<PAGE> 1
REGISTRATION STATEMENT NO. 333-________
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 7, 1999
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------------------------------------
KEYCORP STUDENT LOAN TRUSTS
(Issuer of the Notes and the Certificates)
----------------------------------------------------
KEY BANK USA, NATIONAL ASSOCIATION
(Originator of the Trust described herein)
(Exact name of Registrant as specified in its charter)
UNITED STATES 34-1804148
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
KEY TOWER
127 PUBLIC SQUARE
CLEVELAND, OHIO 44114
(216) 689-6300
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
------------------------------------------------
DANIEL R. STOLZER, ESQ.
VICE PRESIDENT
AND ASSOCIATE GENERAL COUNSEL
KEYCORP
KEY TOWER
127 PUBLIC SQUARE
CLEVELAND, OHIO 44114
(216) 689-6300
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
------------------------------------------------
COPIES TO:
ROBERT A. SELAK, ESQ. REED D. AUERBACH, ESQ.
THOMPSON HINE & FLORY LLP STROOCK & STROOCK & LAVAN LLP
312 WALNUT STREET 180 MAIDEN LANE
SUITE 1400 NEW YORK, NEW YORK 10038
CINCINNATI, OHIO 45202
-----------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
From time to time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
-----------
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
-----------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==============================================================================================================================
PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE PROPOSED MAXIMUM OFFERING AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED (1) PRICE PER UNIT (2) PRICE (2) FEE(3)
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<S> <C> <C> <C> <C>
Asset Backed Notes and Asset $1,000,000 100% $1,000,000 $278.00
Backed Certificates
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</TABLE>
(1) This Registration Statement also relates to market-making transactions that
may be made by McDonald Investments Inc., a KeyCorp Company, an affiliate
of the Registrant.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Calculated pursuant to Rule 457(a) of the Securities Act.
THIS REGISTRATION STATEMENT IS ALSO BEING USED TO REGISTER SECURITIES THAT MAY
BE SOLD IN MARKET-MAKING TRANSACTIONS BY AN AFFILIATE OF THE REGISTRANT. THE
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 2
EXPLANATORY NOTE
THIS REGISTRATION STATEMENT CONTAINS (i) A FORM OF PROSPECTUS SUPPLEMENT,
RELATING TO A PUBLIC OFFERING BY KEYCORP STUDENT LOAN TRUSTS (THE "TRUST") OF
ASSET BACKED NOTES AND ASSET BACKED CERTIFICATES (COLLECTIVELY, THE
"SECURITIES"); (ii) CERTAIN PAGES OF A SECOND FORM OF PROSPECTUS SUPPLEMENT
WHICH MAY BE USED IN CONNECTION WITH OFFERS AND SALES RELATING TO MARKET-MAKING
TRANSACTIONS IN THE SECURITIES BY AN AFFILIATE OF THE REGISTRANT AND (iii) A
BASE PROSPECTUS RELATING TO THE SECURITIES. THE FORM OF PROSPECTUS SUPPLEMENT
RELATING TO THE SECURITIES FOLLOWS IMMEDIATELY AFTER THIS EXPLANATORY NOTE.
FOLLOWING SUCH FORM OF PROSPECTUS SUPPLEMENT ARE ALTERNATE PAGES OF THE
MARKET-MAKING FORM OF PROSPECTUS SUPPLEMENT RELATING TO THE SECURITIES. ALL
OTHER PAGES OF THE PUBLIC OFFERING FORM OF PROSPECTUS SUPPLEMENT FOR THE
SECURITIES ARE ALSO TO BE USED FOR THE MARKET-MAKING PROSPECTUS.
Information contained herein is subject to completion or amendment. A
registration statement relating to these Securities has been filed with the
Securities and Exchange Commission. These Securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these Securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE> 3
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED
[SUBJECT TO COMPLETION DATED JUNE 7, 1999]
$
--------------
KEYCORP STUDENT LOAN TRUST -
----- ---
KEY BANK USA, NATIONAL ASSOCIATION
Seller
FLOATING RATE ASSET-BACKED NOTES
FLOATING RATE ASSET-BACKED CERTIFICATES
--------------
<TABLE>
<S> <C>
SECURITIES OFFERED
o classes of notes and certificates You should carefully consider
listed in the table below the risk factors beginning on
page S-_ of this prospectus
ASSETS supplement and page 2 of the
o student loans prospectus.
o certain student loans guaranteed by federal
or private guarantors The securities are obligations
only of the trust. The
CREDIT ENHANCEMENT securities are not guaranteed
o notes by any person.
o subordination of certificates
o reserve account The securities are not bank
o certificates deposits.
o reserve account
</TABLE>
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 FINAL
PRINCIPAL INTEREST RATE MATURITY PRICE TO UNDERWRITING PROCEEDS TO THE
AMOUNT (PER ANNUM) DATE PUBLIC (1) DISCOUNT SELLER(1)(2)
--------- ------------- -------- ---------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class A-1 Notes $ % % %
Class A-2 Notes $ % % %
Certificates $ % % %
Total............... $ $ $ $
</TABLE>
(1) Plus accrued interest, if any, from ___________.
(2) Before deducting expenses, estimated to be $_______________.
Delivery of the securities will be made on or about ____________, 19__, against
payment in immediately available funds.
[NAMES OF UNDERWRITERS]
Prospectus Supplement dated _____________, _________
<PAGE> 4
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 ______________, _______ 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.
S-2
<PAGE> 5
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<S> <C>
SUMMARY OF TERMS ........................................................ S-4
RISK FACTORS ............................................................ S-9
FORMATION OF THE TRUST .................................................. S-15
USE OF PROCEEDS ......................................................... S-17
THE SERVICERS ........................................................... S-17
THE FINANCED STUDENT LOAN POOL .......................................... S-20
DESCRIPTION OF THE SECURITIES ........................................... S-50
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS .................... S-57
INCOME TAX CONSEQUENCES ................................................. S-79
ERISA CONSIDERATIONS .................................................... S-79
UNDERWRITING ............................................................ S-81
LEGAL MATTERS ........................................................... S-82
INDEX OF PRINCIPAL TERMS ................................................ S-84
[ANNEX I]
PROSPECTUS
RISK FACTORS ............................................................ 5
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE ......................... 12
FORMATION OF THE TRUSTS ................................................. 13
USE OF PROCEEDS ......................................................... 14
THE SELLER, THE ADMINISTRATOR AND THE SERVICERS ......................... 14
THE STUDENT LOAN POOLS .................................................. 15
THE STUDENT LOAN FINANCING BUSINESS ..................................... 17
WEIGHTED AVERAGE LIVES OF THE SECURITIES................................. 45
POOL FACTORS AND TRADING INFORMATION..................................... 48
DESCRIPTIONS OF THE NOTES ............................................... 48
DESCRIPTION OF THE CERTIFICATES ......................................... 57
CERTAIN INFORMATION REGARDING THE SECURITIES ............................ 58
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS .................... 65
CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS .............................. 82
INCOME TAX CONSEQUENCES ................................................. 89
PENNSYLVANIA STATE TAX CONSEQUENCES ..................................... 102
ERISA CONSIDERATIONS .................................................... 103
PLAN OF DISTRIBUTION .................................................... 105
LEGAL MATTERS ........................................................... 107
INDEX OF PRINCIPAL TERMS ................................................ 108
</TABLE>
S-3
<PAGE> 6
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
o KeyCorp Student Loan Trust ____-___
THE SELLER AND ADMINISTRATOR
o Key Bank USA, National Association
THE SERVICERS
o Pennsylvania Higher Education Assistance Agency
o Great Lakes Higher Education Corporation
THE ELIGIBLE LENDER TRUSTEE
o
-----------------------
THE INDENTURE TRUSTEE
o
-----------------------
THE GUARANTORS
o
-----------------------
DATES
DISTRIBUTION DATES
The 27th day of each ______, _______, ________, and _______ or if the 27th is
not a business day, the next business day. The first distribution date is
_________ 2[7]th, _____.
CUTOFF DATE
_______ __________ for the initial student loans and _______ __________ for
the subsequent pool student loans.
STATISTICAL CALCULATION DATE
___________, ___________. The statistical calculation date is the date as of
which certain information with respect to student loans is presented in this
prospectus supplement.
CLOSING DATE
On or about __________.
DESCRIPTION OF THE SECURITIES
OFFERED SECURITIES
o Two classes of notes and one class of certificates
o Original principal amounts and interest rates are on the cover page of this
prospectus supplement
o Securities issued in book-entry form through the Depository Trust Company,
Cedelbank and the Euroclear System
o Minimum denominations of $1,000
TREASURY BILL INDEXED SECURITIES
o
-----------------------------
LIBOR INDEXED SECURITIES
o
-----------------------------
S-4
<PAGE> 7
INTEREST PAYMENTS
o Each interest rate is subject to an interest rate cap described in this
prospectus supplement under the caption "Description of the Securities"
herein.
o Interest calculations
o actual/360 for the ________
o actual/365 or 366 as applicable
for the _________
o Interest not paid on a distribution date due to the interest rate cap 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.
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 servicers, certain fees;
2. to the administrator, certain fees;
3. to the holders of the notes, interest on a pro rata basis;
4. to the holders of the certificates, interest;
5. to the reserve account, an amount, if any, necessary to reinstate the
balance of the reserve account to a specified amount;
6. to the holders of the notes, principal as follows:
(a) to the Class A-1 Notes until paid in full; and then
(b) to the Class A-2 Notes until paid in full;
7. following the date on which the notes have been paid in full, to the
holders of the certificates, principal;
8. to the servicers, certain fees;
9. to the holders of the notes, interest due in excess of the interest rate
cap, if any, on a pro rata basis;
10. to the holders of the certificates, interest due in excess of the
interest rate cap, if any; and
11. to the seller, any remaining amounts.
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 __________ 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 student loans.
S-5
<PAGE> 8
TRUST PROPERTY
THE INITIAL STUDENT LOANS
The initial student loans consist of certain law school, medical school, dental
school, graduate business school and other graduate school loans as well as
certain undergraduate student loans. The initial student loans have the
following characteristics as of ________, _____:
o Aggregate principal amount: $______________
o Weighted average annual percentage rate: _____%
o Weighted average original term: _________ mths
o Weighted average remaining term: _________ mths
o Percent reinsured by the Department of Education _____%
o Percent not reinsured by the Department of Education _____%
o Percent guaranteed by federal guarantors _____%
o Percent guaranteed by the Pennsylvania
Higher Education Assistance Agency _____%
o Percent guaranteed by American Student Assistance _____%
o Percent guaranteed by Nebraska Student Loan Program _____%
o Percent guaranteed by Educational Credit Management Corporation _____%
o Percent guaranteed by California Student Aid Commission _____%
o Percent guaranteed by New York
State Higher Education Services Corporation _____%
o Percent guaranteed by United Student Aid Funds, Inc. _____%
o Percent guaranteed by private guarantors _____%
o Percent guaranteed by The Educational Resources Institute, Inc. _____%
o Percent guaranteed by HEMAR Insurance Corporation _____%
o Percent of graduate school loans _____%
o Percent of undergraduate school loans _____%
o Percent not guaranteed or reinsured by Department of Education _____%
The trust will purchase the initial student loans on the closing date.
PRE-FUNDING ACCOUNT
There will be a pre-funding account of approximately $_______________. The trust
expects to use those amounts to purchase (1) prior to __________ __, _______
subsequent pool student loans and (2) prior to ________ __, ____, 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.
SUBSEQUENT POOL STUDENT LOANS
The subsequent pool student loans consist of certain law school, medical school,
dental school, graduate business school and other graduate school loans as well
as certain undergraduate student loans. The subsequent pool student loans have
the following characteristics as of ____________, ____:
o Aggregate principal amount: $_______________
o Weighted average annual percentage rate: ____%
o Weighted average original term: ______ mths
o Weighted average remaining term: ______ mths
o Percent reinsured by the Department of Education _____%
S-6
<PAGE> 9
o Percent not reinsured by the Department of Education _____%
o Percent guaranteed by federal guarantors _____%
o Percent guaranteed by the
Pennsylvania Higher Education Assistance Agency _____%
o Percent guaranteed by American Student Assistance _____%
o Percent guaranteed by Nebraska Student Loan Program _____%
o Percent guaranteed by Educational Credit Management Corporation _____%
o Percent guaranteed by California Student Aid Commission _____%
o Percent guaranteed by New York
State Higher Education Services Corporation _____%
o Percent guaranteed by United Student Aid Funds, Inc. _____%
o Percent guaranteed by private guarantors _____%
o Percent guaranteed by The Educational Resources Institute, Inc. _____%
o Percent guaranteed by HEMAR Insurance Corporation _____%
o Percent of graduate school loans _____%
o Percent of undergraduate school loans _____%
o Percent not guaranteed or reinsured by Department of Education _____%
OTHER STUDENT LOANS
Following ________, _______ and prior to ________, ________, the trust expects
to purchase other consolidation loans and serial loans made to borrowers with
student loans previously purchased by the trust. The trust expects to purchase
these other student loans with certain collections on the pool of existing
student loans that are not required to be distributed to you or paid to the
trustee, the servicers or the administrator.
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
certificates. Amounts on deposit in the reserve account also will be available,
if necessary, to reduce the principal balance of each class of securities to
zero on its respective final maturity date.
Initially, the account will be $___________. On each distribution date, any
available funds remaining after making all prior required distributions will be
deposited into the reserve account.
TAX STATUS
Thompson Hine & Flory LLP, as federal tax counsel to the trust, is of the
opinion that (1) the trust will not be treated as an association or a publicly
traded partnership taxable as a corporation and (ii) the notes will be
characterized as indebtedness for federal income tax purposes. Each noteholder,
by accepting a note, will agree to treat the notes as indebtedness.
S-7
<PAGE> 10
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.
RATINGS
At least two nationally recognized rating agencies (each a "Rating Agency" and
together, the "Rating Agencies") must each rate the notes in the highest
investment rating category and must rate the certificates in one of the four
highest investment rating categories.
S-8
<PAGE> 11
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 and the pre-funding account. 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 pre-funding account and the reserve
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 or the servicers from time to
time.
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
________% of the sum of the outstanding
principal
S-9
<PAGE> 12
balance of the 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.
In addition, each subsequent pool student
loan will be purchased by the trust for an
amount equal to _____% of the principal
balance thereof. In addition, _____% of the
initial pool of student loans and ____% 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. We
cannot assure you as to when the aggregate
principal amount of the securities 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, if the pool of
student loans is liquidated because of an
event of default under the indenture or the
insolvency of Key Bank USA, National
Association, 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 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 on the
certificates may be delayed or reduced.
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
S-10
<PAGE> 13
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. If any incentive program reduces the
yield on the affected student loan and is
not required by the Higher Education Act of
1965, that program will be applicable to
student loans in the trust only if the trust
receives payment from the seller in an
amount sufficient to offset the related
yield reduction.
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:
o 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.
o YOU MAY RECEIVE A LARGE PRINCIPAL
PREPAYMENT ON ______ __, ___. If the amount
in the pre-funding account is not fully used
to purchase the subsequent pool student
loans on _________, ___, you may receive a
principal prepayment. If the amount
remaining is $___________ 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.
o YOU MAY RECEIVE A PREPAYMENT OF PRINCIPAL
AT END OF FUNDING PERIOD. If the amount in
the pre-funding account is not fully used to
purchase other subsequent student loans by
the end of the funding period, you may
receive a principal prepayment. If the
amount remaining is $________ or less, the
indenture trustee will
S-11
<PAGE> 14
distribute the amount on each class of
securities, pro rata, based on the initial
principal balance of the securities.
o YOU MAY NOT BE ABLE TO REINVEST
DISTRIBUTIONS IN COMPARABLE INVESTMENTS.
Asset backed securities, like the
securities, 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.
o 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 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 as a result of
an interest rate cap. The interest rate cap
may be triggered as a result of:
o The difference between the indices used
to calculate interest on the student
loans and the applicable index used to
calculate interest on the securities.
o 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.
S-12
<PAGE> 15
o The interest rate cap 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 you may receive interest not paid
because of the interest rate cap on
subsequent distribution dates, 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 interest rate cap, the market value and
liquidity of your securities may decline.
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 any servicer, the administrator,
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 made statements
to the public acknowledging that the
Department of Education has been placed on
the Office of Management and Budget's "watch
list" for not meeting certain milestones
toward year 2000 compliance. 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.
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
S-13
<PAGE> 16
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 not paid as a
result of the interest rate cap.
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.
S-14
<PAGE> 17
FORMATION OF THE TRUST
THE TRUST
KeyCorp Student Loan Trust _____- (the "Trust") is a trust formed under
the laws of the State of New York pursuant to the Amended and Restated Trust
Agreement dated as of ________, ____ (as amended and supplemented from time to
time, the "Trust Agreement") between Key Bank USA, National Association (the
"Seller") and The First National Bank of Chicago, as trustee (the "Eligible
Lender Trustee") for the transactions described in this Prospectus Supplement.
The assets of the Trust will include certain law school, medical school, dental
school, graduate business school and other graduate school student loans and
certain undergraduate student loans (collectively "Student Loans"). Such Student
Loans will be acquired by the trust from the Seller on ____, 199_ (the "Closing
Date") and from time to time thereafter (collectively, the "Financed Student
Loans"). The Financed Student Loans will consist of Financed Student Loans that
are reinsured by the United States Department of Education (the "Department")
(collectively, "Financed Federal Loans") and Financed Student Loans that are not
reinsured by the Department or any other government agency (collectively,
"Financed Private Loans").
The Trust will not engage in any activity other than
o acquiring, holding and managing the Financed Student Loans and
the other assets of the Trust and proceeds therefrom
o issuing the Certificates and the Notes
o making payments thereon and
o engaging in other activities that are necessary, suitable or
convenient to accomplish the foregoing or are incidental
thereto or connected therewith.
The Trust will be initially capitalized with equity of $____________
excluding amounts deposited in the Reserve Account in the name of the Indenture
Trustee by the Seller on the Closing Date, representing the initial principal
balance of the Floating Rate Asset Backed Certificates (the "Certificates").
Certificates with an original principal balance of approximately $___________
will be sold to and retained by the Seller and the remaining Certificates will
be sold to third-party investors that are expected to be unaffiliated with the
Seller, the Servicers, the Guarantors, the Trust or the Department. The equity
of the Trust, together with the proceeds from the sale of the Notes, will be
used by the Eligible Lender Trustee to purchase on behalf of the Trust the
Initial Financed Student Loans from the Seller pursuant to the Sale and
Servicing Agreement dated as of ______ __, ____ among the Trust, the Seller, the
Administrator, the Servicers, and the Eligible Lender Trustee (the "Sale and
Servicing Agreement") and to fund the deposit of $___________ (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
S-15
<PAGE> 18
Student Loans to make a deposit of $__________ 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
_______ __, ____,
(c) all Guarantee Agreements and other relevant rights under
certain collateral agreements with respect to the Financed
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"), the
Pre-Funding Account, an account in the name of the Indenture
Trustee (the "Escrow Account") and the
Reserve Account.
To facilitate servicing and to minimize administrative burden and expense, the
Servicers will be appointed by the Eligible Lender Trustee the custodians of the
promissory notes representing the Financed Student Loans that each services on
behalf of the Trust.
"Initial Financed Student Loans" means the Student Loans transferred by
the Seller to the Trust as of the Closing Date having an aggregate principal
balance of approximately $______________ as of ______ __, ____ (the "Statistical
Cutoff Date").
ELIGIBLE LENDER TRUSTEE
The First National Bank of Chicago 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. The First National Bank of Chicago principal offices are located at
One First National Plaza, Suite 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.
The Eligible Lender Trustee will acquire on behalf of the Trust legal
title to all the Financed Student Loans acquired from time to time pursuant to
the Sale and Servicing Agreement. The Eligible Lender Trustee on behalf of the
Trust will enter into a Guarantee Agreement with each of the Guarantors with
respect to the Financed Student Loans that are guaranteed (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 (the "Private
S-16
<PAGE> 19
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 such term is defined in the Prospectus) from any of
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 such term is 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") and Floating Rate Class A-2 Asset Backed Notes (the "Class A-2 Notes"
and together with the Class A-1 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.
In consideration for its performance of its obligations under the Sale
and Servicing Agreement, the Eligible Lender Trustee will be entitled to receive
an annual fee of $________.
USE OF PROCEEDS
After making the deposit of the Pre-Funded Amount to the Pre-Funding
Account, the balance of the net proceeds from the sale of the Certificates and
the Notes will be paid 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 an initial deposit into the Collection Account and (y) for
general corporate purposes.
THE SERVICERS
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
__________ __, ____ it had approximately _______ employees.
S-17
<PAGE> 20
As of __________ ___, _____, PHEAA has outstanding debt and/or credit
facilities (under which the entire aggregate amount of funds available had not
been drawn) in the amount (including amounts drawn or available under such
credit facilities) of approximately $________. As of ___________ ___, _____,
PHEAA owned approximately $__________ outstanding principal amount of student
loans financed with the proceeds of its long-term debt, and had funds available
for acquisition of student loans in the amount of approximately $________.
PHEAA has been guaranteeing student loans since 1964 and has guaranteed
a total of approximately $_________ principal amount of Stafford Loans (as such
term is defined in the Prospectus) and approximately $_________ principal amount
of Parent Loans for Undergraduate Students ("PLUS Loans") and SLS Loans (as such
term is 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 $________ as of ________ ___, ____.
PHEAA's two principal servicing products are its full servicing
operation (in which it performs all student loan servicing functions on behalf
of its customers) and its remote servicing operation (in which it provides only
data processing services to its customers that have their own servicing
operations). As of ________ ___, ____, PHEAA was servicing under its full
service operation approximately 1.1 million student loan accounts representing
approximately $_________ outstanding principal amount for more than ____
customers and under its remote servicing operation, approximately ________
student loans representing approximately $_________ outstanding principal amount
for ___ customers.
The above information relating to PHEAA has been obtained from PHEAA
and the Seller has not conducted any independent verification of such
information. PHEAA has agreed that it will provide a copy of its most recent
audited financial statements to 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.
GREAT LAKES
As of ________, ____, Great Lakes Higher Education Corporation
("GLHEC," and together with PHEAA, the "Servicers" and each a "Servicer")
serviced _________ student and parental accounts with an outstanding balance of
$_______ for ______ lenders nationwide. Less than __% of the portfolio serviced
by GLHEC is made up of loans to students at for-profit trade schools. As of
________, ____, __% of the portfolio serviced by GLHEC was in repayment status,
__% was in grace status and the remaining __% was in interim status.
S-18
<PAGE> 21
The staff and management at GLHEC take the issue of year 2000
compliance very seriously. GLHEC is committed to take the reasonable and
necessary actions to prepare its systems to accurately process dates from the
twentieth and twenty-first centuries. GLHEC is seeking to minimize, if not
eliminate, the risk of error, interruption or loss of functionality for the
lenders, schools, and borrowers who rely on its systems. The remedies available
to the issuer or other third parties shall be subject to the terms and
limitations of its servicing agreement with GLHEC.
GLHEC had adopted a structured management approach to ensuring its
systems are compliant. The Chief Information Officer has been assigned overall
responsibility for year 2000 compliance. GLHEC has not evaluated any computer
system, product or procedure of any third party with whom GLHEC exchanges data,
including but not limited to, the Department, schools or lenders. Accordingly,
GLHEC is unable to provide any assurances regarding the year 2000 compliance of
any third parties or their effect on GLHEC's ability to properly perform its
activities.
GLHEC 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 SERVICERS
Pursuant to the Sale and Servicing Agreement and except as otherwise
expressly assumed by the Administrator, each of PHEAA and GLHEC has agreed as a
Servicer to service, and perform all other related tasks with respect to, all
the Financed Student Loans acquired by the Eligible Lender Trustee on behalf of
the Trust. PHEAA will be Servicer with respect to approximately _____% of the
outstanding principal balance of the Initial Financed Student Loans and GLHEC
will be the Servicer with respect to approximately _____% of the outstanding
principal balance of the Initial Financed Student Loans. As of the Statistical
Cutoff Date, PHEAA will be the Servicer with respect to approximately ___% of
the outstanding principal balance of the Student Loans in the pool of Student
Loans currently owned by the Seller (the "Subsequent Pool") to be purchased from
funds on deposit in the Subsequent Pool Pre-Funding Subaccount and GLHEC will be
the Servicer with respect to approximately __% of the outstanding principal
balance of the Student Loans in the Subsequent Pool. With respect to the
Financed Student Loans it is servicing for the Trust, each Servicer is required
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 Servicer has
serviced Student Loans on behalf of the Seller and otherwise in compliance with
all applicable standards and procedures. In addition, each 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" herein.
