that the
related Trust is insolvent.
AMENDMENT
Each of the Transfer and Servicing Agreements may be amended by the
parties thereto, without the consent of the related Noteholders or the
Certificateholders, 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 such Noteholders or
Certificateholders; provided that such action will not, in the opinion of
counsel satisfactory to the related Indenture Trustee and the related Eligible
Lender Trustee, materially and adversely affect the interest of any such
Noteholder or Certificateholder. Each of the Transfer and Servicing Agreements
may also be amended by the Seller, the Administrator, the Master Servicer, the
related Eligible Lender Trustee and the related Indenture Trustee, as
applicable, with the consent of the holders of Notes of the related series
evidencing at least a majority in principal amount of each class of then
outstanding Notes rated in a similar category by the applicable Rating Agencies
and the holders of Certificates of the related series 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
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rights of the holders of Notes or the holders of Certificates; provided, that no
such amendment may (x) 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 Student Loans or distributions that are
required to be made for the benefit of the holders of Notes or the holders of
Certificates or (y) 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.
PAYMENT OF NOTES
Upon the payment in full of all outstanding Notes of a given series and
the satisfaction and discharge of the related Indenture, the Eligible Lender
Trustee will succeed to all the rights of the Indenture Trustee, and the
Certificateholders of such series will succeed to all the rights of the
Noteholders of such series, under the related Sale and Servicing Agreement,
except as otherwise provided therein.
SELLER LIABILITY
Under each 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 holder of Notes or a holder of
Certificates 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
With respect to each Trust, the obligations of the Seller, the Master
Servicer, the Administrator, the related Eligible Lender Trustee and the related
Indenture Trustee pursuant to the related Transfer and Servicing Agreements will
terminate upon (x) the maturity or other liquidation of the last related Student
Loan and the disposition of any amount received upon liquidation of any such
remaining Student Loans and (y) the payment to the Noteholders and the
Certificateholders of the related series of all amounts required to be paid to
them pursuant to such Transfer and Servicing Agreements.
If so specified in the related Prospectus Supplement, in order to avoid
excessive administrative expense, the Seller or another party will be permitted
at its option to purchase from the related Eligible Lender Trustee, as of the
end of any Collection Period immediately preceding a Distribution Date, if the
then outstanding Pool Balance is less than the percentage specified in the
related Prospectus Supplement of the Initial Pool Balance (as defined in the
related Prospectus Supplement, the "Initial Pool Balance"), all remaining
related Student Loans at a price equal to the aggregate Purchase Amounts thereof
as of the end of such Collection Period, which amounts will be used to retire
the related Notes and Certificates concurrently therewith. Upon termination of a
Trust, as more fully described in the related Prospectus Supplement, all right,
title and interest in the Student Loans and other funds of such Trust, after
giving effect to any final
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distributions to Noteholders and Certificateholders of the related series
therefrom, will be conveyed and transferred to the Seller or such other party.
If so provided in the related Prospectus Supplement, any Student Loans
remaining in the related Trust as of the end of the Collection Period
immediately preceding the Distribution Date which occurs immediately after the
10th anniversary of the Closing Date (the "Auction Date") will be offered for
sale in one or more pools by the related Indenture Trustee. KeyCorp and its
Affiliates and unrelated third parties may offer bids to purchase such 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 or
they, if for separate pools, are equal to or in excess of an amount (the
"Minimum Purchase Amount") equal to the greatest of:
- the Auction Purchase Amount (as such term is defined in the
related Prospectus Supplement, the "Auction Purchase Amount"),
- the fair market value of such Student Loans as of the end of
the Collection Period immediately preceding such Distribution
Date, and
- the aggregate unpaid principal amount of the related Notes and
principal balance of the related Certificates plus, in each
case, accrued and unpaid interest thereon payable on such
Distribution Date (other than any Interest Index Carryover).
If at least two bids are not received or the highest bid or combination of bids
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. In connection with the determination of the Minimum Purchase Amount, the
Indenture Trustee may consult and, at the direction of the Seller, shall
consult, with a financial advisor, including the Underwriters or the
Administrator, to determine if the fair market value of the 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 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 Student Loans on either the Auction Date or any subsequent
Distribution Date. The related Prospectus Supplement will specify what will
happen in the event the Student Loans are not sold in accordance with the
foregoing.
ADMINISTRATOR
The Administrator will enter into an agreement (as amended and
supplemented from time to time, an "Administration Agreement") with each Trust
and the related Indenture Trustee and a Sale and Servicing Agreement with the
related Trust, the Seller, the Master Servicer and the
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Eligible Lender Trustee, pursuant to which the Administrator will agree, to the
extent provided therein,
(a) 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 monthly servicing
payment date or any Distribution Date, as applicable,
(b) to direct the Indenture Trustee to make the required
distributions from the Trust Accounts on each monthly
servicing payment date and each Distribution Date,
(c) to prepare and file with the Department all appropriate claim
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 Federal
Loans,
(d) to prepare (based on the periodic reports received from the
Master Servicer or the Sub-Servicers) and provide periodic
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 as required by the related Sale and
Servicing Agreement, and
(e) 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 set forth in the related Prospectus Supplement (the
"Administration Fee").
CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS
TRANSFER OF STUDENT LOANS
The Seller intends that the transfer of the Student Loans by it to the
related Eligible Lender Trustee on behalf of each Trust will constitute a valid
sale and assignment of such 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 collection with respect thereto. Notwithstanding the foregoing, if the
transfer of the Student Loans is deemed to be an assignment of collateral as
security for the benefit of a Trust, a security interest in the Student Loans
may, pursuant to the provisions of 20 U.S.C. Section 1087-2(d)(3), be perfected
either through the taking of possession of such loans or by the filing of notice
of such security interest in the manner provided by the applicable Uniform
Commercial Code ("UCC") for perfection of security interests in accounts. A
financing statement or
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statements covering the 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 an assignment of collateral as security for the benefit of the
Trust.
If the transfer of the Student Loans is deemed to be an assignment as
security for the benefit of a Trust, there are certain limited circumstances
under the UCC in which prior or subsequent transferees of Student Loans coming
into existence after the Closing Date could have an interest in such Student
Loans with priority over the related Eligible Lender Trustee's interest. A tax
or other government lien on property of the Seller arising prior to the time a
Student Loan comes into existence may also have priority over the interest of
the related Eligible Lender Trustee in such 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 Student Loans. Under the related Sale and Servicing
Agreement, however, the Seller will warrant that it has caused the Student Loans
to be transferred to the related Eligible Lender Trustee on behalf of a 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 Student Loan held by a Trust (or any interest therein) other than to the
related Eligible Lender Trustee on behalf of a Trust, except as provided below.
Pursuant to each Sale and Servicing Agreement, the Sub-Servicer as
custodian on behalf of the Master Servicer and the related Trust will have
custody of the promissory notes evidencing the Student Loans following the sale
of the Student Loans to the related Eligible Lender Trustee. Although the
accounts and computer records of the Seller and, the Master Servicer and the
related Sub-Servicer will be marked to indicate the sale and although the Seller
will cause UCC financing statements to be filed with the appropriate
authorities, the Student Loans will not be physically segregated, stamped or
otherwise marked to indicate that such Student Loans have been sold to such
Eligible Lender Trustee. If, through inadvertence or otherwise, any of the
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 Student Loans in the ordinary course of its business and took possession
of such Student Loans, then the purchaser (or secured party) might acquire an
interest in the 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 Student Loans for new value and without actual knowledge of the
related Eligible Lender Trustee's interest. See "Description of the Transfer and
Servicing Agreements--Sale of Student Loans; Representations and Warranties."
