<PAGE> 1
Filed Pursuant To Rule 424(B)(1)
Registration No. 333-58073
$865,000,000
KeyCorp Student Loan Trust 1999-A
$260,000,000 Floating Rate Class A-1 Asset Backed Notes
$570,400,000 Floating Rate Class A-2 Asset Backed Notes
$34,600,000 Floating Rate Asset Backed Certificates
------------------------
KEY BANK USA, NATIONAL ASSOCIATION
Seller
(KEYBANK LOGO)
------------------------
The KeyCorp Student Loan Trust 1999-A (the "Trust") will issue $260,000,000
aggregate principal amount of Floating Rate Class A-1 Asset Backed Notes (the
"Class A-1 Notes") and $570,400,000 aggregate principal amount of Floating Rate
Class A-2 Asset Backed Notes (the "Class A-2 Notes" and together with the Class
A-1 Notes, the "Notes") and $34,600,000 aggregate principal amount of Floating
Rate Asset Backed Certificates (the "Certificates" and together with the Notes,
the "Securities") as set forth below. The Class A-1 Notes and Class A-2 Notes
will be secured by a pool of law school, medical school, dental school, graduate
business school, and other graduate school student loans ("Student Loans"),
originated by Key Bank USA, National Association (the "Seller"). The
Certificates will represent undivided beneficial ownership interests in the
Trust. Pennsylvania Higher Education Assistance Agency ("PHEAA" and in its
capacity as servicer, "Servicer") and EFS Services, Inc. ("EFS" or "Servicer")
will service the Student Loans included in the Trust.
Interest on and principal of the Securities will be payable quarterly on or
about the twenty-seventh day of each March, June, September and December,
commencing June 28, 1999; provided, that no distributions in respect of
principal of the Class A-2 Notes will be payable until the Class A-1 Notes are
paid in full, and no distributions in respect of principal of the Certificates
will be payable until the Class A-2 Notes are paid in full. The rights of
Certificateholders to receive payments of interest and principal shall be
subordinated to the rights of the Noteholders to receive payments of interest
and principal to the extent described herein.
Neither the Notes nor the Certificates will be listed on any national securities
exchange. Credit Suisse First Boston Corporation intends to, and McDonald
Investments Inc., A KeyCorp Company ("McDonald Investments") may, make a
secondary market in the Notes and the Certificates but neither has any
obligation to do so. There can be no assurance that a secondary market for the
Notes or the Certificates will develop or, if it does develop, that it will
continue.
SEE "RISK FACTORS" BEGINNING ON PAGE 21 FOR CERTAIN CONSIDERATIONS RELEVANT TO
AN INVESTMENT IN THE SECURITIES.
------------------------
THE CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN, AND THE NOTES REPRESENT
OBLIGATIONS OF, THE TRUST ONLY AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS
OF THE SELLER, THE SERVICERS OR ANY AFFILIATE THEREOF. NEITHER THE CERTIFICATES
NOR THE NOTES ARE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAVE APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
Original Underwriting Proceeds to
Principal Balance Applicable Margin(1) Price to Public Discount Seller(2)
----------------- -------------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
CLASS A-1 NOTES...... $260,000,000 0.14% $260,000,000 $ 572,000.00 $259,428,000.00
CLASS A-2 NOTES...... $570,400,000 0.33% $570,400,000 $1,853,800.00 $568,546,200.00
CERTIFICATES......... $ 34,600,000 0.75% $ 34,600,000 $ 165,709.95 $ 34,001,290.05
------------ ------------ ------------- ---------------
TOTAL................ $865,000,000 $865,000,000 $2,591,509.95 $861,975,490.05
============ ============ ============= ===============
</TABLE>
- ---------------
(1) Interest will accrue with respect to each Interest Period at a rate per
annum equal to the lesser of (i) the applicable Investor Index plus the
applicable Margin and (ii) the Student Loan Rate as described herein. The
Investor Index will be Three-Month LIBOR as described herein.
(2) Before deducting expenses, estimated to be $1,123,000.
------------------------
The Securities are offered by Credit Suisse First Boston Corporation and
McDonald Investments (the "Underwriters") when, as and if issued by the Trust,
delivered to and accepted by the Underwriters and subject to their right to
reject orders in whole or in part. It is expected that delivery of the
Securities in book-entry form will be made through the facilities of The
Depository Trust Company on the Same Day Funds Settlement System and, in the
case of the Notes, also Cedelbank, societe anonyme and the Euroclear System on
or about February 9, 1999.
After the initial distribution of the Securities by the Underwriters, this
Prospectus may be used by McDonald Investments, an affiliate of the Seller, in
connection with market-making transactions in the Securities. McDonald
Investments, may act as principal or agent in such transactions. Such
transactions will be at prices related to prevailing market prices at the time
of sale. Certain information in this Prospectus will be updated from time to
time as described in "Incorporation of Certain Documents by Reference."
CREDIT SUISSE FIRST BOSTON MCDONALD INVESTMENTS
A KEYCORP COMPANY
------------------------
The date of this Prospectus is February 3, 1999.
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS WHICH
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES AND THE
CERTIFICATES OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING AND THE
EXCHANGE OF NOTES AND CERTIFICATES TO COVER SHORT POSITIONS. SUCH STABILIZING,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
AVAILABLE INFORMATION
The Seller, as originator of the Trust, has filed 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 the Securities and Exchange Commission (the "Commission") with respect to
the Securities offered pursuant to this Prospectus. This Prospectus, which forms
part of the Registration Statement, does not contain all the information
contained in the Registration Statement. For further information reference is
made to the Registration Statement and amendments thereof and exhibits thereto,
which are available for inspection without charge at the office of the
Commission at 450 Fifth Street N.W., Washington, D.C. 20549; Northeast Regional
Office, 7 World Trade Center, Suite 1300, New York, New York 10048; and Midwest
Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of the Registration Statement can be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates and electronically through the Commission's Electronic
Gathering and Retrieval System at the Commission's Web Site
(http://www.sec.gov).
REPORTS TO SECURITYHOLDERS
Unless and until Definitive Notes or Definitive Certificates are issued,
quarterly and annual unaudited reports containing information concerning the
Financed Student Loans will be prepared by Key Bank USA, National Association in
its capacity as Administrator (the "Administrator") and sent on behalf of the
Trust only to Cede & Co. ("Cede"), as nominee of The Depository Trust Company
("DTC") and registered holder of the Notes and the Certificates, but will not be
sent to any beneficial holder of the Securities. Such reports will not
constitute financial statements prepared in accordance with generally accepted
accounting principles. See "Description of the Securities -- Book-Entry
Registration" and " -- Reports to Securityholders." The Trust will file with the
Commission such periodic reports as are required under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of
the Commission thereunder. The Trust may suspend the filing of such reports
under the Exchange Act when and if the filing of such reports is no longer
statutorily required.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Administrator, on behalf of
the Trust, pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Prospectus and prior to the termination of the
offering of the Notes and Certificates shall be deemed to be incorporated by
reference into this Prospectus and to be part hereof. Any statement contained
herein or in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Administrator will provide, without charge to each person to whom a
copy of this Prospectus is delivered, on the written or oral request of any such
person, a copy of any or all of the documents incorporated herein by reference,
except the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Written requests for such copies
should be directed to Key Bank USA, National Association, Education Resources,
800 Superior Avenue, 4th Floor, Cleveland, Ohio, 44114, Attention: Trust
Administrator, KeyCorp Student Loan Trust 1999-A. Telephone requests for such
copies should be directed to the Administrator at (800) 523-7248.
2
<PAGE> 3
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein. Certain capitalized terms used
herein are defined elsewhere herein on the pages indicated in the "Index of
Principal Terms."
Issuer........................ KeyCorp Student Loan Trust 1999-A (the
"Trust").
Securities Offered............ The Class A-1 Notes, the Class A-2 Notes and
the Certificates (the "Securities"). The
initial principal amount of each of the
Securities, is set forth on the cover page
hereof. 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. Persons acquiring
beneficial ownership interests in the Notes
will hold their interests in the Notes through
The Depository Trust Company ("DTC") in the
United States or Cedellbank societe anonyme
("Cedel") or the Euroclear System ("Euroclear")
in Europe and persons acquiring beneficial
ownership interests in the Certificates will
hold their interests in the Certificates
through DTC. See "Description of the
Securities -- Book-Entry Registration."
Securityholders will not be entitled to receive
a Definitive Security, except in the event that
Definitive Securities are issued in the limited
circumstances described herein. See
"Description of the Securities -- Definitive
Securities."
Designations
Class A-1 Notes............. Floating Rate Class A-1 Asset Backed Notes.
Class A-2 Notes............. Floating Rate Class A-2 Asset Backed Notes.
Notes....................... Class A-1 Notes and Class A-2 Notes.
Certificates................ Floating Rate Asset Backed Certificates.
Securities.................. Class A-1 Notes, Class A-2 Notes and
Certificates.
T-Bill Indexed Securities... None.
LIBOR Indexed Securities.... Class A-1 Notes, Class A-2 Notes and the
Certificates.
Seller........................ Key Bank USA, National Association, a national
banking association (the "Seller"). See "The
Seller, the Administrator and the
Servicers -- The Seller and Administrator."
Servicers..................... Pennsylvania Higher Education Assistance
Agency, an agency of the Commonwealth of
Pennsylvania ("PHEAA") and EFS Services, Inc.,
a wholly-owned subsidiary of EFS, Inc. of
Indiana ("EFS" and together with PHEAA, the
"Servicers"). See "The Seller, the
Administrator and the Servicers -- The
Servicers."
Eligible Lender Trustee....... The First National Bank of Chicago, as trustee
(the "Eligible Lender Trustee") under the
Amended and Restated Trust Agreement dated as
of January 1, 1999 (as amended and supplemented
from time to time, the "Trust Agreement")
between the Seller and the Eligible Lender
Trustee pursuant to which the Eligible Lender
Trustee acts as holder of legal title to the
Financed Student Loans on behalf of the Trust.
See "Formation of the Trust -- Eligible Lender
Trustee."
Indenture Trustee............. Bankers Trust Company, as trustee (the
"Indenture Trustee") under the Indenture dated
as of January 1, 1999 (as amended
3
<PAGE> 4
and supplemented from time to time, the
"Indenture") between the Trust and the
Indenture Trustee.
Administrator................. Key Bank USA, National Association, as
administrator (the "Administrator") on behalf
of the Trust pursuant to the Administration
Agreement dated as of January 1, 1999 (as
amended and supplemented from time to time, the
"Administration Agreement"), among the
Administrator, the Trust and the Indenture
Trustee. See "The Seller, the Administrator and
the Servicers -- The Seller and Administrator."
Transaction Overview.......... The Trust will issue the Notes pursuant to the
Indenture and Certificates pursuant to the
Trust Agreement. The assets of the Trust will
include certain law school, medical school,
dental school, graduate business school and
other graduate school student loans
(collectively, "Student Loans"). Such Student
Loans will be acquired by the Trust from the
Seller on the Closing Date and from time to
time thereafter as described under " -- Assets
of the Trust -- Financed Student Loans"
(collectively, "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") as described under "-- Assets of
the Trust -- Financed Student Loans"
(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 Notes will be secured by the
Financed Student Loans and certain other assets
of the Trust. The Certificates represent
undivided beneficial ownership interests in the
Trust and certain other assets of the Trust.
Payments of interest on and principal of the
Securities will be made from collections and
other payments received with respect to the
Financed Student Loans.
The rights of the holders of Certificates will
be subordinated to the rights of the holders of
Notes to the extent described herein. See
"Description of the Transfer and Servicing
Agreements -- Credit
Enhancement -- Subordination of the
Certificates."
Set forth below is a summary of the material
payment terms of the Securities.
A. Distribution Dates......... The twenty-seventh day of each March, June,
September and December (unless such day is not
a Business Day, then the immediately following
Business Day), commencing June 28, 1999.
B. Record Date................ Payments in respect of the Securities will be
payable to holders of record as of the Business
Day preceding each Distribution Date.
C. Closing Date............... February 9, 1999
D. Interest Period............ With respect to any Distribution Date (except
for the initial Distribution Date), interest
will accrue on the Securities from the previous
Distribution Date to but excluding such
Distribution Date. With respect to the initial
Distribution Date, interest will accrue on the
Securities from the Closing Date to, but
excluding such Distribution Date.
4
<PAGE> 5
E. Interest................... Interest will accrue with respect to each
Interest Period on each class of Securities at
a per annum rate equal to the lesser of the
Formula Rate and the Student Loan Rate
(determined as described under "Description of
the Securities -- The Notes -- Distributions of
Interest").
The "Formula Rate" for any class of Securities
shall mean the applicable Investor Index plus
the applicable Margin.
The "Investor Index" means:
- For T-Bill Indexed Securities: the daily
weighted average of the T-Bill Rates within
such Interest Period (determined as described
under "Description of the
Securities -- Determination of the T-Bill
Rate"); and
- For LIBOR Indexed Securities: Three-Month
LIBOR (determined as described under
"Description of the Securities -- Determination
of LIBOR").
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 March 29, 1999 based on Three
Month LIBOR as determined on the initial LIBOR
Determination Date and for the period from
March 29, 1999 to but excluding June 28, 1999
based on Three Month LIBOR as determined on the
LIBOR Determination Date in March 1999. See
"-- Description of The
Securities -- Determination of LIBOR".
The "Margin" for each class of Securities is as
follows:
Class A-1 Notes: 0.14%
Class A-2 Notes: 0.33%
Certificates: 0.75%
The Student Loan Rate for any Interest Period
is a rate calculated generally on the basis of
collections on the Financed Student Loans
available or expected to be available to pay
interest on the Securities after payment of
certain expenses of the Trust for such Interest
Period. See "Description of the
Securities -- The Notes -- Distributions of
Interest."
Interest on the T-Bill Indexed Securities will
be calculated on the basis of the actual number
of days elapsed in the related Interest Period
divided by 365, or 366 in the case of leap
year. Interest on the LIBOR Indexed Securities
will be calculated on the basis of the actual
number of days elapsed in the related Interest
Period divided by 360.
The amount of interest payable on any class of
Securities on any Distribution Date will not
exceed the Student Loan Rate for such class. To
the extent that for any Interest Period the
rate for any class of Securities 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 such class of Securities) will be paid on
such Distribution Date or any subsequent
Distribution Date on a subordinated basis to
the extent funds are allocated and available
therefor after making all required prior
allocations and
5
<PAGE> 6
distributions on such Distribution Dates, as
described under "Description of the Transfer
and Servicing Agreements -- Distributions." The
payment of such amounts due to
Certificateholders on any Distribution Date
(such amount, the "Certificateholders' Interest
Index Carryover") is further subordinated to
the payment of such amounts due to the
Noteholders on any Distribution Date (such
amount, the "Noteholders' Interest Index
Carryover"). To the extent funds are available
therefor, the Certificateholders' Interest
Index Carryover may be paid prior to the time
that the Notes are paid in full. The ratings on
the Securities do not address the likelihood of
payment of any Noteholders' Interest Index
Carryover or Certificateholders' Interest Index
Carryover.
F. Principal.................. Principal on the Notes will be payable on each
Distribution Date, first to the principal
balance of the Class A-1 Notes until such
principal balance is reduced to zero and then
to the principal balance of the Class A-2 Notes
until such principal balance is reduced to
zero. Principal of the Certificates will be
payable on each Distribution Date on and after
the Class A-2 Notes have been paid in full. The
amount of principal distributable on any
Distribution Date for Securities generally will
be equal to the amount of collections received
on the Financed Student Loans during the
related Collection Period (less certain
expenses of the Trust and other allocations
described herein) necessary to reduce the sum
of the principal balances of the Notes and
Certificates to the Specified Collateral
Balance for such Distribution Date. See
"Description of the Transfer and Servicing
Agreements -- Distributions."