In consideration for performing its obligations under the Sale and
Servicing Agreement, the Servicers will receive, subject to certain limitations
described herein, a monthly fee payable by the
S-19
<PAGE> 22
Trust on or about the twenty-seventh day of each month (the "Monthly Servicing
Payment Date") generally equal to the sum of (a) the per annum percentage
specified in the schedule delivered to the Eligible Lender Trustee on the
Closing Date (the "Servicing Fee Percentage") of the principal balance of the
Financed Student Loans serviced by such Servicer as of the last day of the
preceding calendar month and (b) in the case of PHEAA, certain one-time fixed
fees for each Financed Student Loan for which a forbearance period was granted
or renewed or for which a guarantee claim was filed, in each case subject to
certain adjustments, together with other administrative fees and similar
charges. See "Description of Transfer and Servicing Agreements--Servicing
Compensation" herein.
THE FINANCED STUDENT LOAN POOL
GENERAL
The pool of Financed Student Loans will include the Initial Financed
Student Loans purchased by the Eligible Lender Trustee on behalf of the Trust as
of the Statistical Cutoff Date and any Additional Student Loans purchased by the
Eligible Lender Trustee on behalf of the Trust from the Seller as of the
applicable Subsequent Cutoff Dates.
The Financed Student Loans will be selected from the Seller's portfolio
of Student Loans by several criteria, including, as of the Statistical Cutoff
Date or the applicable Subsequent Cutoff Date, as the case may be, the
following:
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 such term is 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, with respect to the Initial Financed Student
Loans and Subsequent Pool Student Loans, has
graduated or otherwise left graduate school or is
expected to graduate or otherwise leave graduate
school by _____________, ____,
(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 Statistical Cutoff Date
or, with respect to the Other Subsequent Student
Loans or Other Student Loans not more than 90 days
past due as of the applicable Subsequent Cutoff Date,
as the case may be.
S-20
<PAGE> 23
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 Servicers 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 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 preceding payment of interest was made. As payments are
received in respect of such Financed Student Loan, the amount received is
applied first to interest accrued to the date of payment and the balance is
applied to reduce the unpaid principal balance. Accordingly, if a borrower pays
a regular installment before its scheduled due date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be less than it would have been had the payment been made as scheduled, and the
portion of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if a borrower pays a monthly installment
after its scheduled due date, the portion of the payment allocable to interest
for the period since the preceding payment was made will be greater than it
would have been had the payment been made as scheduled, and the portion of the
payment applied to reduce the unpaid principal balance will be correspondingly
less. In either case, subject to any applicable Deferral Periods (as such term
is defined in the Prospectus)or Forbearance Periods (as such term is defined in
the Prospectus), the
S-21
<PAGE> 24
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 such term is defined in the Prospectus), in each case originated by the
Seller in accordance with the Programs and other applicable requirements. Such
Subsequent Pool Student Loans, 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.
THE FINANCED STUDENT LOANS AND SUBSEQUENT POOL STUDENT LOANS
Set forth below in the following tables is a description of certain
additional characteristics of the Initial Financed Student Loans and the
Subsequent Pool Student Loans as of the Statistical Cutoff Date. 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.
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<PAGE> 25
COMPOSITION AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
KEYCORP STUDENT LOAN TRUST INITIAL POOL SUBSEQUENT POOL TOTAL
- -------------------------- ------------ --------------- -----
<S> <C> <C> <C>
Aggregate Outstanding
Balance(1)
Number of Borrowers
Average Outstanding
Balance Per Borrower
Number of Loans
Average Outstanding
Balance Per Loan
Weighted Average
Remaining Term
to Maturity(2)
Weighted Average Annual
Borrower Interest Rate(3)
</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 $______________ with respect to the Initial
Financed Student Loans and $______, with respect to the Subsequent Pool
Student Loans, in each case as of the Statistical Cutoff Date.
(2) Determined from the date of origination or the Statistical Cutoff Date,
as the case may be, to the stated maturity date of the applicable
Initial Financed Student Loans or Subsequent Pool 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 Financed Student Loans and
the Subsequent Pool Student Loans as of the Statistical Cutoff Date.
However, because all the Initial Financed Student Loans and the
Subsequent Pool 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 Financed Student Loans and the
Subsequent Pool Student Loans at any time after the Statistical Cutoff
Date. See "The Student Loan Financing Business" in the Prospectus. The
weighted average spread, including Special Allowance Payments, to the
91-day Treasury Bill Rate or 52-week Treasury Bill Rate, as applicable,
was ____% as of the Statistical Cutoff Date and would have been ____%
if all of the Student Loans were in repayment as of the Statistical
Cutoff Date with respect to the Initial Financed Student Loans. The
weighted average spread, including Special Allowance Payments, to the
91-day Treasury Bill Rate or 52-week Treasury Bill Rate, as applicable,
was ____% as of the Statistical Cutoff Date and would have been ____%
if all of the Student Loans were in repayment as of the Statistical
Cutoff Date with respect to the Subsequent Pool Student Loans.
S-23
<PAGE> 26
DISTRIBUTION BY LOAN TYPE AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
----------------------------------- -----------------------------------
AGGREGATE AGGREGATE PERCENT OF
OUTSTANDING PERCENT OF OUTSTANDING SUBSEQUENT
NUMBER PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL POOL
OF LOANS BALANCE(1) BALANCE LOANS BALANCE (2) BALANCE
-------- ----------- ------------ --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Stafford Subsidized Loans
Stafford Unsubsidized Loans
Federal Consolidation Loans
SLS Loans
Bar Examination Loans
Business Loans
Private Consolidation Loans
Dental Loans
Graduate Loans
Law Loans
Medical Loans
Residency Loans
ADEAL Loans
Key Alternative Loans
Total
<CAPTION>
TOTAL
----------------------------------
AGGREGATE
OUTSTANDING PERCENT OF
NUMBER OF PRINCIPAL POOL
LOANS BALANCE BALANCE
--------- ----------- ----------
<S> <C> <C> <C>
Stafford Subsidized Loans
Stafford Unsubsidized Loans
Federal Consolidation Loans
SLS Loans
Bar Examination Loans
Business Loans
Private Consolidation Loans
Dental Loans
Graduate Loans
Law Loans
Medical Loans
Residency Loans
ADEAL Loans
Key Alternative Loans
Total
</TABLE>
(1) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________ as of the Statistical Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________ as of the Statistical Cutoff Date.
S-24
<PAGE> 27
DISTRIBUTION BY BORROWER INTEREST RATE AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL TOTAL
----------------------------------- ----------------------------------- ----------------------------------
AGGREGATE AGGREGATE PERCENT OF AGGREGATE
OUTSTANDING PERCENT OF OUTSTANDING SUBSEQUENT OUTSTANDING PERCENT OF
NUMBER PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL POOL NUMBER OF PRINCIPAL POOL
OF LOANS BALANCE(2) BALANCE LOANS BALANCE (3) BALANCE LOANS BALANCE BALANCE
-------- ----------- ------------ --------- ------------ ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Less than 7.50%(1)
7.50% to 7.99%
8.00% to 8.49%
8.50% to 8.99%
9.00% and above
Total
</TABLE>
(1) Determined using the interest rates applicable to the Initial Financed
Student Loans and the Subsequent Pool Student Loans as of the
Statistical Cutoff Date. However, because all the Initial Financed
Student Loans and the Subsequent Pool 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 or the Subsequent Pool 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 $________________as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________as of the Statistical Cutoff Date.
S-25
<PAGE> 28
DISTRIBUTION BY OUTSTANDING PRINCIPAL BALANCE AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL TOTAL
----------------------------------- ----------------------------------- ----------------------------------
AGGREGATE AGGREGATE PERCENT OF AGGREGATE
OUTSTANDING PERCENT OF OUTSTANDING SUBSEQUENT OUTSTANDING PERCENT OF
NUMBER PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL POOL NUMBER OF PRINCIPAL POOL
OF LOANS BALANCE(2) BALANCE LOANS BALANCE (3) BALANCE LOANS BALANCE BALANCE
-------- ----------- ------------ --------- ------------ ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Less than $1,000
$1,000 to $1,999
$2,000 to $2,999
$3,000 to $3,999
$4,000 to $4,999
$5,000 to $5,999
$6,000 to $6,999
$7,000 to $7,999
$8,000 to $8,999
$9,000 to $9,999
$10,000 to $10,999
$11,000 to $11,999
$12,000 to $12,999
$13,000 to $13,999
$14,000 to $14,999
$15,000 to $15,999
$16,000 to $16,999
$17,000 to $17,999
$18,000 to $18,999
$19,000 to $19,999
$20,000 to $20,999
$21,000 to $21,999
$22,000 to $22,999
$23,000 to $23,999
$24,000 to $24,999
</TABLE>
S-26
<PAGE> 29
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL TOTAL
----------------------------------- ----------------------------------- ----------------------------------
AGGREGATE AGGREGATE PERCENT OF AGGREGATE
OUTSTANDING PERCENT OF OUTSTANDING SUBSEQUENT OUTSTANDING PERCENT OF
NUMBER PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL POOL NUMBER OF PRINCIPAL POOL
OF LOANS BALANCE(2) BALANCE LOANS BALANCE (3) BALANCE LOANS BALANCE BALANCE
-------- ----------- ------------ --------- ------------ ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$25,000 to $25,999
$26,000 to $26,999
$27,000 to $27,999
$28,000 to $28,999
$29,000 to $29,999
$30,000 and above
Total
</TABLE>
(1) Borrowers generally have more than one outstanding loan. The average
aggregate outstanding principal balance of loans per borrower is
$_____, with respect to the Initial Financed Student Loans, and
$______, with respect to the Subsequent Pool Student Loans, in each
case as of the Statistical Cutoff Date. Some borrowers have both loans
which are Initial Financed Student Loans and loans which are Subsequent
Pool Student Loans. If both pools were combined, the number of
borrowers would be $____ and the average outstanding principal balance
per borrower would be $_____.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________ as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $_____ as of the Statistical Cutoff Date.
S-27
<PAGE> 30
DISTRIBUTION BY REMAINING TERM TO SCHEDULED MATURITY
AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL TOTAL
----------------------------------- ----------------------------------- ----------------------------------
AGGREGATE AGGREGATE PERCENT OF AGGREGATE
OUTSTANDING PERCENT OF OUTSTANDING SUBSEQUENT OUTSTANDING PERCENT OF
NUMBER PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL POOL NUMBER OF PRINCIPAL POOL
OF LOANS BALANCE(2) BALANCE LOANS BALANCE (3) BALANCE LOANS BALANCE BALANCE
-------- ----------- ------------ --------- ------------ ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12 and below(1)
13 to 24
25 to 48
49 to 60
61 to 72
73 to 84
85 to 96
97 to 108
109 to 120
121 to 180
181 to 240
241 and above
Total
</TABLE>
(1) Determined from the Statistical Cutoff Date to the stated maturity date
of the applicable Initial Financed Student Loan or Subsequent Pool
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 $________________as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________as of the Statistical Cutoff Date.
S-28
<PAGE> 31
DISTRIBUTION BY BORROWER PAYMENT STATUS AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL TOTAL
----------------------------------- ----------------------------------- ----------------------------------
AGGREGATE AGGREGATE PERCENT OF AGGREGATE
OUTSTANDING PERCENT OF OUTSTANDING SUBSEQUENT OUTSTANDING PERCENT OF
NUMBER PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL POOL NUMBER OF PRINCIPAL POOL
OF LOANS BALANCE(2) BALANCE LOANS BALANCE (3) BALANCE LOANS BALANCE BALANCE
-------- ----------- ------------ --------- ------------ ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
In School(1)
Grace
Deferral
Forbearance
Repayment
First year in
repayment
Second year in repayment
More than two years in repayment
Total
</TABLE>
(1) Refers to the status of the borrower of each Initial Financed Student
Loan or Subsequent Pool Student Loan to be added, in each case, as of
the Statistical Cutoff Date: such borrower may still be attending law
school, medical school, dental school, graduate business school, or
another type of graduate school ("In-School"), may be in a grace period
prior to repayment commencing ("Grace"), may be repaying such loan
("Repayment") or may have temporarily ceased 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 $________________ as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________ as of the Statistical Cutoff Date.
S-29
<PAGE> 32
SCHEDULED WEIGHTED AVERAGE MONTHS REMAINING IN STATUS
BY CURRENT BORROWER PAYMENT STATUS AS OF THE
STATISTICAL CUTOFF DATE(1)
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
-------------------------------------------------- --------------------------------------------------
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
Grace
Deferral
Forbearance
Repayment
Total
<CAPTION>
TOTAL
--------------------------------------------------
IN-SCHOOL GRACE DEFERRAL FORBEARANCE REPAYMENT
--------- ----- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
In-School
Grace
Deferral
Forbearance
Repayment
Total
</TABLE>
(1) Determined without giving effect to any Deferral Periods or Forbearance
Periods that may be granted in the future.
S-30
<PAGE> 33
GEOGRAPHIC DISTRIBUTION OF STATES REPRESENTING MORE THAN 4%
OF THE AGGREGATE POOL BALANCE AS OF THE STATISTICAL CUTOFF DATE(1)
<TABLE>
<CAPTION>
INITIAL POOL
-----------------------------------
AGGREGATE
OUTSTANDING PERCENT OF
NUMBER PRINCIPAL INITIAL POOL
OF LOANS BALANCE(2) BALANCE
-------- ----------- ------------
<S> <C> <C> <C>
New York
California
Virginia
Texas
Pennsylvania
Florida
Massachusetts
New Jersey
All Other
States(4)
Total
<CAPTION>
SUBSEQUENT POOL
-----------------------------------
AGGREGATE PERCENT OF
OUTSTANDING SUBSEQUENT
NUMBER OF PRINCIPAL POOL
LOANS BALANCE (3) BALANCE
--------- ------------ ----------
<S> <C> <C> <C>
California
Massachusetts
New York
New Jersey
Virginia
<CAPTION>
TOTAL
----------------------------------
AGGREGATE
OUTSTANDING PERCENT OF
NUMBER OF PRINCIPAL POOL
LOANS BALANCE BALANCE
--------- ----------- ----------
<C> <C> <C>
New York
California
Virginia
Massachusetts
Texas
Pennsylvania
Florida
New Jersey
</TABLE>
(1) Based on the permanent billing addresses of the borrowers of the
Initial Financed Student Loans and the Subsequent Pool Student Loans
shown on the Servicers' records as of the Statistical Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon of $_______ 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 $______ 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 aggregate
Pool Balance.
S-31
<PAGE> 34
DISTRIBUTION BY LOAN REPAYMENT TERM AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
------------------------------------ -------------------------------------
AGGREGATE AGGREGATE
OUTSTANDING PERCENT OF OUTSTANDING PERCENT OF
LOAN NUMBER PRINCIPAL INITIAL NUMBER PRINCIPAL INITIAL
REPAYMENT TERMS OF LOANS BALANCE(1) POOL BALANCE OF LOANS BALANCE(2) POOL BALANCE
--------------- -------- ----------- ------------ -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Level Payment
Interest Only(3)
Graduated Payment(4)
Other (5)
Total
<CAPTION>
TOTAL
-----------------------------------
AGGREGATE
OUTSTANDING PERCENT OF
LOAN NUMBER PRINCIPAL INITIAL
REPAYMENT TERMS OF LOANS BALANCE POOL BALANCE
--------------- -------- ----------- ------------
<S> <C> <C> <C>
Level Payment
Interest Only(3)
Graduated Payment(4)
Other (5)
Total
</TABLE>
(1) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________ as of the Statistical Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________ as of the Statistical Cutoff Date.
(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 which will amortize the
then outstanding principal balance of the loan over the then remaining
term and then to begin making payments of both interest and principal.
(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 still not in repayment status.
S-32
<PAGE> 35
DISTRIBUTION OF FINANCED FEDERAL LOANS BY DATE OF DISBURSEMENT
AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
------------------------------------ -------------------------------------
AGGREGATE AGGREGATE
OUTSTANDING PERCENT OF OUTSTANDING PERCENT OF
DATE OF NUMBER PRINCIPAL INITIAL NUMBER PRINCIPAL INITIAL
DISBURSEMENT(1) OF LOANS BALANCE(2) POOL BALANCE OF LOANS BALANCE(3) POOL BALANCE
--------------- -------- ----------- ------------ -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Pre October 1, 1993
October 1, 1993 to
Present
Total
<CAPTION>
TOTAL
------------------------------------
AGGREGATE
OUTSTANDING PERCENT OF
DATE OF NUMBER PRINCIPAL INITIAL
DISBURSEMENT(1) OF LOANS BALANCE POOL BALANCE
--------------- -------- ----------- ------------
<S> <C> <C> <C>
Pre October 1, 1993
October 1, 1993 to
Present
Total
</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 $________________ as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________ as of the Statistical Cutoff Date.
S-33
<PAGE> 36
DISTRIBUTION OF FINANCED STUDENT LOANS BY
NUMBER OF DAYS OF DELINQUENCY AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL TOTAL
----------------------------------- ----------------------------------- ----------------------------------
AGGREGATE AGGREGATE PERCENT OF AGGREGATE
OUTSTANDING PERCENT OF OUTSTANDING SUBSEQUENT OUTSTANDING PERCENT OF
NUMBER PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL POOL NUMBER OF PRINCIPAL POOL
OF LOANS BALANCE(1) BALANCE LOANS BALANCE (2) BALANCE LOANS BALANCE BALANCE
-------- ----------- ------------ --------- ------------ ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Days Delinquent
0-30
31-60
61-90
90-120
120-150
150-180
Total
</TABLE>
(1) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________ as of the Statistical Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________ as of the Statistical Cutoff Date.
S-34
<PAGE> 37
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 such term is defined in
the Prospectus) or Consolidation Loans (as such term is defined in the
Prospectus) made under the Federal Direct Student Loan Program (as such term is
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
(x) after the Loan Purchase Termination Date or (y) from another lender at any
time, Noteholders (as such term is defined in the Prospectus ) (and after the
Notes have been paid in full, Certificateholders (as such term is defined in the
Prospectus )) will collectively receive as a prepayment of principal the
aggregate principal amount of such Financed Student Loans; provided, that if the
Seller makes any such Consolidation Loan during the Funding Period or prior to
the Loan Purchase Termination Date (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 or following the Funding Period but prior to the Loan
Purchase Termination Date, the Collection Account from amounts which constitute
Available Loan Purchase Funds, 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 such term is 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 on or after the
Loan Purchase Termination Date 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 Servicers are 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
S-35
<PAGE> 38
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 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 ________ ____, ____ (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, "--Insolvency Event" in the Prospectus regarding the sale of
the Financed Student Loans if a Seller Insolvency Event (as such term is defined
in the Prospectus) occurs and "--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 Initial Pool Balance
and the auction of the Financed Student Loans occurs on or after the ____ 200__
Distribution Date. [In addition, in the event a TERI Trigger Event occurs, the
holders of Notes and Certificates may receive accelerated payments of
principal.] 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 Loan Purchase Termination Date] 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.
S-36
<PAGE> 39
"Available Loan Purchase Funds" means with respect to any Collection
Period and any Transfer Date after the Funding Period, the excess of Available
Funds (with certain exceptions) for the Collection Period relating to the
Distribution Date next succeeding such Transfer Date that are on deposit in the
Collection Account on such Transfer Date (before giving effect to any
application thereof) over the accrued expected expense payment for such
Distribution Date as specified in the Sale and Servicing Agreement.
The "Initial Pool Balance" will equal $_____________ 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.
"Loan Purchase Termination Date" means ____________, ___________.
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 such term
is defined in the Prospectus) and, with respect to each Financed Federal Loan
that is a Stafford Loan (excluding any Unsubsidized Stafford Loan (as such term
is defined in the Prospectus, each an )) or Consolidation Loan where none of the
Underlying Federal Loans were Unsubsidized Stafford Loans, must be eligible for
Interest Subsidy Payments (as such term is defined in the Prospectus) paid by
the Department. As of the Statistical Calculation Date, approximately ___% (by
aggregate principal balance) of the Financed Private Loans that constitute the
Initial Financed Student Loans and the Subsequent Pool Student Loans will be
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").
S-37
<PAGE> 40
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 TOTAL
----------------------------------- ----------------------------------- ----------------------------------
AGGREGATE AGGREGATE PERCENT OF AGGREGATE
OUTSTANDING PERCENT OF OUTSTANDING SUBSEQUENT OUTSTANDING PERCENT OF
NUMBER PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL POOL NUMBER OF PRINCIPAL TOTAL
OF LOANS BALANCE(1) BALANCE LOANS BALANCE (2) BALANCE LOANS BALANCE POOL BALANCE
-------- ----------- ------------ --------- ------------ ---------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASA
PHEAA
TERI
HICA
NSLP
ECMC
Total
</TABLE>
(1) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________ as of the Statistical Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________ as of the Statistical Cutoff Date.
S-38
<PAGE> 41
Federal Reinsurance. Under the Higher Education Act, each Federal
Guarantor is reimbursed by the Department pursuant to certain agreements between
the Department and such Federal Guarantor for amounts paid under its Guarantee
Agreement. The amount of 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, NSLP and ECMC by which each of PHEAA, ASA, NSLP and ECMC 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 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. NSLP is the
designated Student Loan guarantor for the state of Nebraska. As of the
Statistical Cutoff Date, approximately ____%, ____%, ____% and ____% of the
aggregate outstanding principal balance of the Initial Financed Student Loans
which are Financed Federal Loans and approximately ____%, ____%, ____% and ____%
of the Subsequent Pool Student Loans which are Financed Federal Loans were
guaranteed by PHEAA, ASA, NSLP and ECMC, respectively.
Pursuant to its respective Guarantee Agreement, each of PHEAA, ASA,
NSLP and ECMC guarantees payment of 100% of the principal (including any
interest capitalized from time to time) and accrued interest for each Financed
Federal Loan guaranteed by it as to which any one of the following events has
occurred:
(a) failure by the borrower thereof to make monthly principal
or interest payments on such Financed Federal Loan when due, provided
such failure continues for a period of 180 days (except that such
guarantee against such failures will be 98% of principal and accrued
interest for loans first disbursed on or after October 1, 1993);
(b) any filing by or against the borrower thereof of a
petition in bankruptcy pursuant to any chapter of the Bankruptcy Code
(as such term is defined in the Prospectus);
(c) the closure of, or false certification of borrower
eligibility by, the school;
S-39
<PAGE> 42
(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 PHEAA, ASA, NSLP and ECMC pursuant to their
respective Guarantee Agreements are obligations solely of PHEAA, ASA, NSLP and
ECMC 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:
o the origination and servicing of such Financed Federal Loan
being performed in accordance with the Programs, the Higher
Education Act and other applicable requirements,
o the timely payment to PHEAA, ASA, NSLP or ECMC, as the case
may be, of the guarantee fee payable with respect to such
Financed Federal Loan,
o the timely submission to PHEAA, ASA, NSLP or ECMC, 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
o the transfer and endorsement of the promissory note evidencing
such Financed Federal Loan to PHEAA, ASA, NSLP or ECMC, as the
case may be, upon and in connection with making a claim to
receive Guarantee Payments thereon.
Failure to comply with any of the applicable conditions, including the
foregoing, may result in the refusal of PHEAA, ASA, NSLP or ECMC, as the case
may be, to honor their Guarantee Agreements with respect to such Financed
Federal Loan, in the denial of guarantee coverage with respect to certain
accrued interest amounts with respect thereto or in the loss of certain Interest
Subsidy Payments and Special Allowance Payments with respect thereto. Under the
Sale and Servicing Agreement, such failure to comply would constitute a breach
of the applicable 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 applicable 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
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<PAGE> 43
"Description of the Transfer and Servicing Agreements--Sale of Financed Student
Loans; Representations and Warranties" and "--Servicer Covenants" herein.
Set forth below is certain current and historical information with
respect to each of the Federal Guarantors (excluding ___) in its capacity as a
Guarantor of all education loans guaranteed by each of them. [No such
information is provided with respect to ____ because the aggregate principal
amount of Financed Student Loans guaranteed by ____ is less than 5% of the
Initial Pool Balance.]