With respect to each Trust, in the event of a Master Servicer Default
resulting solely from certain events of insolvency or bankruptcy that may occur
with respect to the Seller, the Master Servicer, a court, trustee-in-bankruptcy,
conservator, receiver or liquidator may have the power to prevent either the
related Indenture Trustee or Noteholders of the related series from appointing a
successor Master Servicer. See "Description of the Transfer and Servicing
Agreements--Rights Upon Master Servicer Default; Administrator Default."
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CERTAIN MATTERS RELATING TO RECEIVERSHIP
The Federal Deposit Insurance Act ("FDIA"), as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("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 Student Loans. To the
extent that the transfer of the 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 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; 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. These requirements are generally inapplicable to Federal Loans, but
in certain circumstances, a Trust may be liable for certain violations of
consumer protection laws that may apply to the Student Loans, either as assignee
or as the party directly responsible for obligations arising after the transfer.
For a discussion of a Trust's rights if the Student Loans were not originated or
serviced in compliance in all material respects with applicable laws, see
"Description
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of the Transfer and Servicing Agreements--Sale of Student Loans; Representations
and Warranties" and " -- Master Servicer Covenants."
LOAN ORIGINATION AND SERVICING PROCEDURES APPLICABLE TO STUDENT LOANS
The Higher Education Act, including the implementing regulations
thereunder, imposes specified requirements, guidelines and procedures with
respect to originating and servicing student loans such as the Federal 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) 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 or servicing agent 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 related Sale and Servicing Agreement to perform (or to cause a Sub-Servicer
to perform) collection and servicing procedures on behalf of the related Trust.
However, failure to follow these procedures or failure of the originator of the
loan to follow procedures relating to the origination of any Federal Loans could
result in adverse consequences. 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 Federal Loans or in the Federal Guarantors'
refusal to honor their Guarantee Agreements with the Eligible Lender Trustee
with respect to such 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
related Eligible Lender Trustee with respect to such Federal Loans.
Loss of any such Guarantee Payments, Interest Subsidy Payments or
Special Allowance Payments could adversely affect the amount of Available Funds
(as such term is defined in the related Prospectus Supplement, the "Available
Funds") on any Distribution Date and the related Trust's ability to pay
principal and interest on the Notes of the related series and to make
distributions in respect of the Certificates of the related series. Under
certain circumstances, unless otherwise specified in the related Prospectus
Supplement, the related Trust has the right, pursuant to the related Sale and
Servicing Agreement, to cause the Seller to repurchase any Student Loan, or to
cause the Master Servicer to arrange for the purchase of any 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 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. See "Description of the Transfer
and Servicing Agreements--Sale of Student Loans; Representations and Warranties"
and "--Servicer Covenants." The failure of the Seller to so purchase, or of the
Master Servicer to arrange for the purchase of, a Student Loan, if so required,
would constitute a breach of the related Sale and Servicing Agreement,
enforceable by the related Eligible Lender Trustee on behalf of the related
Trust or by the related Indenture Trustee on behalf of the
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Noteholders of the related series, but would not constitute an Event of Default
under the Indenture.
FAILURE TO COMPLY WITH THIRD-PARTY SERVICER REGULATIONS MAY ADVERSELY AFFECT
LOAN SERVICING
On November 29, 1994, the Secretary of the Department of Education (the
"Secretary") published final regulations amending FFELP. 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 one of the
Sub-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
regulations, or violates other FFELP requirements, the 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 a Sub-Servicer will not be fined or held
liable by the Department liabilities arising out of its FFELP activities for the
Master Servicer or other client lenders, or that its eligibility will not be
limited, suspended, or terminated in the future. If a Sub-Servicer were so fined
or held liable, or its eligibility were limited, suspended, or terminated, its
ability to properly service the federal loans and to satisfy its obligation to
purchase federal loans with respect to which it breaches its representations,
warranties or covenants under its related Sub-Servicing Agreement could be
adversely affected. However, in the event of a termination of eligibility, each
Sub-Servicing Agreement will provide for the removal of the applicable
Sub-Servicer and the appointment of a successor sub-servicer.
BANKRUPTCY CONSIDERATIONS
Effective for bankruptcy actions commenced on or after October 8, 1998,
Federal Loans are generally not dischargeable by a borrower in bankruptcy
pursuant to the United States Bankruptcy Code, as amended, as codified in 11
U.S.C. Sections 101-1330 (the "Bankruptcy Code"), unless excepting such
debt from discharge will impose an undue hardship on the debtor and the debtor's
dependents. However, Private Loans are generally dischargeable by a borrower in
bankruptcy unless such Private Loan has been made under any program funded in
whole or in part by a governmental unit or non-profit institution.
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RECENT DEVELOPMENTS
Emergency Student Loan Consolidation Act of 1997. On November 13, 1997,
President Clinton signed into law the Emergency Student Loan Consolidation Act
of 1997, which made significant changes to the Federal Consolidation Loan
Program. These changes include:
(1) providing that federal direct student loans are eligible to be
included in a Federal Consolidation Loan;
(2) changing the borrower interest rate on new Federal
Consolidation Loans (previously a fixed rate based on the
weighted average of the loans consolidated, rounded up to the
nearest whole percent) to the annually variable rate
applicable to Stafford Loans (i.e., the bond equivalent rate
at the last auction in May of 91-day Treasury Bills plus
3.10%, not to exceed 8.25% per annum);
(3) providing that the portion of a Federal Consolidated Loan that
is comprised of subsidized Stafford Loans retains its subsidy
benefits during periods of deferment; and
(4) establishing prohibitions against various forms of
discrimination in the making of Federal Consolidation Loans.
Except for the last of the above changes, all such provisions expired on
September 30, 1998. The combination of the change to a variable rate and the
8.25% interest cap reduced the lender's yield in most cases below the rate that
would have been applicable under the previous weighted average formula.
FY 1998 Budget. In the 1997 Budget Reconciliation Act (P.L. 105-33),
several changes were made to the Higher Education Act that impact the FFELP.
These provisions include, among other things, requiring federal guarantors to
return $1 billion of their reserves to the U.S. Treasury by September 1, 2002
(to be paid in annual installments), greater restrictions on use of reserves by
federal guarantors and a continuation of the administrative cost allowance
payable to federal guarantors (which is a fee paid to federal guarantors equal
to 0.85% of new loans guaranteed).
1998 Amendments. On May 22, 1998, Congress passed, and on June 9, 1998,
the President signed into law, a temporary measure relating to the Higher
Education Act and FFELP loans as part of the Intermodal Surface Transportation
Efficiency Act of 1998 that revised interest rate changes under the FFELP that
were scheduled to become effective on July 1, 1998. For loans made during the
period July 1, 1998 through September 30, 1998, the borrower interest rate for
Stafford Loans and Unsubsidized Stafford Loans is reduced to a rate of 91-day
Treasury Bill Rate plus 2.30% (1.70% during school, grace and deferment),
subject to a maximum rate of 8.25%. As described below, The formula for Special
Allowance Payments on Stafford Loans and Unsubsidized Stafford Loans is
calculated to produce a yield to the loan holder of 91-day Treasury Bill Rate
plus 2.80% (2.20% during school, grace and deferment).