On the Closing Date, the sum of the aggregate
initial principal amount of the Notes and the
initial Certificate Balance is 103.48% of the
sum of the aggregate principal balance of the
Initial Financed Student Loans as of the
Statistical Cutoff Date, the Pre-Funded Amount
as of the Closing Date and the amounts on
deposit in the Collection Account on the
Closing Date. The transaction is structured
such that collections on the Financed Student
Loans should be available to make accelerated
payments of principal on the Notes, thereby
reducing the amount by which the outstanding
principal balance of the Notes and the
Certificate Balance exceeds the sum of the
aggregate principal balance of the Financed
Student Loans and the Pre-Funded Amount. The
actual rate and timing of any accelerated
payments of principal, however, will depend on
a number of factors, including the rate and
timing of the payments on the Financed Student
Loans. It is expected that initially there may
not be any such accelerated payments of
principal because of the payment status of many
of the Financed Student Loans and the fact that
certain of the Financed Student Loans require
the related borrowers to pay only interest for
a period of two years. There can be no
assurance of the actual rate or timing of such
accelerated payments of principal or when the
sum of the aggregate principal amount of the
Notes and the Certificate Balance will equal
the sum of the Pool Balance and the Pre-
6
<PAGE> 7
Funded Amount. See "Risk Factors -- Principal
Balance of Securities Exceeds the Sum of the
Aggregate Principal Balance of Initial Financed
Student Loans and Pre-Funded Amount."
Until the outstanding principal balance of the
Notes and the Certificate Balance has been
reduced to the Specified Collateral Balance and
any Excess Servicing Fee has been paid, no
amounts will be available for the payment of
any Noteholders' Interest Index Carryover or
Certificateholders' Interest Index Carryover
with respect to the Notes and the Certificates.
In addition, on the Distribution Date on or
immediately following the last day of the
Funding Period, the amount remaining on deposit
in the Other Additional Funding Subaccount 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 on the Securities on
such Distribution Date.
"Principal Distribution Amount" means, for the
Securities and 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.
"Specified Collateral Balance" generally 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. Following a TERI Trigger
Event, the Specified Collateral Balance will
equal zero.
A "TERI Trigger Event" shall occur when (i) the
Cumulative TERI Claims Ratio (as defined below)
exceeds 20% and (ii) a claim has been made
under the TERI 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.
G. Maturity Dates............. Securities Final Maturity Date
Class A-1 Notes December 2006 Distribution Date
Class A-2 Notes December 2029 Distribution Date
Certificates December 2035 Distribution Date
Although the maturity of some of the Financed
Student Loans will extend beyond the maturity
dates for the Securities, the actual maturity
of one or more classes of such Securities could
7
<PAGE> 8
occur sooner than such maturity dates as a
result of a variety of factors as described
under "Description of the Securities -- The
Notes" and " -- The Certificates."
H. Mandatory Redemption of
Notes and Certificates........ On the Closing Date approximately $32,180,804
(the "Subsequent Pool Pre-Funded Amount") will
be allocated to the Subsequent Pool Pre-Funding
Subaccount of the Pre-Funding Account to
purchase Student Loans, from a pool of Student
Loans currently owned by the Seller (the
"Subsequent Pool") and having as of January 1,
1999 (the "Statistical Cutoff Date") the
characteristics described under "The Financed
Student Loan Pool."
If as of March 1, 1999 (the "Special
Determination Date"), the Subsequent Pool
Pre-Funded Amount has not been reduced to zero,
then the remaining Subsequent Pool Pre-Funded
Amount, if greater than $10,000,000, will be
distributed on the first Distribution Date
thereafter to redeem each class of Notes and
prepay the Certificates on a pro rata basis,
based on the initial principal balance of each
class of Notes and the initial principal
balance of the Certificates; if such amount is
$10,000,000 or less, it will be distributed on
the first Distribution Date only to holders of
the Class A-1 Notes.
In addition, on the Distribution Date on or
immediately following the last day of the
Funding Period, any amounts remaining on
deposit in the Other Additional Pre-Funding
Subaccount on such Distribution Date 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 on the Securities on
such Distribution Date.
Risk Factors.................. There are material risks associated with an
investment in the Securities. Prospective
investors should consider the risks associated
with any investment in the Securities. See
"Risk Factors."
The Trust..................... The Trust was established under the laws of New
York by the Trust Agreement. The activities of
the Trust and the Eligible Lender Trustee will
be limited by the terms of the Trust Agreement
to acquiring, owning and managing the Financed
Student Loans and the other assets of the Trust
as described herein, issuing the Securities,
making payments thereon and other activities
related thereto.
Assets of the Trust........... The assets of the Trust will include the
following:
A. Financed Student Loans..... The Financed Student Loans were or will be
originated by the Seller and will include
Student Loans ("Financed Federal Loans") that
are guaranteed as to the payment of principal
and interest by PHEAA, the Massachusetts Higher
Education Assistance Corporation now doing
business as American Student Assistance
("ASA"), the Nebraska Student Loan Program
("NSLP"), or the Educational Credit Management
Corporation ("ECMC" and together with PHEAA in
its capacity as a guarantor, ASA and NSLP, the
"Federal Guarantors"), and are rein-
8
<PAGE> 9
sured by the United States Department of
Education (the "Department"). The Financed
Student Loans will also include Student Loans
("Financed Private Loans") that are guaranteed
or insured as to the payment of principal and
interest by The Education Resources Institute,
Inc., a Massachusetts non-profit corporation
("TERI") or by HEMAR Insurance Corporation of
America ("HICA" and together with TERI, the
"Private Guarantors"), and are not reinsured by
the Department or any other governmental
entity. The Private Guarantors together with
the Federal Guarantors may be referred to
herein as the "Guarantors". The Financed
Student Loans will be selected from the Student
Loans owned by the Seller based on the criteria
specified in the Sale and Servicing Agreement
and described herein. The Financed Federal
Loans include certain additional Student Loans
to be made under the Federal Consolidation Loan
Program and certain Serial Loans which are
Stafford Loans. The Financed Private Loans may
also include certain additional Student Loans
to be made under the Private Consolidation Loan
Program and certain Serial Loans which are
Private Loans. Financed Federal Loans made on
or after October 1, 1993 are 98% guaranteed
against default by the applicable Federal
Guarantor. The applicable Federal Guarantor is
reinsured by the Department up to a maximum of
98% of Guarantee Payments for loans first
disbursed on or after October 1, 1993 and 95%
for Financed Federal Loans first disbursed on
or after October 1, 1998. All references herein
to the guarantee and reinsurance coverage with
respect to the Financed Federal Loans should be
understood to mean such 98% guarantee and 98%
maximum reinsurance coverage, respectively,
with respect to Financed Federal Loans made on
or after October 1, 1993 (but before October 1,
1998), and such 98% guarantee and the 95%
maximum reinsurance coverage, respectively for
Financed Federal Loans made on or after October
1, 1998.
Certain incentive programs currently or
hereafter made available by the Seller to
borrowers under certain loan programs 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 of 1965,
as amended (such Act, together with all rules
and regulations promulgated thereunder by the
Department and/or the Federal Guarantors, the
"Higher Education Act") will be applicable to
the Financed Student Loans only if and to the
extent that the Trust receives payment from the
Seller (or Seller deposits or causes a deposit
to be made into the Collection Account) in an
amount sufficient to offset such effective
yield reductions. See "The Student Loan
Financing Business -- General -- Incentive
Programs." 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. As of the Statistical Cutoff
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<PAGE> 10
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.
As of the Statistical Cutoff Date, the weighted
average interest rate per annum with respect to
the Initial Financed Student Loans was
approximately 8.06% and the weighted average
remaining term to maturity (exclusive of any
future deferral or forbearance periods and
assuming expected graduation dates and typical
grace periods) of the Initial Financed Student
Loans was approximately 200.04 months. As of
the Statistical Cutoff Date, approximately
61.82% of the outstanding principal balance of
the Initial Financed Student Loans consisted of
Financed Federal Loans and approximately 38.18%
consisted of Financed Private Loans. Of the
Initial Financed Student Loans, approximately
36.60% are guaranteed by PHEAA, approximately
25.22% are guaranteed by ASA, approximately
37.15% are guaranteed by TERI and approximately
1.02% are insured by HICA.
As of the Statistical Cutoff Date, the weighted
average interest rate per annum with respect to
the Subsequent Pool Student Loans was
approximately 8.24% and the weighted average
remaining term to maturity (exclusive of any
future deferral or forbearance periods and
assuming expected graduation dates and typical
grace periods) of the Subsequent Pool Student
Loans was approximately 122.53 months. As of
the Statistical Cutoff Date, the Subsequent
Pool Student Loans consisted entirely of
Financed Federal Loans (of which approximately
1.57% are guaranteed by PHEAA, approximately
0.46% are guaranteed by ASA, approximately
95.97% are guaranteed by NSLP and approximately
2.00% are guaranteed by ECMC).
The statistical information presented in this
Prospectus with respect to the Subsequent Pool
Student Loans is as of the Statistical Cutoff
Date. 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 in this Prospectus, the
Seller does not anticipate that the
characteristics of such Subsequent Pool Student
Loans will vary materially from such
statistical information as of the Statistical
Cutoff Date.
"Collection Period" means each period of three
calendar months from and including the date
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 May 31,
1999).
The "Initial Pool Balance" will equal (i)
$767,111,823.09 plus (ii) 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.
"Pool Balance" is defined in "Description of
the Transfer and Servicing
Agreements -- Distributions." The Pool Balance
at
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<PAGE> 11
any time generally represents the aggregate
principal balance of the Financed Student Loans
at the end of the preceding Collection Period
(including accrued interest thereon for such
Collection Period to the extent such interest
will be capitalized upon commencement of
repayment), after giving effect to all payments
received by the Trust on the Financed Student
Loans during such Collection Period allocable
to principal, all losses realized on Financed
Student Loans liquidated during such Collection
Period, and all Additional Fundings during such
Collection Period.
B. Pre-Funding Account........ During the Funding Period, an account will be
maintained in the name of the Indenture Trustee
(the "Pre-Funding Account"). On the Closing
Date, approximately $62,180,804 (the "Pre-
Funded Amount") of the net proceeds received
from the sale of the Securities will be
deposited in the Pre-Funding Account. During
the Funding Period, the Pre-Funded Amount will
be reduced from time to time by the amount
thereof used to purchase Additional Student
Loans to be included in the Trust, and, under
certain limited circumstances described below,
to cover payments of certain fees with respect
to the Trust and interest payments on the
Securities, in accordance with the Sale and
Servicing Agreement. See "Description of the
Transfer and Servicing Agreements -- Additional
Fundings."
On the Closing Date, for administrative
convenience, a portion of the 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 Pre-Funded Amount
equal to $30,000,000 (the "Other Additional
Pre-Funded Amount") will be allocated to an
administrative subaccount of the Pre-Funding
Account (the "Other Additional Pre-Funding
Subaccount"). The Subsequent Pool Pre-Funded
Amount may only be used by the Trust on or
prior to the Special Determination Date to
purchase from the Seller Subsequent Pool
Student Loans. The Subsequent Pool Pre-Funded
Amount will be reduced on each date Subsequent
Pool Student Loans are transferred to the Trust
by the aggregate Purchase Price of such
Subsequent Pool Student Loans transferred on
such date. 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 amounts on
deposit in the Other Additional Pre-Funding
Subaccount.
The Other Additional Pre-Funded Amount shall
also be available to purchase Other Subsequent
Student Loans, to pay capitalized interest on
any Financed Student Loan and to pay Guarantee
Fee Advances during the Funding Period. The
"Purchase Price" of any Financed Student Loan
will be (i) in the case of Initial Financed
Student Loans, an amount equal to 102.85% 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 102.85%
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<PAGE> 12
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 100.00% 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.
Failure of the Seller to sell sufficient
Student Loans to the Trust during the Funding
Period as required by the Sale and Servicing
Agreement shall result in a mandatory
redemption of the Securities. See
"-- Transaction Overview -- Mandatory
Redemption of Notes and Certificates."
"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
$767,111,823.09, as of the Statistical Cutoff
Date.
"Subsequent Pool Student Loans" means the
Student Loans included in the Subsequent Pool.
"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.
"Additional Student Loans" means collectively
the Subsequent Pool Student Loans, the Other
Subsequent Student Loans, the Other Student
Loans and Guarantee Fee Advances.
"Loan Purchase Termination Date" means the last
day of the Funding Period.
"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. Notwithstanding the foregoing,
because the Loan Purchase Termination Date is
defined as the last day of the Funding Period,
the Trust will not apply any Available Loan
Purchase Funds to purchase Other Student Loans.
The "Funding Period" means the period from the
Closing Date until the first to occur of (i) an
Event of Default occurring under the Indenture,
a Servicer Default occurring under the Sale and
Servicing Agreement or an Administrator Default
occurring under the Sale and Servicing
Agreement or the Administration
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<PAGE> 13
Agreement, (ii) certain events of insolvency
with respect to the Seller or (iii) 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 (iv) the last day of the
Collection Period preceding the March 2001
Distribution Date.
C. Escrow Account............. Pursuant to the Sale and Servicing Agreement,
an account in the name of the Indenture Trustee
(the "Escrow Account") will be established and
maintained by the Administrator and such
account will be an asset of the Trust. With
respect to each Consolidation Loan, the
Eligible Lender Trustee on behalf of the Trust
will convey to the Seller all Underlying
Federal Loans and Underlying Private Loans, as
applicable, on each Transfer Date (as defined
below) 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, in each case plus accrued
interest thereon to the date (the "Transfer
Date") of such conveyance. Amounts on deposit
in the Escrow Account will be invested in
Eligible Investments and will be used on the
succeeding Transfer Date to purchase Additional
Student Loans, as described above, from the
Seller.
Any amounts remaining in the Escrow Account on
such Transfer Date, after giving effect to the
conveyance of all such Student Loans on such
Transfer Date, will be deposited into the
Collection Account and distributed on the
Distribution Date immediately following such
Transfer Date. See "Description of the Transfer
and Servicing Agreements -- Additional
Fundings."
D. Collection Account......... The Administrator will establish in the name of
the Indenture Trustee one or more accounts into
which all collections in respect of the
Financed Student Loans will be required to be
deposited.
1. Deposits into Collection Account. Pursuant
to the Sale and Servicing Agreement, an account
in the name of the Indenture Trustee (the
"Collection Account") will be established and
maintained by the Administrator and such
account will be an asset of the Trust. The
Seller will make an initial deposit into the
Collection Account on the Closing Date of cash
or certain Eligible Investments equal to
$6,614,533.55. Except under certain conditions
described herein, the Servicers will be
required to remit all collections received with
respect to the Financed Student Loans within
two Business Days of receipt thereof to the
Collection Account. Except under certain
conditions described herein, the Eligible
Lender Trustee will be required to remit
Interest Subsidy Payments and Special Allowance
Payments (each as defined under "The Student
Loan Financing Business -- Federal Loans Under
the Programs") it receives with respect to the
Financed Federal Loans within two Business Days
of receipt thereof to the Collection Account.
If, however, such conditions are satisfied as
described herein,
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<PAGE> 14
such collections received by a Servicer and the
Eligible Lender Trustee will be remitted to the
Administrator, who will not be required to
deposit such amounts into the Collection
Account generally until on or before the
Business Day preceding each Distribution Date.
See "Description of the Transfer and Servicing
Agreements -- Payments on Financed Student
Loans."