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 each Federal
Guarantor (excluding ____) and by all federal guarantors in each of the last
five federal fiscal years:*
<TABLE>
<CAPTION>
STAFFORD, SLS AND PLUS LOANS GUARANTEED
---------------------------------------
FEDERAL FISCAL (DOLLARS IN MILLIONS)
--------------------
YEAR PHEAA ASA NSLP ALL GUARANTORS
- ---- ----- ------ ---- --------------
<S> <C> <C> <C> <C>
1994 $1,747 $1,100 $378 $23,053
1995 1,808 906 351 20,951
1996 1,794 716 316 19,728
1997 1,869 682 397 --
1998 1,784 667 629 --
</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 (each, a "DOE Data Book"). Information for PHEAA,
ASA and NSLP was obtained from PHEAA, ASA and NSLP, respectively.
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.
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<PAGE> 44
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 each of 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 CUMULATIVE CUMULATIVE
FISCAL CASH RESERVE CASH RESERVE CASH RESERVE NATIONAL
YEAR RESERVES RATIO RESERVES RATIO 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 --
1997 189.35 1.4 39.29 0.7 24.07 1.2 --
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 PHEAA,
ASA and NSLP has been obtained from PHEAA, ASA and NSLP, respectively,
and the information with respect to the national average has been
obtained from the DOE Data Books.
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 each of PHEAA, ASA and NSLP for the last five
federal fiscal years:*
<TABLE>
<CAPTION>
FEDERAL
FISCAL RECOVERY RATE
---------------------------------------
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 38.0
</TABLE>
* Information for PHEAA, ASA and NSLP was provided by each entity,
respectively.
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 October 1, 1998 and
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<PAGE> 45
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 September 30, 1998, PHEAA has not specifically provided for
this risk. PHEAA does have deferred guaranty fees of $39.7 million and cash
reserves of $190.7 million to cover this risk. ASA has a loan loss reserve in
the amount of $6.3 million and NSLP maintains a reserve of $3.96 million.
Claims Rate. For the past five federal fiscal years, none of PHEAA's,
ASA's or NSLP's claims rate has exceeded 5%, and as a result, all claims of
PHEAA, ASA and NSLP have been reimbursed by the Department at the maximum
reinsurance rate permitted by the Higher Education Act. See "--Federal
Reinsurance" above. 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 each Federal Guarantor
(excluding ECMC) for each of the last five federal fiscal years:*
<TABLE>
<CAPTION>
FEDERAL CLAIMS RATE
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>
* Information for PHEAA, ASA and NSLP was provided by each entity,
respectively.
Guarantors for the Financed 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
certain Financed Private Loans (each a "Financed Guaranteed Private Loan").
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 Financed
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 Financed Guaranteed Private Loan when due,
provided such failure continues for a period of 120 days (150 days for
HICA);
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<PAGE> 46
(b) any filing by or against the borrower thereof of a
petition in bankruptcy pursuant to any chapter of the Bankruptcy Code,
(with respect to the Financed 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 Financed 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
Financed Guaranteed Private Loan is conditioned upon the satisfaction of all the
conditions set forth in the applicable Guarantee Agreement between TERI or HICA
and the Eligible Lender Trustee.
These conditions include, but are not limited to, the following:
o the origination and servicing of such Financed
Guaranteed Private Loan being performed in accordance
with the Programs and other applicable requirements,
o the timely payment to TERI or HICA, as the case may
be, of all guarantee fees or premiums payable with
respect to such Financed Guaranteed Private Loan,
o 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
Financed Guaranteed Private Loan, and
o the transfer and endorsement of the promissory note
evidencing such Financed 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 Financed Guaranteed Private
Loan. In addition, in the event that any Financed Guaranteed Private Loan is
determined to be unenforceable because the terms of such Financed 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 Financed Guaranteed Private Loan. Under the Sale and Servicing Agreement,
such failure to comply or such unenforceability would constitute a breach of the
applicable Servicer's covenants or the Seller's representations and warranties,
as the case may be, and would create an obligation of the Seller to repurchase
such Financed Guaranteed Private
S-44
<PAGE> 47
Loan or of the applicable Servicer to purchase such Financed Guaranteed Private
Loan. See "Description of the Transfer and Servicing Agreements--Sale of
Financed Student Loans; Representations and Warranties" and "--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 Financed Guaranteed Private
Loan. Based upon the Rating Agencies' assessment of the financial position,
reserves and potential claims against TERI and HICA, respectively, the Seller
has structured the Trust and the Notes and Certificates (together, the
"Securities") assuming that neither TERI nor HICA will have the financial
resources to satisfy all its obligations under its respective Guarantee
Agreement with respect to the Financed Guaranteed Private Loan throughout the
term of such loans.
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 or any of the Underwriters:
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 people, as of ________ ___,
____.
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 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 or any of the Underwriters:
<TABLE>
<CAPTION>
PRIVATE LOANS
CALENDAR YEAR GUARANTEED BY YEAR
- ------------- ---------------------
(DOLLARS IN MILLIONS)
<S> <C>
1994 $292.2
1995 303.4
1996 339.7
1997 332.6
1998
</TABLE>
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
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<PAGE> 48
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 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 or any
of the Underwriters:
<TABLE>
<CAPTION>
AMOUNTS
AVAILABLE
TO MEET
GUARANTEE RESERVE
CALENDAR YEAR COMMITMENTS RATIO
- ------------- ----------- ----------
(DOLLARS IN (UNAUDITED)
THOUSANDS)
(UNAUDITED)
<S> <C> <C>
1994 $ 73,624 6.1%
1995 83,937 5.7%
1996 96,362 5.7%
1997 102,201 5.4%
1998 %
------- ---
</TABLE>
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 December 31, 1997, the balance of loans outstanding guaranteed
directly and indirectly by TERI amounted to approximately $1.9 billion and $0.25
billion, respectively. At December 31, 1997, TERI was required to have
approximately $84.7 million in reserves (consisting of loan loss reserves,
deferred revenue and unrestricted and/or temporarily unrestricted net assets)
available as security for TERI's performance as guarantor.
As of the end of each of the five calendar years referred to below,
TERI had available the following funds and reserves to meet its loan guarantee
commitments; such information is not
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<PAGE> 49
guaranteed as to accuracy or completeness and is not to be construed as a
representation by the Seller or any of the Underwriters:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(AS RESTATED)
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Deferred Guarantee Fees $ 5,269 $ 5,234 $ 5,140 $ 5,032
Loan Loss Reserve 29,629 29,092 57,006 56,999
Unrestricted--Board Designated 33,151 46,063 31,169 33,951
Unrestricted--Undesignated 5,579 3,548 3,047 6,219
-------- -------- -------- --------
Total Amounts Available To Meet
Guarantee Commitments $ 73,624 $ 83,937 $ 96,362 $102,201
======== ======== ======== ========
</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 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
significantly increased its total amounts available to meet guarantee
commitments over the last two years in conjunction with an increase in the
outstanding principal amount of loans guaranteed by TERI over such period. 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 September 30, 1998, with respect to loans defaulting in each of the
five calendar years 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 or any of the Underwriters:
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD OF CASH RECOVERY RATE
DEFAULT (UNAUDITED)
- --------- ---------
<S> <C>
1994 44% (January 1, 1994--September 30, 1998)
1995 38% (January 1, 1995--September 30, 1998)
1996 26% (January 1, 1996--September 30, 1998)
1997 21% (January 1, 1997--September 30, 1998)
1998 7% (January 1, 1998--September 30, 1998)
</TABLE>
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<PAGE> 50
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 (exclusive of any subsequent recoveries by
TERI) for the cohort year (or period) as a percentage of the aggregate principal
amount of loans guaranteed by TERI for the cohort year (or period). As a result,
the claims rate information provided above for the Federal Guarantors is not
comparable to that provided for TERI below. The following table sets forth the
total loans guaranteed, total defaults paid and the cohort default rate as of
September 30 for each of the six calendar years 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 or any of the Underwriters:
<TABLE>
<CAPTION>
TOTAL TOTAL DEFAULTS
LOANS PAID FOR LOANS COHORT
GUARANTEED GUARANTEED IN DEFAULT
COHORT YEAR IN COHORT YEAR COHORT YEAR RATE
----------- -------------- --------------- ----------
(DOLLARS IN (DOLLARS IN (UNAUDITED)
THOUSANDS) THOUSANDS)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
1994 $292,289 $13,009 4.45%
1995 303,369 10,177 3.35%
1996 339,675 4,362 1.28%
1997 332,530 1,201 0.36%
1998 %
------- ------ ----
</TABLE>
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
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<PAGE> 51
available to cover TERI guaranteed loans outside of the Programs, are equally
available to all holders of TERI guaranteed Private Loans made 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 Financed
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 Financed Guaranteed Private Loans. The Seller will
assign the portion of its rights under the agreement implementing these
segregated reserves that is attributable to such Financed 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.
HICA
The Eligible Lender Trustee will take an assignment of Surety Bonds by
which HICA has insured Financed 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 ___ people as of ___________ ___, _____. 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 six calendar years
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 or any
of the Underwriters:
<TABLE>
<CAPTION>
PRIVATE LOANS
INSURED
CALENDAR YEAR BY YEAR
- ------------- -------------------
(DOLLARS IN MILLIONS)
<S> <C>
1993 $135
1994 161
1995 173
1996 256
1997 286
1998 267
</TABLE>
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<PAGE> 52
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. Bruce Olson, Treasurer, 7633 Mount Carmel Drive, Orlando,
Florida 32835.
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
_____ ___, ____ between the Trust and the Indenture Trustee (the "Indenture").
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.
Each class of 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
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<PAGE> 53
excluding the current Distribution Date (each, an "Interest Period") and will be
payable to the Noteholders on each Distribution Date. Interest accrued as of any
Distribution Date but not paid on such Distribution Date will be due on the next
Distribution Date together with an amount equal to interest on such amount at
the 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 Servicing Fee for
each of the two immediately preceding Monthly Servicing Payment Dates and of the
Servicing Fee, and the Administration Fee for each Distribution Date. See
"Description of the Transfer and Servicing Agreements -- Distributions" and
"--Credit Enhancement" herein. If such sources are insufficient to pay the
Noteholders' Interest Distribution Amount for such Distribution Date, such
shortfall will be allocated pro rata to the Noteholders (based upon the total
amount of interest then due on each class of 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 the
Statistical Cutoff Date and ending on _______
- --, ----).
"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 ______ __, ____ based on Three Month LIBOR as determined on the
initial LIBOR Determination Date and for the period from ______ ___, ____ to but
excluding ______ __, ____ based on Three Month LIBOR as determined on the LIBOR
Determination Date in _______ ____. See "--Determination of LIBOR" below.
The "Margin" for each class of Securities is ___% for the Class A-1
Notes, ___% for the Class A-2 Notes and ___% 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 Servicing Fees and the Administration
Fee and payable on the related Distribution Date and any Servicing Fees paid on
the two preceding Monthly Servicing Payment Dates during the related Collection
Period and 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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<PAGE> 54
"Expected Interest Collections" means, with respect to any Collection
Period, the sum of
o 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),
o 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
o Investment Earnings for such Collection Period.
To the extent that for any Interest Period the rate for the Notes
calculated on the basis of the Formula Rate exceeds the Student Loan Rate, the
amount of such excess ("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 the Formula Rate for the
Notes) 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 Date, as described under "Description of the Transfer and Servicing
Agreements-- Distributions" herein. Any Noteholders' Interest Index Carryover
due on the Notes that may exist on any Distribution Date will be payable to
holders of the Notes on that Distribution Date on a pro rata basis, based on the
amount of the Noteholders' Interest Index Carryover then owing on the Notes, and
on any succeeding Distribution Dates, solely out of the amount of Available
Funds remaining in the Collection Account on any such Distribution Date after
distribution of the amounts set forth in "Description of the Transfer and
Servicing Agreements--Distributions" herein. 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 on 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.
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, provided, that, on any Distribution
Date that the principal balance of the Notes exceeds 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. 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
Noteholders on subsequent Distribution Dates and (except with respect to the
Final Maturity Date
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for such classes of Notes), the remaining shortfall will not constitute an Event
of Default (as such term is 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 ______ _____ Distribution Date, the Specified Collateral Balance will
be reduced to zero and all amounts on deposit in the Collection Account (after
distribution of the Servicing Fee for each of the two immediately preceding
Monthly Servicing Payment Dates and the Servicing Fee, the Administration Fee,
the Noteholders' Interest Distribution Amount, any Noteholders' Priority
Principal Distribution Amount, the Certificateholders' Interest Distribution
Amount and any amounts necessary to reinstate the balance of the Reserve Account
to the Specified Reserve Account Balance on such Distribution Date) will be
distributed to the Noteholders and then 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 and then to the principal balance of the Class A-2
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
respective Final Maturity Dates for the related 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 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.
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 $_____, 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 $_______
or less, it will be distributed on the first Distribution Date thereafter only
to holders of the Class A-1 Notes.
The Indenture Trustee. _______________, a ___________ 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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<PAGE> 56
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 amount of such excess (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. The payment of such
amounts due to Certificateholders on any Distribution Date (such amount, the
"Certificateholders' Interest Index Carryover") is further subordinated to the
payment of Noteholders' Interest Index Carryover. To the extent funds are
available therefor, the Certificateholders' Interest Index Carryover may be paid
prior to the time that the Notes are paid in full. Any Certificateholders'
Interest Index Carryover due on the Certificates that may exist on any
Distribution Date will be payable on that Distribution Date on a pro rata basis
and any succeeding Distribution Dates solely out of the amount of Available
Funds remaining in the Collection Account on any such Distribution Date after
distribution of the amounts set forth in "Description of the Transfer and
Servicing Agreements--Distributions" herein. 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.
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<PAGE> 57
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 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.
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, if an Event of Default occurs and is continuing
under the Indenture or a Seller Insolvency Event occurs and the Financed Student
Loans are liquidated, all amounts due on the Notes will be payable before any
amounts are payable on the Certificates. Additionally, if on any Distribution
Date 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.
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 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
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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:
<TABLE>
<CAPTION>
ASSUMED INTEREST
------------------------
SETTLEMENT DAYS RATE ON INTEREST
DATE OUTSTANDING THE NOTES FACTOR
---------- ----------- --------- --------
<S> <C> <C> <C>
1st
2nd 1
3rd 2
4th 3
5th* 4
6th 5
7th 6
8th 7
9th 8
10th 9
</TABLE>
* 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.
DETERMINATION OF LIBOR
Pursuant to the Sale and Servicing Agreement, the Administrator 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 ______ __, ____ and as determined on the
second business day prior to _______ __, ____ for the period from ________ __,
____ to but excluding _____ __, ____ (each, a "LIBOR Determination Date"). For
purposes of calculating Three-Month LIBOR, a business day is any day
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<PAGE> 59
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 Dow
Jones Telerate Service (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices).
"Reference Bank" means a leading bank (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.
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
Servicers will service and the Administrator will perform certain administrative
functions with respect to the Financed Student Loans; the Administration
Agreement, dated _____ __, ____ 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
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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 _______ __, ____
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 (i) in the
case of Initial Financed Student Loans, an amount equal to _______ of the
aggregate principal balance of such Initial Financed student Loan as of the
Statistical Cutoff Date, (ii) in the case of Subsequent Pool Student Loans, an
amount equal to _______ of the aggregate principal balance thereof as of the
related Subsequent Cutoff Date and (iii) in the case of Other Subsequent Student
Loans, an amount equal to ________ 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 of origination to, with respect to each Initial
Financed Student Loan, the Statistical 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.
To assure uniform quality in servicing and to reduce administrative
costs, each Servicer will be appointed custodian of the promissory notes
representing the Financed Student Loans which such Servicer is servicing by the
Eligible Lender Trustee on behalf of the Trust. The Seller's and the 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.
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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 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 and from the Escrow Account and Available Loan Purchase Funds on
Transfer Dates during the period which begins on the day following the end of
the Funding Period and ends on the Loan Purchase
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Termination Date, in each case consisting of amounts paid to the Seller to
acquire Additional 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 $__________ (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 $__________ (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 $__________ (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 $__________ (less the amount thereof, if
any, used by the Trust to fund shortfalls in the payment of interest 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 ___% 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
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.
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
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Period preceding the _______ ____ Distribution Date; however, there can be no
assurance that a sufficient amount of Additional Fundings will be made during
such time. If, 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
Servicing Fee and on each Distribution Date to cover any shortfalls in payments
of the Servicing Fee, the Administration Fee, interest amounts payable in
respect of the Notes and the Certificates (other than the Noteholders' Interest
Index Carryover and the Certificateholders' Interest Index Carryover) for such
Distribution Date for which funds otherwise available therefor on such
Distribution Date are insufficient to make such distributions and after giving
effect to the application of funds on deposit in the Reserve Account to cover
such shortfalls; provided, however, that the Other Additional Pre-Funded Amount
will only be available to cover shortfalls in interest 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. 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
(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.
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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 and during the period which begins
following the end of the Funding Period and ends on the Loan Purchase
Termination Date (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 or Other Student Loans, as
applicable, 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 (x) with respect to
Subsequent Pool Student Loans and Other Subsequent Student Loans, during the
Funding Period, from the Pre-Funding Account and (y) with respect to Other
Student Loans, during the period following the end of the Funding Period until
the Loan Purchase Termination Date, from Available Loan Purchase Funds on
deposit in the Collection Account, in each case on such date and transferred to
the Seller. Amounts in the Escrow Account will not be available to purchase any
Subsequent Pool Student Loan. The Trust will not purchase an aggregate amount of
Other Subsequent Student Loans and Other Student Loans which exceeds 25% of the
Initial Pool Balance.
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 from (a) during the Funding Period, the Pre-Funding Account and
(b) after the end of the Funding Period until the Loan Purchase Termination
Date, from Available Loan Purchase Funds on deposit in the Collection Account,
in each case, 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
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purchase Additional Student Loans from the Seller. Any of such amounts remaining
in the Escrow 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:
"Additional Student Loans" means collectively the Subsequent
Pool Student Loans, the Other Subsequent Student Loans, the Other
Student Loans and Fee Advances.
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 Servicer Default (as such term is 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 ______ ____ Distribution Date.
"Loan Purchase Termination Date" means __________,
____________.
"Other Student Loans" means Serial Loans and Consolidation
Loans made to a borrower who is also a borrower under at least one
outstanding Financed Student Loan which the Trust is obligated to
purchase from the Seller during the period which begins following the
end of the Funding Period and ends on the Loan Purchase Termination
Date, from amounts on deposit in the Escrow Account and Available Loan
Purchase Funds (as defined below) to the extent permitted by the Sale
and Servicing Agreement.
"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.
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"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 but do not
include Stafford Loans made after July 1, 1998 without each of the
rating agencies confirming the then current rating of the Securities.
"Subsequent Pool Student Loans" means the Student Loans
included in the Subsequent Pool.
SERVICING PROCEDURES
Pursuant to the Sale and Servicing Agreement, PHEAA and GLHEC have each
agreed as 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, a Servicer will
hold on behalf of the Trust the notes evidencing, and other documents relating
to, that Financed Student Loan. With respect to the Financed Student Loans it is
servicing, each Servicer is required pursuant to the Sale and Servicing
Agreement to perform all services and duties customary to the servicing of
Student Loans (including all collection practices), and to do so in the same
manner as such Servicer has serviced student loans on behalf of the Seller and
in compliance with all standards and procedures provided for in the Higher
Education Act, the Guarantee Agreements and all other applicable federal and
state laws.
Without limiting the foregoing, the duties of each Servicer under the
Sale and Servicing Agreement include, but are not limited to, the following:
collecting and depositing into the Collection Account (or, in the event that
daily deposits into the Collection Account are not required, paying to the
Administrator) all payments with respect to the Financed Student Loans such
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, each Servicer will keep ongoing records with respect to
such Financed Student Loans and collections thereon and will furnish quarterly
and annual statements to the Administrator with respect to such information, in
accordance with the Servicer's customary practices with respect to the Seller
and as otherwise required in the Sale and Servicing Agreement. In its capacity
as Servicer, 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, each Servicer will deposit all payments on
Financed Student Loans (from whatever source), and all proceeds of Financed
Student Loans collected by it during each Collection Period into the Collection
Account within two business days of receipt thereof. Except as provided below,
the Eligible Lender Trustee will deposit all Interest Subsidy Payments
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and all Special Allowance Payments with respect to the Financed Student Loans
received by it during each Collection Period into the Collection Account within
two business days of receipt thereof.
However, in the event that Key Bank USA, National Association satisfies
certain requirements for quarterly remittances and the rating agencies affirm
their ratings of the Notes and the Certificates at the initial level, then so
long as Key Bank USA, National Association is the Administrator and provided
that (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, each Servicer and the Eligible Lender Trustee will pay
all the amounts referred to in the preceding paragraph that would otherwise be
deposited into the Collection Account to the Administrator, and the
Administrator will not be required to deposit such amounts into the Collection
Account until on or before the business day immediately preceding each Monthly
Servicing Payment Date (to the extent of the Servicing Fee payable on such date)
and on or before the business day immediately preceding each Distribution Date
(to the extent of the remainder of such amounts). In such event, the
Administrator will deposit the aggregate Purchase Amount of Financed Student
Loans repurchased by the Seller and purchased by a Servicer into the Collection
Account on or before the business day preceding each Distribution Date. Pending
deposit into the Collection Account, collections may be invested by the
Administrator at its own risk and for its own benefit, and will not be
segregated from funds of the Administrator.
SERVICER COVENANTS
In the Sale and Servicing Agreement, each Servicer covenants that:
(a) it will duly satisfy all obligations on its part to be
fulfilled under or in connection with the Financed Student Loans such
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 any rescission or cancellation of a
Financed Student Loan such 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 to impair the rights of the
Certificateholders and the Noteholders in such Financed Student Loans;
and
(d) it will not 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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Certain incentive programs currently or hereafter made available by the
Seller to borrowers may also be made available by each Servicer to borrowers
with Financed Student Loans. 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 such Servicer receives
payment from the Seller in an amount sufficient to offset such effective yield
reductions.
Under the terms of the Sale and Servicing Agreement, if the Seller or a
Servicer discovers, or receives written notice, that any covenant of the
Servicers set forth above has not been complied with by such 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, such 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, such 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 such
Servicer. In addition, a 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 such
Servicer.
SERVICING COMPENSATION
The Servicers will be entitled to receive, subject to the limitations
set forth in the following paragraph, the Servicing Fee monthly in an amount
equal to the sum of (a) the Servicing Fee Percentage of the Pool Balance as of
the last day of the immediately preceding calendar month and (b) in the case of
PHEAA certain one-time fixed fees for each Financed Student Loan for which a
forbearance period was granted or renewed or for which a guarantee claim was
filed, in each case subject to adjustment, together with other administrative
fees and similar charges, as compensation for performing the functions as
servicers for the Trust described above. The Servicing Fee set forth in clause
(a) above may be subject to reasonable increase agreed to by the Administrator,
the Eligible Lender Trustee and the Servicers to the extent that a demonstrable
and significant increase occurs in the costs incurred by the Servicers in
providing the services to be provided under the Sale and Servicing Agreement,
whether due to changes in applicable governmental regulations, guarantor program
requirements or regulations, United States Postal Service postal rates or some
other identifiable cost increasing event. The Servicing Fee (together with any
portion of the Servicing Fee that remains unpaid from prior Distribution Dates)
will be payable on each Monthly
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Servicing Payment Date and will be paid solely out of Available Funds and
amounts on deposit in the Reserve Account on such Monthly Servicing Payment
Date.
Notwithstanding the foregoing, in the event that the aggregate fees
payable to the Servicers as defined above for any Monthly Servicing Payment Date
would exceed 0.50% per annum of the Pool Balance as of the last day of the
preceding calendar month (other than any deconversion fees) (the "Capped
Amount"), then the "Servicing Fee" for such Monthly Servicing Payment Date will
instead be the Capped Amount for such date plus any deconversion fees referred
to below. The remaining amount in excess of such Servicing Fee, together with
any such excess amounts from prior Monthly Servicing Payment Dates that remain
unpaid (the aggregate amounts being the "Excess Servicing Fee"), will be payable
to the Servicers on each succeeding Distribution Date out of Available Funds
after payment on such Distribution Date of the amounts set forth in "Description
of the Transfer and Servicing Agreements--Distributions" herein. The Servicers
will only be entitled to receive the Excess Servicing Fee if and to the extent
that Available Funds exist to make such payments after making all prior
distributions and deposits.
The Servicing Fee and the Excess Servicing Fee will compensate the
Servicers for performing 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 Financed Student Loans,
investigating delinquencies, pursuing, filing and collecting any Guarantee
Payments, accounting for collections and furnishing monthly and annual
statements to the Administrator. The Servicing Fee and the Excess Servicing Fee
also will reimburse the Servicers for certain taxes, accounting fees, outside
auditor fees, data processing costs and other costs incurred in connection with
administering the Financed Student Loans.