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1998 Reauthorization Bill. On October 7, 1998, President Clinton signed
into law the Higher Education Amendments of 1998 (the "1998 Reauthorization
Bill"), which enacted significant reforms in FFELP. The major provisions of the
1998 Reauthorization Bill include the following:
- All references to a "transition" to full implementation of the
Federal Direct Student Loan Program were deleted from the
FFELP statute.
- Guarantor reserve funds were restructured so that federal
guarantors are provided with additional flexibility in
choosing how to spend certain funds they receive.
- Additional recall of reserve funds by the Secretary was
mandated, amounting to $85 million in fiscal year 2002, $82.5
million in fiscal year 2006, and $82.5 million in fiscal year
2007. However, certain minimum reserve levels are protected
from recall.
- The administrative cost allowance was replaced by two (2) new
payments, a Student Loan processing and issuance fee equal to
65 basis points (40 basis points for loans made on or after
October 1, 2003) paid at the time a loan is guaranteed, and an
account maintenance fee of 12 basis points (10 basis points
for fiscal years 2001-2003) paid annually on outstanding
guaranteed Student Loans.
- The percentage of collections on defaulted Student Loans a
federal guarantor is permitted to retain is reduced from 27%
to 24% (23% beginning on October 1, 2003) plus the complement
of the reinsurance percentage applicable at the time a claim
was paid to the lender on the Student Loan.
- Federal reinsurance provided to federal guarantors is reduced
from 98% to 95% for Student Loans first disbursed on or after
October 1, 1998.
- The delinquency period required for a loan to be declared in
default is increased from 180 days to 240 days for loans on
which the first day of delinquency occurs on or after the date
of enactment of the 1998 Reauthorization Bill.
- Interest rates charged to borrowers on Stafford Loans, and the
yield for Stafford Loan holders established by the 1998
Amendments, were made permanent.
- Federal Consolidation Loan interest rates were revised to
equal the weighted average of the loans consolidated rounded
up to the nearest one-eighth of 1%, capped at 8.25%. When the
91-day Treasury Bill Rate plus 3.1% exceeds the borrower's
interest rate, Special Allowance Payments are made to make up
the difference.
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- The lender-paid offset fee on Federal Consolidation Loans of
1.05% is reduced to .62% for loans made pursuant to
applications received on or after October 1, 1998 and on or
before January 31, 1999.
- The Federal Consolidation Loan interest rate calculation was
revised to reflect the rate for Federal Consolidation Loans,
and will be effective for loans on which applications are
received on or after February 1, 1999.
- Lenders are required to offer extended repayment schedules to
new borrowers after the enactment of the 1998 Reauthorization
Bill who accumulate after such date outstanding loans under
FFELP totaling more than $30,000, under these extended
schedules the repayment period may extend up to 25 years
subject to certain minimum repayment amounts.
- The Secretary is authorized to enter into six (6) voluntary
flexible agreements with federal guarantors under which
various statutory and regulatory provisions can be waived.
- Federal Consolidation Loan lending restrictions are revised to
allow lenders who do not hold one of the borrower's Underlying
Federal Loans to issue a Federal Consolidation Loan to a
borrower whose Underlying Federal Loans are held by multiple
holders.
- Inducement restrictions were revised to permit federal
guarantors and lenders to provide assistance to schools
comparable to that provided to schools by the Secretary under
the Federal Direct Student Loan Program.
- The Secretary is now required to pay off Student Loan amounts
owed by borrowers due to failure of the borrower's school to
make a tuition refund allocable to the Student Loan.
- Discharge of FFELP and certain other Student Loans in
bankruptcy is now limited to cases of undue hardship
regardless of whether the Student Loan has been due for more
than seven (7) years prior to the bankruptcy filing.
INCOME TAX CONSEQUENCES
Set forth below is a general summary of the material federal and
Pennsylvania state income tax consequences of the purchase, ownership and
disposition of the Notes and the Certificates. Thompson Hine & Flory LLP
("Federal Tax Counsel") has reviewed this summary with respect to federal income
tax matters and is of the opinion that the descriptions of the law and legal
conclusions contained herein are correct in all material respects and the
discussions hereunder fairly summarize the federal income tax considerations
that are likely to be material to Noteholders and Certificateholders.
Kirkpatrick & Lockhart LLP ("Pennsylvania Tax Counsel") has reviewed this
summary with respect to Pennsylvania income and franchise tax matters and is
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of the opinion that the descriptions of the law and legal conclusions contained
herein are correct in all material respects and the discussions hereunder fairly
summarize the Pennsylvania income and franchise tax considerations that are
likely to be material to Noteholders and Certificateholders. The summary is
intended as an explanatory discussion of the possible effects of certain federal
and Pennsylvania income tax consequences to holders generally, but does not
purport to furnish information in the level of detail or with the attention to a
holder's specific tax circumstances that would be provided by a holder's own tax
advisor. For example, it does not discuss the tax treatment of Noteholders or
Certificateholders that are insurance companies, regulated investment companies
or dealers in securities. In addition, any discussion regarding the Notes is
limited to the federal and Pennsylvania income tax consequences of the initial
Noteholders and not a purchaser in the secondary market. Moreover, there are no
cases or Internal Revenue Service ("IRS") rulings on similar transactions
involving both debt and equity interests issued by a trust with terms similar to
those of the Notes and the Certificates. As a result, the IRS may disagree with
all or a part of the discussion below. Prospective investors are urged to
consult their own tax advisors in determining the federal, state, local, foreign
and any other tax consequences to them of the purchase, ownership and
disposition of the Notes and the Certificates.
With respect to federal tax matters, the following summary is based
upon current provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the Treasury Regulations promulgated thereunder and judicial or ruling
authority, all of which are subject to change, which change may be retroactive.
Each Trust will be provided with an opinion of Federal Tax Counsel regarding
certain federal income tax matters discussed below and an opinion of
Pennsylvania Tax Counsel regarding certain Pennsylvania State income tax matters
discussed below, which opinions will be filed with the Commission on a Form 8-K
prior to the sale of the securities issued by such Trust. An opinion of Federal
Tax Counsel, however, is not binding on the IRS or the courts. No ruling on any
of the issues discussed below will be sought from the IRS. For purposes of the
following summary, references to the Trust, the Notes, the Certificates and
related terms, parties and documents shall be deemed to refer, unless otherwise
specified herein, to each Trust and the Notes, Certificates and related terms,
parties and documents applicable to such Trust. EACH PROSPECTIVE INVESTOR SHOULD
CONSULT WITH ITS TAX ADVISOR AS TO THE FEDERAL, STATE, LOCAL, FOREIGN AND ANY
OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF SECURITIES
SPECIFIC TO SUCH PROSPECTIVE INVESTOR.
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FEDERAL TAX CONSEQUENCES FOR TRUSTS
FOR WHICH A PARTNERSHIP ELECTION IS MADE
TAX CHARACTERIZATION OF THE TRUST
Federal Tax Counsel will deliver its opinion that the Trust will not be
an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Trust Agreement and related documents will be complied with.
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
and the Certificates.