2. Distributions from the Collection Account.
Pursuant to the Sale and Servicing Agreement,
the Administrator will instruct the Indenture
Trustee to withdraw funds on deposit in the
Collection Account and to apply such funds on
or about the twenty-seventh day of each month
(the "Monthly Servicing Payment Date") (i) to
the payment to the Seller of 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 (ii) to
the payment of the Servicing Fee (as defined
under " -- Transfer and Servicing Agreements"
below) and on each Distribution Date to the
following (except as otherwise described
herein, in the priority indicated): (i)
Guarantee Payments made by TERI in excess of
the Maximum TERI Payments Amount payable to the
Seller; (ii) the Servicing Fee and all overdue
Servicing Fees; (iii) the quarterly fee payable
to the Administrator and all overdue
administration fees; (iv) interest due on the
Notes and all overdue interest thereon (other
than the Noteholders' Interest Index Carryover)
as described above under "-- Transaction
Overview -- Interest"; (v) interest due on the
Certificates and all overdue interest (other
than the Certificateholders' Interest Index
Carryover) as described above under
"-- Transaction Overview -- Interest"; (vi) the
amount, if any, necessary to be deposited in
the Reserve Account to reinstate the balance
thereof to the Specified Reserve Account
Balance; (vii) principal payable on the Notes
as described above under " -- Transaction
Overview -- Principal"; (viii) on each
Distribution Date on and after which the Notes
are paid in full, principal payable on the
Certificates as described above under
" -- Transaction Overview -- Principal"; (ix)
the Excess Servicing Fee (as defined under
" -- Transfer and Servicing Agreements" below),
if any; (x) the aggregate unpaid amount of
Noteholders' Interest Index Carryover due to
any Noteholders, if any; (xi) the aggregate
unpaid amount of Certificateholders' Interest
Index Carryover due to any Certificateholders,
if any; and (xii) any remaining amounts after
application of clauses (i) through (xi) above
to the Seller. 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 for
the Notes, principal will be payable on the
Notes in the amount of such excess, to the
extent of funds available, before any amount is
payable on the Certificates. See "Description
of the Transfer and Servicing
Agreements -- Distributions -- Distributions
from Collection Account."
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<PAGE> 15
The "Maximum TERI Payments Amount" means 19% of
the Initial Pool Balance.
The "Specified Reserve Account Balance" with
respect to any Distribution Date will be equal
to the greater of (i) 0.30% 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 (ii) $1,297,500;
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. See "Description of the Transfer
and Servicing Agreements -- Credit
Enhancement -- Reserve Account."
3. Additional Fundings from the Collection
Account. Amounts on deposit in the Collection
Account which constitute Available Loan
Purchase Funds may be withdrawn from the
Collection Account to the extent necessary (i)
on each Transfer Date, during the period which
begins following the end of the Funding Period
and ends on the Loan Purchase Termination Date,
to purchase Other Student Loans, subject to the
aggregate purchase limits for the applicable
type of Student Loan and (ii) following the end
of the Funding Period, in the case of amounts
on deposit in the Collection Account, to pay
Guarantee Fee Advances. "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.
Notwithstanding the foregoing, because the Loan
Purchase Termination Date is defined as the
last day of the Funding Period, the Trust will
not apply any Available Loan Purchase Funds to
purchase Other Student Loans or to pay any
Guarantee Fee Advances. See "Formation of the
Trust -- The Trust" and "Description of the
Transfer and Servicing Agreements -- Additional
Fundings."
E. Reserve Account............ Pursuant to the Sale and Servicing Agreement,
an account in the name of the Indenture Trustee
(the "Reserve Account") will be established and
maintained by the Administrator and such
account will be an asset of the Trust. The
Seller will make an initial deposit into the
Reserve Account on the Closing Date of cash or
certain Eligible Investments equal to
$2,595,000 (the "Reserve Account Initial
Deposit"). On the Closing Date, the Reserve
Account Initial Deposit will equal the
Specified Reserve Account Balance as of the
Closing Date. The amount 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 deposits
therein from certain amounts available therefor
remaining after making all prior distributions
on such date. See "Description of the Transfer
and Servicing Agreements -- Distributions."
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<PAGE> 16
Pursuant to the Sale and Servicing Agreement,
amounts on deposit in the Reserve Account will
be available on each Monthly Servicing Payment
Date to cover any shortfalls in payments of the
Servicing Fee, and on each Distribution Date to
cover any shortfalls in payments of the
Servicing Fee, the Administration Fee, and
interest payable in respect of the Notes and
the Certificates (other than the Noteholders'
Interest Index Carryover and the
Certificateholders' Interest Index Carryover)
for such Distribution Date for which funds
otherwise available therefor for such
Distribution Date are insufficient to make such
payments and distributions; 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
for the Notes (after giving effect to such
withdrawals from the Reserve Account) is not
less than the outstanding principal balance of
the Notes. In addition, on the Final Maturity
Date for each class of Securities, amounts on
deposit in the Reserve Account, if any, will be
available, if necessary, to be applied to
reduce the principal balance of such classes of
Securities to zero. Amounts on deposit in the
Reserve Account will not be available to cover
any unpaid Excess Servicing Fee, Noteholders'
Interest Index Carryover or Certificateholders'
Interest Index Carryover.
Pursuant to the Sale and Servicing Agreement,
amounts in the Reserve Account on any
Distribution Date (without giving effect to any
distributions on such Distribution Date) in
excess of the Specified Reserve Account Balance
for such Distribution Date will be included as
Available Funds for distribution on such
Distribution Date. See "Description of the
Transfer and Servicing Agreements -- Credit
Enhancement -- Reserve Account."
The funding and maintenance of the Reserve
Account is intended to enhance the likelihood
of timely payment of interest in respect of the
Notes and the Certificates (other than the
Noteholders' Interest Index Carryover and the
Certificateholders' Interest Index Carryover)
and payment of principal in respect of the
Notes and the Certificates on their respective
Final Maturity Dates. In certain circumstances,
however, the Reserve Account could be depleted
and shortfalls in distributions on the Notes or
Certificates could result.
F. Transfer and Servicing
Agreements.................... Under the Sale and Servicing Agreement, the
Seller will sell the Financed Student Loans to
the Trust, with the Eligible Lender Trustee
holding legal title thereto. In addition, the
Servicers will agree with the Trust to be
responsible for servicing, managing,
maintaining custody of and making collections
on the Financed Student Loans. As of the
Statistical Cutoff Date, PHEAA will be the
Servicer with respect to approximately 95.64%
of the outstanding principal balance of the
Initial Financed Student Loans and EFS will be
the Servicer with respect to approximately
4.36% 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 100%
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<PAGE> 17
of the outstanding principal balance of the
Subsequent Pool Student Loans and EFS will be
the Servicer with respect to approximately 0%
of the outstanding principal balance of the
Subsequent Pool Student Loans. The obligations
of the Seller and the Servicers under the Sale
and Servicing Agreement include the following:
The Seller will be obligated to repurchase, and
the Servicers will be obligated to purchase,
any Financed Student Loan if the interests of
the Noteholders or the Certificateholders
therein are materially adversely affected by a
breach of any representation, warranty or
covenant (including the applicable Servicer's
covenant to service all the applicable Financed
Student Loans in accordance with, and to
otherwise comply with, applicable laws,
restrictions and guidelines) made by the Seller
or a Servicer, as the case may be, with respect
to the Financed Student Loan, if the breach has
not been cured following the discovery by or
notice to the Seller or a Servicer, as the case
may be, of the breach (it being understood that
any such breach that does not affect any
Guarantor's obligation to guarantee or insure
payment of such Financed Student Loan will not
be considered to have a material adverse effect
for this purpose). In addition, the Seller or
the applicable Servicer, as the case may be,
will be obligated to reimburse the Trust with
respect to a Financed Federal Loan for any
accrued interest amounts not guaranteed by a
Federal Guarantor due to, or any lost Interest
Subsidy Payments or Special Allowance Payments
as a result of, a breach of the Seller's
representations and warranties or the
Servicer's covenants, as the case may be, with
respect to such Financed Federal Loan.
The Servicers will receive, subject to the
limitations set forth in the following
paragraph, a monthly fee (the "Servicing Fee")
payable on each Monthly Servicing Payment Date.
The Servicing Fee will be payable from
distributions and from amounts on deposit in
the Reserve Account commencing March 1, 1999.
The Servicing Fee shall be equal to the sum of
(i) the Servicing Fee Percentage (as defined
below) of the outstanding principal balance of
Financed Student Loans each Servicer is
servicing as of the last day of the calendar
month immediately preceding the applicable
Monthly Servicing Payment Date, and (ii) 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. The "Servicing Fee Percentage" means,
with respect to each Servicer, the per annum
percentage specified in a fee schedule for such
Servicer delivered to the Eligible Lender
Trustee on the Closing Date.
Notwithstanding the foregoing, in the event
that the aggregate fees payable to the
Servicers from distributions as described above
for any Monthly Servicing Payment Date would
exceed 0.50% per annum of the Pool Balance as
of the last day of the calendar month
immediately preceding the applicable Monthly
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<PAGE> 18
Servicing Payment Date (other than any
deconversion fees), (the "Capped Amount"), then
the "Servicing Fee" with respect to such
Monthly Servicing Payment Date will instead be
the Capped Amount for such date. The remaining
amount in excess of such Servicing Fee,
together with any such excess amounts from
prior Monthly Servicing Payment Dates that
remain unpaid (the "Excess Servicing Fee"),
will be payable to the Servicers on each
succeeding Distribution Date out of funds
available therefor after payment on such
Distribution Date of the Servicing Fee, the
Administration Fee, amounts payable in respect
of the Notes and the Certificates (other than
the Noteholders' Interest Index Carryover and
the Certificateholders' Interest Index
Carryover) and the amount, if any, necessary to
be deposited in the Reserve Account to
reinstate the balance thereof to the Specified
Reserve Account Balance.
Pursuant to the Sale and Servicing Agreement
and the Administration Agreement, the
Administrator will agree with the Trust to be
responsible for, among other things, preparing
and filing with the Department all appropriate
claim forms and other documents and filings on
behalf of the Eligible Lender Trustee in order
to claim the Interest Subsidy Payments and
Special Allowance Payments from the Department
in respect of the Financed Federal Loans
entitled thereto and preparing and providing
monthly, quarterly and annual statements to the
Eligible Lender Trustee and the Indenture
Trustee with respect to distributions to
Noteholders and Certificateholders.
Auction of Trust Assets....... Any Financed Student Loans remaining in the
Trust as of the end of the Collection Period
immediately preceding the March 2009
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 all, but not less than all of such
Financed Student Loans on such Distribution
Date. If at least two bids are received, the
Indenture Trustee will solicit and resolicit
new bids from all participating bidders until
only one bid remains or the remaining bidders
decline to resubmit bids. The Indenture Trustee
will accept the highest of such remaining bids
if it is equal to or in excess of an amount
(the "Minimum Purchase Amount") equal to the
greatest of (i) the Auction Purchase Amount,
(ii) the fair market value of such Financed
Student Loans as of the end of the Collection
Period immediately preceding such Distribution
Date and (iii) the aggregate unpaid principal
amount of the Notes and principal balance of
the Certificates in each case plus accrued and
unpaid interest thereon payable on such
Distribution Date (other than any Noteholders'
Interest Index Carryover and
Certificateholders' Interest Index Carryover).
If at least two bids are not received or the
highest bid after the resolicitation process is
completed is not equal to or in excess of the
Minimum Purchase Amount, the Indenture Trustee
will not consummate such sale. The net proceeds
of any such sale will be used to redeem any
outstand-
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<PAGE> 19
ing Notes and to retire any outstanding
Certificates on such Distribution Date.
If the sale is not consummated in accordance
with the procedures described above, the
Indenture Trustee may, but shall not be under
any obligation to, solicit bids for sale of the
Financed Student Loans on future Distribution
Dates upon terms similar to those described
above. In the event the Financed Student Loans
are not sold in accordance with the foregoing,
the Specified Collateral Balance shall be
reduced to zero and all amounts on deposit in
the Collection Account (after payment of the
Servicing Fee, Administration Fee, and interest
on the Notes and Certificates) on each
subsequent Distribution Date will be paid as
principal to the Noteholders and then the
Certificateholders until the outstanding
principal balance of the Notes and Certificates
has been reduced to zero. 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 March 2009 Distribution Date or any
subsequent Distribution Date.
"Auction Purchase Amount" with respect to the
Financed Student Loans means the aggregate
unpaid principal balance owed by the applicable
borrowers thereon plus accrued interest thereon
to the date of purchase less the amount on
deposit in the Reserve Account as of such date.
See "Description of the Transfer and Servicing
Agreements -- Termination."
Optional Purchase............. The Seller may repurchase all remaining
Financed Student Loans, and thus effect the
early retirement of the Certificates, on any
Distribution Date on or after which the Pool
Balance is equal to 5% or less of the Initial
Pool Balance. See "Description of the Transfer
and Servicing Agreements -- Termination."
Tax Considerations............ Upon issuance of the Notes and Certificates,
Thompson Hine & Flory LLP, as federal tax
counsel to the Trust ("Federal Tax Counsel")
will deliver an opinion to the effect that, (i)
the Notes will be characterized as debt for
federal income tax purposes, although there is
no specific authority with respect to the
characterization for federal income tax
purposes of securities having the same terms as
the Notes and, (ii) for federal income tax
purposes, the Trust will not be characterized
as an association (or publicly traded
partnership) taxable as a corporation. Each
Noteholder, by acceptance of a beneficial
interest in a Note, will agree to treat such
Note as indebtedness, and each
Certificateholder, by acceptance of a
beneficial interest in a Certificate, will
agree to treat the Trust as a partnership in
which they are partners.
Upon issuance of the Notes and Certificates,
Kirkpatrick & Lockhart LLP, as Pennsylvania tax
counsel to the Trust ("Pennsylvania Tax
Counsel"), will deliver an 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.
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<PAGE> 20
See "Income Tax Consequences" for additional
information concerning the application of
federal and Pennsylvania state tax laws.
ERISA Considerations.......... Subject to the considerations discussed under
"ERISA Considerations," the Notes may be
acquired by employee benefit plans or other
retirement arrangements.
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. See "ERISA
Considerations."
Rating of the Securities...... It is a condition to the issuance and sale of
the Notes and the Certificates that each class
of Notes be rated in the highest investment
rating category and that the Certificates be
rated in one of the four highest investment
rating categories by at least two nationally
recognized rating agencies. The ratings of the
Notes do not address the likelihood of the
payment of any Noteholders' Interest Index
Carryover and the ratings of the Certificates
do not address the likelihood of the payment of
any Certificateholders' Interest Index
Carryover. A rating is not a recommendation to
buy, sell or hold securities and may be subject
to revision or withdrawal at any time by the
assigning rating agency.
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<PAGE> 21
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information contained in this Prospectus before purchasing the
Securities offered hereby.
Limited Assets of Trust. The Trust does not have, nor is it permitted or
expected to have, any significant assets or sources of funds other than the
Financed Student Loans (and the related Guarantee Agreements and other relevant
rights under certain collateral agreements with respect to the Financed Private
Loans to the extent assigned to the Trust by the Seller ("Assigned Rights")),
the Collection Account, the Pre-Funding Account, the Escrow Account and the
Reserve Account. Each Class of Notes represents obligations solely of the Trust,
and the Certificates represent interests solely in the Trust and its assets, and
neither the Notes nor the Certificates will be insured or guaranteed by the
Seller, the Servicers, the Guarantors, the Eligible Lender Trustee or the
Department. Holders of the Notes and the Certificates must rely on payments with
respect to the Financed Student Loans and, if and to the extent available under
the circumstances described herein, amounts on deposit in the Pre-Funding
Account, the Escrow Account and the Reserve Account. The Pre-Funding Account
will only be available during the Funding Period to cover (i) obligations of the
Trust relating to Additional Fundings and (ii) shortfalls in respect of the
payment of interest on the Notes and Certificates (other than the Noteholders'
Interest Index Carryover and the Certificateholders' Interest Index Carryover)
and certain administrative and servicing fees of the Trust to the extent that
the Reserve Account has been reduced to zero. The Escrow Account will also be
available to cover obligations of the Trust relating to purchases of
Consolidation Loans. Except as described above, neither the Pre-Funding Account
nor the Escrow Account are intended to cover losses on the Financed Student
Loans. Similarly, amounts to be deposited in the Reserve Account are limited in
amount and will be reduced, subject to a specified minimum, as the Pool Balance
is reduced. In addition, funds in the Reserve Account will first be made
available to cover shortfalls in distributions of interest and principal on the
Notes. Amounts on deposit in the Reserve Account or the Pre-Funding Account will
not be available to cover shortfalls in payment of interest on the Certificates
if after giving effect to withdrawals from the Reserve Account and the
Pre-Funding Account, respectively, the Note Collateralization Amount for the
Notes is less than the aggregate principal balance of the Notes. If the Reserve
Account and the Pre-Funding Account are exhausted, holders of the Securities
will depend solely on payments with respect to the Financed Student Loans. See
"Description of the Transfer and Servicing Agreements -- Distributions" and
"-- Credit Enhancement."