In the event of (x) any sale of the Financed Student Loans on behalf of
the Trust to any person (other than the Seller, the Administrator, PHEAA or the
Servicers) in which the purchaser elects to deconvert the Financed Student Loans
and not retain PHEAA or GLHEC, as the case may be, as Servicer or (y) any
termination by the Trust of PHEAA or GLHEC, as the case may be, as Servicer of
the Financed Student Loans, except for any termination for cause or as a result
of any Servicer Default by PHEAA or GLHEC, as the case may be, the Trust shall
pay to PHEAA or GLHEC, as the case may be, as a part of the Servicing Fee (not
subject to the Capped Amount) the following deconversion fee, per loan, based on
the status of the loan at the time of deconversion: (a) $115 for each in-school
Stafford Loan, in-school deferred SLS Loan, Law Loan, Medical Loan, Dental Loan,
Business Loan, Graduate Loan, Bar Exam Loan, and Residency Loan; and (b) $62.50
for each loan of any other status or loan type.
DISTRIBUTIONS
Deposits to Collection Account. On or about the third business day
prior to each Distribution Date (the "Determination Date"), the Administrator
will provide the Indenture Trustee with certain information with respect to the
distributions to be made on such Distribution Date.
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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 Servicers 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 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 Servicer in the
case of the Servicing Fee. On or before the business day prior to each
Distribution Date, the Administrator will cause (or will cause the Servicers 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 the 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 such term is
defined in the Prospectus) and Federal Consolidation Loan Rebate (as
such term is defined in the Prospectus) payable to the Department on
Federal Consolidation Loans disbursed after October 1, 1993, and (y)
any collections in respect of principal on the Financed Student Loans
applied by the Trust to repurchase guaranteed loans from the Guarantors
in accordance with the Guarantee Agreements;
(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 Servicers' respective
customary servicing procedures, net of expenses incurred by the
Servicers in connection with such liquidation and any amounts required
by law to be remitted to the borrower on such Liquidated Student Loans
("Liquidation Proceeds"), and all recoveries in respect of Liquidated
Student Loans which were written off in prior Collection Periods 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 a 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
a Servicer, as the case may be, as reimbursement of non-guaranteed
interest amounts, or lost Interest Subsidy Payments and Special
Allowance Payments;
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(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 initial
deposit into the Collection Account;
(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 (A) all payments and proceeds (including
Liquidation Proceeds) of any Financed Student Loans, the Purchase Amount of
which has been included in Available Funds for a prior Distribution Date and (B)
following the end of the Funding Period and prior to the Loan Purchase
Termination Date, amounts withdrawn from the Collection Account to purchase
Other Student Loans or pay Fee Advances during the period following the
preceding Distribution Date and ending on or prior to such 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 and (y) 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, in the case of clause (x) above such items specified in
clauses (1) through (3) respectively and in the case of clause (y) above the
Certificateholders' Interest Distribution Amount and the Available Funds for
such succeeding Distribution Date will be adjusted accordingly.
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 Servicers the Servicing Fee due
with respect to the period from and including the preceding Monthly Servicing
Payment Date from amounts on deposit in the Collection Account.
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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 Servicers, the Servicing Fee due on such
Distribution Date and all prior unpaid Servicing Fees;
(3) to the Administrator, the Administration Fee and all
unpaid Administration Fees from prior Collection Periods;
(4) to the holders of the Notes, the Noteholders' Interest
Distribution Amount;
(5) to the holders of the Certificates, the
Certificateholders' Interest Distribution Amount;
(6) 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;
(7) to the holders of the Notes, the Noteholders' Principal
Distribution Amount;
(8) 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;
(9) to the Servicers, the aggregate unpaid amount, if any, of
the Excess Servicing Fee;
(10) to the holders of the Notes on a pro rata basis, based on
the amount of the Noteholders' Interest Index Carryover owing on each
class of Notes, the aggregate unpaid amount of the Noteholders'
Interest Index Carryover, if any;
(11) to the holders of the Certificates, the aggregate unpaid
amount of the Certificateholders' Interest Index Carryover, if any; and
(12) to the Seller, any remaining amounts after application of
clauses (1) through (11).
Additionally, if on any Distribution Date the outstanding principal
balance of the Notes (after giving effect to distributions on such Distribution
Date) is in excess of the Note Collateralization Amount, the principal will be
payable to the Noteholders in the amount of the
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Noteholders' Priority Principal Distribution Amount to the extent of funds
available before any amounts are payable to the holders of the Certificates.
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 $__________ 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
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 Initial Pool Balance.
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"Monthly Servicing Payment Date" means the 27th day of each month.
"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;
(c) the amount on deposit in the Reserve Account after
giving effect to distributions on such Distribution
Date; and
(d) 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, the excess of (x) the sum of the Noteholders' Interest
Distribution Amount on the preceding Distribution Date over (y) the amount of
interest actually distributed to the holders of the Notes on such preceding
Distribution Date, plus interest on the amount of such excess interest due to
the holders of the Notes, to the extent permitted by law, at the weighted
average of the Note Interest Rates from such preceding Distribution Date to the
current Distribution Date.
"Noteholders' Interest Distribution Amount" means, with respect to any
Distribution Date, 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 each class of the Notes on the immediately
preceding Distribution Date after giving effect to all principal distributions
to Noteholders on such date (or, in the case of the first Distribution Date, on
the Closing Date) and (b) the Noteholders' Interest Carryover Shortfall for such
Distribution Date; provided, that the Noteholders' Interest Distribution Amount
will not include any Noteholders' Interest Index Carryover.
"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
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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 will include the amount required to reduce the outstanding principal
balance of such Class A-2 Notes to zero. In the event that 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:
o 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"),
o all Purchase Amounts received by the Trust related to
the Financed Student Loans for such Collection Period
from the Seller or the Servicers,
o all Additional Fundings made from the Escrow Account
and the Pre-Funding Account or the Available Loan
Purchase Funds with respect to such Collection
Period, and
o 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.
"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 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 _________ ______ Distribution Date, the Specified Collateral
Balance will be zero. Following a TERI Trigger Event, the Specified Collateral
Balance will equal zero.
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A "TERI Trigger Event" shall occur when (a) the Cumulative TERI Claims
Ratio exceeds 20% and (b) a claim has been made under TERI's Guarantee Agreement
and TERI has failed to fully satisfy such claim. Notwithstanding the foregoing,
no TERI Trigger Event will be deemed to occur if each rating agency rating the
Securities waives the TERI Trigger Event.
"Cumulative TERI Claims Ratio" means, with respect to any Distribution
Date, the fraction, expressed as a percentage, the numerator of which is equal
to the aggregate dollar amount of claims filed against TERI under its Guarantee
Agreement from the Closing Date through and including the last day of the
Collection Period preceding such Distribution Date and the denominator of which
is equal to the dollar amount of the Financed Private Loans guaranteed by TERI
as of the Closing Date.
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 $__________
(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) ____% 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) $________; 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.
Funds will be withdrawn from the Reserve Account to the extent that the
amount of Available Funds is insufficient to pay the Servicing Fee on any
Monthly Servicing Payment Date and any of the items specified in clauses (1)
through (5) under "--Distributions--Distributions from Collection Account" above
on any Distribution Date; provided that amounts on deposit in the Reserve
Account shall only be available to cover shortfalls in interest payments on 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. Such funds will be paid from the
Reserve Account to the Servicers 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 (1) through (5) 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
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Reserve Account will not be available to cover any reimbursement for unpaid
Excess Servicing Fees, Noteholders' Interest Index Carryover or
Certificateholders' Interest Index Carryover.
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.
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 Certificates. 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 (and, in certain
circumstances, principal) and the rights of the holders of Certificates to
receive payments of principal are subordinated to the rights of the holders of
Notes to receive payments of interest and principal. Consequently, amounts on
deposit in the Collection Account, the Reserve Account and the Pre-Funding
Account will be applied to the payment of interest on the Notes before payment
of interest on the Certificates and will be applied to the payment of principal
on the Notes before payment of principal on the Certificates. In addition if (x)
an Event of Default should occur and be continuing under the Indenture or (y) an
Insolvency Event should occur and the Financed Student Loans were liquidated,
all amounts due on the Notes will be payable before any amounts are payable on
the Certificates. Also if the outstanding principal balance of the Notes is in
excess of the Note Collateralization Amount, principal will be payable to
holders of Notes in the amount of such excess to the extent of funds available
before any amounts are payable to holders of Certificates. See "Description of
the Securities--The Certificates--Subordination of the Certificates" herein.
STATEMENTS TO INDENTURE TRUSTEE AND TRUST
Prior to each Distribution Date, the Administrator (based on the
quarterly statements and other information provided to it by the 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;
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(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;
(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 Servicing Fee and any Excess Servicing
Fee paid to the Servicers and the amount of the Administration Fee paid
to the Administrator with respect to such Collection Period, and the
amount, if any, of the Excess Servicing Fee remaining unpaid after
giving effect to any such payment;
(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) 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;
(10) 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;
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(11) 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; and
(12) the aggregate amount of TERI's Guarantee Payments
deposited into the Collection Account expressed as a percentage of the
Initial Pool Balance.
"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.
TERMINATION
The obligations of the Servicers, 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 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 _______ _____ Distribution Date will
be offered for sale by the Indenture Trustee. KeyCorp, its affiliates (other
than the Seller), PHEAA, TERI and unrelated third parties may offer bids to
purchase such Financed Student Loans on such Distribution Date. If at least two
bids are received, the Indenture Trustee will solicit and resolicit bids from
all participating bidders until only one bid remains or the remaining bidders
decline to resubmit bids. The Indenture Trustee will accept the highest of such
remaining bids if it is equal to or in excess of an amount (the "Minimum
Purchase Amount") equal to the greatest of
(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
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(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).
If at least two bids are not received or the highest bid after the
resolicitation process is completed is not equal to or in excess of the Minimum
Purchase Amount, the Indenture Trustee will not consummate such sale. 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 ______ _____ Distribution Date or any subsequent Distribution
Date. In the event the Financed Student Loans are not sold in accordance with
the foregoing, on each Distribution Date on and after the _____ ____
Distribution Date the Specified Collateral Balance shall be reduced to zero and
all Available Funds remaining after applying such amounts to pay the 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 Servicers 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 $______ per quarter (the
"Administration Fee").
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INCOME TAX CONSEQUENCES
Thompson Hine & Flory LLP, Federal tax counsel ("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 Servicers 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
purposes, with the assets of the partnership being the assets held by the Trust,
the partners of the partnership being the Certificateholders (including the
Seller in its capacity as recipient of distributions from the Reserve Account),
and the Notes being debt of the partnership.
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 distributable with respect to the Notes and the Certificates
(and 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
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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
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.
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UNDERWRITING
Subject to the terms and conditions set forth in the respective
Underwriting Agreements relating to the Notes and the Certificates (the
"Underwriting Agreements"), the Seller has agreed to cause the Trust to sell to
the underwriters named below (the "Underwriters"), and each of the Underwriters
has severally agreed to purchase, the principal amount of Class A-1 Notes, Class
A-2 Notes and Certificates set forth opposite its name:
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF PRINCIPAL
CLASS A-1 CLASS A-2 AMOUNT OF
UNDERWRITER NOTES NOTES CERTIFICATES TOTAL
- ----------- --------- ---------- ------------ -----
<S> <C> <C> <C> <C>
- ------------------
McDonald Investments
Total
</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 _____% per Class A-1 Note, _____%
per Class A-2 Note and _____% per Certificate. The Underwriters may allow and
such dealers may reallow to other dealers a discount not in excess of _____% per
Class A-1 Note, _____% per Class A-2 Note and _____% per Certificate. After the
initial public offering, such public offering prices, concessions and
reallowances may be changed.
The representative, 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 ____________________ that
it intends to, and by McDonald Investments that it may, make a market in the
Securities. The Underwriters are not obligated,
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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.
____________________ 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 may be used by McDonald Investments, an affiliate of the Seller
and KeyCorp, 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 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., A
KeyCorp Company. 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 $_____.
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
_______________. Certain Pennsylvania state income tax matters will be passed
upon for the Trust by _______________.
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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.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
52-week Treasury Bill Rate............................................... 77
91-day Treasury Bill Rate................................................ 55
Additional Funding....................................................... 59
Additional Student Loans................................................. 63
Administration Agreement................................................. 57
Administration Fee....................................................... 78
ASA...................................................................... 17
Assigned Rights.......................................................... 16
Auction Purchase Amount.................................................. 78
Available Funds.......................................................... 68
Available Loan Purchase Funds............................................ 37
Bankruptcy Code.......................................................... 39
Benefit Plan............................................................. 79
Capped Amount............................................................ 67
Cede..................................................................... 50
Certificate Balance...................................................... 71
Certificate Rate......................................................... 54
Certificateholders....................................................... 35
Certificateholders' Distribution Amount.................................. 71
Certificateholders' Interest Carryover Shortfall......................... 71
Certificateholders' Interest Distribution Amount......................... 71
Certificateholders' Interest Index Carryover............................. 54
Certificateholders' Principal Distribution Amount........................ 71
Certificates............................................................. 15
Class A-1 Notes.......................................................... 17
Class A-2 Notes.......................................................... 17
Closing Date............................................................. 15
Code..................................................................... 79
Cohort Default Rate...................................................... 48
Collection Account....................................................... 16
Collection Period........................................................ 51
Consolidation Loan....................................................... 35
Cumulative TERI Claims Ratio............................................. 74
Deferral................................................................. 29
Deferral Period.......................................................... 21
Department............................................................... 15
Depository............................................................... 50
</TABLE>
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<TABLE>
<S> <C>
Determination Date....................................................... 67
Distribution Dates....................................................... 4
DOE Data Book............................................................ 41
DTC...................................................................... 50
ECMC..................................................................... 17
Eligible Deposit Account................................................. 59
Eligible Institution..................................................... 59
Eligible Investments..................................................... 59
Eligible Lender Trustee.................................................. 15
Equity Interest.......................................................... 80
ERISA.................................................................... 8
Escrow Account........................................................... 16
Event of Default......................................................... 53
Excess Servicing Fee..................................................... 67
Exchange Act............................................................. 81
Expected Interest Collections............................................ 52
FDIC..................................................................... 59
Federal Assistance....................................................... 17
Federal Consolidation Loan............................................... 35
Federal Consolidation Loan Rebate........................................ 68
Federal Direct Student Loan Program...................................... 35
Federal Guarantors....................................................... 17
Federal Loans............................................................ 16
Federal Origination Fee.................................................. 68
Federal Tax Counsel...................................................... 79
Fee Advance.............................................................. 22
Final Maturity Dates..................................................... 5
Financed Federal Loans................................................... 15
Financed Guaranteed Private Loan......................................... 43
Financed Private Loans................................................... 15
Financed Student Loans................................................... 15
Forbearance.............................................................. 29
Forbearance Periods...................................................... 21
Formula Rate............................................................. 51
Funding Period........................................................... 63
GLHEC.................................................................... 18
Grace.................................................................... 29
Grace Period............................................................. 36
Guarantee Agreement...................................................... 16
Guarantee Payments....................................................... 17
Guarantors............................................................... 4
HICA..................................................................... 37
Higher Education Act..................................................... 17
Indenture................................................................ 50
</TABLE>
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<TABLE>
<S> <C>
Indenture Trustee........................................................ 4
Index Maturity........................................................... 57
Initial Financed Student Loans........................................... 16
Initial Pool Balance..................................................... 37
Initial Pre-Funded Amount................................................ 60
In-School................................................................ 29
Interest Period.......................................................... 51
Interest Subsidy Payments................................................ 37
Investment Earnings...................................................... 59
Investor Index........................................................... 51
LIBOR.................................................................... 57
LIBOR Determination Date................................................. 56
LIBOR Indexed Securities................................................. 4
Liquidated Student Loans................................................. 68
Liquidation Proceeds..................................................... 68
Loan Purchase Termination Date........................................... 37
Lock-In Period........................................................... 55
Margin................................................................... 51
Maximum TERI Payments Amount............................................. 71
McDonald................................................................. 82
Minimum Purchase Amount.................................................. 77
Monthly Servicing Payment Date........................................... 20
Net Government Receivable................................................ 72
Note Collateralization Amount............................................ 72
Note Interest Rate....................................................... 50
Noteholders.............................................................. 35
Noteholders' Distribution Amount......................................... 72
Noteholders' Interest Carryover Shortfall................................ 72
Noteholders' Interest Distribution Amount................................ 72
Noteholders' Interest Index Carryover.................................... 52
Noteholders' Principal Distribution Amount............................... 72
Noteholders' Priority Principal Distribution Amount...................... 73
Notes.................................................................... 17
NSLP..................................................................... 17
Obligors................................................................. 73
Other Additional Pre-Funded Amount....................................... 60
Other Additional Pre-Funding Subaccount.................................. 60
Other Student Loans...................................................... 63
Other Subsequent Student Loans........................................... 63
Participants............................................................. 50
Pennsylvania Tax Counsel................................................. 79
PHEAA.................................................................... 17
Plan Assets Regulation................................................... 80
PLUS Loans............................................................... 18
</TABLE>
S-85
<PAGE> 88
<TABLE>
<S> <C>
Pool Balance............................................................. 73
Pre-Funded Amount........................................................ 15
Pre-Funding Account...................................................... 15
Principal Distribution Amount............................................ 73
Private Guarantors....................................................... 37
Private Loans............................................................ 17
Programs................................................................. 20
Prospectus............................................................... 9
Prospectus Supplement.................................................... 9
PTCE..................................................................... 80
Purchase Price........................................................... 58
Rating Agencies.......................................................... 8
Rating Agency............................................................ 8
Realized Losses.......................................................... 77
Reference Bank........................................................... 57
Repayment................................................................ 29
Reserve Account.......................................................... 7
Reserve Account Initial Deposit.......................................... 16
Sale and Servicing Agreement............................................. 15
Securities............................................................... 45
Securityholders.......................................................... 18
Seller................................................................... 15
Seller Insolvency Event.................................................. 36
Serial Loans............................................................. 64
Servicer................................................................. 18
Servicer Default......................................................... 63
Servicers................................................................ 18
Servicing Fee............................................................ 67
Servicing Fee Percentage................................................. 20
SLS Loans................................................................ 18
Special Allowance Payments............................................... 37
Special Determination Date............................................... 36
Specified Collateral Balance............................................. 73
Specified Reserve Account Balance........................................ 74
Stafford Loans........................................................... 18
Statistical Calculation Date............................................. 4
Statistical Cutoff Date.................................................. 16
Student Loan Rate........................................................ 51
Student Loans............................................................ 15
Subsequent Cutoff Date................................................... 62
Subsequent Pool.......................................................... 19
Subsequent Pool Pre-Funded Amount........................................ 60
Subsequent Pool Pre-Funding Subaccount................................... 60
Subsequent Pool Student Loans............................................ 64
</TABLE>
S-86
<PAGE> 89
<TABLE>
<S> <C>
Telerate Page 3750....................................................... 57
TERI..................................................................... 37
TERI Trigger Event....................................................... 74
Three-Month LIBOR........................................................ 57
Transfer Agreement....................................................... 62
Transfer and Servicing Agreements........................................ 57
Transfer Date............................................................ 62
Treasury Bill Indexed Securities......................................... 51
Trust.................................................................... 15
Trust Accounts........................................................... 59
Trust Agreement.......................................................... 15
Underlying Federal Loans................................................. 35
Underlying Private Loans................................................. 62
Underwriters............................................................. 81
Underwriting Agreements.................................................. 81
Unsubsidized Stafford Loan............................................... 37
</TABLE>
S-87
<PAGE> 90
[ALTERNATE PAGE]
Prospectus supplement to prospectus dated _________, _____
$
--------------
KEYCORP STUDENT LOAN TRUST -
----- ---
KEY BANK USA, NATIONAL ASSOCIATION
Seller
FLOATING RATE ASSET-BACKED NOTES
FLOATING RATE ASSET-BACKED CERTIFICATES
--------------
<TABLE>
<S> <C>
SECURITIES OFFERED
o classes of notes and certificates You should carefully consider
listed in the table below the risk factors beginning on
page S-_ of this prospectus
ASSETS supplement and page 2 of the
o student loans prospectus.
o certain student loans guaranteed by federal
or private guarantors The securities are obligations
only of the trust. The
CREDIT ENHANCEMENT securities are not guaranteed
o notes by any person.
o subordination of certificates
o reserve account The securities are not bank
o certificates deposits.
o reserve account
</TABLE>
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 FINAL
PRINCIPAL INTEREST RATE MATURITY PRICE TO UNDERWRITING PROCEEDS TO THE
AMOUNT (PER ANNUM) DATE PUBLIC (1) DISCOUNT SELLER(1)(2)
--------- ------------- -------- ---------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class A-1 Notes $ % % %
Class A-2 Notes $ % % %
Certificates $ % % %
Total............... $ $ $ $
</TABLE>
(1) Plus accrued interest, if any, from ___________.
(2) Before deducting expenses, estimated to be $_______________.
Delivery of the securities will be made on or about ____________, 19__, against
payment in immediately available funds.
This prospectus supplement and the prospectus to which it relates are to be
used by McDonald Investments, Inc., a KeyCorp. company and an affiliate of the
Seller, in connection with offers and sales related to market-making
transactions in the securities in which it acts as principal and/or agent.
Sales will be made at prices related to the prevailing prices at the time of
sale.
[NAMES OF UNDERWRITERS]
Prospectus Supplement dated _____________, _________
<PAGE> 91
[ALTERNATE PAGE]
PLAN OF DISTRIBUTION
This Prospectus Supplement and the Prospectus to which it relates are
to be used by McDonald Investments, Inc., a KeyCorp Company and an affiliate of
the Seller ("McDonald"), in connection with offers and sales related to
market-making transactions in the Securities in which McDonald acts as
principal. McDonald may also act as agent in such transactions. Sales will be
made at prices related to prevailing prices at the time of sale. Any obligations
of McDonald are the sole obligations of McDonald and do not create any
obligations on the part of any affiliate of McDonald.
In connection with the offering, McDonald may engage in transactions
that stabilize, maintain or otherwise affect the price of the Notes and the
Certificates. Specifically, McDonald may overallot the offering, creating a
short position in the Notes and the Certificates for its own account. McDonald
may bid for and purchase Notes and Certificates in the open market to cover such
short positions. In addition, McDonald may bid for and purchase Notes and
Certificates in the open market to stabilize the price of the Notes and the
Certificates. These activities may stabilize or maintain the market price of the
Notes and the Certificates above independent market levels. McDonald is not
required to engage in these activities, and may end these activities at any
time.