Possible Alternative Treatment of the Trust. If, contrary to the
opinion of Federal Tax Counsel, the Trust were taxable for federal income tax
purposes as a corporation, the income from the Student Loans (reduced by
deductions, possibly including interest on the Notes) would be subject to
federal income tax at corporate rates, which could materially reduce or
eliminate the cash that would otherwise be available to make payments on the
Notes and the Certificates (and the Certificateholders could be liable for any
such tax that is unpaid by the Trust).
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. Federal Tax Counsel will
deliver an opinion to the Trust that the Notes will be classified as debt for
federal income tax purposes. The Seller will agree, and the Noteholders will
agree by their purchase of Notes, to treat the Notes as debt for federal income
tax purposes. The discussion below assumes this characterization of the Notes is
correct.
Original Issue Discount. The discussion below assumes that all payments
on the Notes are denominated in U.S. dollars, that the interest formula for the
Notes meets the requirements for "qualified stated interest" under Treasury
Regulations (the "OID Regulations") relating to original issue discount ("OID"),
and that any OID on the Notes (i.e., any excess of the stated redemption price
at maturity of the Notes, generally the principal amount of the Notes, over
their issue price) is less than a de minimis amount (i.e., 0.25% of their
principal amount multiplied by the weighted number of full years included in
their term), all within the meaning of the OID Regulations. If these conditions
are not satisfied with respect to any given series of Notes, additional tax
considerations with respect to such Notes will be disclosed in the related
Prospectus Supplement.
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 the Noteholder's method of tax accounting. Based on the above
assumptions, the Notes will not be considered issued with 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 a constant-yield accrual basis. However, until
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the IRS determines otherwise, the Trust intends to take the position that the
Notes are not issued with OID.
Under the OID Regulations, a holder of a Note that was issued with a de
minimis amount of OID must include such OID generally in income, on a pro rata
basis, as principal payments are made on the Note. Alternatively, a Noteholder
may elect to accrue all interest, discount (including de minimis market discount
or OID) and premium in income as interest, based on a constant-yield method. A
purchaser who buys a Note for more or less than its principal amount will
generally be subject, respectively, to the premium amortization or market
discount 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 market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect to the
Note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by such Noteholder
with respect to such Note. Any such gain or loss will be capital gain or loss if
the Note was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in income. Any such
gain or loss would be long-term capital gain or loss if the Noteholder's holding
period exceeded one year. Capital losses generally may be used by a corporate
taxpayer only to offset capital gains, and by an individual taxpayer only to the
extent of capital gains plus $3,000 of other income.
Foreign Holders. Interest paid (or accrued) to a Noteholder who is a
nonresident alien, foreign corporation or other person that is not a United
States person as such term is defined in the Code and the Treasury Regulations
thereunder (a "foreign person") generally will be considered "portfolio
interest", and generally will not be subject to United States federal income tax
and withholding tax, provided, that
(a) the interest is not effectively connected with the conduct of
a trade or business within the United States by the foreign
person
(b) the foreign person is not actually or constructively a "10
percent shareholder" of the Trust or the Seller (including a
holder of 10% of the outstanding Certificates) or a
"controlled foreign corporation" with respect to which the
Trust or the Seller is a "related person" within the meaning
of the Code, and
(c) the foreign person provides the Trustee or other person who is
otherwise required to withhold U.S. tax with respect to the
Notes with an appropriate statement (on Form W-8, new Form
W-8BEN or a similar form), signed under penalty of perjury,
certifying that the beneficial owner of the Note is a foreign
person and providing the foreign person's name and address.
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If a Note is held through a securities clearing organization or certain other
financial institutions, the organization or institution may provide the relevant
signed statement to the withholding agent; in that case, however, the signed
statement must be accompanied by a Form W-8, new Form W-8BEN 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 generally will be exempt from
United States federal income and withholding tax, provided that (x) such gain is
not effectively connected with the conduct of a trade or business in the United
States by the foreign person and (y) 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 on Form
4224 or new Form W-8ECI), the holder generally will be subject to United States
federal income tax on the interest, gain or income at regular federal income tax
rates. In addition, if the foreign person is a foreign corporation, it may be
subject to a branch profits tax equal to 30% of its "effectively connected
earnings and profits" within the meaning of the Code for the taxable year, as
adjusted for certain items, unless it qualifies for a lower rate under an
applicable tax treaty (as modified by the branch profits tax rules).
Final regulations dealing with backup withholding and information
reporting on income paid to foreign persons and related matters (the "New
Withholding Regulations") were published in the Federal Register in October
1997. In general, the New Withholding Regulations do not significantly alter the
substantive withholding and information reporting requirements, but do unify
current certification procedures and forms and clarify reliance standards.
Generally, those persons currently required to file Form W-8 or Form 1001 (to
claim tax treaty benefits) will be required to file new Form W-8BEN or W-8IMY
(in the case of certain foreign intermediaries, partnerships and look-through
entities), while those persons currently required to file Form 4224 will be
required to file new Form W-8ECI. The New Withholding Regulations generally are
effective for payments of interest due after December 31, 2000, subject to
certain transition rules. PROSPECTIVE NOTEHOLDERS WHO ARE FOREIGN PERSONS ARE
STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE NEW
WITHHOLDING REGULATIONS.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalty of perjury, a certificate setting forth 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 related Trust will be
required to withhold 31% of the amount otherwise payable to the holder and remit
the withheld amount to the IRS as a credit against the holder's federal
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income tax liability. As previously mentioned, the New Withholding Regulations
generally will be effective for payments made after December 31, 2000, subject
to certain transition rules, and all Noteholders should consult their own tax
advisors regarding the certifications, if any, that must be made in order to
avoid backup withholding after such date.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of Federal Tax Counsel, the IRS successfully asserted that one or more
classes of Notes did not represent debt for federal income tax purposes, such
class or classes of Notes might be treated as equity interests in the Trust. If
so treated, the Trust might be treated as a publicly traded partnership but it
would not be taxable as a corporation because it would meet certain qualifying
income tests.
Nonetheless, even if the Trust were not taxable as a corporation, the
treatment of Notes as equity interests in such a publicly traded partnership
could have adverse tax consequences to certain holders of such Notes. For
example, income from certain classes of Notes to certain tax-exempt entities
(including pension funds) might be "unrelated business taxable income," income
to foreign holders may be subject to U.S. withholding tax and U.S. tax return
filing requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of Trust expenses. In the
event one or more classes of Notes were treated as interests in a partnership,
the consequences governing the Certificates as equity interests in a partnership
described above under "Federal Tax Consequences For Trusts For Which a
Partnership Election is Made--Tax Consequences to Holders of the Certificates"
would generally apply to the holders of such Notes.
FASITs
Sections 860H through 860L to the Code (the "FASIT Provisions") provide
for a new type of entity for federal income tax purposes known as a "financial
asset securitization investment trust" (a "FASIT"). Many technical issues
relating to the taxation of FASITs and the holders of FASIT interests are to be
addressed in Treasury regulations yet to be issued. In general, the FASIT
legislation enables trusts such as the Trust to elect to be treated as a
pass-through entity not subject to federal entity-level income tax (except with
respect to certain prohibited transactions) and to issue securities that would
be treated as debt for federal income tax purposes. If a Trust is intended to
qualify as a FASIT for federal income tax purposes, the Prospectus Supplement
will so indicate and will describe the tax consequences of such election
therein.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
The following discussion only applies to a Trust which issues one or
more classes of Certificates and assumes that all payments on the Certificates
are denominated in U.S. dollars, that a series of Securities includes a single
class of Certificates and that the Certificates are sold to both the Seller and
to persons other than the Seller. If these conditions are not satisfied with
respect to any given series of Certificates, any additional tax considerations
with respect to such Certificates will be disclosed in the applicable Prospectus
Supplement.