Principal Balance of Securities Exceeds the Sum of the Aggregate Principal
Balance of Initial Financed Student Loans and Pre-Funded Amount. On the Closing
Date, the sum of the aggregate initial principal balances of the Class A-1 Notes
and Class A-2 Notes and the Certificate Balance is 103.48% of the sum of the
aggregate principal balance of the Initial Financed Student Loans as of the
Statistical Cutoff Date, the Pre-Funded Amount as of the Closing Date and the
amounts on deposit in the Collection Account on the Closing Date. Each Initial
Financed Student Loan will be purchased by the Trust for an amount equal to
102.85% of the principal balance thereof (including any accrued interest thereon
expected to be capitalized upon repayment) as of the Statistical Cutoff Date. In
addition, each Subsequent Pool Student Loan will be purchased by the Trust for
an amount equal to 102.85% of the principal balance thereof (including any
accrued interest thereon expected to be capitalized upon repayment) as of the
related Subsequent Cutoff Date. Because Other Subsequent Student Loans and Other
Student Loans are purchased for an amount equal to 100.00% of the principal
balance thereof (including any accrued interest thereon expected to be
capitalized upon repayment) as of the related Subsequent Cutoff Date, the
purchase of Other Subsequent Student Loans and Other Student Loans should not
increase the amount by which the principal balance of Securities exceeds the sum
of the Pool Balance and the Pre-Funded Amount. However, because the actual rate
and timing of and any accelerated payments of principal will depend on a number
of factors, including the rate and timing of the principal payments on the
Financed Student Loans, there can be no assurance of the actual rate or timing
of such accelerated payments of principal or when the aggregate principal amount
of the Notes and principal balance of the Certificates will be equal to or less
than the sum of the Pool Balance, the Pre-Funded Amount and the amounts on
deposit in the Reserve Account. Also because 14.60% of the Initial
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Financed Student Loans and 1.06% 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, the actual rate or timing of such
accelerated payments may be reduced. As a result, if, (i) an Event of Default
should occur under the Indenture or an Insolvency Event should occur or (ii) the
Financed Student Loans were liquidated at a time when the outstanding principal
amount of the Securities exceeded the sum of the Pool Balance, the Pre-Funded
Amount and the amounts on deposit in the Reserve Account, such Financed Student
Loans would likely have to be liquidated at a premium for holders of
Certificates and, in some circumstances, holders of Notes, not to suffer a loss.
Subordination of Certificates to 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 (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 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 Certificates
will not be entitled to any payments of principal until the Notes are paid in
full. In addition, if (i) an Event of Default occurs and is continuing under the
Indenture or (ii) an 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.
Notwithstanding the foregoing, distributions to Certificateholders of the amount
of interest (other than any Certificateholders' Interest Index Carryover) and
principal payable thereon on any Distribution Date will not be subordinated to
the payment of any Noteholders' Interest Index Carryover that may exist from
time to time. The Certificateholders bear directly the credit and other risks
associated with an undivided interest in the Trust. See "Description of the
Securities -- The Certificates -- Subordination of the Certificates,"
"Description of the Transfer and Servicing Agreements -- Distributions" and
"--Credit Enhancement -- Subordination of the Certificates."
Borrower Default Risk on Certain Federal Loans. Under the Omnibus Budget
Reconciliation Act of 1993, Financed Federal Loans first disbursed on or after
October 1, 1993, are 98% insured by Federal Guarantors. As a result, to the
extent a borrower of such a Financed Federal Loan defaults, the Trust will
experience a loss of 2%, of outstanding principal and accrued interest on each
such defaulted Financed Federal Loan. A defaulted loan will be fully assigned to
the applicable Federal Guarantor in exchange for a guarantee payment on the
guaranteed portion and the Trust may have no right thereafter to pursue the
borrower for the unguaranteed portion. Financed Federal Loans continue to be
100% guaranteed in the event of death, disability or bankruptcy of the borrower
regardless of disbursement date. Approximately 99.35% of the Initial Financed
Student Loans and approximately 98.32% of the Subsequent Pool Student Loans
consist of Financed Federal Loans first disbursed on or after October 1, 1993.
Dependence on Guarantors as Security for Financed Student Loans. All of
the Financed Student Loans will be unsecured. As a result, the only security for
payment of the Financed Student Loans are the guarantees provided under the
Guarantee Agreements between the Eligible Lender Trustee and the Guarantors. A
deterioration in the financial status of the Guarantors and their ability to
honor guarantee claims with respect to the Financed Student Loans could result
in a delay in making or a failure to make Guarantee Payments to the Eligible
Lender Trustee. Failures by borrowers of Student Loans generally to pay timely
the principal and interest due on such Student Loans could obligate the
Guarantors to make payments thereon, which could adversely affect the solvency
of the Guarantors and their ability to meet their guarantee obligations
(including with respect to the Financed Student Loans). Moreover, to the extent
that the Department pays reimbursement claims submitted by a Federal Guarantor
in respect of
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defaulting Student Loans for any fiscal year exceeding certain specified levels,
the Department's obligation to reimburse the Federal Guarantor for losses will
be reduced on a sliding scale from 100% (98% for loans made on or after October
1, 1993 but before October 1, 1998, and 95% for loans made on or after October
1, 1998) to a minimum, depending on the guarantors default rate, of 80% (78% for
loans made on or after October 1, 1993 but before October 1, 1998, and 75% for
loans made on or after October 1, 1998).
Pursuant to the Higher Education Amendments of 1992 (the "1992
Amendments"), under Section 432(o) of the Higher Education Act, if the
Department has determined that a federal guarantor is unable to meet its
insurance obligations, the loan holder may submit claims directly to the
Department and the Department is required to pay the full Guarantee Payment due
with respect thereto in accordance with guarantee claim processing standards no
more stringent than those applied by such guarantor. However, the Department's
obligation to pay guarantee claims directly in this fashion is contingent upon
the Department making the determination referred to above. There can be no
assurance that the Department would ever make such a determination with respect
to a Federal Guarantor or, if such a determination was made, whether such
determination or the ultimate payment of such guarantee claims would be made in
a timely manner.
TERI and HICA, the Private Guarantors, are not entitled to any federal
reinsurance or assistance from the Department. Although each of TERI and HICA
maintains loan loss reserves intended to absorb losses arising from guarantee
commitments, there can be no assurance that the amount of such reserves will be
sufficient to cover the obligations of TERI and HICA, respectively, over the
term of the Financed Private Loans. There can be no assurance that TERI, HICA or
any other Guarantor will have the financial resources to make all
guarantee/insurance payments related to the Financed Private Loans that may
arise from time to time. The inability of any Guarantor to meet its
guarantee/insurance obligations could reduce the amount of principal and
interest paid to the holders of the Securities. Although approximately 37.15% of
the Initial Pool Balance consists of Financed Private Loans guaranteed by TERI,
the aggregate amount of all guarantee payments made by TERI with respect to any
Financed Private Loans, which may be available for distributions with respect to
the Securities shall be no greater than the Maximum TERI Payments Amount. See
"The Financed Student Loan Pool -- Insurance of Student Loans; Guarantors of
Student Loans" and "Description of the Transfer and Servicing Agreements."
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.
The failure of TERI (subject to the Maximum TERI Payments Amount) or HICA
to make any Guarantee Payment may extend the weighted average life of one or
more classes of the Securities.
"Maximum TERI Payments Amount" means 19% of the Initial Pool Balance.
Risk of Loss of Federal Guarantor and Department Payments for Failure to
Comply with Loan Origination and Servicing Procedures for Federal Loans. The
Higher Education Act, including the implementing regulations thereunder,
requires lenders and their assignees making and servicing Student Loans that are
reinsured by the Department ("Federal Loans") and guarantors guaranteeing
Federal Loans to follow specified procedures, including due diligence
procedures, to ensure that the Federal Loans are properly made and disbursed to,
and repaid on a timely basis by or on behalf of, borrowers. Certain of those
procedures, which are specifically set forth in the Higher Education Act, are
summarized herein. See "The Student Loan Financing Business" and "Description of
the Transfer and Servicing Agreements -- Servicing Procedures." The Servicers
have agreed pursuant to the Sale and Servicing Agreement to perform servicing
and collection procedures on behalf of the Trust in accordance with the Higher
Education Act and the rules and regulations promulgated thereunder. However,
failure to follow these procedures or failure of the Seller to follow procedures
relating to the origination of any Financed Federal Loans may result in the
Department's refusal to make reinsurance payments to the Federal Guarantors or
to make Interest Subsidy Payments and Special Allowance Payments to the Eligible
Lender
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Trustee with respect to such Financed Federal Loans or in the Federal
Guarantors' refusal to honor their agreements with the Eligible Lender Trustee
to, inter alia, guarantee the payment of such Financed Federal Loans (each such
agreement, a "Guarantee Agreement"). Failure of the Federal Guarantors to
receive reinsurance payments from the Department could adversely affect the
Federal Guarantors' ability or legal obligation to make payments under the
Guarantee Agreements ("Guarantee Payments") to the Trust. Loss of any such
Guarantee Payments, Interest Subsidy Payments or Special Allowance Payments
could adversely affect the amount of Available Funds for any Collection Period
and the Trust's ability to pay timely interest and principal on any Distribution
Date, and principal on such Securities on the related Final Maturity Dates.
Under certain circumstances, pursuant to the Sale and Servicing Agreement,
the Seller is obligated to repurchase, or the applicable Servicer is obligated
to purchase, any Financed Federal Loan, if a breach of the representations,
warranties or covenants of the Seller or the applicable Servicer, as the case
may be, with respect to such Financed Federal Loan has a material adverse effect
on the interests of the Noteholders or the Certificateholders therein and such
breach is not cured within any applicable cure period (it being understood that
any such breach that does not affect any Federal Guarantor's obligation to
guarantee payment of such Financed Federal Loans will not be considered to have
such a material adverse effect). In addition, under certain circumstances
pursuant to the Sale and Servicing Agreement, the Seller or the applicable
Servicer, as the case may be, is obligated to reimburse the Trust with respect
to a Financed Federal Loan for any accrued interest amounts not guaranteed by a
Federal Guarantor due to, or any lost Interest Subsidy Payments and Special
Allowance Payments as a result of, a breach of the Seller's representations and
warranties or the applicable Servicer's covenants, as the case may be, with
respect to such Financed Federal Loan. See "Description of the Transfer and
Servicing Agreements -- Sale of Financed Student Loans; Representations and
Warranties" and "-- Servicer Covenants." There can be no assurance, however,
that the Seller or the applicable Servicer will have the financial resources to
do so. The failure of the Seller to so repurchase or the applicable Servicer to
so purchase a Financed Federal Loan would constitute a breach of the Sale and
Servicing Agreement, enforceable by the Eligible Lender Trustee on behalf of the
Trust or by the Indenture Trustee on behalf of the Noteholders, but would not
constitute an Event of Default under the Indenture or permit the exercise of
remedies thereunder.
Risk of Loss of Private Guarantor Payments for Failure to Comply with Loan
Origination and Servicing Procedures for Private Loans. There are certain rules
and procedures applicable to originating and servicing Student Loans not
reinsured by the Department or any other governmental agencies ("Private
Loans"), which are analogous to those of Federal Loans. Failure to make or
service properly a Financed Private Loan in accordance with those procedures
could adversely affect the Eligible Lender Trustee's ability to obtain guarantee
payments from TERI (subject to the Maximum TERI Payments Amount) or insurance
payments from HICA. Loss of such guarantee/insurance payments could adversely
affect the Trust's ability to pay principal and interest on the Securities. As
described above for Financed Federal Loans, under certain circumstances pursuant
to the Sale and Servicing Agreement, the Seller is obligated to repurchase, or
the applicable Servicer is obligated to purchase, a Financed Private Loan. See
"Description of the Transfer and Servicing Agreements -- Sale of Financed
Student Loans; Representations and Warranties" and "-- Servicer Covenants."
There can be no assurance, however, that the Seller or the applicable Servicer
will have the financial resources to do so.
Changes in Legislation May Adversely Affect Financed Student Loans and
Guarantors. There can be no assurance that the Higher Education Act or other
relevant federal or state laws, rules and regulations and the programs
implemented thereunder will not be amended or modified in the future in a manner
that will adversely impact the programs described in this Prospectus and the
Student Loans made thereunder, including the Financed Student Loans, or the
Guarantors. Such changes could result in a reduction of the Federal Guarantors'
ability to make Guarantee Payments to the Eligible Lender Trustee with respect
to the Financed Federal Loans which in turn could result in a reduction in the
Trust's ability to pay principal and interest on the Notes. In addition,
existing legislation and future measures to reduce the federal budget deficit or
for other purposes may adversely affect the amount and nature of federal
financial assistance available with respect to these programs. In recent years,
federal legislation has
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provided for the recovery of certain funds held by guarantee agencies in order
to achieve reductions in federal spending. There can be no assurance, however,
that future federal legislation or administrative actions will not adversely
affect expenditures by the Department or the financial condition of the Federal
Guarantors.
Under the Omnibus Budget Reconciliation Act of 1993, Congress made a number
of changes that may adversely affect the financial condition of the Federal
Guarantors, as such changes reduce certain financial benefits previously enjoyed
by Federal Guarantors and give the Department broad powers over Federal
Guarantors and their reserves. See "The Student Loan Financing
Business -- Federal Loans Under the Programs" for a more detailed description of
the impact of such legislation on Federal Guarantors. The changes create a
significant risk that the resources available to the Federal Guarantors to meet
their guarantee obligations will be significantly reduced. In addition, this
legislation sought to greatly expand the loan volume under the direct lending
program of the Department (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 under the
direct lending program. The expansion of this program in the future could result
in increasing reductions in the volume of loans made under the Stafford Loan
Program, and the Federal Consolidation Loan Program (such programs being
collectively referred to herein as the "Federal Programs"). Under the Federal
Direct Student Loan Program, the Department directly originates and holds
student loans without the involvement of private lenders. If the Federal 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 reductions
or effects could occur as a result of reductions in the volume of new loans made
under the Federal Programs or the consolidation of existing loans under the
Federal Direct Student Loan Program. Such cost increases could affect the
ability of the Servicers to satisfy their obligations to service the Financed
Student Loans or to purchase Financed Student Loans in the event of certain
breaches of its covenants. See "Description of the Transfer and Servicing
Agreements -- Servicer Covenants." Such volume reductions could further reduce
revenues received by the Federal Guarantors available to pay claims on defaulted
Financed Federal Loans. Finally, the level of competition currently in existence
in the secondary market for loans made under the Federal Programs could be
reduced, resulting in fewer potential buyers of the Financed Federal Loans and
lower prices available in the secondary market for those loans.