<PAGE> 92
PROSPECTUS
[SUBJECT TO COMPLETION
DATED JUNE 7, 1999]
KEYCORP STUDENT LOAN TRUSTS
Issuer
KEY BANK USA, NATIONAL ASSOCIATION
Seller
Asset Backed Notes
Asset Backed Certificates
SECURITIES OFFERED
<TABLE>
<S> <C>
------------------------------------------
o asset backed notes and asset backed You should carefully consider the risk
certificates factors beginning on page 2.
o rated in one of four highest rating
categories by at least one rationally The securities are not bank deposits
recognized rating organization and are not insured by the Federal
o not listed on any trading exchange Deposit Insurance Corporation.
o obligations only of the related trust
This prospectus must be accompanied
ASSETS by a prospectus supplement for the
o student loans particular series.
o may include one or more forms of ------------------------------------------
enhancement
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPOECTUS 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 ______, ____
<PAGE> 93
TABLE OF CONTENTS
<TABLE>
<S> <C>
RISK FACTORS......................................................................................................5
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..................................................................12
FORMATION OF THE TRUSTS..........................................................................................13
THE TRUSTS..............................................................................................13
ELIGIBLE LENDER TRUSTEE.................................................................................13
USE OF PROCEEDS..................................................................................................14
THE SELLER, THE ADMINISTRATOR AND THE SERVICERS..................................................................14
THE SELLER AND ADMINISTRATOR.....................................................................................14
GENERAL.................................................................................................14
SERVICES AND FEES OF ADMINISTRATOR......................................................................14
THE SERVICERS....................................................................................................15
THE STUDENT LOAN POOLS...........................................................................................15
GENERAL ................................................................................................15
CLAIMS AND RECOVERY RATES...............................................................................17
THE STUDENT LOAN FINANCING BUSINESS..............................................................................17
PROGRAMS OFFERED BY THE SELLER..........................................................................17
DESCRIPTION OF FEDERAL LOANS UNDER THE PROGRAMS.........................................................18
GENERAL .......................................................................................18
STAFFORD LOANS.................................................................................19
(1) ELIGIBILITY REQUIREMENTS..................................................................20
(2) LOAN LIMITS...............................................................................20
(3) INTEREST..................................................................................21
(4) REPAYMENT.................................................................................22
(5) GRACE PERIODS, DEFERRAL PERIODS, FORBEARANCE PERIODS......................................23
(6) INTEREST SUBSIDY PAYMENTS.................................................................23
(7) SPECIAL ALLOWANCE PAYMENTS................................................................24
SLS LOANS......................................................................................25
FEDERAL CONSOLIDATION LOANS....................................................................26
UNDERGRADUATE FEDERAL LOANS....................................................................28
GRADUATE FEDERAL LOANS.........................................................................29
DESCRIPTION OF PRIVATE LOANS UNDER THE PROGRAMS.........................................................30
GENERAL .......................................................................................30
PRIVATE UNDERGRADUATE LOANS....................................................................31
(1) ELIGIBILITY REQUIREMENTS..................................................................31
(2) LOAN LIMITS...............................................................................32
</TABLE>
<PAGE> 94
<TABLE>
<S> <C>
(3) INTEREST..................................................................................32
(4) REPAYMENT.................................................................................32
(5) GRACE PERIODS DEFERRAL PERIODS, FORBEARANCE PERIODS.......................................32
PRIVATE GRADUATE LOANS.........................................................................32
PAYMENT TERMS..................................................................................34
PRIVATE CONSOLIDATION LOANS....................................................................36
INSURANCE OF STUDENT LOANS; GUARANTORS OF STUDENT LOANS.................................................37
FEDERAL GUARANTORS.............................................................................37
FEDERAL INSURANCE AND REINSURANCE OF FEDERAL GUARANTORS........................................38
PRIVATE GUARANTORS.............................................................................41
ORIGINATION PROCESS.....................................................................................41
SERVICING AND COLLECTIONS PROCESS.......................................................................44
INCENTIVE PROGRAMS......................................................................................45
WEIGHTED AVERAGE LIVES OF THE SECURITIES.........................................................................45
POOL FACTORS AND TRADING INFORMATION.............................................................................47
DESCRIPTION OF THE NOTES.........................................................................................48
GENERAL ................................................................................................48
PRINCIPAL OF AND INTEREST ON THE NOTES..................................................................49
THE INDENTURE...........................................................................................50
MODIFICATION OF INDENTURE......................................................................50
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT................................................51
CERTAIN COVENANTS..............................................................................55
ANNUAL COMPLIANCE STATEMENT....................................................................56
INDENTURE TRUSTEE'S ANNUAL REPORT..............................................................56
SATISFACTION AND DISCHARGE OF INDENTURE........................................................56
THE INDENTURE TRUSTEE..........................................................................56
DESCRIPTION OF THE CERTIFICATES..................................................................................56
GENERAL ................................................................................................57
PRINCIPAL AND INTEREST IN RESPECT OF THE CERTIFICATES...................................................57
CERTAIN INFORMATION REGARDING THE SECURITIES.....................................................................58
FIXED RATE SECURITIES...................................................................................58
FLOATING RATE SECURITIES................................................................................58
BOOK-ENTRY REGISTRATION.................................................................................59
DEFINITIVE SECURITIES...................................................................................63
LIST OF SECURITYHOLDERS.................................................................................64
REPORTS TO SECURITYHOLDERS..............................................................................65
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS.............................................................65
GENERAL ................................................................................................65
SALE OF STUDENT LOANS; REPRESENTATIONS AND WARRANTIES...................................................66
</TABLE>
<PAGE> 95
<TABLE>
<S> <C>
ADDITIONAL FUNDINGS.....................................................................................67
ACCOUNTS ...............................................................................................68
SERVICING PROCEDURES....................................................................................68
PAYMENTS ON STUDENT LOANS...............................................................................69
SERVICER COVENANTS......................................................................................70
SERVICING COMPENSATION..................................................................................71
DISTRIBUTIONS...........................................................................................72
CREDIT AND CASH FLOW ENHANCEMENT........................................................................72
GENERAL .......................................................................................72
RESERVE ACCOUNT................................................................................73
STATEMENTS TO INDENTURE TRUSTEE AND TRUST...............................................................73
EVIDENCE AS TO COMPLIANCE...............................................................................75
CERTAIN MATTERS REGARDING THE SERVICER..................................................................75
SERVICER DEFAULT; ADMINISTRATOR DEFAULT.................................................................76
RIGHTS UPON SERVICER DEFAULT AND ADMINISTRATOR DEFAULT..................................................77
WAIVER OF PAST DEFAULTS.................................................................................78
INSOLVENCY EVENT........................................................................................79
AMENDMENT...............................................................................................79
PAYMENT OF NOTES........................................................................................80
SELLER LIABILITY........................................................................................80
TERMINATION.............................................................................................80
ADMINISTRATOR...........................................................................................82
CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS.......................................................................82
TRANSFER OF STUDENT LOANS...............................................................................82
CERTAIN MATTERS RELATING TO RECEIVERSHIP................................................................84
CONSUMER PROTECTION LAWS................................................................................84
LOAN ORIGINATION AND SERVICING PROCEDURES APPLICABLE TO
STUDENT LOANS.......................................................................................85
FAILURE TO COMPLY WITH THIRD-PARTY SERVICER REGULATIONS
MAY ADVERSELY AFFECT LOAN SERVICING.................................................................86
STUDENT LOANS GENERALLY NOT SUBJECT TO DISCHARGE IN
BANKRUPTCY..........................................................................................86
RECENT DEVELOPMENTS.....................................................................................87
EMERGENCY STUDENT LOAN CONSOLIDATION ACT OF 1997....................................................87
FY 1998 BUDGET......................................................................................87
1998 AMENDMENTS.....................................................................................87
1998 REAUTHORIZATION BILL...........................................................................88
INCOME TAX CONSEQUENCES..........................................................................................89
FEDERAL TAX CONSEQUENCES FOR TRUSTS FOR WHICH A PARTNERSHIP
ELECTION IS MADE...............................................................................................91
TAX CHARACTERIZATION OF THE TRUST.......................................................................91
TAX CONSEQUENCES TO HOLDERS OF THE NOTES................................................................91
</TABLE>
<PAGE> 96
<TABLE>
<S> <C>
TREATMENT OF THE NOTES AS INDEBTEDNESS.........................................................91
ORIGINAL ISSUE DISCOUNT........................................................................91
INTEREST INCOME ON THE NOTES...................................................................92
SALE OR OTHER DISPOSITION......................................................................92
FOREIGN HOLDERS................................................................................93
BACKUP WITHHOLDING.............................................................................94
RECENT LEGISLATION......................................................................................94
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES.........................................................95
CLASSIFICATION AS A PARTNERSHIP.........................................................................95
TREATMENT OF THE TRUST AS A PARTNERSHIP........................................................95
PARTNERSHIP TAXATION...........................................................................95
COMPUTATION OF INCOME..........................................................................97
DETERMINING THE BASES OF TRUST ASSETS..........................................................97
DISCOUNT AND PREMIUM...........................................................................98
DISPOSITION OF CERTIFICATES....................................................................98
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES................................................98
SECTION 754 ELECTION...........................................................................99
ADMINISTRATIVE MATTERS.........................................................................99
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS................................................100
BACKUP WITHHOLDING............................................................................101
FEDERAL TAX CONSEQUENCES FOR TRUSTS IN WHICH ALL RESIDUAL
INTERESTS ARE RETAINED BY THE SELLER OR AN AFFILIATE OF THE
SELLER........................................................................................................101
TAX CHARACTERIZATION OF THE TRUST......................................................................101
TAX CONSEQUENCES TO HOLDERS OF THE NOTES...............................................................101
TREATMENT OF THE NOTES AS INDEBTEDNESS........................................................101
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES..................................................102
PENNSYLVANIA STATE TAX CONSEQUENCES.............................................................................102
PENNSYLVANIA INCOME AND FRANCHISE TAX CONSEQUENCES WITH
RESPECT TO THE NOTES...............................................................................102
PENNSYLVANIA INCOME AND FRANCHISE TAX CONSEQUENCES WITH
RESPECT TO THE CERTIFICATES........................................................................102
ERISA CONSIDERATIONS............................................................................................103
THE NOTES..............................................................................................104
THE CERTIFICATES.......................................................................................105
PLAN OF DISTRIBUTION............................................................................................105
LEGAL MATTERS...................................................................................................107
INDEX OF PRINCIPAL TERMS........................................................................................108
</TABLE>
<PAGE> 97
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 Most 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
o federal guarantees are generally
limited to 98% of the principal amount
of the student loan
o if Key Bank USA, National Association
fails to follow proscribed origination
procedures or if the 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 interest subsidy or
special allowance payments to the
trust
o 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
DEFAULTS ON STUDENT LOANS
WITHOUT GUARANTEES MAY
RESULT IN LOSSES A trust may include student loans that
are not guaranteed by any third party or
governmental agency. Since all student
loans, whether guaranteed or not, are
unsecured, if a
5
<PAGE> 98
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:
o the amount of claims made against such
federal guarantor as result of
borrower defaults;
o the amount of claims reimbursed to
such federal guarantor from the
Department;
o 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;
o loss of reinsurance benefits due to a
servicer's failure to follow required
servicing procedures; and
o 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 be delays
in making the necessary determination.
Loss of any such guarantee payments,
interest subsidy payments or special
allowance payments could adversely
affect the related trust's ability to
pay you timely interest and principal.
In such event, you may suffer a loss on
your investment.
6
<PAGE> 99
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 and the
servicers of their respective
obligations. Any failure to perform
could have material adverse consequences
as follows:
o FAILURE TO HONOR PURCHASE OBLIGATIONS
MAY CAUSE LOSSES. Key Bank USA,
National Association or the applicable
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 sure,
however, that Key Bank USA, National
Association or the applicable 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.
o 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 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
requirements, the Department may fine
the servicer and/or limit, suspend, or
terminate the servicer's eligibility
to contract to service federal student
loans. If a 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 could be adversely affected.
Moreover, if the Department terminates
a servicer's
7
<PAGE> 100
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.
o THE TRUST'S INTEREST IN ITS STUDENT
LOANS COULD BE DEFEATED BY ACTIONS OF
THE SERVICERS AS CUSTODIANS. The
applicable servicer as custodian on
behalf of a 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.
o INSOLVENCY OF A SERVICER OR THE
ADMINISTRATOR MAY CAUSE LOSSES. In the
event of a default by a servicer or an
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 servicer or
administrator, 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
8
<PAGE> 101
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 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 servicers is reduced. Such cost
increases could reduce the ability of
the 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 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
9
<PAGE> 102
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.
Although the trust agreements for the
trusts established by the Seller which
share a lender identification number
will require each such trust to
indemnify the other trusts for a
shortfall or an offset by the Department
or a federal guarantor 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 a servicer
or the administrator, the indenture
trustee or the noteholders, may remove a
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 a servicer or the
administrator, including defaults that
could materially adversely affect the
certificateholders.
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
10
<PAGE> 103
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.
11
<PAGE> 104
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, Cleveland, Ohio
44114, Attention: Trust Administrator (Telephone: (800) 523-7248).
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<PAGE> 105
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
(a) a pool of undergraduate loans, law school, medical school,
dental school, graduate business school, and/or other
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 Private Loans to the extent assigned to each Trust
by the Seller, and
(d) all moneys and investments on deposit in the 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 Servicers will be appointed the custodians
of the promissory notes representing the Student Loans that
each services by the related Eligible Lender Trustee.
The principal offices of each Trust and the related Eligible Lender
Trustee will be specified in the applicable Prospectus Supplement.
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 with each of the
Guarantors with respect to such Student Loans. 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
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<PAGE> 106
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 Lender Trustee 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
applied 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 AND THE SERVICERS
THE SELLER AND ADMINISTRATOR
General. Key Bank USA, National Association (the "Bank"), will act as
seller (the "Seller") pursuant to the related Sale and Servicing Agreement and
administrator (the "Administrator") pursuant to the related Administration
Agreement. The Bank, a wholly owned subsidiary of KeyCorp, is a national
banking association providing consumer financial services nationwide, including
credit cards, student loans, home equity loans, and indirect automobile, marine
and recreational vehicle loans.
As of December 31, 1998, the Bank had total assets of approximately
$_____ billion, total liabilities of approximately $_____ billion and
approximately $_____ billion in stockholder's equity. As of such date, the
Seller had an aggregate principal amount of student loans outstanding of
approximately $_____ billion, of which approximately $_____ billion aggregate
principal amount consists of Student Loans originated under various graduate
student loan programs. The principal executive offices of the Bank 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."
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<PAGE> 107
THE SERVICERS
The servicers (the "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 for each Trust, each
Servicer is required 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 Servicer has serviced Student Loans on behalf of the Seller and
otherwise in compliance with all applicable standards and procedures. In
addition, each 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."
In consideration for performing its obligations under the applicable
Sale and Servicing Agreement, the Servicers will receive in aggregate, subject
to certain limitations described herein, (a) a monthly fee payable by the Trust
as specified in the related Prospectus Supplement and (b) certain one-time
fixed fees for each Student Loan for which a forbearance period was granted or
renewed or for which a guarantee claim was filed, in each case subject to
certain adjustments, together with other administrative fees and similar
charges. See "Description of Transfer and Servicing Agreements--Servicing
Compensation."
THE STUDENT LOAN 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
o 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)
o contains terms in accordance with those required by the Programs, the
Guarantee Agreements and other applicable requirements
o 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
o satisfies the other criteria, if any, set forth in the related
Prospectus Supplement.
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<PAGE> 108
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,
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 originated by the Seller in accordance with the Programs 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.
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, the portion of the payment allocable to interest for the period since the
preceding payment was made will be greater than it would have been had the
payment been made as scheduled, and the portion of the payment applied to
reduce the unpaid principal balance will be correspondingly less. In either
case, subject to any applicable Deferral Periods or Forbearance Periods, the
borrower pays a regular installment until the final scheduled payment date, at
which time the amount of the final installment is increased or decreased as
necessary to repay the then outstanding principal balance of and any accrued
but unpaid interest on such Student Loan.
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<PAGE> 109
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.
THE STUDENT LOAN FINANCING BUSINESS
PROGRAMS OFFERED BY THE SELLER
The Student Loans to be sold by the Seller to an 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 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 by certain federal or state guarantors
pursuant to a guarantee agreement to be entered into between such federal or
state guarantors specified in the related Prospectus Supplement (each a
"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 all or substantially 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 third party or governmental agency ("Private
Unguaranteed Loans") or (2)
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<PAGE> 110
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 such private guarantors
specified in the related Prospectus Supplement (each a "Private Guarantor" and
collectively, the "Private Guarantors," and together with the Federal
Guarantors, the "Guarantors" or individually a "Guarantor"), the Seller and the
Eligible Lender Trustee, or by the 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
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.
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.
STAFFORD LOANS. "Stafford Loans" are loans made by eligible lenders in
accordance with the Higher Education Act to Eligible Students, based on
financial need, to finance a portion of
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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 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;
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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:
o must be unsecured;
o 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
o 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.
The following chart sets forth the current and historic loan limits.
<TABLE>
<CAPTION>
ALL STUDENTS (1) INDEPENDENT STUDENTS(1)
---------------- -----------------------------
BASE AMOUNT ADDITIONAL
SUBSIDIZED AND UNSUBSIDIZED MAXIMUM
SUBSIDIZED SUBSIDIZED UNSUBSIDIZED ON ONLY ON OR AGGREGATE
ON OR AFTER ON OR AFTER OR AFTER AFTER TOTAL
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>
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- -----------------
(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 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
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<PAGE> 114
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 Stafford Loan on behalf of the borrower during such periods,
in amounts equal to the accrued and unpaid interest for the previous quarter
with respect to such Stafford Loan. uring 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 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
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<PAGE> 115
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.
(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.
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<PAGE> 116
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.
SLS LOANS. 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 Program"). The basic framework and principal provisions of the Stafford
Loan Program as described above are similar in many respects to those that are
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<PAGE> 117
applicable to loans under the SLS Program ("SLS Loans"). In particular, SLS
Loans are subject to similar eligibility requirements and, provided that such
requirements are satisfied, are entitled to the same guarantee and federal
reinsurance arrangements. SLS Loans differ significantly from Stafford Loans,
however, in the context of the Interest Subsidy Payments and Special Allowance
Payments discussed above.
The annual and aggregate limitations that are applicable to SLS Loans
in the case of those constituting 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.
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
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<PAGE> 118
advanced after July 23, 1992, who also has Stafford Loans outstanding may defer
commencing repayment of such SLS Loan for the Grace Period applicable to such
Stafford Loans. For SLS Loans entering repayment on or after October 1, 1995,
borrowers may choose among several repayment options, including the option to
make interest only payments for limited periods.
As of July 1, 1994, the SLS Program was discontinued and SLS Loans are
no longer made.
FEDERAL CONSOLIDATION LOANS. The Higher Education Act established a
program to facilitate the ability of eligible borrowers of Stafford Loans or
SLS Loans (each, an "Underlying Federal Loan") to consolidate such 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
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 multipleholders 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. The lower rate applies
only to borrowers who apply 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,
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<PAGE> 119
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
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 1993 Act 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)
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<PAGE> 120
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.
The 1998 Amendments and the 1998 Reauthorization Bill made additional
changes with regard to Federal Consolidation Loans. These changes include,
among other things, a reduction in the 1.05% per annum Federal Consolidation
Loan Rebate to .62% per annum on Student Loans for which applications are
received between October 1, 1998 and January 31, 1999.
UNDERGRADUATE FEDERAL LOANS. The Seller originates 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
o only admits persons who have a high school diploma or its
equivalent,
o is legally authorized to operate within a state,
o provides not less than a two-year program with credit acceptable
toward a bachelor's degree,
o is a public or non-profit institution and
o is credited by a nationally recognized accrediting agency or is
determined by the Department to meet the standards of an accredited
institution.
Eligible proprietary institutions of higher education include
business, trade and vocational schools meeting standards which provide that the
institution
o 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 1993 Act),
o is authorized by a state to provide a program of vocational
education designed to fit individuals for useful employment in
recognized occupations,
o has been in existence for at least two years,
o provides at least a six-month training program to prepare students
for gainful employment in a recognized occupation and
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o 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
o offers more than 50 percent of its courses by correspondence,
o enrolls 50 percent or more of its students in correspondence
courses,
o has a student enrollment in which more than 25 percent of the
students are incarcerated or
o 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
o the educational institution has filed for bankruptcy,
o 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
o 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 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> 122
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.
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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.
PRIVATE UNDERGRADUATE LOANS. The Key Alternative Loan (the "Key
Alternative Loan") provides an undergraduate student supplemental funding that
allows the student to share the responsibility of education financing with a
cosigner. The Key Alternative Loan was introduced to students in 1995 and is
serviced on behalf of the Seller by the Great Lakes Higher Education
Corporation ("GLHEC"). The Key Alternative Loan is a not guaranteed by any
third party or governmental agency. Loan fees are deducted from the principal
amount of each loan at disbursement to help cover the costs of defaults.
(1) Eligibility Requirements. In order to qualify for a Key
Alternative Loan, the borrower must meet the following eligibility
requirements:
o At least half-time undergraduate student at a Title IV eligible
four-year institution (Prior to the 1998-1999 program year, the
borrower had to be a full-time student.)
o U.S. citizen/national or an eligible non-citizen
o 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.
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<PAGE> 124
(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:
<TABLE>
<CAPTION>
PROGRAM YEAR YEAR IN SCHOOL ANNUAL MAXIMUM AGGREGATE MAXIMUM
- ------------ -------------- -------------- -----------------
<S> <C> <C> <C>
1995-1996 First year $ 5,000 $35,000
through Second - Fifth years $7,500
1997-1998
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 3.10% during the interim period and 3.25% 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
$15,0000 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 four-year 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 with a maximum of 18 months in total forbearance except for
graduate school forbearance which is granted in 12 month increments
for a maximum of twelve months.
PRIVATE GRADUATE LOANS. The Seller originates Private Graduate Loans
in conjunction with the Federal Loans. Like the Federal Loans, the Private
Graduate Loans provide educational financing to help pay for the costs of
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<PAGE> 125
o attending law, medical, dental, graduate, business, or other
graduate school,
o taking/passing one or more state bar examinations upon graduation
from law school, or
o 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, if
applicable, a majority of the Private Graduate 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, 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 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 Law Loan Up to the cost of attendance N/A $120,000
through
1997-1998
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 N/A
Bar Exam Loan $ 7,500 $ 7,500 $ 7,500
Residency Loan $ 8,000 $ 8,000 $ 8,000
</TABLE>
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(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.
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 3.25% 3.25%
1992-1993 Law & Bar Exam 3.25% 3.40%
1993-1994 Law & Bar Exam 3.25% 3.40%
1994-1995 Law & Bar Exam 3.25% 3.40%
1995-1996 Law Loan 3.25% 3.40%
through
1997-1998
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 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 approximately six months after such
borrower ceases to be an Eligible Student (or, with respect to each Private
Graduate Loan [made since the commencement of the 1990-1991 program year,
approximately nine months] after such borrower ceases to be an Eligible
Student), subject to deferral or forbearance as discussed below (the "Private
Loan Repayment Commencement Date"). Subject to certain conditions, borrowers of
Private Graduate Loans (other than Private Consolidation Loans) may receive the
benefits of certain deferral periods
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<PAGE> 127
(either prior to commencing repayment or thereafter) similar to those
applicable to Stafford Loans, during which borrowers are permitted to defer
principal payments and to capitalize the interest accruing on such Private
Graduate Loans. Borrowers who incur Residency Loans, subject to certain
conditions, may defer repayment of such loans until the required residency
program is completed, not to exceed 48 months. In addition, borrowers of
Private 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)] 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 applicable Private Loan
Repayment Commencement Date.
At the option of such student, 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.
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<PAGE> 128
<TABLE>
<CAPTION>
PROGRAM YEAR TYPE OF LOAN SUPPLEMENTAL FEE
<S> <C> <C>
1990-1991 Law Loan 2%
through Bar Loan
1995-1996
1996-1997 Law Loan 4%
Medical Loan 2%
Dental Loan 2%
Business Loan 2%
Graduate Loan 3%
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
Residency Loan
1998-1999(1) Law Loan 1.5%-6.9%
Medical Loan 1.5%-2%
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%
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%.
"ADEAL" (Alternative Dental Education Assistance Loan) loans are
similar to the Dental Loans outlined above. They are made to borrowers who are
full-time dental or postdoctoral dental students attending or accepted for
attendance at a member institution of the American Association of Dental
Schools (AADS) and members of the American Student Dental Association (ASDA).
The borrower must meet minimum credit criteria and not have outstanding
education loans with an aggregate balance that exceeds $175,000. If the
borrower is in post-doctorate study, the aggregate is $200,000. Interest rates
vary quarterly based upon the 91-day Treasury Bill Rate plus 2.50% prior to
repayment and 3.00% at repayment. Interest is capitalized once when the loans
enter repayment. The maximum loan term for ADEAL loans is 20 years and
repayment begins twelve months after the borrower ceases to be enrolled,
twenty-four months after the borrower graduates if the borrower provides
verification that he or she is enrolled in a residency program within the
initial twelve month grace period, or six years after the date of the first
disbursement of any ADEAL loan.
PRIVATE CONSOLIDATION LOANS. The Seller has established a 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
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<PAGE> 129
loan (a "Private Consolidation Loan"; together with Federal Consolidation
Loans, sometimes referred to herein collectively as "Consolidation Loans"). The
Private Consolidation Loan Program (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. [Under this program, an
eligible borrower of Private Consolidation Loans 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 Private Consolidation
Loan must consolidate all of his or her eligible loans and in doing so will
forgo all opportunities for deferment or forbearance.
Private Consolidation Loans originated during the 1995 through 1998
program years 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. Private Consolidation Loans
will be repayable over a period of 25 to 30 years, depending on the original
principal amount of such Private Consolidation Loan. The Private Loan Repayment
Commencement Date with respect to a Private Consolidation Loan will occur
immediately upon disbursement, with no provision for deferment or forbearance.
The borrower of a Private Consolidation Loan will be offered repayment options
similar to those available for other Private Graduate Loans. With respect to
each 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").