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CLASSIFICATION AS A PARTNERSHIP
Treatment of the Trust as a Partnership. The Seller and the Master
Servicer will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust as a partnership for purposes of federal, state
and local income and 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 both in its capacity as owner of Certificates and as recipient of
distributions from the Reserve Account, if any), and the Notes being debt of the
partnership. There is, however, no specific authority with respect to the proper
characterization of the arrangement involving the Trust, the Certificateholders,
the Noteholders, the Seller and the Master Servicer.
Under the provisions of Subchapter K of the Code, a partnership is not
considered a separate taxable entity. Instead, partnership income is taxed
directly to the partners and each partner generally is viewed as owning a direct
undivided interest in each partnership asset. The partnership is generally
treated as an entity, however, for computing partnership income, determining the
tax consequences of transactions between a partner and the partnership, and
characterizing the gain on the sale or exchange of a partnership interest.
Partnership Taxation. As a partnership, the Trust will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account the holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest and finance charges earned on the Student Loans (including
appropriate adjustments for market discount, OID and bond premium), investment
income from investments of amounts on deposit in any related Trust Accounts and
any gain upon collection or disposition of 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
Student Loans.
Guaranteed Payments. Under the Trust Agreement, payments on the
Certificates at the Pass-Through Rate (including accruals on amounts previously
due on the Certificates but not yet distributed) will be treated as "guaranteed
payments" under Section 707(c) of the Code. Guaranteed payments are payments to
partners for the use of their capital and, in the present circumstances, are
treated as deductible to the Trust and ordinary income to the
Certificateholders. The Trust will have a calendar year and will deduct the
guaranteed payments under the accrual method of accounting. Certificateholders
with a calendar tax year are required to include the payments in income in their
taxable year that corresponds to the year in which the Trust deducts the
payments, and the Certificateholders with a different taxable year are required
to include the payments in income in their taxable year that includes the
December 31st of the year in which the Trust deducts the payments. It is
possible that guaranteed payments will not be treated as interest for all
purposes of the Code.
Allocation of Tax Items. 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, in general, that in
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addition to the guaranteed payments described above, the Certificateholders will
be allocated the following tax items of the Trust for each Interest Period (as
defined in the applicable Prospectus Supplement, an "Interest Period"):
(a) any Trust income attributable to discount on the Student Loans
that corresponds to any excess of the principal amount of the
Certificates over their initial issue price;
(b) any Trust expense attributable to the amortization by the
Trust of premium on Student Loans that corresponds to any
excess of the issue price of Certificates over their principal
amount; and
(c) all other amounts of income payable to the Certificateholders
for such Interest Period.
All remaining taxable income of the Trust will be allocated to the Seller.
Losses will generally be allocated in the manner in which they are borne. Based
on the economic arrangement of the parties, this approach for allocating Trust
tax items should be permissible 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, even under the foregoing
method of allocation, Certificateholders may be allocated income equal to the
entire amount of interest accruing on the Certificates for an Interest Period,
based on the Pass-Through Rate plus the other items described above, even though
the Trust might not make (or 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, and
Certificateholders may become liable for taxes on Trust income even if they have
not received cash from the Trust to pay such taxes. 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, all of the guaranteed payments and the taxable income
allocated to a Certificateholder that is a tax-exempt entity may 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's share of expenses of the Trust (including fees
to the Master Servicer but not interest expenses) are miscellaneous itemized
deductions which are deductible only to the extent they exceed two percent of
the individual's adjusted gross income (and not at all for alternative minimum
tax purposes). Accordingly, such deductions might be disallowed to the
individual in whole or in part 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. These deductions may also be subject to
reduction under Section 68 of the Code if an individual taxpayer's adjusted
gross income exceeds certain limits.
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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 Student Loans,
the Trust might be required to incur additional expense, but it is believed that
there would not be a material adverse effect on Certificateholders.
Computation of Income. Taxable income of the Trust will be computed at
the Trust level and the portion allocated to the Certificateholders will be
allocated to them pro rata. Consequently, the method of accounting for taxable
income will be chosen by, and any elections (such as those described below with
respect to the market discount rules) will be made by the Trust rather than the
Certificateholders. The Trust intends, to the extent possible, to (x) have the
taxable income of the Trust computed under the accrual method of accounting and
(y) adopt a calendar-year taxable year for computing the taxable income of the
Trust. The tax year of the Trust, however, is generally determined by reference
to the tax years of the Certificateholders. An owner of a Certificate is
required to include its pro rata share of Trust income for a taxable year as
determined by the Trust in such Certificateholder's gross income for its taxable
year in which the taxable year of the Trust ends.
Section 708 Termination. Under Section 708 of the Code, if 50% or more
of the outstanding interests in the Trust are sold or exchanged within any
12-month period, the Trust will be deemed to terminate and then be reconstituted
for federal income tax purposes. If a termination occurs, the Trust will be
considered to contribute all of its assets and liabilities to the Trust, as a
new partnership, for an interest in the new partnership; and immediately
thereafter, the Trust, as the former partnership, will be considered to
distribute interests in the new partnership to the Certificateholders in
proportion to their respective interests in the former partnership in
liquidation of the former partnership. If a sale of the Certificates terminates
the Trust under Section 708 of the Code, a Certificateholder's basis in its
ownership interest would not change. The Trust's taxable year would also
terminate as a result of a constructive termination and, if the
Certificateholder's taxable year is different from the Trust's, the termination
could result in the "bunching" of more than 12 month's income or loss of the
Trust in such Certificateholder's income tax return for the year in which the
Trust was deemed to terminate. A liquidation of interests is not considered a
sale or exchange of interests for purposes of applying this constructive
termination rule.
The Trust will not comply with certain technical requirements that
might apply if a constructive termination were to occur. 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 a lack of data.
Discount and Premium. To the extent that OID, if any, on the Student
Loans exceeds a de minimis amount, the Trust would have OID income. As indicated
above, a portion of such OID income may be allocated to the Certificateholders.
Moreover, the purchase price paid by the Trust for the Student Loans
may be greater or less than the remaining aggregate principal balances of the
Student Loans at the time of purchase. If so, the Student Loans will have been
acquired at a premium or discount, as the case may be.
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(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.)
If the Trust acquires the Student Loans at a market discount or
premium, the Trust will elect to include any such discount in income currently
as it accrues over the life of the Student Loans or to offset any such premium
against interest income over the life of the Student Loans. As indicated above,
a portion of such market discount income or premium deduction may be allocated
to Certificateholders.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
Any such gain or loss would be long-term capital gain or loss if the
Certificateholder's holding period exceeded one year. A Certificateholder's tax
basis in a Certificate will generally equal the holder's cost increased by the
holder's share of Trust income (includible in gross income) and decreased by any
distributions received or losses allocated 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 the
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 Student Loans would
generally be treated as ordinary income to the holder. Since the Trust will make
an election to include market discount, if any, in income currently as it
accrues over the life of the Student Loans, there may be little, if any,
unrecognized accrued market discount at the time a Certificate is sold.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed 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 Transferors and Transferees. 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
laws and regulations. If a monthly convention is not allowed (or only applies to
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
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transferors and transferees to conform to a method permitted by future laws,
regulations or other IRS guidance.