Fees Payable on Certain Financed Federal Loans. The Trust will be
obligated to pay to the Department a monthly rebate fee (the "Monthly Rebate
Fee") at an annualized rate of 1.05% (.62% for applications received between
October 1, 1998 and January 31, 1999) of the outstanding principal balance on
the last day of each month plus accrued interest thereon of each Federal
Consolidation Loan which is a part of the Trust, which rebate will be payable
prior to distributions to the Securityholders and which rebate will reduce the
amount of funds which would otherwise be available to make distributions on the
Securities and will reduce the Student Loan Rate. In addition, the Trust must
pay to the Department a 0.50% origination fee (the "Federal Origination Fee") on
the initial principal balance of each Financed Student Loan which is originated
on its behalf by the Eligible Lender Trustee (i.e., each Other Subsequent
Student Loan and Other Student Loan which is a Federal Consolidation Loan),
which fee will be deducted by the Department out of Interest Subsidy Payments
and Special Allowance Payments. If the amount of Interest Subsidy Payments and
Special Allowance Payments due to the Trust are not sufficient 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 or may be required to be
paid immediately. If such amounts never accrue, the Trust would be obligated to
pay any remaining fee from other assets of the Trust prior to making
distributions to the Securityholders. The offset of Interest Subsidy Payments
and Special Allowance Payments, and the payment of any remaining fee from other
Trust assets will further reduce the amount of the Available Funds from which
payments to the Securityholders may be made. Furthermore, any offset of Interest
Subsidy Payments and Special Allowance Payments will further reduce the Student
Loan Rate.
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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.
Recent Developments -- 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).
Recent Developments -- 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 (the "1998 Amendments") that revised
interest rate changes under the FFELP that were scheduled to become effective on
July 1, 1998. For loans made during the period July 1, 1998 through September
30, 1998, the borrower interest rate for Stafford Loans and Unsubsidized
Stafford Loans is reduced to a rate of 91-day Treasury Bill Rate plus 2.30%
(1.70% during school, grace and deferment), subject to a maximum rate of 8.25%.
As described below, The formula for Special Allowance Payments on Stafford Loans
and Unsubsidized Stafford Loans is calculated to produce a yield to the loan
holder of 91-day Treasury Bill Rate plus 2.80% (2.20% during school, grace and
deferment).
Recent Developments--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 the FFELP.
The major provisions of the 1998 Reauthorization Bill include the following:
- All references to a "transition" to full implementation of the
Federal Direct Student Loan Program were deleted from the FFELP
statute.
- Guarantor reserve funds were restructured so that federal guarantors
are provided with additional flexibility in choosing how to spend
certain funds they receive.
- Additional recall of reserve funds by the Secretary of Education
(the "Secretary") was mandated, amounting to $85 million in fiscal
year 2002, $82.5 million in fiscal year 2006, and $82.5 million in
fiscal year 2007. However, certain minimum reserve levels are
protected from recall.
- The administrative cost allowance was replaced by two (2) new
payments, a Student Loan processing and issuance fee equal to 65
basis points (40 basis points for loans made on or after October 1,
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.
- 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
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complement of the reinsurance percentage applicable at the time a
claim was paid to the lender on the Student Loan.
- Federal reinsurance provided to federal guarantors is reduced from
98% to 95% for Student Loans first disbursed on or after October 1,
1998.
- The delinquency period required for a loan to be declared in default
is increased from 180 days to 270 days for loans on which the first
day of delinquency occurs on or after the date of enactment of the
1998 Reauthorization Bill.
- Interest rates charged to borrowers on Stafford Loans, and the yield
for Stafford Loan holders established by the 1998 Amendments, were
made permanent.
- Federal Consolidation Loan interest rates were revised to equal the
weighted average of the loans consolidated rounded up to the nearest
one-eighth of 1%, capped at 8.25%. When the 91-day Treasury Bill
Rate plus 3.1% exceeds the borrower's interest rate, Special
Allowance Payments are made to make up the difference.
- The lender-paid offset fee on Federal Consolidation Loans of 1.05%
is reduced to .62% for Loans made pursuant to applications received
on or after October 1, 1998 and on or before January 31, 1999.
- The Federal Consolidation Loan interest rate calculation was revised
to reflect the rate for Federal Consolidation Loans, and will be
effective for loans on which applications are received on or after
February 1, 1999.
- Lenders are required to offer extended repayment schedules to new
borrowers after the enactment of the 1998 Reauthorization Bill who
accumulate after such date outstanding loans under FFELP totaling
more than $30,000, under these extended schedules the repayment
period may extend up to 25 years subject to certain minimum
repayment amounts.
- The Secretary is authorized to enter into six (6) voluntary flexible
agreements with federal guarantors under which various statutory and
regulatory provisions can be waived.
- Federal Consolidation Loan lending restrictions are revised to allow
lenders who do not hold one of the borrower's Underlying Federal
Loans to issue a Federal Consolidation Loan to a borrower whose
Underlying Federal Loans are held by multiple holders.
- Inducement restrictions were revised to permit federal guarantors
and lenders to provide assistance to schools comparable to that
provided to schools by the Secretary under the Federal Direct
Student Loan Program.
- The Secretary is now required to pay off Student Loan amounts owed
by borrowers due to failure of the borrower's school to make a
tuition refund allocable to the Student Loan.
- Discharge of FFELP and certain other Student Loans in bankruptcy is
now limited to cases of undue hardship regardless of whether the
Student Loan has been due for more than seven (7) years prior to the
bankruptcy filing.
All of the Federal Guarantors will be subject to the new recall of reserves
and reduced reinsurance provisions for federal guarantors. The new recall of
reserves and reduced reinsurance for federal guarantors increases the risk that
resources available to the Federal Guarantors to meet their guarantee
obligations will be significantly reduced.
Consolidation of Federal Benefit Billings and Receipts with Other
Trusts. Due to a Department policy limiting the granting of new lender
identification numbers, the Eligible Lender Trustee is allowed under the Trust
Agreement to permit the Trust, and other trusts established by the Seller to
securitize Student Loans, to use a common Department lender identification
number. The billings submitted to the Department for Interest Subsidy Payments
and Special Allowance Payments on the Financed Student Loans will be
consolidated with the billings for such payments for Student Loans in such other
trusts
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using the same lender identification number and payments on such billings will
be made by the Department in lump sum form. Such lump sum payments will then be
allocated among the various trusts using the lender identification number.
In addition, the sharing of the lender identification number by the Trust
with other trusts may result in the receipt of claim payments by federal
guarantors in lump sum form. In that event, such payments would be allocated
among the trusts in a manner similar to the allocation process for Interest
Subsidy Payments and Special Allowance Payments.
The Department regards the Eligible Lender Trustee as the party primarily
responsible to the Department for any liabilities owed to the Department or
federal guarantors resulting from the Eligible Lender Trustee's activities in
the FFELP. As a result, if the Department or a federal guarantor were to
determine that the Eligible Lender Trustee owes a liability to the Department or
a federal guarantor on any Student Loan for which the Eligible Lender Trustee is
or was legal titleholder, including loans held in the Trust or other trusts, the
Department or such federal guarantor may seek to collect that liability by
offset against payments due the Eligible Lender Trustee under the Trust. In the
event that the Department or a federal guarantor determines such a liability
exists in connection with a trust using the shared lender identification number,
the Department or such federal guarantor would be likely to collect that
liability by offset against amounts due the Eligible Lender Trustee under the
shared lender identification number, including amounts owed in connection with
the Trust.
In addition, other trusts using the shared lender identification number may
in a given quarter incur Federal Origination Fees that exceed the Interest
Subsidy Payments and Special Allowance Payments payable by the Department on the
loans in such other trusts, resulting in the consolidated payment from the
Department received by the Eligible Lender Trustee under such lender
identification number for that quarter being less than the amount owed by the
Department on the loans in the Trust for that quarter.
The Trust Agreement for the Trust and the trust agreements for other trusts
established by the Seller which share the lender identification number to be
used by the Trust (the Trust and such other trusts, collectively, the "Seller
Trusts") will require each Seller Trust (including the Trust) to indemnify the
other Seller Trusts for a shortfall or an offset by the Department or a federal
guarantor arising from the Financed Federal Loans held by the Eligible Lender
Trustee on such Seller Trust's behalf.
Risks Associated with Year 2000 Compliance. The Servicers, the Guarantors,
the Seller, the Administrator, the Eligible Lender Trustee and the Indenture
Trustee utilize a significant number of computer software programs and operating
systems and are highly dependent on computer systems operated by third parties
which include, but are not limited to, their suppliers, customers, brokers and
agents and the telephone, electric and utility companies. To the extent that any
computer system relied upon by the Servicers, the Guarantors, the Seller, the
Administrator, the Eligible Lender Trustee and the Indenture Trustee or any
third party, has software applications and contains source codes that are unable
to appropriately interpret the upcoming calendar year 2000, some level of
modification or replacement of such applications or hardware may be necessary.
The year 2000 issue is the result of prior computer programs being written using
two digits, rather than four digits, to define the applicable year. Any of the
Servicers', the Guarantors', the Seller's, the Administrator's, the Eligible
Lender Trustee's and the Indenture Trustee's computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. Any such occurrence could result in a major computer system
failure or miscalculations. Several federal regulatory agencies, including the
Commission, require the entities that they regulate to take steps to address
problems which may arise in relation to the year 2000.
The Servicers, the Guarantors, the Seller, the Administrator, the Eligible
Lender Trustee and the Indenture Trustee currently are assessing the impact of
modifications or replacements required to adjust for the year 2000. The
Servicers, the Guarantors, the Seller, the Administrator, the Eligible Lender
Trustee and the Indenture Trustee are utilizing both internal and external
resources to identify, correct or reprogram, and test their systems for year
2000 compliance. It is anticipated that all reprogramming efforts and necessary
testing will be completed prior to the year 2000. The Servicers, the Guarantors,
the
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Seller, the Administrator, the Eligible Lender Trustee and the Indenture Trustee
have initiated formal communications with those third parties on whom they will
rely to determine the extent to which the Servicers, the Guarantors, the Seller,
the Administrator, the Eligible Lender Trustee and the Indenture Trustee are
vulnerable to the failure of these third parties to remediate their own year
2000 issue. However, there can be no assurance that the systems of third parties
on which the systems of the Servicers, the Guarantors, the Seller, the
Administrator, the Eligible Lender Trustee and the Indenture Trustee rely will
be converted in a timely fashion, or that a failure to convert by a third party,
or a conversion that is incompatible with the systems of the Servicers, the
Guarantors, the Seller, the Administrator, the Eligible Lender Trustee and the
Indenture Trustee would not have an adverse effect on the business, financial
condition or results of operations of the Servicers, the Guarantors, the Seller,
the Administrator, the Eligible Lender Trustee and the Indenture Trustee,
respectively. The total year 2000 project cost and estimates for the Servicers,
the Guarantors, the Seller, the Administrator, the Eligible Lender Trustee and
the Indenture Trustee include the estimated costs and time associated with the
impact of the third parties' year 2000 issue, and are based on presently
available information. The costs allocated to the year 2000 project are
significant. The costs of the project and the dates on which the Servicers, the
Guarantors, the Seller, the Administrator, the Eligible Lender Trustee and the
Indenture Trustee plan to complete their year 2000 modifications are based on
their best estimates, which were derived utilizing numerous assumptions of
future events including the continued availability of certain resources, third
party modifications plans and other factors. However, there can be no assurance
that these estimates will be achieved and actual results could differ materially
from such estimates. Specific factors that might cause such material differences
include, but are not limited to: (i) the availability and cost of personnel
trained in this area, (ii) the ability to locate and correct all relevant
computer codes and (iii) similar uncertainties.
No assurance can be given that any or all of the systems discussed above,
including the systems of the Servicers, the Guarantors, the Seller, the
Administrator, the Eligible Lender Trustee and the Indenture Trustee, are or
will be year 2000 compliant or that the costs required to address year 2000
issues will not adversely affect the business, financial condition or results of
operations of the respective party or the performance of their obligations under
the Sale and Servicing Agreement. As a result of this potential effect on the
operations of the Servicers, the Guarantors, the Seller, the Administrator, the
Eligible Lender Trustee and the Indenture Trustee, the timely receipt of payment
by the Securityholders may also be adversely affected.
Year 2000 Compliance of the Department. The Department has undertaken a
year 2000 compliance project to address year 2000 issues. Information regarding
the Department's year 2000 efforts can be obtained at the Department's site on
the World Wide Web at http://www.ed.gov. Officials at the Department have made
statements to the public acknowledging that the Department has been placed on
the Office of Management and Budget's "watch list" for not meeting certain
milestones toward year 2000 compliance, but have further indicated that
compliance for the Department's mission-critical systems relating to FFELP are
on schedule for completion by the Office of Management and Budget's March 1999
deadline. Any failure by the Department to resolve any year 2000 issues or any
adverse effect on the Department caused by a party on which the Department
relies as a result of year 2000 issues may have a material adverse effect on
FFELP, the Federal Guarantors and the Securityholders.
Incentive programs. The Seller currently makes available and may hereafter
make available certain incentive programs to borrowers. The effect of these
incentive programs may be to reduce the yield on the Initial Financed Student
Loans or on Additional Student Loans which may be added to the Trust. If any
such incentive program reduces the yield on the affected Student Loan and, with
respect to Financed Federal Loans, is not required by the Higher Education Act,
such program will be applicable to Student Loans in the Trust only if and to the
extent that the Trust receives payment from the Seller in an amount sufficient
to offset such yield reduction.
Inability of Indenture Trustee to Liquidate Financed Student Loans. If an
Event of Default occurs under the Indenture, subject to certain conditions, the
Indenture Trustee is authorized to sell the Financed Student Loans (without the
consent of the Certificateholders). In that event, PHEAA, TERI and certain
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unrelated parties will be given the opportunity, upon 30 days' prior notice, to
bid to purchase the Financed Student Loans and, if any is the highest bidder,
the Financed Student Loans must be sold to that entity. There can be no
assurance, however, that the Indenture Trustee will be able to find a purchaser
for the Financed Student Loans in a timely manner or that PHEAA, TERI or any
other party will submit a bid therefor or that the market value of such Financed
Student Loans would, at any time, be equal to the aggregate outstanding
principal amount of the Securities and accrued interest thereon. In addition, in
the event of (i) any sale of the Financed Student Loans on behalf of the Trust
prior to the Certificate Final Maturity Date to any person (other than the
Seller, the Administrator or the Servicers) in which the purchaser elects to
deconvert the Financed Student Loans and not retain PHEAA or EFS, as applicable,
as Servicer or (ii) any termination by the Trust of PHEAA as Servicer of the
Financed Student Loans it services or EFS as Servicer of the Financed Student
Loans it services, except for any termination for cause or as a result of any
Servicer Default, the Trust shall pay to PHEAA and EFS, as the case may be as a
part of the Servicing Fee (not subject to the Capped Amount) the following
deconversion fee, per Financed Student Loan, based on the status of the Financed
Student 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 (each as described under
"The Student Loan Financing Business -- Federal Loans Under the Programs" and
"-- Private Loans Under the Programs"); and (b) $62.50 for each Financed Student
Loan of any other status or loan type. If the net proceeds of any such sale,
together with amounts then on deposit in the Reserve Account, do not exceed the
aggregate outstanding principal amount of the Securities and accrued interest
thereon, the Securityholders will suffer a loss. In such circumstances, the
Certificateholders would not be entitled to receive any portion of such
proceeds, however, the Certificateholders have certain consent rights relating
to any liquidation of the Financed Student Loans that would result in such
shortfall. In addition, the amount of principal required to be distributed to
Noteholders under the Indenture is generally limited to amounts available to be
so distributed. Therefore, the failure to pay principal on the Notes may not
result in the occurrence of an Event of Default until the Class A-1 Final
Maturity Date, in the case of the Class A-1 Notes and the Class A-2 Final
Maturity Date, in the case of the Class A-2 Notes. See "Description of the
Transfer and Servicing Agreements -- Credit Enhancement."
Failure to Comply with Third-Party Servicer Regulations May Adversely
Affect Loan Servicing. On November 29, 1994, the Secretary of the Department of
Education published final regulations amending the Student Assistance General
Provisions and Federal Family Education Loan Program ("FFELP") regulations.