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 and from 78% to 98% of
each default claim paid for loans disbursed on or after October 1, 1993.
Federal Guarantors are reinsured by the federal government for 100% of death,
disability, bankruptcy, closed school and false certification claims 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.
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<PAGE> 130
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 a certain period
of time as specified by the Higher Education Act. 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 the borrower of a Parental
Loan For Undergraduate Students (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
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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.
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
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<PAGE> 132
Guarantor to return all reserve funds to the Department if the Department
determines such action 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% guarantor risk sharing from 2% to 5%.
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
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uninterrupted payment of default claims to lenders or to take any other action
the Department deems necessary to ensure the continued availability of student
loans and the full honoring of guarantee claims thereunder. In addition, the
1992 Amendments provide that if the Department determines that a Federal
Guarantor is unable to meet its guarantee obligations, holders of Federal Loans
covered thereby may submit guarantee claims directly to the Department until
such time as such guarantee obligations are transferred to a new guarantor
capable of meeting such obligations or until a successor guarantor assumes such
obligations. There can be no assurance that the Department would under any
given circumstances assume such obligation to ensure satisfaction of a
guarantee obligation by exercising its right to terminate a reimbursement
agreement with a Federal Guarantor or by making a determination that such
Federal Guarantor is unable to meet its guarantee obligations.
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. The Seller
will structure each Trust and the related Securities assuming that each Private
Guarantor will not have the financial resources to satisfy all its obligations
under its respective Guarantee Agreement with respect to the related Private
Loans throughout the term of such loans.
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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o No acount that has been 90 or more days delinquent in the past two
years, no more than one account is currently more than 60 days
delinquent.
o No record of bankruptcy, foreclosure, repossession, skips or wages
garnishment.
o No record of unpaid collections, charged-off accounts or
written-off accounts.
o 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.
o Credit criteria for the 1994-1995 program year also include
requirements that no account has been delinquent 90 or more days in
the past five years or three years with respect to any previous
borrower, and there have been no more than three inquiries and none
with respect to any previous borrower to an authorized credit
reporting agency in the past six months.
o Credit criteria for the 1997-1998 program year includes 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. $30,000 for MedAchiever.
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.
The marketing agent or origination department forwards a copy of each
application that satisfies the foregoing reviews to the respective Guarantor,
if applicable, which reviews the application to determine that such application
satisfies all applicable conditions, including the foregoing, for the loan to
be eligible to receive Guarantee Payments, subject to compliance with the terms
of the respective Guarantee Agreements, including the proper servicing of the
loan.
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<PAGE> 135
Upon approval of an application by either the marketing agent or the
origination department and the respective Guarantor, if applicable (and
approval by the Seller, in the case of all Private Graduate Loans) and receipt
of evidence from such Guarantor that the applicable loan is guaranteed, the
Seller causes the proceeds of such loan to be disbursed in one or more
installments. For each loan that is made, the marketing agent or the
origination department forwards the completed loan application and executed
promissory note to the designated Servicer, which serves as custodian for such
materials.
The origination process described above is generally true for both
Federal Loans and Private Graduate Loans, except that 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 received by the marketing agent or the Seller are
forwarded to the appropriate Servicer, who contacts the borrower, prepares and
sends to the borrower an application (which includes a promissory note) for a
Consolidation Loan for the borrower's review and signature. Although the
borrower is permitted to choose any lender to make a Federal Consolidation
Loan, borrowers typically express no preference as to the identity of the
lender. In that event, each Servicer generally will choose the lender that has
the highest balance of the loans to be consolidated or, if there is no such
lender, the lender that has made the most recent loan to the borrower to be
consolidated. Each 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 Servicer
retains the completed loan application and executed promissory note as
custodian.
Applications for Key Alternative Loans will be loaded to the
origination system of GLHEC. Completed input applications will be transferred
electronically to the Seller's credit department in Boston for credit review
nightly. Applications will be reviewed daily Monday through Friday. Approved
applications are transmitted back to GLHEC on a daily basis, where an approval
letter is generated and sent to the applicant, cosigner and the school. For
schools who are participating in the confirmation process, the process remains
the same up to the point where the approval letters are processed. Schools who
are participating in this process receive a report via fax that allows the
school to approve the loan amount and disbursement dates, adjust the loan
amount or the disbursement date, or cancel the loan entirely, before the
applicant, cosigner and school receive the approval letter. Once the
confirmation roster is received back from the school, based on the school's
approval of the roster, GLHEC will produce either an approval letter or a
denial letter, as applicable. Denied applicants receive 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
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<PAGE> 136
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.
Loan disbursements are sent to the school ten days prior to the
academic start dates indicated on the application, unless the term is already
in progress. If the term is already in progress, the funds are sent immediately
upon loan approval. Checks are sent payable to the borrower unless the school
requests checks payable to the school and the borrower. Loan disbursements may
also be sent via electronic funds transfer.
Loan fees are deducted from each disbursement. For co-signed loans,
the fee is 4%. For non-cosigned loans, the loan fee is 9%.
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 Servicer
performs such procedures on behalf of the Seller and will agree, pursuant to
the related Sale and 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 Servicer's loan file for the borrower. Each Servicer also will be
required to perform skip tracing procedures on delinquent borrowers whose
current location is unknown, including contacting such borrowers' schools and
references. Failure to comply with the established procedures could adversely
affect the ability of the 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 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
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Loans made prior to the enactment date of the 1998 Reauthorization Bill), 240
days (in the case of Federal Loans made on or after October 7, 1998), or 150
days (in the case of Private Guaranteed Loans), each 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), 330 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. Each 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
Servicer to purchase the applicable Student Loan. See "Description of the
Transfer and Servicing Agreements--Servicer Covenants."
INCENTIVE PROGRAMS
The Seller has offered, and may continue to offer, incentive programs
to certain Student Loan borrowers. Two such programs are currently made
available by the Seller and may apply to Student Loans owned by a Trust. These
incentive programs currently or hereafter made available by the Seller may also
be made available by each Servicer to borrowers with Student Loans. Any such
incentive program that effectively reduces borrower payments on Student Loans
and is not required by the Higher Education Act will be applicable to the
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 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. he 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 from the Seller
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(1) 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) 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; provided, that
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.
The Federal Direct Consolidation Loan Program provides borrowers with
the opportunity to consolidate outstanding student loans at interest rates
below, and income-contingent repayment terms that some borrowers may find
preferable to, those that would be available from the Seller on a loan
originated by the Seller under the Federal Consolidation Loan Program. The
lower rate applies only to borrowers who apply for Student Loans 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
Consolidation Loan with respect to borrowers with federal loans, as well as
increase the likelihood that a federal loan in the trust will be prepaid
through the issuance of a Federal Direct Consolidation Loan. 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.
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 warranties, and the Servicers 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
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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
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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.
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 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,
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(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 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
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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
(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 "Index Shortfall Carryover"), the Interest Rate
for such Distribution Date will be such alternate rate and the Index Shortfall
Carryover shall be payable as described in such Prospectus Supplement. Payment
of the Index Shortfall 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 Index Shortfall 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 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 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
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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
(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, 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 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' Index Shortfall Carryover) and
(2) to pay to Certificateholders, the outstanding Certificate
Balance plus accrued and unpaid interest thereon (other than
the Certificateholders' Index Shortfall Carryover) 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'
Index
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Shortfall Carryover) and (2) to pay to Certificateholders the
outstanding Certificate Balance plus accrued and unpaid
interest thereon (other than the Certificateholders' Index
Shortfall Carryover).
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 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 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.
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 in principal amount of such
outstanding Notes.
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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.
With respect to any Trust, none of the related Indenture Trustee, the
Seller, the Administrator, the 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,
o 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,
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o 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,
o except as contemplated by the Related Documents, dissolve or liquidate in
whole or in part,
o 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
o 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
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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 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,
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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").
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
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interests through DTC. Securities will be registered in the name of Cede as
nominee for DTC. Cedel and Euroclear will hold omnibus positions with respect
to the Notes on behalf of Cedel Participants and the Euroclear Participants,
respectively, through customers' securities accounts in Cedel's and Euroclear's
name on the books of their respective depositaries (collectively, the
"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
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Participant to a Participant will be received with value on the DTC settlement
date but will be available in the relevant Cedel or Euroclear cash account only
as of the business day following settlement in DTC.
Cross-market transfers between persons holding Notes directly or
indirectly through DTC, on the one hand, and directly or indirectly through
Cedel Participants or Euroclear Participants, on the other, will be effected in
DTC in accordance with DTC Rules on behalf of the relevant European
international clearing system by its 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.
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.
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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
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
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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 SERVICERS, THE ADMINISTRATOR, THE
ELIGIBLE LENDER TRUSTEE, THE INDENTURE TRUSTEE NOR THE UNDERWRITERS WILL HAVE
ANY RESPONSIBILITY OR OBLIGATION TO ANY PARTICIPANTS, CEDEL PARTICIPANTS OR
EUROCLEAR PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS NOMINEES WITH
RESPECT TO (1) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC, CEDEL OR
EUROCLEAR OR ANY PARTICIPANT, (2) THE PAYMENT BY DTC, CEDEL OR EUROCLEAR OR ANY
PARTICIPANT OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE
PRINCIPAL AMOUNT 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,
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(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 Servicer
Default, Securityholders representing at least a majority of
the outstanding principal amount of the 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 such Notes or Certificates
is no longer in the best interest of the holders of such
Securities.
Upon the occurrence of any event described in the immediately
preceding paragraph, the Applicable Trustee will be required to notify all
applicable Securityholders 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 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
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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 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 Servicers will 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
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(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.
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
o 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;
o the information provided with respect to the Student Loans is
true and correct as of the Cutoff Date; and
o 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
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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 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, each Servicer will be appointed custodian of the promissory notes
representing the Student Loans which such Servicer is servicing and any other
related documents by the related Eligible Lender Trustee on behalf of each
Trust. The Seller's and the 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 a 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 a 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.
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ACCOUNTS
With respect to each Trust, 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.
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, each 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, a Servicer will
hold on behalf of the Trust the notes evidencing, and other documents relating
to, that Student Loan. With respect to the Student Loan it is servicing, each
Servicer is
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required pursuant to the related Sale and Servicing Agreement to perform all
services and duties customary to the servicing of Student Loans (including all
collection practices), to do so in the same manner as such Servicer has
serviced student loans for parties other than the Seller and to do so 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.
Without limiting the foregoing, the duties of each 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 with respect to the Student Loans
such Servicer is servicing, including claiming and obtaining any Guarantee
Payments with respect thereto 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. In
addition, each Servicer will 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
Servicer's customary practices with respect to the Seller and as otherwise
required in the related Sale and Servicing Agreement.
PAYMENTS ON STUDENT LOANS
With respect to each Trust, except as provided below, each Servicer
will 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 Key Bank USA, National Association
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 Key Bank USA, National Association 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, each 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 (as such term is defined in the related
Prospectus Supplement, the "Monthly Servicing Payment Date") (to the extent of
the Servicing Fee payable on such date) and on or before the business day
immediately preceding each Distribution Date (to the extent of the
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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 a Servicer into the Collection Account on or before the business
day preceding each Distribution Date. Pending deposit into the Collection
Account, collections may be invested by the Administrator at its own risk and
for its own benefit, and will not be segregated from funds of the
Administrator.
SERVICER COVENANTS
With respect to each Trust, each Servicer will covenant in the related
Sale and Servicing Agreement that:
(a) it will 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 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 impair the rights of the related
Certificateholders and the related Noteholders in the Student
Loans; and
(d) it will not 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.
Certain incentive programs currently or hereafter made available by
the Seller to borrowers may also be made available by each Servicer to
borrowers with Student Loans. Any such incentive program that effectively
reduces borrower payments on Student Loans and is not required by the Higher
Education Act will be applicable to the Student Loans only if and to the extent
that such Servicer receives payment from the Seller in an amount sufficient to
offset such effective yield reductions.
Under the terms of the related Sale and Servicing Agreement, unless
otherwise specified in the related Prospectus Supplement, if the Seller or a
Servicer discovers, or receives written notice, that any covenant of the
Servicers set forth above has not been complied with by such 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
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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, such 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, such 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 such Servicer. In addition, a 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 such Servicer.
SERVICING COMPENSATION
With respect to any Trust, the Servicers will be entitled to receive,
the servicing fee monthly in an amount in the aggregate equal to the sum of (a)
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
(b) certain one-time fixed fees for each Student Loan for which a forbearance
period was granted or renewed or for which a guarantee claim was filed, in each
case subject to adjustment, together with other administrative fees and similar
charges specified in the related Prospectus Supplement as compensation for
performing the functions as servicers for the related Trust described above
(the "Servicing Fee"). The Servicing Fee (together with any portion of the
Servicing Fee that remains unpaid from prior Distribution Dates) will be paid
as specified in the applicable Prospectus Supplement.
The Servicing Fee will compensate the Servicers for performing 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 Servicing Fee also will reimburse the Servicers for certain taxes,
accounting fees, outside auditor fees, data processing costs and other costs
incurred in connection with administering the Student Loans.
In the event of (x) any sale of the Student Loans on behalf of the
Trust to any person (other than the Seller, the Administrator, or the
Servicers) in which the purchaser elects to deconvert the Student Loans and not
retain the applicable Servicer or (y) any termination by the Trust of the
applicable Servicer of the Student Loans, except for any termination for cause
or as a result of any Servicer Default by the applicable Servicer, the Trust
shall pay to the applicable Servicer, as a part of the Servicing Fee the
following deconversion fee, per loan, based on the status of the loan at the
time of deconversion as set forth in the related Prospectus Supplement.
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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 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
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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 quarterly statements and other
information provided to it by the 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;
2. the amount of the distribution allocable to interest on each
class of Securities, together with the interest rates applicable with
respect thereto;
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3. the amount of the distribution, if any, allocable to any Index
Shortfall 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 Servicing Fee paid to the Servicers 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 for the next period 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
13. the aggregate amount of Guarantee Payments deposited into
the Collection Account expressed as a percentage of the Initial Pool
Balance.
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Each amount set forth pursuant to subclauses (1), (2) (5) and (8) 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 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 each Servicer or the Administrator, as the case may be, stating that, to his
knowledge, such 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 Servicers and
the Administrator will agree to give the Indenture Trustee and the Eligible
Lender Trustee notice of certain Servicer Defaults and Administrator Defaults,
respectively, under the Sale and Servicing Agreement.
Copies of such statements and certificates may be obtained by
Securityholders by a request in writing addressed to the Applicable Trustee.
CERTAIN MATTERS REGARDING THE SERVICER
Each Sale and Servicing Agreement will provide that the Servicers may
not resign from their obligations and duties as Servicer thereunder, except upon
determination that a 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
Servicer's servicing obligations and duties under the Sale and Servicing
Agreement.
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Each Sale and Servicing Agreement will further provide that neither the
Servicer nor any of its directors, officers, employees or agents will be under
any liability to the 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 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
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 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 a Servicer may be merged or consolidated, or any entity
resulting from any merger or consolidation to which such Servicer is a party, or
any entity succeeding to the business of such Servicer, which corporation or
other entity in each of the foregoing cases assumes the obligations of such
Servicer, will be the successor of such Servicer under such Sale and Servicing
Agreement.
SERVICER DEFAULT; ADMINISTRATOR DEFAULT
Except as otherwise provided in the related Prospectus Supplement,
"Servicer Default" under each Sale and Servicing Agreement will consist of
(1) any failure by a 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 such Servicer or after
discovery by such Servicer;
(2) any failure by a Servicer duly to 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 such
Servicer by the Indenture Trustee, the Eligible Lender
Trustee, the other Servicer or the Administrator or (y) to
such 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;
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(3) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities, or similar proceedings
with respect to a Servicer and certain actions by a Servicer
indicating its insolvency, reorganization pursuant to
bankruptcy proceedings or inability to pay its obligations;
and
(4) failure by a 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 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 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,
marshalling of assets and liabilities, or similar proceedings
with respect to the Administrator and certain actions by the
Administrator indicating its insolvency or inability to pay
its obligations.
RIGHTS UPON SERVICER DEFAULT AND ADMINISTRATOR DEFAULT
As long as a Servicer Default under a Sale and Servicing Agreement or
an Administrator Default under a Sale and Servicing Agreement or an
Administration Agreement remains unremedied, the Indenture Trustee or holders of
Notes evidencing not less than 25% in principal amount of then outstanding Notes
may terminate all the rights and obligations of the applicable
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Servicer under such Sale and Servicing Agreement, or the Administrator under
such Sale and Servicing Agreement 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 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 a Servicer or the Administrator, and
no Servicer Default or Administrator Default other than such appointment has
occurred, such trustee or official may have the power to prevent the Indenture
Trustee or the Noteholders from effecting such a transfer. In the event that
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 Servicers under such Sale and Servicing Agreement or the
Administrator under such Sale and Servicing Agreement and such Administration
Agreement, as the case may be, unless such compensation arrangements will result
in a downgrading of such Notes and Certificates by any Rating Agency. In the
event a Servicer Default or an Administrator Default occurs and is continuing,
such Indenture Trustee or the holders of Notes, as described above, may remove
the applicable Servicer or the Administrator, as the case may be, without the
consent of the related Eligible Lender Trustee or any of the holders of
Certificates. Moreover, only the Indenture Trustee or the holders of Notes, and
not the Eligible Lender Trustee or the holders of Certificates, have the ability
to remove a Servicer or the Administrator, as the case may be, if a Servicer
Default or an Administrator Default occurs and is continuing.
WAIVER OF PAST DEFAULTS
With respect to each Trust, the holders of Notes evidencing at least a
majority in principal amount of the then outstanding Notes (or the holders of
Certificates evidencing not less than a majority of the outstanding Certificate
Balance, in the case of any Servicer Default which does not adversely affect the
Indenture Trustee or the Noteholders of the related series) may, on behalf of
all Noteholders and Certificateholders, waive any default by a 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 Servicers and the Administrator which could materially
adversely affect the Certificateholders. No such waiver will impair the
Noteholders' or the Certificateholders' rights with respect to subsequent
defaults.
Unless and until Definitive Securities are issued, holders of Notes and
Certificates will not be recognized by the Indenture Trustee or the Eligible
Lender Trustee as "Noteholders" or
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"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 any of certain events of insolvency or receivership, readjustment of
debt, marshalling of assets and liabilities, or similar proceedings with respect
to the Seller or certain actions by the Seller indicating its insolvency or
inability to pay its obligations (each, a "Seller Insolvency Event") occurs, the
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
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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 Servicers, 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 the then outstanding Notes 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 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
Servicers, 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.
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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 5% or less 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 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 by the related Indenture Trustee. Affiliates of the Seller, the related
Servicers 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 is
equal to or in excess of an amount (the "Minimum Purchase Amount") equal to the
greatest of
o the Auction Purchase Amount (as such term is defined in the
related Prospectus Supplement, the "Auction Purchase Amount"),
o the fair market value of such Student Loans as of the end of the
Collection Period immediately preceding such Distribution Date
and
o 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 Index Shortfall Carryover).
If at least two bids are not received or the highest bid after the
resolicitation process is completed is not equal to or in excess of the Minimum
Purchase Amount, the Indenture Trustee will not consummate such sale. 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
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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 an Sale and Servicing Agreement with the
related Trust, the Seller, the Servicers and the 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 quarterly and annual reports received
from the Servicers) and provide monthly, quarterly and annual
statements to the Eligible Lender Trustee and the Indenture
Trustee with respect to distributions to Noteholders and
Certificateholders and any related federal income tax
reporting information and
(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 Financial
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Statement 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. ss. 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 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 Servicer as
custodian on behalf of 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 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 Servicer Default
resulting solely from certain events of insolvency or bankruptcy that may occur
with respect to the Seller or the Servicer, a court, trustee-in-bankruptcy,
conservator, receiver or liquidator may have the power to prevent
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either the related Indenture Trustee or Noteholders of the related series from
appointing a successor Servicer. See "Description of the Transfer and Servicing
Agreements--Rights Upon Servicer Default and Administrator Default."
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 Servicer Default or an Administrator Default
resulting solely from certain events of insolvency or bankruptcy that may occur
with respect to a Servicer or the Administrator, a court, conservator, receiver
or liquidator may have the power to prevent either the Indenture Trustee or
Noteholders from appointing a successor Servicer or Administrator, as the case
may be. See "Description of the Transfer and Servicing Agreements--Rights Upon
Servicer Default and Administrator Default."
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon lenders and servicers involved
in consumer finance. Also, some state laws impose finance charge ceilings and
other restrictions on certain consumer transactions and require contract
disclosures in addition to those required under federal law. These requirements
impose specific statutory liabilities upon lenders who fail to comply with their
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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 of the Transfer and Servicing Agreements--Sale of Student Loans;
Representations and Warranties" and "--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 Student Loans.
Generally, those procedures require that completed loan applications be
processed, a determination of whether an applicant is an eligible borrower under
applicable standards (including a review of a financial need analysis) be made,
the borrower's responsibilities under the loan be explained to him or her, the
promissory note evidencing the loan be executed by the borrower and then that
the loan proceeds be disbursed in a specified manner by the lender. After the
loan is made, the lender must establish repayment terms with the borrower,
properly administer deferrals and forbearances and credit the borrower for
payments made thereon. If a borrower becomes delinquent in repaying a loan, a
lender or a servicing agent must perform certain collection procedures
(primarily telephone calls and demand letters) which vary depending upon the
length of time a loan is delinquent. The Servicer has agreed pursuant to the
related Sale and Servicing Agreement 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 Servicer to arrange for the purchase of any Student Loan, if a breach
of the representations, warranties or covenants of the Seller or the Servicer,
as the case may be, with respect to such Student Loan has a material adverse
effect on the interest of the
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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 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
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
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 Servicer will not be fined or held
liable by the Department liabilities arising out of its FFELP activities for the
Trust or other client lenders, or that its eligibility will not be limited,
suspended, or terminated in the future. If a 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 the Sale and Servicing Agreement could be adversely affected.
However, in the event of a termination of eligibility, each Sale and Servicing
Agreement will provide for the removal of the applicable Servicer and the
appointment of a Successor Servicer.
STUDENT LOANS GENERALLY NOT SUBJECT TO DISCHARGE IN BANKRUPTCY
Student 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. ss.ss.101-1330 (the "Bankruptcy Code") unless (a) such
Student Loan first became due before seven years (exclusive of any applicable
suspension of the repayment period) before the date of the bankruptcy, or (b)
excepting such debt from discharge will impose an undue hardship on the debtor
and the debtor's dependents. However, Private Loans guaranteed by certain
Private Guarantors are generally dischargeable by a borrower in bankruptcy.
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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
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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).
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:
o All references to a "transition" to full implementation of the
Federal Direct Student Loan Program were deleted from the
FFELP statute.
o Guarantor reserve funds were restructured so that federal
guarantors are provided with additional flexibility in
choosing how to spend certain funds they receive.
o 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.
o 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, 1993) 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.
o 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.
o Federal reinsurance provided to federal guarantors is reduced
from 98% to 95% for Student Loans first disbursed on or after
October 1, 1998.
o 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.
o Interest rates charged to borrowers on Stafford Loans, and the
yield for Stafford Loan holders established by the 1998
Amendments, were made permanent.
o 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
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borrower's interest rate, Special Allowance Payments are made
to make up the difference.
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
o 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 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
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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 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 and
on counsel's conclusions that the nature of the income of the Trust will exempt
it from the rule that certain publicly traded partnerships are taxable as
corporations.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. 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. Federal Tax Counsel will, except as otherwise
provided in the related Prospectus Supplement, deliver an opinion to the Trust
that the Notes will be classified 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" ("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. The OID Regulations do not address their
application to debt instruments such as the Notes that are subject to prepayment
based on the prepayment of other debt instruments. The legislative history of
the OID provisions of the Code provides, however, that the calculation and
accrual of OID should be based on the prepayment assumption used by the parties
in pricing the transaction. In the event that any of the notes are issued with
OID, the prepayment assumption will be set forth in the related Prospectus
Supplement. Furthermore, although premium amortization and accrued market
discount on debt instruments such as the Notes, which are subject to prepayment
based on the payments on other debt instruments, are to be determined under
regulations yet to be issued, the legislative history of these Code provisions
provides that the same prepayment assumption used to calculate OID, whether or
not the debt instrument is issued with OID, should be used.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in
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accordance with such Noteholder's method of tax accounting. Under the OID
Regulations, a holder of a Note that was issued with a de minimis amount of OID
must include such OID 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. If such an election were made with
respect to a Note with market discount, the Noteholder would be deemed to have
made an election to include in income currently market discount with respect to
all debt instruments having market discount that such Noteholder acquires during
the year of the election and thereafter. Similarly, a Noteholder that makes this
election for a Note that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Noteholder owns at the beginning of the first
taxable year to which the election applies or acquires thereafter. The election
to accrue interest, discount and premium under a constant yield method with
respect to a Note is irrevocable. 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.