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 were to file 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 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. 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 each
Certificateholder's allocable share of items of Trust income and expense to
holders and the IRS 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 timely notifies the IRS
of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee 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 (1) the name, address
and taxpayer identification number of the nominee and (2) as to each beneficial
owner (a) the name, address and taxpayer identification number of such person,
(b) 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 (c) certain information on
Certificates that were held, bought or sold 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 31st. Nominees, brokers and financial
institutions that fail to provide the Trust with the information described above
may be subject to penalties.
The Seller will be designated as "tax matters partner" in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in certain disputes 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
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not expire before the later of three years after the date on which the
partnership information return is filed or the last day for filing such return
for such year (determined without regard to extensions). 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. 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. Accordingly, 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 withholding status, the Trust may rely on
Form W-8, new Form W-8BEN, Form W-9 or the holder's certification of non-foreign
status signed under penalty of perjury.
As previously mentioned, the New Withholding Regulations generally will
be effective for payments made after December 31, 2000, subject to certain
transition rules. Under the New Withholding Regulations, generally, those
persons currently required to file Form W-8 or Form 1001 (to claim tax treaty
benefits) will be required to file new Form W-8BEN or W-8IMY (in the case of
certain foreign intermediaries, partnerships and look-through entities), while
those persons currently required to file Form 4224 will be required to file new
Form W-8ECI. PROSPECTIVE CERTIFICATEHOLDERS WHO ARE FOREIGN PERSONS ARE STRONGLY
URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE NEW WITHHOLDING
REGULATIONS.
Each foreign holder may be required to file a U.S. individual or
corporate income tax return (including in the case of a corporation, the branch
profits tax) on its share of the Trust's income. Each foreign holder must obtain
a taxpayer identification number from the IRS and submit that number to the
Trust in order to assure appropriate crediting of the taxes withheld. Each
foreign holder will be subject to United States federal income tax and
withholding tax at a rate of 30 percent on the holder's share of guaranteed
payments, unless reduced or eliminated pursuant to an applicable treaty. A
foreign holder generally would be entitled to file with the IRS a claim for
refund with respect to taxes withheld by the Trust in excess of those that are
withheld with respect to guaranteed payments, taking the position that those
taxes were not due because the Trust was not engaged in a U.S. trade or
business. EACH POTENTIAL FOREIGN CERTIFICATEHOLDER SHOULD CONSULT ITS TAX
ADVISOR AS TO WHETHER THE TAX CONSEQUENCES OF HOLDING A CERTIFICATE MAKE IT AN
UNSUITABLE INVESTMENT.
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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. As previously mentioned, the New Withholding
Regulations generally will be effective for payments made after December 31,
2000, subject to certain transition rules and all Certificateholders should
consult their own tax advisors regarding the certifications, if any, that must
be made in order to avoid backup withholding after such date.
FEDERAL TAX CONSEQUENCES FOR TRUSTS IN WHICH ALL
CERTIFICATES ARE RETAINED BY THE SELLER
TAX CHARACTERIZATION OF THE TRUST
Federal Tax Counsel will deliver its opinion that a Trust, which issues
one or more classes of Notes to investors and all the Certificates of which are
retained by the Seller, will not be an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes, assuming
that no election will be made to treat the Trust as a corporation for federal
income tax purposes. In such a case, the Seller and the Master Servicer will
agree to treat the Trust as a division of the Seller for purposes of federal,
state and local income and franchise tax and any other tax measured in whole or
in part by income; consequently, the Trust will be disregarded as an entity
separate from the Seller.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. As discussed above, Federal Tax
Counsel will deliver an opinion to the Trust that the Notes will be classified
as debt for federal income tax purposes. The Seller will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Assuming such characterization of the Notes is
correct, the federal income tax consequences to Noteholders described above
under "Federal Tax Consequences For Trusts For Which a Partnership Election is
Made--Tax Consequences to Holders of the Notes" would apply to the Noteholders.
PENNSYLVANIA STATE TAX CONSEQUENCES
PENNSYLVANIA INCOME AND FRANCHISE TAX CONSEQUENCES WITH RESPECT TO THE NOTES
If a majority of the Student Loans of a Trust are serviced by the
Pennsylvania Higher Education Assistance Agency ("PHEAA"), it may be argued that
the principal place of business of such Trust will be in the Commonwealth of
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, if a majority of the Student Loans of a
Trust are serviced by PHEAA, Pennsylvania Tax Counsel
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will, prior to the issuance of the Notes and Certificates, deliver its opinion
to 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.
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, Pennsylvania Tax Counsel will, prior to the issuance of the Notes and
Certificates, deliver its 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.
THE FEDERAL AND PENNSYLVANIA TAX DISCUSSIONS SET FORTH ABOVE ARE
INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
NOTEHOLDER'S OR CERTIFICATEHOLDER'S PARTICULAR TAX SITUATION. PROSPECTIVE
PURCHASERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF SECURITIES,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS
AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL, PENNSYLVANIA OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and/or the Code impose certain requirements on employee benefit plans
and on certain other retirement plans and arrangements, including individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts (and, as applicable, insurance company general accounts)
in which such plans, accounts or arrangements are invested that are subject to
the fiduciary responsibility provisions of ERISA and Section 4975 of the Code
("Plans") and on persons who are fiduciaries with respect to such Plans in
connection with the investment of Plan assets. Certain employee benefit plans,
such as governmental plans (as defined in ERISA Section 3(32)), and, if no
election has been made under Section 410(d) of the Code, church plans (as
defined in Section 3(33) of ERISA) are not subject to ERISA requirements.
Accordingly, assets
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of such plans may be invested in Notes without regard to the ERISA
considerations described below, subject to the provisions of other applicable
federal and state law. Any such plan which is qualified and exempt from taxation
under Sections 401(a) and 501(a) of the Code, however, is subject to the
prohibited transaction rules set forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, Section 406 of ERISA and Section 4975 of the
Code prohibit a broad range of transactions involving assets of Plan and persons
(parties in interest under ERISA and disqualified persons under the Code,
collectively, "Parties in Interest") who have certain specified relationships to
the Plan unless a statutory, regulatory or administrative exemption is
available. Certain Parties in Interest that participate in a prohibited
transaction may be subject to an excise tax imposed pursuant to Section 4975 of
the Code or a penalty imposed pursuant to Section 502(i) of ERISA, unless a
statutory, regulatory or administrative exemption is available. These prohibited
transactions generally are set forth in Section 406 of ERISA and Section 4975 of
the Code.
THE NOTES
Unless otherwise specified in the related Prospectus Supplement, the
Notes of each series may be purchased by a Plan. The Trust, any underwriter, the
Eligible Lender Trustee, the Indenture Trustee, the Master Servicer, the
Administrator, any provider of credit support or any of their affiliates may be
considered to be or may become Parties in Interest with respect to certain
Plans. Prohibited transactions under Section 406 of ERISA and Section 4975 of
the Code may arise if a Note is acquired by a Plan with respect to which such
persons are Parties in Interest unless such transactions are subject to one or
more statutory or administrative exemptions, such as:
- Prohibited Transaction Class Exemption ("PTCE") 96-23, which
exempts certain transactions effected on behalf of a Plan by
an "in-house asset manager";
- PTCE 90-1, which exempts certain transactions between
insurance company separate accounts and Parties in Interest;
- PTCE 91-38, which exempts certain transactions between bank
collective investment funds and Parties in Interest;
- PTCE 95-60, which exempts certain transactions between
insurance company general accounts and Parties in Interest; or
- PTCE 84-14, which exempts certain transactions effected on
behalf of a Plan by a "qualified professional asset manager".