These regulations, among other things, establish requirements governing
contracts between holders of Federal Loans and third-party servicers, establish
standards of administrative and financial responsibility for third-party
servicers that administer any aspect of a guarantee agency's or lender's
participation in the FFELP and establish sanctions for third-party servicers.
Under these regulations, a third-party servicer (such as the 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 for
liabilities arising out of its FFELP activities for the Trust or other client
lenders, or that its eligibility will not be limited, suspended, or terminated
in the future. If a Servicer were so fined or held liable, or its eligibility
were limited, suspended, or terminated, its ability to properly service the
Financed Federal Loans and to satisfy its obligation to purchase Financed
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, the Sale and Servicing
Agreement provides for the removal of the applicable Servicer and the
appointment of a Successor Servicer.
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Characteristics of the Financed Student Loans Will Vary. Certain
characteristics of the Financed Student Loans will vary from the characteristics
of the Initial Financed Student Loans and the Subsequent Pool Student Loans. The
distribution by weighted average interest rates may vary as a result of
variations in the effective rates of interest applicable to the Financed Student
Loans after each Additional Funding and the remaining term to maturity may vary
significantly from the actual term to maturity as a result of the granting of
deferral and forbearance periods.
Insolvency Risk of Seller. The Seller intends that the transfer of the
Financed Student Loans by it to the Eligible Lender Trustee on behalf of the
Trust under the Sale and Servicing Agreement constitutes a valid sale and
assignment of such Financed Student Loans. However, a court could treat the
transfer of the Financed Student Loans to the Eligible Lender Trustee as an
assignment of collateral as security for the benefit of the Noteholders and the
Certificateholders. If the transfer of the Financed Student Loans to the
Eligible Lender Trustee is deemed to create a security interest therein, a tax
or government lien on property of the Seller arising before the Financed Student
Loans came into existence may have priority over the Eligible Lender Trustee's
interest in such Financed Student Loans and, if the Federal Deposit Insurance
Corporation (the "FDIC") were appointed receiver or conservator of the Seller,
the FDIC's administrative expenses may also have priority over the Eligible
Lender Trustee's interest in such Financed Student Loans. In the event that the
Seller becomes insolvent, the Federal Deposit Insurance Act ("FDIA"), as amended
by the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), sets forth certain powers which the FDIC could exercise if it were
appointed as receiver or conservator of the Seller. Subject to clarification by
FDIC regulations or interpretations, it would appear from the positions taken by
the FDIC that the FDIC, in its capacity as a receiver or conservator for the
Seller, would not interfere with the timely transfer to the Trust of collections
with respect to the Financed Student Loans. To the extent that the transfer of
the Financed Student Loans is deemed to create a security interest, and that
interest was validly perfected before the Seller's insolvency and was not taken
in contemplation of insolvency or with the intent to hinder, delay or defraud
the Seller or its creditors, based upon opinions and statements of policy issued
by the general counsel of the FDIC addressing the enforceability against the
FDIC, as conservator or receiver for a depository institution, of a security
interest in collateral granted by such depository institution, such security
interest should not be subject to avoidance, and payments to the Trust with
respect to the Financed Student Loans should not be subject to recovery by the
FDIC as receiver or conservator of the Seller. If, however, the FDIC were to
assert a contrary position, certain provisions of the FDIA which, at the request
of the FDIC, have been applied in recent lawsuits to avoid security interests in
collateral granted by depository institutions, would permit the FDIC to avoid
such security interest, thereby resulting in possible delays and reductions in
payments on the Notes and the Certificates. In addition, if the FDIC were to
require the Indenture Trustee or the Eligible Lender Trustee to establish its
right to such payments by submitting to and completing the administrative claims
procedure under the FDIA, as amended by FIRREA, delays in payments on the Notes
and the Certificates and possible reductions in the amount of those payments
could occur. See "Certain Legal Aspects of the Financed Student Loans."
In addition, in the event of the occurrence of certain insolvency related
events with respect to the Seller, the Financed Student Loans may be required to
be sold. There can be no assurance, however, that the net sale proceeds will be
sufficient to repay the principal amount of the Notes and the Certificates in
full plus accrued interest thereon. See "Description of the Transfer and
Servicing Agreements -- Insolvency Event."
Custodial Risk of Servicer. Pursuant to the Sale and Servicing Agreement,
the applicable Servicer as custodian on behalf of the Trust, with respect to the
Financed Student Loans it services, will have custody of the promissory notes
evidencing the related Financed Student Loans following the sale of the Financed
Student Loans to the Eligible Lender Trustee. Although the accounts of the
Seller will be marked to indicate the sale and although the Seller will cause
UCC financing statements to be filed with the appropriate authorities, the
Financed Student Loans will not be physically segregated, stamped or otherwise
marked to indicate that such Financed Student Loans have been sold to the
Eligible Lender Trustee. If, through inadvertence or otherwise, any of the
Financed Student Loans were sold to another
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party, or a security interest therein were granted to another party that
purchased (or took such security interest in) any of such Financed Student Loans
in the ordinary course of its business and took possession of such Financed
Student Loans, then the purchaser (or secured party) would acquire an interest
in the Financed Student Loans superior to the interest of the Eligible Lender
Trustee, if the purchaser (or secured party) acquired such Financed Student
Loans without knowledge of the Eligible Lender Trustee's interest. See
"Description of the Transfer and Servicing Agreements -- Sale of Financed
Student Loans; Representations and Warranties" and "--Servicer Covenants."
Insolvency Risk of Servicer or Administrator. In the event of a Servicer
Default or an Administrator Default resulting solely from certain events of
insolvency or bankruptcy that may occur with respect to a Servicer or the
Administrator, a court, conservator, receiver or liquidator may have the power
to prevent either the Indenture Trustee or the Noteholders from appointing a
successor Servicer or Administrator, as the case may be, and delays in
collections in respect of the Financed Student Loans may occur. See "Description
of the Transfer and Servicing Agreements -- Rights Upon Servicer Default and
Administrator Default."
Prepayment Risk from Pre-Funded Amount. On the Closing Date, the Eligible
Lender Trustee on behalf of the Trust will own the $767,111,823.09 outstanding
principal balance of the Initial Financed Student Loans as of the Statistical
Cutoff Date and the $62,180,803.50 aggregate Pre-Funded Amount on deposit in the
Pre-Funding Account. If, as of the Special Determination Date, the Subsequent
Pool Pre-Funded Amount has not been reduced to zero, then the remaining
Subsequent Pool Pre-Funded Amount, if greater than $10,000,000, will be
distributed on the first Distribution Date 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 principal balance of the
Certificates; if such amount is $10,000,000 or less, it will be distributed on
the first Distribution Date only to holders of the Class A-1 Notes.
Although the Seller intends to sell all of the Financed Student Loans
constituting the Subsequent Pool to the Trust on or prior to the Special
Determination Date, because of the potential for a bankruptcy or death of a
borrower subsequent to the Statistical Cutoff Date and other administrative
reasons, the Seller may not be able to sell all such Financed Student Loans to
the Trust. Further, if the sum of (i) the principal amount of eligible Financed
Student Loans originated by the Seller during the Funding Period, net of the
principal amount of the Financed Student Loans sold to the Seller during the
Funding Period in connection with the Seller's making of Consolidation Loans,
and (ii) the amount of Guarantee Fee Advances during the Funding Period is less
than the difference between the initial Pre-Funded Amount and the initial
principal balance of the Subsequent Pool Student Loans as of the related
Subsequent Cutoff Date, the Trust will have insufficient opportunities to make
Additional Fundings, thereby resulting in a prepayment of principal to
Noteholders as described in the following paragraph.
To the extent that the Pre-Funded Amount has not been fully applied to
Additional Fundings by the Trust by the end of the Funding Period, such amount
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
on the Securities on such Distribution Date. It is anticipated that the amount
of Additional Fundings made by the Trust will not be exactly equal to the amount
on deposit in the Pre-Funding Account and that therefore there will be at least
a nominal amount of principal prepaid to the Noteholders. Any reinvestment risk
will be borne directly by the Noteholders. See also "The Financed Student Loan
Pool -- Maturity and Prepayment Assumptions" regarding the risk to Noteholders
and Certificateholders of prepayment in the event that Consolidation Loans are
made with respect to the Financed Student Loans by the Seller after the Funding
Period or by another lender at any time.
Prepayment, Maturity and Yield Risks. All the Financed Student Loans are
prepayable at any time. (For this purpose the term "prepayments" includes
prepayments in full or in part (including pursuant to Consolidation Loans) and
liquidations due to default (including receipt of Guarantee Payments)). The rate
of prepayments on the Financed Student Loans may be influenced by a variety of
economic, social and other factors affecting borrowers, including interest
rates, the availability of alternative financing and
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the general market for legal, medical, dental and other post-graduate
professional services. In addition, under certain circumstances, the Seller will
be obligated to repurchase or the applicable Servicer will be obligated to
purchase Financed Student Loans from the Trust pursuant to the Sale and
Servicing Agreement as a result of breaches of their respective representations,
warranties or covenants. See "Description of the Transfer and Servicing
Agreements -- Sale of Financed Student Loans; Representations and Warranties"
and "-- Servicer Covenants." Moreover, to the extent borrowers of Financed
Student Loans elect to borrow Consolidation Loans with respect to such Financed
Student Loans from the Seller, (i) after the Loan Purchase Termination Date or
(ii) from another lender at any time, Noteholders (and after the Notes have been
paid in full, Certificateholders) will collectively receive as a prepayment of
principal the aggregate principal amount of such Financed Student Loans. There
can be no assurance that borrowers with Financed Student Loans will not seek to
obtain Consolidation Loans with respect to such Financed Student Loans or, if
they do so, that such Consolidation Loans will not be made (x) after the Loan
Purchase Termination Date or (y) by another lender at any time. See "The Student
Loan Financing Business" and "The Financed Student Loan Pool -- Maturity and
Prepayment Assumptions."
The Federal Direct Consolidation Loan Program provides borrowers with the
opportunity to consolidate outstanding student loans at interest rates below,
and income-contingent repayment terms that some borrowers may find preferable
to, those that would be available from the Seller on a loan originated by the
Seller under the Federal Consolidation Loan Program. The 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 Financed Federal Loans, as well as increase the
likelihood that a Financed Federal Loan in the Trust will be prepaid through the
issuance of a Federal Direct Consolidation Loan. Any such prepayments will
result in a more rapid amortization of the Securities then would otherwise be
the case. The volume of existing loans that may be repaid in this fashion is not
determinable at this time.
On the other hand, scheduled payments with respect to, and maturities of,
the Financed Student Loans may be extended, including pursuant to Grace Periods,
Deferral Periods and, under certain circumstances, Forbearance Periods (each as
defined under "The Student Loan Financing Business -- Federal Loans Under the
Programs") and comparable periods with respect to the Financed Private Loans or
as a result of the conveyance of Serial Loans to the Eligible Lender Trustee on
behalf of the Trust as described herein or of refinancings through Consolidation
Loans having longer maturities, which may lengthen the remaining term of the
Financed Student Loans and the average life of the Notes and the Certificates.
In addition, the stated maturity of many of the Financed Student Loans will
occur well beyond the Final Maturity Date. See "The Student Loan Financing
Business" and "The Financed Student Loan Pool -- Maturity and Prepayment
Assumptions." Any reinvestment risks resulting from a faster or slower incidence
of prepayment of Financed Student Loans will be borne entirely by the
Noteholders and the Certificateholders. See also (i) "Description of the
Transfer and Servicing Agreements -- Additional Fundings" regarding the
prepayment of principal to holders of Notes and Certificates 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 holders of the Notes as a
result of excess funds remaining on deposit in the Pre-Funding Account at the
end of the Funding Period, (ii) "-- Insolvency Event" regarding the sale of the
Financed Student Loans if a Seller Insolvency Event occurs and (iii)
"-- Termination" regarding the Seller's option to purchase the Financed Student
Loans when the 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
March 2009 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.
Any Financed Student Loans remaining in the Trust as of the end of the
Collection Period immediately preceding the March 2009 Distribution Date will be
offered for sale by the Indenture Trustee. If acceptable bids to purchase such
Financed Student Loans on such Distribution Date are received, as
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described herein, the proceeds of the sale will be applied on such Distribution
Date to redeem any outstanding Notes and to retire any outstanding Certificates
on such date. In addition, if acceptable bids to purchase such Financed Student
Loans on such Distribution Date are not received, the sale of such Financed
Student Loans may occur on a subsequent Distribution Date, as described herein,
and applied on such date to redeem any outstanding Notes and retire any
outstanding Certificates. No assurance can be given as to whether the Indenture
Trustee will be successful in soliciting acceptable bids to purchase the
Financed Student Loans on the March 2009 Distribution Date or any subsequent
Distribution Date. See "Description of the Transfer and Servicing
Agreements -- Termination."
Holders of Notes or Certificates should consider, in the case of Notes or
Certificates, as the case may be, purchased at a discount, the risk that a
slower than anticipated rate of principal payments on the Financed Student Loans
could result in an actual yield that is less than the anticipated yield and, in
the case of Notes or Certificates, as the case may be, purchased at a premium,
the risk that a faster than anticipated rate of principal payments on the
Financed Student Loans could result in an actual yield that is less than the
anticipated yield.
Prepayment Risks Differ Between the Notes and the Certificates. Because
(except for certain limited circumstances) the Class A-2 Noteholders will
receive no payments of principal until the Class A-1 Notes have been paid in
full, and the holders of Certificates will receive no payments of principal
until the Class A-2 Notes have been paid in full, the Class A-1 Notes and, to a
lesser extent, the Class A-2 Notes bear relatively greater risk than do the
Certificates of an increased rate of principal repayments with respect to the
Financed Student Loans (whether as a result of voluntary prepayments,
Consolidation Loans or liquidations due to default or breach). In addition, the
Class A-1 Notes generally bear the risk of principal prepayments as a result of
any remaining Pre-Funded Amount at the end of the Funding Period and any
remaining Subsequent Pool Pre-Funding Amount after the Final Subsequent Transfer
Date if either of such amounts is equal to or less than $10,000,000. On the
other hand, Certificateholders, and, to a lesser extent, the Class A-2 Notes
bear a greater risk of delay in the receipt of principal than do Class A-1
Noteholders in the event of a shortfall in Available Funds and in amounts on
deposit in the Reserve Account because the Certificates do not receive principal
distributions from Available Funds until the Class A-2 Notes are paid in full
and the Class A-2 Notes do not receive principal distributions until the Class
A-1 Notes are paid in full.
Variability of Actual Cash Flows. Amounts received with respect to the
Financed Student Loans for a particular Collection Period may vary greatly in
both timing and amount from the payments actually due on the Financed Student
Loans as of such Collection Period for a variety of economic, social and other
factors, including both individual factors, such as additional periods of
deferral or forbearance prior to or after a borrower's commencement of repayment
and the borrower's selection of a repayment option (which may include interest
only payments for certain periods), and general factors, such as a general
economic downturn which could increase the amount of defaulted Student Loans.
Failures by borrowers to pay timely the principal and interest on the Financed
Student Loans will affect the amount of funds available for distribution on a
Distribution Date, which may reduce the amount of principal and interest paid to
the Securityholders on such Distribution Date. In addition, because the funds
available for distribution on any Distribution Date include Interest Subsidy
Payments and Special Allowance Payments on the Financed Federal Loans that are
received during that Collection Period (and which accrued during the prior
Collection Period) and because the Student Loan Rate is based on the amount of
Interest Subsidy Payments and Special Allowance Payments that have accrued
during such Collection Period, a significant increase in the amount of such
payments being made by the Department in respect of the Financed Federal Loans
from one Collection Period to the next (as a result, for example, of a
significant increase in prevailing interest rates) could result in a temporary
shortfall in the funds available for distribution for the given Distribution
Date. In addition, the failure of a Guarantor to timely meet its guarantee
obligations with respect to the Financed Student Loans could also reduce the
amount of funds available for distribution on a given Distribution Date. The
effect of such factors, including the effect on a Guarantor's ability to meet
its guarantee obligations with respect to the Financed Student Loans, or the
Trust's ability to pay principal and interest with respect to the Securities is
impossible to predict.