Qualified Stated Interest, which is taxable in accordance with the
holder's method of accounting, is interest that is unconditionally payable
(i.e., payments cam be compelled or the debt instrument provides terms and
conditions that make the likelihood of late payment or nonpayment remote) at
least annually at a single fixed rate (or certain variable rates). The Seller
intends to treat the interest paid on the Notes as Qualified Stated Interest.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (each, a "Short-Term Note") may be subject
to special rules. An accrual basis holder of a Short-Term Note (and certain cash
method holders, including regulated investment companies, banks and securities
dealers, as set forth in Section 1281 of the Code) generally will be required to
report interest income as interest accrues on a ratable basis over the term of
each interest period or, at the election of the holder, on a constant yield
basis. Cash basis holders of a Short-Term Note will, in general, be required to
report interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1282 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, and would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
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
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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 only to offset
capital gains.
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, the Seller or the Seller
(including a holder of 10% of the outstanding Certificates) or
a "controlled foreign corporation" with respect to which the
Trust, the Seller 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 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.
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 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
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exempt from the withholding tax previously discussed if the holder provides an
appropriate statement), the holder generally will be subject to United States
federal income tax on the interest, gain or income at regular federal income tax
rates. In addition, if the foreign person is a foreign corporation, it may be
subject to a branch profits tax equal to 30% of its "effectively connected
earnings and profits" within the meaning of the Code for the taxable year, as
adjusted for certain items, unless it qualifies for a lower rate under an
applicable tax treaty (as modified by the branch profits tax rules).
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 on October 14,
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. As
set forth in Notice 98-16, 1998-15 I.R.B. 1, the New Withholding Regulations
generally will be effective for payments made after December 31, 1999, subject
to certain transition rules. THE DISCUSSION SET FORTH ABOVE DOES NOT TAKE THE
NEW WITHHOLDING REGULATIONS INTO ACCOUNT. 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 income
tax liability. As previously mentioned, the New Withholding Regulations
generally will be effective for payments made after December 31, 1999, subject
to certain transition rules.
RECENT LEGISLATION
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"). The legislation providing
for the new FASIT entity, however, did not become effective until September 1,
1997, and many technical issues are to be addressed in Treasury regulations yet
to be drafted. 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.
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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 any such Certificates are sold 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.
CLASSIFICATION AS A PARTNERSHIP
Treatment of the Trust as a Partnership. The Seller and the Servicer
will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust as a partnership for purposes of federal and
state income tax, franchise tax and any other tax measured in whole or in part
by income, with the assets of the partnership being the assets held by the
Trust, the partners of the partnership being the Certificateholders (including
the Seller in its capacity as recipient of distributions from the Reserve
Account, if any), and the Notes being debt of the partnership. However, the
proper characterization of the arrangement involving the Trust, the
Certificateholders, the Noteholders, the Seller and the Servicer is not clear
because there is no authority on transactions comparable to that contemplated
herein.
Under the provisions of Subchapter K, 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. The
following discussion is a summary of some of the material federal income tax
consequences of classifying the Trust as a partnership. PROSPECTIVE OWNERS OF
CERTIFICATES SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE MATERIAL INCOME
TAX CONSEQUENCES DISCUSSED BELOW, AS WELL AS ANY OTHER MATERIAL INCOME TAX
CONSEQUENCES THAT MAY RESULT FROM APPLYING THE PROVISIONS OF SUBCHAPTER K TO THE
OWNERSHIP AND TRANSFER OF A CERTIFICATE.
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 such 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.
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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 the Certificateholders will be allocated taxable
income of the Trust for each Interest Period (as defined in the applicable
Prospectus Supplement, an "Interest Period") equal to the sum of
(a) the interest that accrues on the Certificates in accordance
with their terms for such Interest Period, including interest
accruing at the Pass-Through Rate for such Interest Period and
interest on amounts previously due on the Certificates but not
yet distributed;
(b) 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; 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
income 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.
An individual taxpayer's share of expenses of the Trust (including fees
to the 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. Such deductions may also be subject to reduction under
Section 68 of the Code if an individual taxpayers 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 above 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.
Determining the Bases of Trust Assets. The will become a partnership on
the first date when Certificates are held by more than one person. On that date,
each of the Certificateholders should be treated as having purchased a share of
the assets of the Trust (subject to the liability for the Notes) followed
immediately by a deemed contribution of such assets to the newly formed
partnership. The partnership's basis in the Trust's assets would therefore equal
the sum of the Certificateholders' bases in their respective interests in the
Trust's assets immediately prior to the deemed contribution to the partnership.
To the extent that the fair market value of the assets deemed contributed to the
partnership varied from the bases of such assets to the partnership, the
allocation of taxable income to the Certificateholders would be adjusted in
accordance with Section 704(c) of the Code to account for such variations.
Under Section 708 of the Code, if 50% or more of the outstanding
interests in a partnership are sold or exchanged within any 12-month period,
such partnership will be deemed to terminate and then be reconstituted for
federal income tax purposes. If such a termination occurs, the assets of the
terminated partnership are deemed to be constructively contributed to a
reconstituted partnership in exchange for interests in such reconstituted
partnership. Such interests would be deemed distributed to the partners of the
terminated partnership in liquidation thereof, which distribution would not
constitute a sale or exchange. Accordingly, if the sale of the Certificates
terminates the partnership 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 months' 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 redemption of interests is not considered a
sale or exchange of interests for purposes of applying this constructive
termination rule.
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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. (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 on 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 such
Certificates and, upon sale or other disposition of some of the Certificates,
allocate a pro rata portion of such aggregate tax basis to the Certificates sold
(rather than maintaining a separate tax basis in each Certificate for purposes
of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's
share of unrecognized accrued market discount on the Student Loans would
generally be treated as ordinary income to the holder.
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
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Certificates may be allocated tax items (which will affect the tax liability and
tax basis of the holder) attributable to periods before the actual transaction.
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 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 (a) the name, address
and taxpayer identification number of the nominee and (b) as to each beneficial
owner (x) the name, address and identification number of such person, (y)
whether such person is a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information 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
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be furnished to the Trust on or before the following January 31. Nominees,
brokers and financial institutions that fail to provide the Trust with the
information described above may be subject to penalties.
The 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 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. Although it is not expected
that the Trust would be engaged in a trade or business in the United States for
such purposes, the Trust will withhold as if it were so engaged in order to
protect the Trust from possible adverse consequences of a failure to withhold.
The Trust expects to withhold on the portion of its taxable income that is
allocable to foreign Certificateholders pursuant to Section 1446 of the Code, as
if such income were effectively connected to a U.S. trade or business, at a rate
of 35% for foreign holders that are taxable as corporations and 39.6% for all
other foreign holders. Subsequent adoption of Treasury regulations or the
issuance of other administrative pronouncements may require the Trust to change
its withholding procedures. In determining a holder's withholding status, the
Trust may rely on IRS Form W-8, IRS Form W-9 or the holder's certification of
nonforeign status signed under penalty of perjury. As previously mentioned, the
New Withholding Regulations generally will be effective for payments made after
December 31, 1999, subject to certain transition rules. THE DISCUSSION SET FORTH
ABOVE DOES NOT TAKE INTO ACCOUNT THE NEW WITHHOLDING REGULATIONS. 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. A foreign
holder generally would be entitled to file with the IRS a claim for refund with
respect to taxes withheld by the Trust, taking the position that no taxes were
due because the Trust was not engaged in a U.S. trade or business. However,
interest payments made (or accrued) to a
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Certificateholder who is a foreign person may be considered "guaranteed
payments" (to the extent such payments are determined without regard to the
income of the Trust). If these interest payments are properly characterized as
guaranteed payments, then the interest will not be considered "portfolio
interest." As a result, Certificateholders will be subject to United States
federal income tax and withholding tax at a rate of 30 percent on the Trust's
gross income, unless reduced or eliminated pursuant to an applicable treaty. In
such case, a foreign holder would only be entitled to claim a refund for that
portion of the taxes, if any, in excess of the taxes that should be withheld
with respect to the guaranteed payments. AS A RESULT, EACH POTENTIAL FOREIGN
CERTIFICATEHOLDER SHOULD CONSULT ITS TAX ADVISOR AS TO WHETHER THE TAX
CONSEQUENCES OF HOLDING A CERTIFICATE MAKE IT AN UNSUITABLE INVESTMENT.
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,
1999, subject to certain transition rules.
FEDERAL TAX CONSEQUENCES FOR TRUSTS IN WHICH ALL RESIDUAL INTERESTS ARE RETAINED
BY THE SELLER OR AN AFFILIATE OF 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 Residual Interests of
which are retained by the Seller or an affiliate thereof will be treated as a
division of its owner and as such will be disregarded as an entity separate from
its owner for federal income tax purposes, assuming no election will be made to
treat the Trust as a corporation for federal income tax purposes.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. As discussed above, 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. Federal Tax Counsel will,
except as otherwise provided in the related Prospectus Supplement, advise the
Trust that the Notes will be classified 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.
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
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interests in the Trust. If so treated, the Trust could, in the view of Federal
Tax Counsel, be treated as a publicly traded partnership that would be taxable
as a corporation In such case, the entity would be subject to federal income
taxes at corporate tax rates on its taxable income generated by Student Loans.
Such an entity-level tax could result in reduced distribution to Noteholders and
Noteholders could be liable for a share of such tax.
Furthermore, even if the Trust were not taxable as a corporate, the
treatment of Notes as equity interests in such a 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 apply to the holders of such
Notes.
PENNSYLVANIA STATE TAX CONSEQUENCES
PENNSYLVANIA INCOME AND FRANCHISE TAX CONSEQUENCES WITH RESPECT TO THE NOTES
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, Pennsylvania Tax Counsel 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
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<PAGE> 195
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 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 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
103
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statutory 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 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:
o Prohibited Transaction Class Exemption ("PTCE") 96-23, which
exempts certain transactions effected on behalf of a Plan by
an "in-house asset manager";
o PTCE 90-1, which exempts certain transactions between
insurance company separate accounts and Parties in Interest;
o PTCE 91-38, which exempts certain transactions between bank
collective investment funds and Parties in Interest;
o PTCE 95-60, which exempts certain transactions between
insurance company general accounts and Parties in Interest; or
o 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 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 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.
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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 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.
105
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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 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.
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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.
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 ____________________. Certain Pennsylvania state income tax matters will be
passed upon for each Trust by _______________________.
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INDEX OF PRINCIPAL TERMS
<TABLE>
<CAPTION>
Page
<S> <C>
10 percent shareholder...........................................................................................93
1992 Amendments..................................................................................................18
1993 Act.........................................................................................................39
1998 Amendments..................................................................................................18
1998 Reauthorization Bill........................................................................................88
91-day Treasury Bill Rate........................................................................................22
AACSB............................................................................................................30
Additional Fundings..............................................................................................16
ADEAL............................................................................................................36
Administration Agreement.........................................................................................82
Administration Fee...............................................................................................82
Administrator....................................................................................................14
Administrator Default............................................................................................77
Applicable Trustee...............................................................................................60
Auction Date.....................................................................................................81
Auction Purchase Amount..........................................................................................81
Available Funds..................................................................................................85
Bank.............................................................................................................14
Bankruptcy Code..................................................................................................86
Bar Exam Loan....................................................................................................30
Base Rate........................................................................................................59
Benefit Plan....................................................................................................105
bunching.........................................................................................................97
Calculation Agent................................................................................................59
Cede.............................................................................................................49
Cedel............................................................................................................59
Cedel Participants...............................................................................................61
Certificate Balance..............................................................................................48
Certificate Pool Factor..........................................................................................48
Certificateholder................................................................................................60
Certificates.....................................................................................................57
Closing Date.....................................................................................................66
Code.............................................................................................................90
Collection Account...............................................................................................68
Collection Period................................................................................................66
Commission.......................................................................................................12
Consolidation Loans..............................................................................................37
controlled foreign corporation...................................................................................93
Cooperative......................................................................................................62
Cutoff Date......................................................................................................13
</TABLE>
108
<PAGE> 201
<TABLE>
<S> <C>
Deferral Period..................................................................................................23
Definitive Certificates..........................................................................................63
Definitive Notes.................................................................................................63
Definitive Securities............................................................................................63
Department.......................................................................................................14
Depositories.....................................................................................................60
Depository.......................................................................................................48
Distribution Date................................................................................................49
DTC..............................................................................................................59
effectively connected earnings and profits.......................................................................94
Eligible Deposit Account.........................................................................................68
Eligible Institution.............................................................................................68
Eligible Investments.............................................................................................68
Eligible Lender Trustee..........................................................................................13
Eligible Students................................................................................................19
ERISA...........................................................................................................103
Escrow Account...................................................................................................68
Euroclear........................................................................................................59
Euroclear Operator...............................................................................................62
Euroclear Participants...........................................................................................62
Event of Default.................................................................................................51
Exchange Act.....................................................................................................12
FASIT............................................................................................................94
FASIT Provisions.................................................................................................94
FDIA.............................................................................................................84
FDIC.............................................................................................................68
Federal Assistance...............................................................................................19
Federal Consolidation Loan.......................................................................................26
Federal Consolidation Loan Program...............................................................................18
Federal Consolidation Loan Rebate................................................................................27
Federal Direct Consolidation Loan................................................................................27
Federal Direct Consolidation Loan Program........................................................................26
Federal Direct Student Loan Program..............................................................................40
Federal Graduate Programs........................................................................................29
Federal Guarantee Agreements.....................................................................................17
Federal Guarantee Payments.......................................................................................18
Federal Guarantors...............................................................................................17
Federal Loans....................................................................................................17
Federal Origination Fee..........................................................................................28
Federal Programs.................................................................................................18
Federal Tax Counsel..............................................................................................89
Fee Advance......................................................................................................35
FFELP............................................................................................................22
FIRREA...........................................................................................................84
</TABLE>
109
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<TABLE>
<S> <C>
Fixed Rate Securities............................................................................................58
Floating Rate Securities.........................................................................................58
Forbearance Period...............................................................................................23
foreign person...................................................................................................93
Funding Period...................................................................................................16
GLHEC............................................................................................................31
Grace Period.....................................................................................................23
Graduate Loans...................................................................................................17
Guarantee Agreements.............................................................................................18
Guarantee Payments...............................................................................................18
guaranteed payments.............................................................................................101
Guarantors.......................................................................................................18
Higher Education Act.............................................................................................17
Indenture........................................................................................................48
Indenture Trustee................................................................................................48
Index Shortfall Carryover........................................................................................52
Indirect Participants............................................................................................60
in-house asset manager..........................................................................................104
Initial Pool Balance.............................................................................................81
Interest Period..................................................................................................96
Interest Rate....................................................................................................49
Interest Reset Period............................................................................................59
Interest Subsidy Payments........................................................................................19
Investment Earnings..............................................................................................68
IRS..............................................................................................................90
Key Alternative Loan.............................................................................................31
LIBOR............................................................................................................59
Minimum Purchase Amount..........................................................................................81
Monthly Servicing Payment Date...................................................................................69
Negative Carry Account...........................................................................................68
New Withholding Regulations......................................................................................94
Note Pool Factor.................................................................................................48
Noteholder.......................................................................................................60
Notes............................................................................................................48
OID..............................................................................................................91
OID Regulations..................................................................................................91
Participants.....................................................................................................49
Parties in Interest.............................................................................................103
Pass-Through Rate................................................................................................58
Pennsylvania Tax Counsel.........................................................................................90
Plans...........................................................................................................103
PLUS Loan........................................................................................................38
Pool Balance.....................................................................................................48
Pool Factor......................................................................................................48
</TABLE>
110
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<TABLE>
<S> <C>
portfolio interest...............................................................................................93
Post-Graduate Loans..............................................................................................17
Pre-Funded Amount................................................................................................74
Pre-Funding Account..............................................................................................68
Private Consolidation Fee Advance................................................................................37
Private Consolidation Loan.......................................................................................37
Private Graduate Loans...........................................................................................30
Private Guarantee Agreements.....................................................................................18
Private Guarantee Payments.......................................................................................18
Private Guaranteed Loans.........................................................................................18
Private Guarantors...............................................................................................18
Private Loan Repayment Commencement Date.........................................................................34
Private Loans....................................................................................................31
Private Undergraduate Loans......................................................................................30
Private Unguaranteed Loans.......................................................................................17
Programs.........................................................................................................17
Prospectus.......................................................................................................48
Prospectus Supplement............................................................................................48
PTCE............................................................................................................104
Purchase Amount..................................................................................................66
qualified professional asset manager............................................................................104
Qualified Stated Interest........................................................................................91
Rating Agency....................................................................................................55
Record Date......................................................................................................64
Registration Statement...........................................................................................12
Related Documents................................................................................................55
related person...................................................................................................93
Reserve Account..................................................................................................68
Residency Loan...................................................................................................30
Revolving Period.................................................................................................16
Rules............................................................................................................61
Sale and Servicing Agreement.....................................................................................65
Secretary........................................................................................................86
Securities.......................................................................................................57
Securities Act....................................................................................................3
Securityholders..................................................................................................60
Seller...........................................................................................................14
Seller Insolvency Event..........................................................................................79
Servicer Default.................................................................................................76
Servicers........................................................................................................15
Servicing Fee....................................................................................................71
Short-Term Note..................................................................................................92
SLS Loans........................................................................................................25
SLS Program......................................................................................................24
</TABLE>
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<TABLE>
<S> <C>
Special Allowance Payments.......................................................................................19
Spread...........................................................................................................59
Spread Multiplier................................................................................................59
Stafford Loan Program............................................................................................18
Stafford Loans...................................................................................................18
Student Loans....................................................................................................13
tax matters partner.............................................................................................100
Terms and Conditions.............................................................................................62
Transfer and Servicing Agreements................................................................................66
Trust............................................................................................................13
Trust Accounts...................................................................................................68
Trust Agreement..................................................................................................13
UCC..............................................................................................................83
Undergraduate Loans..............................................................................................17
Underlying Federal Loan..........................................................................................26
Underlying Private Graduate Loans................................................................................36
Underwriting Agreements.........................................................................................105
unrelated business taxable income...............................................................................102
Unsubsidized Stafford Loan Program...............................................................................38
Unsubsidized Stafford Loans......................................................................................19
</TABLE>
112
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- --------------------------------------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary of Terms..................................S-4
Risk Factors......................................S-9
Formation of the Trust...........................S-15
Use of Proceeds..................................S-17
The Servicers....................................S-17
The Financed Student Loan Pool...................S-20
Description of the Securities....................S-50
Description of the Transfer and
Servicing Agreements...........................S-57
Certain Federal Income Tax Consequences..........S-79
ERISA Considerations.............................S-79
Underwriting.....................................S-81
Legal Matters....................................S-82
Index of Principal Terms.........................S-84
Annex I
Prospectus
Table of Contents...................................1
Risk Factors........................................5
Incorporation of Certain Documents
by Reference.....................................12
Formation of the Trusts............................13
Use of Proceeds....................................14
The Seller, the Administrator and the Servicers....14
The Student Loan Pools.............................15
The Student Loan Financing Business................17
Weighted Average Life of the Securities............45
Pool Factors and Trading Information...............48
Description of the Notes...........................48
Description of the Certificates....................57
Certain Information Regarding the Securities.......58
Description of the Transfer and Servicing
Agreements.......................................65
Certain Legal Aspects of the Student Loans.........82
Income Tax Consequences............................89
Pennsylvania State Tax Consequences...............102
ERISA Considerations..............................103
Plan of Distribution..............................105
Legal Matters.....................................107
Index of Principal Terms..........................108
</TABLE>
.........UNTIL ________, ALL DEALERS THAT EFFECT
TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TOO THE
DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
$
-----------
KEYCORP STUDENT LOAN TRUST -
----- ---
$
-----------
FLOATING RATE CLASS A-1
ASSET BACKED NOTES
$
-----------
FLOATING RATE CLASS A-2
ASSET BACKED NOTES
$
-----------
FLOATING RATE
ASSET BACKED CERTIFICATES
KEY BANK USA, NATIONAL ASSOCIATION
SELLER
PROSPECTUS
[UNDERWRITERS]
- --------------------------------------------------------------------------------
<PAGE> 206
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses in connection with the offering of the Notes and the
Certificates being registered herein are estimated as follows:
<TABLE>
<S> <C>
SEC registration fee............................................. *
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Rating agency fees............................................... *
Eligible Lender Trustee fees and expenses........................ *
Indenture Trustee fees and expenses.............................. *
Printing and engraving........................................... *
Servicer conversion fees......................................... *
Miscellaneous.................................................... *
-----------
Total................................................. $ *
===========
</TABLE>
- -----------------
* TO BE FILED BY AMENDMENT
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Paragraph (a) of Article Tenth of the Articles of Association of the
Registrant (this "Association") provides as follows:
(a) This Association shall indemnify, to the full extent
permitted or authorized by the Ohio General Corporation Law as it may
from time to time be amended, any person made or threatened to be made
a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, or investigative,
by reason of the fact that he is or was a director, officer, or
employee of this Association, or is or was serving at the request of
this Association as a director, trustee, officer, or employee of
another association, corporation, partnership, joint venture, trust, or
other enterprise; in the case of a person serving at the request of
this Association, such request shall be evidenced by a resolution of
the Board of Directors or a duly authorized committee thereof or by a
writing executed by an officer of this Association pursuant to a
resolution of the Board of Directors or a duly authorized committee
thereof. In the case of a merger into this Association of a constituent
association which, if its separate existence had continued, would have
been required to indemnify directors, officers, or employees in
specified situations prior to the merger, any person who served as a
director, officer, or employee of the constituent association, or
served at the request of the constituent association as a director,
trustee, officer, or employee of another association, corporation,
partnership, joint venture, trust, or other enterprise, shall be
entitled to indemnification by this Association (as the surviving
association) for acts, omissions, or other events or occurrences prior
to the merger to the same extent he would have been entitled to
5
<PAGE> 207
indemnification by the constituent association if its separate
existence had continued. The indemnification provided by this Article
Tenth shall not be deemed exclusive of any other rights to which any
person seeking indemnification may be entitled by law or under these
Articles or the Bylaws of this Association, or any agreement, vote of
shareholders or disinterested directors, or otherwise, both as to
action in his official capacity and as to action in another capacity
while holding such office, and shall continue as to a person who has
ceased to be a director, trustee, officer, or employee and shall inure
to the benefit of the heirs, executors, and administrators of such a
person.
(b) Notwithstanding division (a) of this [Article Tenth], no
director, officer, or employee of this Association shall be indemnified
against expenses, including attorneys' fees, penalties or other
payments incurred in an administrative proceeding or action instituted
by the Comptroller of the Currency or other appropriate bank regulatory
agency when such proceeding or action results in a final order
assessing civil money penalties against, or requiring affirmative
action of, such director, officer, or employee in the form of payments
to this Association.
Reference is made to Section 1701.13(E) of the General Corporation Law
of the State of Ohio relating to indemnification of directors, officers and
employees of an Ohio corporation. For the full text of Article Tenth of the
Registrant's Articles of Association, reference is hereby made to Exhibit 3(a)
hereto.
The Registrant also maintains insurance on behalf of each director and
certain officers against any loss arising from any claim asserted against him in
any such capacity, subject to certain exclusions.
ITEM 16. EXHIBITS.