There can be no assurance that any of these class exemptions will apply with
respect to any particular Plan investment in Notes or, even if it were deemed to
apply, that any exemption would
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apply to all prohibited transactions that may occur in connection with such
investment. Accordingly, prior to making an investment in the Notes, investing
Plans should determine whether the Trust, any underwriter, the Eligible Lender
Trustee, the Indenture Trustee, the Master Servicer, the Administrator, or any
provider of credit support or any of their affiliates is a Party in Interest
with respect to such Plan and, if so, whether such transaction is subject to one
or more statutory, regulatory or administrative exemptions.
Any Plan fiduciary considering whether to invest in Notes on behalf of
a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment. Each Plan fiduciary also should determine whether,
under the general fiduciary standards of investment prudence and
diversification, an investment in the Notes is appropriate for the Plan,
considering the overall investment policy of the Plan and the composition of the
Plan's investment portfolio, as well as whether such investment is permitted
under the governing Plan instruments.
THE CERTIFICATES
Unless otherwise specified in the Prospectus Supplement, the
Certificates of each series 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"). Such purchase of an equity interest in the
Trust will result in the assets of the Trust being deemed assets of a Benefit
Plan for the purposes of ERISA and the Code and certain transactions involving
the Trust may then be deemed to constitute prohibited transactions under Section
406 of ERISA and Section 4975 of the Code. A violation of the "prohibited
transaction" rules may result in an excise tax or other penalties and
liabilities under ERISA and the Code for such persons.
By its acceptance of a Certificate, each Certificateholder will be
deemed to have represented and warranted that it is not a Benefit Plan.
If a given series of Certificates may be acquired by a Benefit Plan
because of the application of an exception contained in a regulation or
administrative exemption issued by the United States Department of Labor, such
exception will be discussed in the related Prospectus Supplement.
* * *
A plan fiduciary considering the purchase of Securities of a given
series should consult its tax and/or legal advisors regarding whether the assets
of the related Trust would be considered plan assets, the possibility of
exemptive relief from the prohibited transaction rules and other issues and
their potential consequences.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement with
respect to the Notes of a given series and an underwriting agreement with
respect to the Certificates of such
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series (collectively, the "Underwriting Agreements"), the Seller will agree to
cause the related Trust to sell to the underwriters named therein and in the
related Prospectus Supplement, and each of such underwriters will severally
agree to purchase, the principal amount of each class of Notes and Certificates,
as the case may be, of the related series set forth therein and in the related
Prospectus Supplement.
In each of the Underwriting Agreements with respect to any given series
of Securities, the several underwriters will agree, subject to the terms and
conditions set forth therein, to purchase all the Notes and Certificates, as the
case may be, described therein which are offered hereby and by the related
Prospectus Supplement if any of such Notes and Certificates, as the case may be,
are purchased.
Each Prospectus Supplement will either (x) set forth the price at which
each class of Notes and Certificates, as the case may be, being offered thereby
will be offered to the public and any concessions that may be offered to certain
dealers participating in the offering of such Notes and Certificates, as the
case may be, or (y) specify that the related Notes and Certificates, as the case
may be, are to be resold by the underwriters in negotiated transactions at
varying prices to be determined at the time of such sale. After the initial
public offering of any such Notes and Certificates, as the case may be, such
public offering prices and such concessions may be changed.
Until the distribution of the Securities is completed, rules of the
Commission may limit the ability of the underwriters and certain selling group
members to bid for and purchase the Securities. As an exception to these rules,
the underwriters are permitted to engage in certain transactions that stabilize
the price of the Securities. Such transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of the Securities.
If an underwriter creates a short position in the Securities in
connection with the offering (i.e., if it sells more Securities than are set
forth on the cover page of the related Prospectus Supplement), the underwriter
may reduce that short position by purchasing Securities in the open market.
An underwriter may also impose a penalty bid on certain underwriters
and selling group members. This means that if the underwriter purchases
Securities in the open market to reduce the underwriters' short position or to
stabilize the price of the Securities, it may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
Securities as part of the offering.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
discourages resales of the security.
Neither the Seller nor the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Securities. In addition, neither
the Seller nor the underwriters make any representation that
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the underwriters will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
Each Underwriting Agreement will provide that the Seller will indemnify
the underwriters against certain civil liabilities, including liabilities under
the Securities Act, or contribute to payments the several underwriters may be
required to make in respect thereof.
Each Trust may, from time to time, invest the funds in its Trust
Accounts in Eligible Investments acquired from such underwriters.
Pursuant to each of the Underwriting Agreements with respect to a given
series of Securities, the closing of the sale of any class of Securities subject
to either thereof will be conditioned on the closing of the sale of all other
such classes subject to either thereof.
This Prospectus may be used by McDonald Investments Inc. ("McDonald
Investments"), a wholly-owned subsidiary of KeyCorp and an affiliate of the
Seller and the Master Servicer, or its successors, in connection with offers and
sales related to market-making transactions in the Securities in which McDonald
Investments acts as a principal. McDonald Investments may also act as agent in
such transactions. McDonald Investments is a member of the New York Stock
Exchange, Inc. McDonald Investments is not a bank or thrift, is an entity
separate from the Seller and the Master Servicer, and is solely responsible for
its own contractual obligations and commitments.
The place and time of delivery for the Securities in respect of which
this Prospectus is delivered will be set forth in the related Prospectus
Supplement.
LEGAL MATTERS
Certain legal matters relating to the Securities of any series will be
passed upon for the related Trust, the Seller and the Administrator by Forrest
F. Stanley, Esq., General Counsel and Assistant Secretary of the Seller, as
counsel for the Seller, and by Thompson Hine & Flory LLP, Cleveland, Ohio.
Certain federal income tax and other matters will be passed upon for the Trust
by Thompson Hine & Flory LLP. Certain Pennsylvania state income tax matters will
be passed upon for each Trust by Kirkpatrick & Lockhart LLP.