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Certain incentive programs currently or hereafter made available by the
Seller to borrowers under the Programs may also be made available by a Servicer
to borrowers with Financed Student Loans. Any such incentive program that
effectively reduces borrower payments on Financed Student Loans and is not
required by the Higher Education Act will be applicable to the Financed Student
Loans only if and to the extent that a Servicer receives payment from the Seller
(or Seller deposits or causes a deposit to be made into the Collection Account)
in an amount sufficient to offset such effective yield reductions. See "The
Student Loan Financing Business -- General -- The Graduate Loan
Programs -- Incentive Programs."
Noteholders' Right to Control Upon Certain Defaults may Adversely Affect
Certificateholders. In the event a Servicer Default or an Administrator Default
occurs, the Indenture Trustee or the Noteholders, as described under
"Description of the Transfer and Servicing Agreements -- Rights upon Servicer
Default and Administrator Default," may remove a Servicer or the Administrator,
as the case may be, without the consent of the Eligible Lender Trustee or any of
the Certificateholders. Moreover, only the Indenture Trustee or the Noteholders,
and not the Eligible Lender Trustee or the Certificateholders, have the ability
to remove a Servicer or the Administrator, as the case may be, if a Servicer
Default or an Administrator Default occurs. In addition, the Noteholders have
the ability, with certain specified exceptions, to waive defaults by a Servicer
and the Administrator, including defaults that could materially adversely affect
the Certificateholders. See "Description of the Transfer and Servicing
Agreements -- Waiver of Past Defaults."
Consumer Protection Laws May Affect Enforceability of Student
Loans. Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon lenders and servicers involved
in consumer finance. Also, some state laws impose finance charge ceilings and
other restrictions on certain consumer transactions and require contract
disclosures in addition to those required under federal law. These requirements
impose specific statutory liability that could affect an assignee's ability to
enforce consumer finance contracts such as the Student Loans. In addition, the
remedies available to the Indenture Trustee or the Noteholders upon an Event of
Default under the Indenture may not be readily available or may be limited by
applicable state and federal laws. See "Certain Legal Aspects of the Financed
Student Loans."
Basis Risk. Although the interest rate on the Notes and the Certificates
is generally based on the applicable Investor Index it is possible that a
positive spread may not exist between (a) the Student Loan Rate calculated with
respect to any class of Notes or the Certificates and (b) the interest rate on
each class of Notes and the Certificates based on the Investor Index. In such a
case, the interest rate on one or more classes of Notes and the Certificates, as
applicable, for such Distribution Date will be the applicable Student Loan Rate.
See "Description of the Securities -- The Notes -- Distributions of Interest"
and "--The Certificates -- Distributions of Interest." Any Noteholders' Interest
Index Carryover or Certificateholders' Interest Index Carryover arising as a
result of the interest rate on one or more classes of Notes and the Certificates
being determined on the basis of the applicable Student Loan Rate will be paid
on that Distribution Date or on any succeeding Distribution Date to the extent
funds are allocated and available therefor after making all required prior
distributions and deposits with respect to such date. Payment of such amounts,
however, will not be covered, in the case of the Notes, by amounts on deposit in
the Reserve Account or by subordination of distributions in respect of the
Certificates (although distributions of any Certificateholders' Interest Index
Carryover due to Certificateholders will be subordinated to payment of any
Noteholders' Interest Index Carryover due to Noteholders) and, in the case of
the Certificates, by amounts on deposit in the Reserve Account. See "Description
of the Transfer and Servicing Agreements -- Distributions."
Limitations on Credit Ratings of the Securities. It is a condition to the
issuance and sale of each class of Notes and the Certificates that the Notes be
rated in the highest investment rating category and that the Certificates be
rated in one of the four highest investment rating categories by at least two
nationally recognized Rating Agencies. A rating is not a recommendation to
purchase, hold or sell Securities, inasmuch as such rating does not comment as
to market price or suitability for a particular investor. The ratings of the
Securities address the likelihood of the payment of principal on the respective
Final Maturity Dates and the payment of interest on the Securities pursuant to
their terms. However, the
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Rating Agencies do not evaluate, and the ratings of the Securities do not
address, the likelihood of payment of the Noteholders' Interest Index Carryover
or the Certificateholders' Interest Index Carryover. There can be no assurance
that a rating will remain for any given period of time or that a rating will not
be lowered or withdrawn entirely by a Rating Agency if in its judgment
circumstances in the future so warrant. In the event that any ratings initially
assigned to any of the Securities were subsequently lowered or withdrawn for any
reason, no person or entity will be obligated to provide any additional credit
enhancement with respect to the Securities. Any reduction or withdrawal of a
rating may have an adverse effect on the liquidity and market price of the
Securities.
Book-Entry Registration -- Beneficial Owners Not Recognized by Trust. Each
class of Securities will initially be represented by one or more certificates
registered in the name of Cede, the nominee for DTC, and will not be registered
in the names of the holders of such Securities or their nominees. Because of
this, unless and until Definitive Securities are issued, holders of the
Securities will not be recognized by the Indenture Trustee or the Eligible
Lender Trustee as "Noteholders" or "Certificateholders," as the case may be (as
such terms are used in the Indenture and the Trust Agreement, respectively).
Hence, until Definitive Securities are issued, holders of such Securities will
only be able to exercise the rights of Securityholders indirectly through DTC,
Cedel or Euroclear and their respective participating organizations. See
"Description of the Securities -- Book-Entry Registration" and "-- Definitive
Securities."
FORMATION OF THE TRUST
THE TRUST
KeyCorp Student Loan Trust 1999-A is a trust formed under the laws of the
State of New York pursuant to the Trust Agreement for the transactions described
in this Prospectus. The Trust will not engage in any activity other than (i)
acquiring, holding and managing the Financed Student Loans and the other assets
of the Trust and proceeds therefrom, (ii) issuing the Certificates and the
Notes, (iii) making payments thereon and (iv) engaging in other activities that
are necessary, suitable or convenient to accomplish the foregoing or are
incidental thereto or connected therewith.
The Trust will be initially capitalized with equity of $34,600,000
excluding amounts deposited in the Reserve Account by the Seller on the Closing
Date, representing the initial principal balance of the Certificates.
Certificates with an original principal balance of approximately $433,000 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 and to fund the deposit of the Pre-Funded Amount. The Seller
will use a portion of the net proceeds it receives from the sale of the Initial
Financed Student Loans to make the Reserve Account Initial Deposit. Upon the
consummation of such transactions, the property of the Trust will consist of (a)
a pool of 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 January 1, 1999, (c) all Assigned Rights with respect to
certain Financed Private Loans contained in such pool, and (d) all moneys and
investments on deposit in the Collection Account, the Pre-Funding Account, the
Escrow Account and the Reserve Account. To facilitate servicing and to minimize
administrative burden and expense, the Servicers will be appointed the
custodians of the promissory notes representing the Financed Student Loans that
each services by the Eligible Lender Trustee.
ELIGIBLE LENDER TRUSTEE
General. The First National Bank of Chicago is the Eligible Lender Trustee
for the Trust under the Trust Agreement. The First National Bank of Chicago
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
such Financed Student
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Loans. The Eligible Lender Trustee qualifies as an eligible lender and owner of
all Federal Loans and Private Loans for all purposes under the Higher Education
Act and the Guarantee Agreements. Failure of the Financed Federal Loans to be
owned by an eligible lender would result in the loss of any Guarantee Payments
from any Federal Guarantor and any Federal Assistance with respect to such
Financed Federal Loans. See "The Financed Student Loan Pool -- Insurance of
Student Loans; Guarantors of Student Loans." The Eligible Lender Trustee's
liability in connection with the issuance and sale of the Notes and the
Certificates is limited solely to the express obligations of the Eligible Lender
Trustee set forth in the Trust Agreement and the Sale and Servicing Agreement.
See "Description of the Securities" and "Description of the Transfer and
Servicing Agreements." The Seller plans to maintain normal commercial banking
relations with the Eligible Lender Trustee.
Fees. In consideration for its performance of its obligations under the
Sale and Servicing Agreement, the Eligible Lender Trustee will be entitled to
receive an annual fee of $4,500.
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 (i) to make the Reserve Account
Initial Deposit and an initial deposit into the Collection Account and (ii) 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 pursuant to the Sale and Servicing Agreement and Administrator pursuant
to the Administration Agreement. The Bank, a wholly owned subsidiary of KeyCorp,
is a national banking association providing consumer financial services
nationwide, including credit cards, student loans, home equity loans, and
indirect automobile, marine and recreational vehicle loans. Seller, an affiliate
of the Seller, and the predecessor of such affiliate have been collectively
originating graduate student loans since 1990 and student loans in general since
1965.
As of September 30, 1998, the Bank had total assets of approximately $4.73
billion, total liabilities of approximately $3.77 billion and approximately
$0.96 billion in stockholder's equity. As of such date, the Seller had an
aggregate principal amount of student loans outstanding of approximately $2.46
billion, of which approximately $1.69 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 Administration
Agreement, the Administrator will be responsible for preparing and filing claim
forms on behalf of the Eligible Lender Trustee for Interest Subsidy Payments and
Special Allowance Payments from the Department and is required to provide
notices and reports and to perform other administrative obligations required by
the Indenture, the Trust Agreement and the Sale and Servicing Agreement. As
compensation for the performance of the Administrator's obligations and as
reimbursement for its expenses related thereto, the Administrator will be
entitled to an administration fee in an amount equal to $3,000 per quarter (the
"Administration Fee") payable by the Trust on each Distribution Date. See
"Description of the Transfer and Servicing Agreements -- Administrator."
THE SERVICERS
PHEAA. Pennsylvania Higher Education Assistance Agency ("PHEAA") is a body
corporate and politic constituting a public corporation and government
instrumentality created pursuant to an act of the Pennsylvania Legislature.
Under its enabling legislation, PHEAA is authorized to issue bonds or notes,
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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
September 30, 1998 it had approximately 2,300 employees.
As of September 30, 1998, PHEAA has outstanding debt and/or credit
facilities (under which the entire aggregate amount of funds available had not
been drawn) in the amount (including amounts drawn or available under such
credit facilities) of approximately $2.4 billion. As of September 30, 1998,
PHEAA owned approximately $1.8 billion outstanding principal amount of student
loans financed with the proceeds of its long-term debt, and had funds available
for acquisition of student loans in the amount of approximately $298 million.
PHEAA has been guaranteeing student loans since 1964 and has guaranteed a
total of approximately $19.8 billion principal amount of Stafford Loans and
approximately $2.0 billion principal amount of PLUS Loans and SLS Loans under
the Higher Education Act. In addition to guaranteeing loans under the Higher
Education Act, PHEAA also operates certain guarantee programs for which it
receives no federal reinsurance. PHEAA has outstanding guarantee obligations of
such loans in the amount of approximately $40.7 million as of September 30,
1998.
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 September 30, 1998, PHEAA was servicing under its full service operation
approximately 1.1 million student loan accounts representing approximately $12.8
billion outstanding principal amount for more than 450 customers and under its
remote servicing operation, approximately 725,000 student loans representing
approximately $4.3 billion outstanding principal amount for 5 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 Securityholders upon receipt of a written request
directed to Mr. Tim Guenther, Chief Financial Officer, Financial Management,
1200 North Seventh Street, Harrisburg, Pennsylvania 17102.
EFS. EFS Services, Inc. ("EFS") is a wholly-owned subsidiary of EFS, Inc.,
which is a private, employee-owned company headquartered in Indianapolis,
Indiana. The corporation began operations in 1985 for the purpose of servicing
education loans made by financial institutions under the Higher Education Act to
student and parent borrowers. EFS employs approximately 270 people.
As of September 30, 1998, EFS was servicing approximately $2.8 billion in
student loans representing over 400,000 borrower accounts. It has the ability to
service all Federal Family Education Loan Program (FFELP) loans and currently
maintains relationships with approximately 700 financial institutions and 20
guarantors.
The above information relating to EFS has been obtained from EFS and the
Seller has not conducted any independent verification of such information. EFS
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.
Gary Varner, Chief Financial Officer, 8425 Woodfield Crossing Boulevard,
Indianapolis, Indiana 46240.
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 EFS 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 95.64% of the outstanding principal balance of the
Initial Financed Student Loans and EFS will be the Servicer with respect to
approximately 4.36% 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 100% of the outstanding principal balance of the
Student Loans in the Subsequent Pool and EFS will be
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the Servicer with respect to approximately 0% 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."
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 Trust on each Monthly Servicing
Payment Date equal to the sum of (i) the Servicing Fee Percentage of the Pool
Balance as of the last day of the preceding calendar month and (ii) 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."
THE STUDENT LOAN FINANCING BUSINESS
GENERAL
The Student Loans to be sold by the Seller to the Eligible Lender Trustee
on behalf of the Trust pursuant to the Sale and Servicing Agreement have been
selected from Student Loans originated by the Seller under various loan programs
("Graduate Loan Programs") and made to students enrolled in or recently
graduated from approved or accredited law schools, medical schools, dental
schools, graduate business schools or other graduate level certificate or degree
programs ("Graduate Schools"). Legal title to all the Financed Student Loans
that from time to time comprise assets of the Trust will be held by the Eligible
Lender Trustee, as trustee on behalf of the Trust. See "Formation of the
Trust -- Eligible Lender Trustee."
The proceeds of these Student Loans are used by students to finance a
portion of the costs of attending law school, medical school, dental school,
graduate business school and other graduate schools, of preparing for and taking
one or more state bar examinations upon graduation from law school and for
participating in medical or dental residency programs upon graduation from
medical or dental school. As described herein, substantially all payments of
principal and interest with respect to the Financed Federal Loans will be
guaranteed against default, death, bankruptcy or disability of the applicable
borrower by PHEAA pursuant to a guarantee agreement to be entered into between
PHEAA and the Eligible Lender Trustee, by ASA pursuant to a guarantee agreement
to be entered into between ASA and the Eligible Lender Trustee, by NSLP pursuant
to a guarantee agreement to be entered into between NSLP and the Eligible Lender
Trustee, or by ECMC pursuant to a guarantee agreement to be entered into between
ECMC and the Eligible Lender Trustee, (such agreements, each as amended or
supplemented from time to time, the "Federal Guarantee Agreements"). Each of
PHEAA, ASA, NSLP and ECMC 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, the Eligible Lender Trustee, as a holder
of the Financed Federal Loans on behalf of the Trust, is entitled to receive
from the Department certain Interest Subsidy Payments and Special Allowance
Payments with respect to certain of such Financed Federal Loans as described
herein. See "-- Federal Loans Under the Programs" and "The Financed Student Loan
Pool -- Insurance of Student Loans; Guarantors of Student Loans."
Payment of principal and interest with respect to the Financed Private
Loans will be guaranteed against default, death, bankruptcy or disability of the
applicable borrower by TERI pursuant to a
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guarantee agreement to be entered into among TERI, the Seller and the Eligible
Lender Trustee, or will be insured by HICA pursuant to surety bonds issued to
Seller and assigned to the Eligible Lender Trustee on behalf of the 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"). See "-- Private Loans Under the
Programs" and "The Financed Student Loan Pool -- Insurance of Student Loans;
Guarantors of Student Loans." PHEAA, ASA, NSLP, ECMC, TERI and HICA are
sometimes individually referred to herein as a "Guarantor" and collectively as
the "Guarantors." TERI and HICA are collectively referred to herein as the
"Private Guarantors." The discussion herein with respect to Private Loans
includes detail on those Private Loans guaranteed by TERI based on the
standards, requirements and policies of TERI. The Seller believes that the
standards, requirements and policies of HICA with respect to Private Loans
insured by HICA are in material respects similar to those of TERI. HICA will
insure approximately 0.98% of the Initial Financed Student Loans and Subsequent
Pool Student Loans in the aggregate.