1.1. Form of Underwriting Agreement for Notes*
1.2. Form of Underwriting Agreement for Certificates*
3.1. Articles of Association of Key Bank USA, National Association*
3.2. Bylaws of Key Bank USA, National Association*
4.1. Form of Indenture between the Trust and the Indenture Trustee
(including as exhibits thereto a form of Asset Backed Note) *
4.2. Form of Amended and Restated Trust Agreement between Key Bank USA,
National Association and the Eligible Lender Trustee (including as an
exhibit thereto a form of Asset Backed Certificate)*
2
<PAGE> 208
5.1. Opinion of Forrest F. Stanley, Esq. with respect to legality*
8.1. Opinion of _____________________ with respect to federal tax matters
(included as part of Exhibit 5.1)*
8.2. Opinion of Kirkpatrick & Lockhart with respect to Pennsylvania tax
matters*
10.1. Form of Sale and Servicing Agreement among the Seller, the Servicers,
the Trust, the Eligible Lender Trustee and the Administrator*
10.2. Form of Supplemental Sale and Servicing Agreement among Key Bank USA,
National Association, as Seller and Administrator, the Servicers, the
Trust and the Eligible Lender Trustee*
10.3. Form of Administration Agreement among the Administrator, the Trust
and the Indenture Trustee*
23.1 Consent of _________________ (included as part of Exhibit 5.1)*
23.2. Consent of Forrest F. Stanley, Esq. (included as part of Exhibit
8.1)*
23.3. Consent of Kirkpatrick & Lockhart (included as part of Exhibit 8.2)*
24.1. Powers of Attorney of directors and officers of Key Bank USA,
National Association**
24.2 Certified Board of Directors Resolutions of Key Bank USA, National
Association**
25.1. Statement of Eligibility under the Trust Indenture Act of 1939 of the
Indenture Trustee*
- ---------------
* TO BE FILED BY AMENDMENT.
** FILED HEREWITH.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) To provide to the Underwriters at the closing specified in
the Underwriting Agreements Notes and Certificates in such
denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under
the Securities Act of 1933, as amended (the "Securities Act") may be
permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 15, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and
3
<PAGE> 209
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
(3) For purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the time it was
declared effective.
(4) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating
to the securities offered therein, and the offering of such securities
at the time shall be deemed to be the initial bona fide offering
thereof.
(5) For purposes of determining any liability under the
Securities Act, each filing of the Registrant's annual report pursuant
to section 13(a) or section 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") that is incorporated by reference
in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(6) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section
10(a) (3) of the Securities Act;
(ii) To reflect in the Prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement; and
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement.
4
<PAGE> 210
(7) That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(8) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
5
<PAGE> 211
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3, it believes that the securities
rating requirement for use of Form S-3 will be met by the time of sale of the
securities and it has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Cleveland, State of Ohio, on June 4, 1999.
KEY BANK USA, NATIONAL ASSOCIATION
By: /s/ Forrest F. Stanley
------------------------------------------
Forrest F. Stanley, Assistant Secretary
and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed on June 4, 1999, by the following persons in the
capacities indicated.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
* Principal Executive Officer and Director
- -----------------------
James A. Fishell
* Principal Financial Officer and Director
- -----------------------
Michael W. Dvorak
* Principal Accounting Officer
- -----------------------
Joseph A. Pampush
* Director
- -----------------------
Patrick J. Swanick
* Director
- -----------------------
Kevin M. Blakely
/s/ Forrest F. Stanley Director
- -----------------------
Forrest F. Stanley
*By: /s/ Forrest F. Stanley
-----------------------
Forrest F. Stanley
Attorney-in-Fact
</TABLE>
6
<PAGE> 212
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
- ------- ----------------------
<S> <C>
1.1. Form of Underwriting Agreement for Notes*
1.2. Form of Underwriting Agreement for Certificates*
3.1. Articles of Association of Key Bank USA, National Association*
3.2. Bylaws of Key Bank USA, National Association*
4.1. Form of Indenture between KeyCorp Student Loan Trust ____-__
(the "Trust") and ______________ (the "Indenture Trustee")
(including as exhibits thereto a form of Asset Backed Note)*
4.2. Form of Amended and Restated Trust Agreement between Key Bank
USA, National Association and ___________________ (the
"Eligible Lender Trustee") (including as an exhibit thereto a
form of Asset Backed Certificate)*
5.1. Opinion of Forrest F. Stanley, Esq. with respect to legality*
8.1. Opinion of ________________ with respect to federal tax
matters (included as part of Exhibit 5.1)*
8.2. Opinion of Kirkpatrick & Lockhart with respect to Pennsylvania
tax matters*
10.1. Form of Sale and Servicing Agreement among Key Bank USA,
National Association (in its capacity as the Seller and the
Administrator), the Servicers, the Trust and the Eligible
Lender Trustee*
10.2. Form of Supplemental Sale and Servicing Agreement among Key
Bank USA, National Association, as Seller and Administrator,
the Servicers, the Trust and the Eligible Lender Trustee*
10.3. Form of Administration Agreement among the Administrator, the
Servicers, the Trust and the Indenture Trustee*
23.1 Consent of ___________________ (included as Exhibit 5.1)*
23.2. Consent of Forrest F. Stanley, Esq. (included as Exhibit 8.2)*
23.3. Consent of Kirkpatrick & Lockhart (included as Exhibit 8.2)*
24.1. Powers of Attorney of directors and officers of Key Bank USA,
National Association**
24.2 Certified Board of Directors Resolutions of Key Bank USA,
National Association**
25.1. Statement of Eligibility under the Trust Indenture Act of 1939
of the Indenture Trustee*
- ------------------
</TABLE>
* To be filed by Amendment.
** Filed herewith
<PAGE> 213
REGISTRATION STATEMENT NO. 333-________
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 7, 1999
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------------------------
EXHIBITS TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------------------------------------
KEYCORP STUDENT LOAN TRUSTS
(Issuer of the Notes and the Certificates)
----------------------------------------------------
KEY BANK USA, NATIONAL ASSOCIATION
(Originator of the Trust described herein)
(Exact name of Registrant as specified in its charter)
UNITED STATES 34-1804148
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
KEY TOWER
127 PUBLIC SQUARE
CLEVELAND, OHIO 44114
(216) 689-6300
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------------------------------------------
DANIEL R. STOLZER, ESQ.
VICE PRESIDENT
AND ASSOCIATE GENERAL COUNSEL
KEYCORP
KEY TOWER
127 PUBLIC SQUARE
CLEVELAND, OHIO 44114
(216) 689-6300
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
------------------------------------------------
COPIES TO:
ROBERT A. SELAK, ESQ. REED D. AUERBACH, ESQ.
THOMPSON HINE & FLORY LLP STROOCK & STROOCK & LAVAN LLP
312 WALNUT STREET 180 MAIDEN LANE
SUITE 1400 NEW YORK, NEW YORK 10038
CINCINNATI, OHIO 45202
-----------------------------
<PAGE> 214
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
- ------- ----------------------
<S> <C>
1.1. Form of Underwriting Agreement for Notes*
1.2. Form of Underwriting Agreement for Certificates*
3.1. Articles of Association of Key Bank USA, National Association*
3.2. Bylaws of Key Bank USA, National Association*
4.1. Form of Indenture between KeyCorp Student Loan Trust ____-__
(the "Trust") and ______________ (the "Indenture Trustee")
(including as exhibits thereto a form of Asset Backed Note)*
4.2. Form of Amended and Restated Trust Agreement between Key Bank
USA, National Association and ___________________ (the
"Eligible Lender Trustee") (including as an exhibit thereto a
form of Asset Backed Certificate)*
5.1. Opinion of Forrest F. Stanley, Esq. with respect to legality*
8.1. Opinion of ________________ with respect to federal tax
matters (included as part of Exhibit 5.1)*
8.2. Opinion of Kirkpatrick & Lockhart with respect to Pennsylvania
tax matters*
10.1. Form of Sale and Servicing Agreement among Key Bank USA,
National Association (in its capacity as the Seller and the
Administrator), the Servicers, the Trust and the Eligible
Lender Trustee*
10.2. Form of Supplemental Sale and Servicing Agreement among Key
Bank USA, National Association, as Seller and Administrator,
the Servicers, the Trust and the Eligible Lender Trustee*
10.3. Form of Administration Agreement among the Administrator, the
Servicers, the Trust and the Indenture Trustee*
23.1 Consent of ___________________ (included as Exhibit 5.1)*
23.2. Consent of Forrest F. Stanley, Esq. (included as Exhibit 8.2)*
23.3. Consent of Kirkpatrick & Lockhart (included as Exhibit 8.2)*
24.1. Powers of Attorney of directors and officers of Key Bank USA,
National Association**
24.2 Certified Board of Directors Resolutions of Key Bank USA,
National Association**
25.1. Statement of Eligibility under the Trust Indenture Act of 1939
of the Indenture Trustee*
</TABLE>
- ------------------
* To be filed by Amendment.
** Filed herewith.
<PAGE> 1
EXHIBIT 24.1
POWERS OF ATTORNEY OF DIRECTORS AND OFFICERS OF
KEYBANK USA, NATIONAL ASSOCIATION.
<PAGE> 2
POWER OF ATTORNEY
The undersigned director, officer, or director and officer of Key Bank
USA, National Association, a national banking association (the "Bank"), which
proposes to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Act of 1933, as amended, a Registration
Statement with respect to the issuance of up to $1,900,000,000 in securities by
one or more Trusts, to be established by the Bank in connection with the
securitization, from time to time, of a portion of the Bank's student loan
portfolio, hereby constitutes and appoints James A. Fishell, Daniel R. Stolzer,
and Forrest F. Stanley, and each of them, as his attorney, with full power of
substitution and resubstitution, for and in his or her name, place, and stead,
to sign and file the proposed Registration Statement and any and all amendments,
post-effective amendments, supplements, prospectuses and exhibits thereto, and
any and all applications and other documents to be filed with the Securities and
Exchange Commission pertaining to such securities or such registration, on
behalf of itself as originator of such Trust and in its capacity as
Administrator on behalf of such Trust, with full power and authority to do and
perform any and all acts and things whatsoever requisite and necessary to be
done in the premises, hereby ratifying and approving the acts of such attorney
or any such substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand at
Cleveland, Ohio this 26th day of May, 1999.
Signature Title
--------- -----
/s/ James A. Fishell Principal Executive Officer and Director
--------------------------
James A. Fishell
<PAGE> 3
POWER OF ATTORNEY
The undersigned director, officer, or director and officer of Key Bank
USA, National Association, a national banking association (the "Bank"), which
proposes to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Act of 1933, as amended, a Registration
Statement with respect to the issuance of up to $1,900,000,000 in securities by
one or more Trusts, to be established by the Bank in connection with the
securitization, from time to time, of a portion of the Bank's student loan
portfolio, hereby constitutes and appoints James A. Fishell, Daniel R. Stolzer,
and Forrest F. Stanley, and each of them, as his attorney, with full power of
substitution and resubstitution, for and in his or her name, place, and stead,
to sign and file the proposed Registration Statement and any and all amendments,
post-effective amendments, supplements, prospectuses and exhibits thereto, and
any and all applications and other documents to be filed with the Securities and
Exchange Commission pertaining to such securities or such registration, on
behalf of itself as originator of such Trust and in its capacity as
Administrator on behalf of such Trust, with full power and authority to do and
perform any and all acts and things whatsoever requisite and necessary to be
done in the premises, hereby ratifying and approving the acts of such attorney
or any such substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand at
Cleveland, Ohio this 25th day of May, 1999.
Signature Title
--------- -----
/s/ Michael W. Dvorak Principal Executive Officer and Director
----------------------
Michael W. Dvorak
<PAGE> 4
POWER OF ATTORNEY
The undersigned director, officer, or director and officer of Key Bank
USA, National Association, a national banking association (the "Bank"), which
proposes to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Act of 1933, as amended, a Registration
Statement with respect to the issuance of up to $1,900,000,000 in securities by
one or more Trusts, to be established by the Bank in connection with the
securitization, from time to time, of a portion of the Bank's student loan
portfolio, hereby constitutes and appoints James A. Fishell, Daniel R. Stolzer,
and Forrest F. Stanley, and each of them, as his attorney, with full power of
substitution and resubstitution, for and in his or her name, place, and stead,
to sign and file the proposed Registration Statement and any and all amendments,
post-effective amendments, supplements, prospectuses and exhibits thereto, and
any and all applications and other documents to be filed with the Securities and
Exchange Commission pertaining to such securities or such registration, on
behalf of itself as originator of such Trust and in its capacity as
Administrator on behalf of such Trust, with full power and authority to do and
perform any and all acts and things whatsoever requisite and necessary to be
done in the premises, hereby ratifying and approving the acts of such attorney
or any such substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand at
Cleveland, Ohio this 26th day of May, 1999.
Signature Title
--------- -----
/s/ Joseph A. Pampush Principal Executive Officer and Director
-------------------------
Joseph A. Pampush
<PAGE> 5
POWER OF ATTORNEY
The undersigned director, officer, or director and officer of Key Bank
USA, National Association, a national banking association (the "Bank"), which
proposes to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Act of 1933, as amended, a Registration
Statement with respect to the issuance of up to $1,900,000,000 in securities by
one or more Trusts, to be established by the Bank in connection with the
securitization, from time to time, of a portion of the Bank's student loan
portfolio, hereby constitutes and appoints James A. Fishell, Daniel R. Stolzer,
and Forrest F. Stanley, and each of them, as his attorney, with full power of
substitution and resubstitution, for and in his or her name, place, and stead,
to sign and file the proposed Registration Statement and any and all amendments,
post-effective amendments, supplements, prospectuses and exhibits thereto, and
any and all applications and other documents to be filed with the Securities and
Exchange Commission pertaining to such securities or such registration, on
behalf of itself as originator of such Trust and in its capacity as
Administrator on behalf of such Trust, with full power and authority to do and
perform any and all acts and things whatsoever requisite and necessary to be
done in the premises, hereby ratifying and approving the acts of such attorney
or any such substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand at
Cleveland, Ohio this 26th day of May, 1999.
Signature Title
--------- -----
/s/ Patrick J. Swanick Director
- ---------------------------
Patrick J. Swanick
<PAGE> 6
POWER OF ATTORNEY
The undersigned director, officer, or director and officer of Key Bank
USA, National Association, a national banking association (the "Bank"), which
proposes to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Act of 1933, as amended, a Registration
Statement with respect to the issuance of up to $1,900,000,000 in securities by
one or more Trusts, to be established by the Bank in connection with the
securitization, from time to time, of a portion of the Bank's student loan
portfolio, hereby constitutes and appoints James A. Fishell, Daniel R. Stolzer,
and Forrest F. Stanley, and each of them, as his attorney, with full power of
substitution and resubstitution, for and in his or her name, place, and stead,
to sign and file the proposed Registration Statement and any and all amendments,
post-effective amendments, supplements, prospectuses and exhibits thereto, and
any and all applications and other documents to be filed with the Securities and
Exchange Commission pertaining to such securities or such registration, on
behalf of itself as originator of such Trust and in its capacity as
Administrator on behalf of such Trust, with full power and authority to do and
perform any and all acts and things whatsoever requisite and necessary to be
done in the premises, hereby ratifying and approving the acts of such attorney
or any such substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand at
Cleveland, Ohio this 27th day of May, 1999.
Signature Title
--------- -----
/s/ Kevin M. Blakely Director
----------------------
Kevin M. Blakely
<PAGE> 7
POWER OF ATTORNEY
The undersigned director, officer, or director and officer of Key Bank
USA, National Association, a national banking association (the "Bank"), which
proposes to file with the Securities and Exchange Commission, Washington, D.C.,
under the provisions of the Securities Act of 1933, as amended, a Registration
Statement with respect to the issuance of up to $1,900,000,000 in securities by
one or more Trusts, to be established by the Bank in connection with the
securitization, from time to time, of a portion of the Bank's student loan
portfolio, hereby constitutes and appoints James A. Fishell, Daniel R. Stolzer,
and Forrest F. Stanley, and each of them, as his attorney, with full power of
substitution and resubstitution, for and in his or her name, place, and stead,
to sign and file the proposed Registration Statement and any and all amendments,
post-effective amendments, supplements, prospectuses and exhibits thereto, and
any and all applications and other documents to be filed with the Securities and
Exchange Commission pertaining to such securities or such registration, on
behalf of itself as originator of such Trust and in its capacity as
Administrator on behalf of such Trust, with full power and authority to do and
perform any and all acts and things whatsoever requisite and necessary to be
done in the premises, hereby ratifying and approving the acts of such attorney
or any such substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand at
Cleveland, Ohio this 25th day of May, 1999.
Signature Title
--------- -----
/s/ Forrest F. Stanley Director
-------------------------
Forrest F. Stanley
<PAGE> 1
EXHIBIT 24.2
CERTIFIED BOARD OF DIRECTORS RESOLUTIONS OF
KEY BANK USA, NATIONAL ASSOCIATION
<PAGE> 2
KEY BANK USA, NATIONAL ASSOCIATION
ASSISTANT SECRETARY'S CERTIFICATE
I, Forrest F. Stanley, Assistant Secretary of Key Bank USA,
National Association, a national banking association (the "Bank"), hereby
certify that attached hereto is a true copy of resolutions duly adopted by the
Board of Directors of the Bank; such resolutions have not been amended, modified
or rescinded and remain in full force and effect; and such resolutions are the
only resolutions adopted by the Bank's Board of Directors or any committee
thereof relating to the transactions referred to in such resolutions.
IN WITNESS WHEREOF, I have hereunto signed my name as of June
4, 1999.
/s/ Forrest F. Stanley
-------------------------------
Forrest F. Stanley
Assistant Secretary
<PAGE> 3
Resolutions adopted by the Board of Directors of Key Bank USA,
National Association (the "Bank") on May 24, 1999.
RESOLVED, that the Bank is hereby authorized to establish one
or more trusts (the "Student Loan Trusts") for the purpose of
securitizing, from time to time, (the "Securitization") up to
$1,900,000,000 aggregate principal amount of the Bank's student loans
(the "Student Loans").
FURTHER RESOLVED, that the terms of the Student Loan Trusts
may provide for the public or private issuance and sale of one or more
series of asset-backed securities or other securities, including,
without limitation, one or more series of senior notes and one or more
series of subordinated notes or certificates (the "Student Loan
Securities"), the amounts and terms of which, including the rate or
rates of interest to be paid and the maturity thereof, may be fixed by
the President, the Chief Financial Officer, the Chief Accounting
Officer, any Executive Vice President, any Senior Vice President, the
Treasurer, Secretary, or any Assistant Secretary of the Bank, or any
one of them.
FURTHER RESOLVED, that the President, the Chief Financial
Officer, the Chief Accounting Officer, any Executive Vice President,
any Senior Vice President, any Vice President, the Secretary or any
Assistant Secretary of the Bank, or the Associate General Counsel of
KeyBank National Association with responsibility for securities
issuances, or any other officer of the Bank or of an affiliate of the
Bank designated by any of them (each an "Authorized Official") are and
each of them is hereby authorized for and on behalf of the Bank and the
Student Loan Trusts, to prepare, or cause to be prepared, and to
execute and cause to be filed with the Securities and Exchange
Commission (the "SEC") pursuant to the Securities Act of 1933, as
amended (the "1933 Act"), (i) one or more registration statements (the
"Registration Statement"), together with any and all pre-effective and
post-effective amendments or supplements to such Registration Statement
and any prospectus or prospectuses included therein (whether one or
more in number, a "Prospectus"), with respect to which Student Loan
Securities may be offered for sale from time to time pursuant to a
Prospectus, and (ii) any additional documents that any such Authorized
Official may deem to be necessary or advisable with respect to the
registration and offering of the Student Loan Securities, including,
without limitation, powers of attorney appointing one or more attorneys
in fact to sign and file with the SEC such Registration Statement and
any amendments, supplements, prospectuses, exhibits or other documents
relating thereto, such Registration Statement, plus amendments,
supplements and documents to be in such form or forms as the Authorized
Official executing the same may approve, as conclusively evidenced by
such Authorized Official's execution thereof.
FURTHER RESOLVED, that, in connection with the Securitization
and with the registration, public or private offering, and sale of the
Student Loan
<PAGE> 4
Securities, the Authorized Officials are and each of them is hereby
authorized, for and on behalf of the Bank: (a) to select one or more
underwriters to which the Student Loan Securities or any one or more
series thereof may be sold (the "Underwriters") and/or one or more
agents through which the Student Loan Securities may be sold (the
"Agents"), (b) to approve the form of underwriting or purchase
agreements with the Underwriters and/or distribution agreement with the
Agents, setting forth (i) the terms of the public offering or private
placement and sale, (ii) the Bank's representations, warranties, and
agreements with respect to the filing with the SEC of the Registration
Statement, the compliance thereof with the provisions of the 1933 Act,
and the accuracy of the statements and other information contained
therein, (iii) the agreement of the Bank to indemnify the Underwriters
and such persons, if any, as may control any of the Underwriters
against certain losses or liabilities which may arise out of actual or
alleged misstatements of material facts or actual or alleged omissions
to state material facts in the Registration Statement, (iv) the
underwriting discount and/or commissions on the sale of the Student
Loan Securities, and (v) such other terms and conditions as any
Authorized Official may deem to be necessary and appropriate, and (c)
to negotiate, execute, deliver, and perform any such underwriting,
purchase or distribution agreement.
FURTHER RESOLVED, that the Authorized Officials are and each
of them is hereby authorized, for and on behalf of the Bank, in
connection with the proposed offering of the Student Loan Securities,
to take any action which any of them may deem to be necessary or
advisable to effect the registration or qualification of the Student
Loan Securities under the securities or blue sky laws of any of the
States of the United States of America and of any foreign country or to
carry out such offering, as contemplated by resolutions hereby adopted,
and in connection therewith to execute, acknowledge, verify, deliver,
file, and publish all such applications, reports, issuer's covenants,
resolutions, and other papers and instruments, to post bonds or
otherwise give security as may be required under such laws and to take
all such further action as any of them may deem to be necessary or
advisable to maintain any such registration or qualification for as
long as any Authorized Official may deem to be in the best interests of
the Bank.
FURTHER RESOLVED, that the Authorized Officials are and each
of them is hereby authorized, for and on behalf of the Bank, to execute
and file irrevocable written consents to service of process in all
States of the United States of America and in all foreign countries
where such consents may be required or advisable under the securities
law thereof in connection with the registration or qualification of the
Student Loan Securities, and to appoint the appropriate person as agent
of the Bank for the purpose of receiving and accepting such process.
FURTHER RESOLVED, that the Bank is hereby authorized to sell,
from time to time, Student Loans to the Student Loan Trusts in an
aggregate principal
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<PAGE> 5
amount not to exceed $1,900,000,000 (the "Sale"), at such price and
upon such terms and conditions as any Authorized Official of the Bank
may approve.
FURTHER RESOLVED, that in connection with the Sale and the
Securitization and with the registration, issuance, and sale of the
Student Loan Securities, the Authorized Officials are and each of them
is hereby authorized, for and on behalf of the Bank, to execute,
acknowledge, and deliver: (a) one or more trust agreements to establish
the Student Loan Trusts, appoint a trustee and issue the Student Loan
Securities; (b) one or more sale and servicing agreements, pooling and
servicing agreements, or similar agreements providing for (i) the Sale,
(ii) the formation of the Student Loan Trusts, and (iii) the servicing
of the Student Loans, as appropriate; (c) one or more indentures of
trust relating to one or more of the series or classes of Student Loan
Securities to be issued; (d) one or more administration agreements
pursuant to which the Bank will perform certain of the obligations of
the trustee for the Student Loan Trust; and (e) such financing
statements, and such other documents, instruments, certificates and
agreements as any Authorized Official may deem necessary or advisable
in connection with the Sale and the Securitization and with the
registration, issuance, offer and sale of the Student Loan Securities,
including, without limitation, any agreements dealing with caps, swaps,
derivatives or other similar financial instruments or agreements, all
of which such documents, instruments, certificates and agreements may
contain such terms, provisions, and conditions, including indemnities,
as any Authorized Official may approve, which approval shall be
conclusively established by such Authorized Official's execution and
delivery of such documents, instruments, certificates and agreements.
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<PAGE> 6
FURTHER RESOLVED, that the Authorized Officials are and each
of them is hereby authorized, for and on behalf of the Bank, to execute
any documents and take any and all actions as may be necessary or
advisable to carry out the intent and purposes of the foregoing
resolutions, and that the signature of any Authorized Official to any
such document shall be conclusive as to the approval of the Bank and
this Board of Directors of the form and substance of such written
instrument.
FURTHER RESOLVED, that all actions and deeds contemplated by
these resolutions previously taken by any Authorized Official, be and
each of them are hereby confirmed and ratified in all respects as duly
authorized acts and deeds of, and shall be fully binding upon and
enforceable against, the Bank.
FURTHER RESOLVED, that any form of additional resolution appropriate to
or required by law, regulation or a regulatory agency in connection with the
transactions contemplated by the resolutions herein adopted, be and it hereby is
adopted, and that the Secretary or any Assistant Secretary of the Bank each be
and they hereby are authorized to certify as having been adopted by the Board of
Directors such form of authorizing resolution required in accordance with the
foregoing, provided that a copy of such form of authorizing resolution so
certified shall be attached to these resolutions.
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