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INDEX OF PRINCIPAL TERMS
Page
10 percent shareholder.................................................. 96
1992 Amendments......................................................... 20
1993 Act................................................................ 42
1998 Amendments......................................................... 20
1998 Reauthorization Bill............................................... 92
91-day Treasury Bill Rate............................................... 24
AACSB................................................................... 33
Additional Fundings..................................................... 18
Administration Agreement................................................ 85
Administration Fee...................................................... 86
Administrator........................................................... 15
Administrator Default................................................... 80
Applicable Trustee...................................................... 62
Auction Date............................................................ 85
Auction Purchase Amount................................................. 85
Available Funds......................................................... 89
Bankruptcy Code......................................................... 91
Bar Exam Loan........................................................... 33
Base Rate............................................................... 61
Benefit Plan............................................................ 108
bunching................................................................ 101
Calculation Agent....................................................... 61
Cede.................................................................... 51
Cedel................................................................... 61
Cedel Participants...................................................... 64
Certificate Balance..................................................... 50
Certificate Pool Factor................................................. 50
Certificateholder....................................................... 62
Certificates............................................................ 59
Closing Date............................................................ 69
Code.................................................................... 94
Collection Account...................................................... 70
Collection Period....................................................... 69
Commission.............................................................. 13
Consolidation Loans..................................................... 39
controlled foreign corporation.......................................... 96
Cooperative............................................................. 64
Cutoff Date............................................................. 14
Deferral Period......................................................... 25
Definitive Certificates................................................. 66
Definitive Notes........................................................ 66
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Definitive Securities................................................... 66
Department.............................................................. 15
Depositories............................................................ 62
Depository.............................................................. 50
Depository Services..................................................... 63
Distribution Date....................................................... 51
DTC..................................................................... 50
effectively connected earnings and profits.............................. 97
Eligible Deposit Account................................................ 71
Eligible Institution.................................................... 71
Eligible Investments.................................................... 71
Eligible Lender Trustee................................................. 14
Eligible Students....................................................... 22
ERISA................................................................... 106
Escrow Account.......................................................... 70
Euroclear............................................................... 61
Euroclear Operator...................................................... 64
Euroclear Participants.................................................. 64
Event of Default........................................................ 53
Exchange Act............................................................ 13
FASIT................................................................... 98
FDIA.................................................................... 88
FDIC.................................................................... 71
Federal Assistance...................................................... 21
Federal Consolidation Loan.............................................. 29
Federal Consolidation Loan Program...................................... 20
Federal Consolidation Loan Rebate....................................... 31
Federal Direct Consolidation Loan....................................... 30
Federal Direct Consolidation Loan Program............................... 30
Federal Direct Student Loan Program..................................... 43
Federal Graduate Programs............................................... 32
Federal Guarantee Agreements............................................ 20
Federal Guarantee Payments.............................................. 20
Federal Guarantors...................................................... 20
Federal Loans........................................................... 19
Federal Origination Fee................................................. 31
Federal Programs........................................................ 20
Federal Tax Counsel..................................................... 94
Fee Advance............................................................. 38
FFELP................................................................... 24
FIRREA.................................................................. 88
Fixed Rate Securities................................................... 60
Floating Rate Securities................................................ 60
Forbearance Period...................................................... 25
foreign person.......................................................... 96
112
<PAGE> 227
Funding Period.......................................................... 18
Grace Period............................................................ 25
Graduate Loans.......................................................... 19
Great Lakes............................................................. 34
Guarantee Agreements.................................................... 20
Guarantee Payments...................................................... 20
Guarantors.............................................................. 20
Higher Education Act.................................................... 20
Indenture............................................................... 50
Indenture Trustee....................................................... 50
Indirect Participants................................................... 62
Industry................................................................ 63
in-house asset manager.................................................. 107
Initial Pool Balance.................................................... 84
Interest Index Carryover................................................ 54
Interest Period......................................................... 100
Interest Rate........................................................... 51
Interest Reset Period................................................... 61
Interest Subsidy Payments............................................... 21
Investment Earnings..................................................... 71
IRS..................................................................... 94
KBUSA................................................................... 15
Key Alternative Loan.................................................... 34
KeyCorp................................................................. 16
Keys2Repay Program...................................................... 37
LIBOR................................................................... 61
Master Servicer......................................................... 15
Master Servicer Default................................................. 80
Master Servicing Fee.................................................... 74
Minimum Purchase Amount................................................. 85
Monthly Servicing Payment Date.......................................... 73
Negative Carry Account.................................................. 70
New Withholding Regulations............................................. 97
Note Pool Factor........................................................ 50
Noteholder.............................................................. 62
Notes................................................................... 50
OID..................................................................... 95
OID Regulations......................................................... 95
Participants............................................................ 51
Parties in Interest..................................................... 107
Pass-Through Rate....................................................... 60
Pennsylvania Tax Counsel................................................ 94
PHEAA................................................................... 105
Plans................................................................... 106
PLUS Loan............................................................... 42
113
<PAGE> 228
PLUS Loan Program....................................................... 20
PLUS Loans.............................................................. 28
Pool Balance............................................................ 50
Pool Factor............................................................. 50
portfolio interest...................................................... 96
Post-Graduate Loans..................................................... 19
Pre-Funded Amount....................................................... 78
Pre-Funding Account..................................................... 70
Private Consolidation Fee Advance....................................... 40
Private Consolidation Loan.............................................. 39
Private Consolidation Loan Program...................................... 39
Private Graduate Loans.................................................. 33
Private Guarantee Agreements............................................ 20
Private Guarantee Payments.............................................. 20
Private Guaranteed Loans................................................ 20
Private Guarantors...................................................... 20
Private Loan Repayment Commencement Date................................ 37
Private Loans........................................................... 34
Private Undergraduate Loans............................................. 33
Private Unguaranteed Loans.............................................. 20
Programs................................................................ 19
Prospectus.............................................................. 50
Prospectus Supplement................................................... 50
PTCE.................................................................... 107
Purchase Amount......................................................... 69
qualified professional asset manager.................................... 108
Rating Agency........................................................... 57
Record Date............................................................. 67
Registration Statement.................................................. 13
Related Documents....................................................... 57
related person.......................................................... 96
Reserve Account......................................................... 70
Residency Loan.......................................................... 33
Revolving Period........................................................ 18
Rules................................................................... 63
Sale and Servicing Agreement............................................ 68
Secretary............................................................... 90
Securities.............................................................. 59
Securityholders......................................................... 62
Seller.................................................................. 15
Seller Insolvency Event................................................. 83
SLS Loan Program........................................................ 20
SLS Loans............................................................... 27
Special Allowance Payments.............................................. 21
Specified Reserve Account Balance....................................... 52
114
<PAGE> 229
Spread.................................................................. 61
Spread Multiplier....................................................... 61
Stafford Loan Program................................................... 20
Stafford Loans.......................................................... 21
Student Loans........................................................... 14
Sub-Servicers........................................................... 17
Sub-Servicing Agreement................................................. 17
Systems................................................................. 63
tax matters partner..................................................... 104
Terms and Conditions.................................................... 65
Transfer and Servicing Agreements....................................... 68
Trust................................................................... 13
Trust Accounts.......................................................... 70
Trust Agreement......................................................... 13
UCC..................................................................... 87
Undergraduate Loans..................................................... 19
Underlying Federal Loan................................................. 29
Underlying Private Graduate Loans....................................... 39
Underwriting Agreements................................................. 109
unrelated business taxable income....................................... 98
Unsubsidized Stafford Loan Program...................................... 41
Unsubsidized Stafford Loans............................................. 21
YEAR 2000............................................................... 16
Year 2000 problems...................................................... 63
115
<PAGE> 230
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KEYCORP STUDENT LOAN TRUST 1999-B
$280,000,000
CLASS A-1 FLOATING RATE
ASSET-BACKED NOTES
$625,000,000
CLASS A-2 FLOATING RATE
ASSET-BACKED NOTES
$30,000,000
CLASS M FLOATING RATE
ASSET-BACKED NOTES
$65,000,000
FLOATING RATE
ASSET-BACKED CERTIFICATES
KEY BANK USA, NATIONAL ASSOCIATION
SELLER AND MASTER SERVICER
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PROSPECTUS SUPPLEMENT
SEPTEMBER 30, 1999
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CREDIT SUISSE FIRST BOSTON
MCDONALD INVESTMENTS
A KEYCORP COMPANY
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