The description and summaries of the Higher Education Act, the Federal
Programs, the Guarantee Agreements and the other statutes, regulations and
documents referred to in this Prospectus do not purport to be comprehensive, and
are qualified in their entirety by reference to each such statute, regulation or
document (and, with respect to the Guarantee Agreements, by references to the
forms of such agreements, if any, included as exhibits to the Registration
Statement). There can be no assurance that future amendments or modifications
will not materially change any of the terms or provisions of the programs
described in this Prospectus or of the statutes and regulations implementing
these programs. See "Risk Factors -- Changes in Legislation May Adversely Affect
Financed Student Loans and Guarantors."
THE GRADUATE LOAN PROGRAMS
General. The Graduate Loan Programs (the "Programs") 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 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 Programs since 1990. The
Programs consist of Student Loans which are guaranteed by PHEAA, ASA, NSLP, or
ECMC and are reinsured by the Department ("Federal Loans") and Student Loans
which are guaranteed or insured by TERI or HICA but are not reinsured by the
Department or any other governmental entity ("Private Loans"). As described
below, Federal Loans include "Stafford Loans," "SLS Loans" and "Federal
Consolidation Loans" and Private Loans include loans related to each of the
above-mentioned fields of study (including Bar Exam Loans and Residency Loans)
and "Private Consolidation Loans."
Eligibility. To be eligible to obtain a loan under the Programs (other
than a Consolidation Loan, bar examination loan or residency loan), a student
must, among other things, (i) be enrolled in, or admitted for enrollment in, an
approved or accredited graduate school, (ii) be enrolled in, or admitted for
enrollment in an acceptable degree program, be attending at least half-time and
be making satisfactory progress toward the completion of such program according
to the standards of the school, (iii) be a U.S. citizen, U.S. national or
eligible non-citizen, (iv) not have borrowed, together with the loan being
requested, more than the applicable annual and aggregate limits specified from
time to time under the Programs, (v) meet the program credit criteria
established by the lender and (vi) not be in default on any education loan or
(except for TERI guaranteed loans) owe a refund on an educational grant (each
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such student, an "Eligible Student"). The following table sets forth the
approved or accredited schools and the acceptable degree programs for each
graduate field of study:
<TABLE>
<CAPTION>
ACCEPTABLE
FIELD OF STUDY APPROVED/ACCREDITED SCHOOLS DEGREE PROGRAMS
-------------- --------------------------- ---------------
<S> <C> <C>
Law American Bar Association approved law schools that Juris Doctor of Law
are members of LSAC or other joint degree
program
Medical Liaison Committee on Medical Education or American Medical Doctor or
Osteopathic Association accredited graduate Doctor of Osteopathy
medical schools
Dental American Dental Association accredited dental Graduate dental
schools program
Business American Assembly of Collegiate Schools of Graduate business
Business ("AACSB") accredited graduate business program
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 Graduate level
of Schools and Colleges, the Middle States certificate or degree
Association of Colleges and Schools, The North program
Central Association of Colleges and Schools, the
Southern Association of Colleges and Schools, the
Western Association of Schools and Colleges, or
the North West Association of Schools and Colleges
</TABLE>
In addition, a law student may also receive a bar examination loan ("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 ("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 before or after graduation. Under current Programs
rules, a student is not required to have existing Student Loans outstanding
under the Programs in order to receive a bar examination or residency loan.
Origination Process. The Higher Education Act specifies rules regarding
loan origination practices, which lenders must comply with in order for their
Federal Loans to be guaranteed and to be eligible to receive Federal Assistance.
Lenders are prohibited from offering points, premiums, payments or other
inducements, directly or indirectly, to any educational institution, guarantee
agency or individual in order to secure loan applications, and no lender may
conduct unsolicited mailings of student loan applications to students who have
not previously received student loans from that lender.
With respect to all Student Loans made under the Programs (other than
Consolidation 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 in Boston,
Massachusetts. 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 Programs. In addition, a credit report of
each applicant for Private Loans is obtained from an applicable credit reporting
service, which the Seller then uses to determine whether such applicant
satisfies certain specified credit underwriting criteria. Such
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criteria with respect to such Private Loans include that the credit report shows
that no account has been more than 90 days delinquent in the past two years,
that no more than one account is currently more than 60 days delinquent, that no
account has been charged-off in the past two years, that there is no record of a
bankruptcy in the past seven years and that there has been no foreclosure,
repossession, open judgment or suit, unpaid prior educational debt or negative
public credit items in the past six years. Such 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 a previous borrower) to an authorized credit reporting
agency in the past six months. The credit criteria for the 1997-1998 Program
Year includes the additional requirement that no more than two accounts have
been more than 60 days delinquent in the past two years. The marketing agent or
origination department forwards a copy of each application that satisfies the
foregoing reviews to the respective Guarantor (with the exception of HICA), who
reviews such application to determine that such application satisfies all
applicable conditions, including the foregoing, for the loan to be eligible to
receive Guarantee Payments, subject to compliance with the terms of the
applicable Guarantee Agreement, including the proper servicing of the loan. Upon
approval of an application by either the marketing agent or the origination
department and the applicable Guarantor (and approval by the Seller, in the case
of all Private 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.
Any borrower inquiries concerning 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, if the borrower has multiple lenders, borrowers
typically express no preference as to the identity of the lender. In that event,
each Servicer is required under the Programs to choose the lender that has the
highest balance of the loans to be consolidated or, if there is no such lender,
the lender that has made the most recent loan to the borrower to be
consolidated. Pursuant to the Programs, the Servicers are 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.
Servicing and Collections Process. The Higher Education Act, the Programs,
the applicable Guarantee Agreements and the requirements and policies of the
applicable Guarantor 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 has agreed, pursuant to the Sale and
Servicing Agreement, to perform specified and detailed servicing and collection
procedures with respect to the Financed Student Loans on behalf of the Trust.
Such procedures generally include periodic attempts to contact any delinquent
borrower by telephone and by mail, commencing with a written notice at the tenth
day of delinquency and including multiple written notices and telephone calls to
the borrower thereafter at specified times during any such delinquency. All
telephone calls and letters are automatically registered, and a synopsis of each
call or the mailing of each letter is noted in each Servicer's loan file for the
borrower. Each Servicer is also required to perform skip tracing procedures on
delinquent borrowers whose current location is unknown, including contacting
such borrowers' schools and references. Failure to comply with the established
procedures could adversely affect the ability of the Eligible Lender Trustee, as
holder of legal title to the Financed Student Loans on behalf of the Trust, to
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realize the benefits of any Guarantee Agreement or to receive the benefits of
Federal Assistance from the Department with respect thereto. Failure to comply
with certain of the established procedures with respect to a Financed Federal
Loan may also result in the denial of coverage under a Guarantee Agreement for
certain accrued interest amounts, in circumstances where such failure has not
caused the loss of the guarantee of the principal of such Financed Federal Loan.
See "Risk Factors -- Risk of Loss of Federal Guarantor and Department Payments
for Failure to Comply with Loan Origination and Servicing Procedures for Federal
Loans" and "-- Risk of Loss of Private Guarantor Payments for Failure to Comply
with Loan Origination and Servicing Procedures for Private Loans."
At prescribed times prior to submitting a claim for payment under a
Guarantee Agreement for a delinquent Financed Student Loan, 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 Loans made prior to the enactment date of the 1998
Reauthorization Bill), 270 days (in the case of Federal Loans made on or after
October 7, 1998), or 120 days (in the case of Private Loans guaranteed by TERI),
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), 360 days (in the case of
Federal Loans made on or after October 7, 1998), or 180 days (in the case of
Private Loans guaranteed by TERI) 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 Financed
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
the Trust. These incentive programs currently or hereafter made available by the
Seller to borrowers under the Programs 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
the Trust receives payment from the Seller (or Seller deposits or causes a
deposit to be made into the Collection Account) in an amount sufficient to
offset such effective yield reductions.
FEDERAL LOANS UNDER THE PROGRAMS
General. The following descriptions of the Federal Stafford Loan Program,
the Federal Supplemental Loans for Students Program and the Federal
Consolidation Loan Program (such programs being collectively referred to herein
as the "Federal Programs") as authorized under the Higher Education Act are
qualified in their entirety by reference to the Higher Education Act. Since its
original enactment in 1965, the Higher Education Act has been amended and
reauthorized several times, including by the Higher Education Amendments of 1992
(the "1992 Amendments"). The 1992 Amendments extended the principal provisions
of the Federal Programs to September 30, 1998 (or, in the case of borrowers who
have received Federal Loans prior to that date, September 30, 2002), and the
1998 Reauthorization Bill 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 and the Student Loans
made thereunder, including the Financed 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
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or administrative actions will not adversely affect expenditures by the
Department or the financial condition of the Federal Guarantors. For a
discussion of each Federal Guarantor's claims-paying ability, see "The Financed
Student Loan Pool -- Insurance of Student Loans; Guarantors of Student Loans."
On August 10, 1993, President Clinton signed the Omnibus Budget
Reconciliation Act of 1993, which made a number of changes that may adversely
affect the financial condition of the Federal Guarantors. One such change
included reducing to 98% the maximum percentage of Guarantee Payments the
Department will reimburse for loans first disbursed on or after October 1, 1993,
reducing substantially the premiums and default collections that Federal
Guarantors are entitled to receive and/or retain and giving the Department broad
powers over Federal Guarantors and their reserves. These powers include the
authority to require a Federal Guarantor to return all reserve funds to the
Department if the Department determines such action is necessary to serve the
best interests of the student loan programs 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 significant risk that the resources available to
the Federal Guarantors to meet their guarantee obligations will be significantly
reduced. In addition, this legislation sought to greatly expand the Federal
Direct Student Loan Program volume 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 under the direct lending program. The expansion of
this program in the future could result in increasing reductions in the volume
of loans made under the Federal Programs. Under the Federal Direct Student Loan
Program, the Department directly originates and holds student loans without the
involvement of private lenders.
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%.
Stafford Loans. "Stafford Loans" are loans made by eligible lenders in
accordance with the Higher Education Act to Eligible Students, based on
financial need, to finance a portion of the costs of attending an eligible
institution of higher education or a vocational school. The Higher Education Act
limits the amount of Stafford Loans that may be made to a student in any given
academic year, 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: (i) a guarantee of the payment of principal and
interest with respect to such Stafford Loans by a guarantee agency (PHEAA, ASA,
NSLP or ECMC in the case of the Financed Federal Loans), which guarantee will be
supported by federal reinsurance of all or most of such guaranteed amounts as
described herein; (ii) federal interest subsidy payments equal to the interest
payable on such Stafford Loans prior to the time the borrower begins repayment
of such Stafford Loans and during any applicable Deferral Periods, together with
interest on any such amounts not paid by the Department when due ("Interest
Subsidy Payments"), and (iii) federal special allowance payments, 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 (ii) and (iii) above, being collectively
referred to herein as "Federal Assistance").
The Initial Financed Federal Loans and certain Subsequent Pool Student
Loans include Stafford Loans that do not qualify for Interest Subsidy Payments
but otherwise qualify for all other forms of Federal Assistance ("Unsubsidized
Stafford Loans"). These loans are identical to Stafford Loans in all material
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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 (who, in the case of law
school, medical school, dental school, graduate business school and other
graduate school students, constitute Eligible Students) in amounts not exceeding
their unmet need for financing as determined in accordance with the provisions
of the Higher Education Act.
In addition to complying with the borrower's eligibility requirements set
forth above under the caption "-- The Graduate Loan Programs," each Stafford
Loan (i) must be unsecured, (ii) must provide for deferral of the obligation of
the borrower to make (x) interest payments for as long as the Department makes
Interest Subsidy Payments and (y) principal payments so long as the borrower
remains an Eligible Student and thereafter during any applicable Grace Periods,
Deferral Periods or Forbearance Periods and (iii) must provide for repayment
over a period not to exceed 10 years (excluding any Deferral Periods or
Forbearance Periods) from the date repayment commences.
(2) Loan Limits. In order to qualify for Federal Assistance under the
Federal 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. For the time periods applicable to the Financed
Federal Loans, the annual and aggregate limitations are as follows: such student
can borrow no more than $7,500 per year of Stafford Loans (subsidized and
unsubsidized) and cannot have outstanding Federal Loans (but excluding for this
purpose SLS Loans and loans made under the Parent Loans to Undergraduate
Students program) in excess of $54,750 at any one time (or $65,500, for loans
first disbursed on or after July 1, 1993). On July 1, 1993, the annual
limitation for Unsubsidized Stafford Loans was increased to $10,000, and the
graduate student aggregate loan limit amount was increased to $138,500, not to
exceed $65,500 in subsidized loans. On October 1, 1993, the annual limitation
for subsidized Stafford Loans was increased to $8,500. As a result of both
revisions, a graduate student may borrow up to $18,500 per year of Stafford
Loans (subsidized and unsubsidized). On August 15, 1996, the Secretary
authorized higher annual (but not aggregate) Unsubsidized Stafford Loan limits
for certain new health professions student borrowers to compensate for
restrictions recently enacted by Congress on the ability of those students to
borrow under other federal loan programs. As a result, some Unsubsidized
Stafford Loans sold into the Trust made for periods of enrollment beginning on
or after July 1, 1996 may reflect the higher limits.
(3) Interest. Stafford Loans made to students with respect to periods of
enrollment commencing prior to July 1, 1988 (or thereafter to students who had
Federal Loans outstanding on such date), bear interest at either 7%, 8% or 9%
per annum, depending on the date of issuance and the interest rate applicable to
such student's outstanding Federal Loans. Except as noted in the next paragraph,
for the time periods applicable to the Financed Federal Loans, Stafford Loans
made on or after July 1, 1988, to students with no outstanding Federal Loans on
the date such Stafford Loan is made ("new borrowers"), bear interest at rates of
8% per annum from disbursement through four years after repayment commences and
at a variable rate reset each July 1 equal to the 91-day Treasury Bill Rate plus
3.25% or, for Stafford Loans to such borrowers which are first disbursed after
July 23, 1992, 3.10%, not to exceed 10% per annum thereafter. The rate for
variable rate Stafford Loans applicable for any 12-month period beginning on
July 1 and ending on June 30 is determined on the preceding June 1 and is equal
to the lesser of (a) the applicable maximum rate and (b) the sum of (i) the bond
equivalent rate of 91 day Treasury bills auctioned at the final auction held
prior to such June 1 and (ii) the applicable interest rate margin.
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A Stafford Loan made on or after October 1, 1992, to a student with no
outstanding Federal Loans on the date such Stafford Loan is made, bears interest
at a variable rate, based on the 91-day Treasury Bill Rate plus 3.10%, or 9%,
whichever is less. A Stafford Loan made on or after October 1, 1992, to a
student with prior outstanding Federal Loans on the date such Stafford Loan is
made, bears interest at a variable rate, equal to the 91-day Treasury Bill Rate
plus 3.10%, with a maximum rate ranging from 7% to 10% based upon the borrower's
outstanding loans and how long the new Stafford Loan has been in repayment.
Stafford Loans first disbursed on or after July 1, 1995 and prior to July 1,
1998 bear interest at a rate equal to the 91-day Treasury Bill Rate plus 2.50%
while the borrowers are in in-school, grace, or deferment status, and at a rate
equal to the 91-day Treasury Bill Rate plus 3.10% during periods in which the
loan does not qualify for Interest Subsidy Payments. Stafford Loans made on or
after July 1, 1998, bear interest at a rate equal to the 91-day Treasury Bill
Rate plus 1.7% while the borrowers are in in-school, grace, or deferment status,
and at a rate equal to the 91-day Treasury Bill Rate plus 2.3% during repayment
periods, with a cap of 8.25%.
Interest is payable on each Stafford Loan monthly in arrears until the
principal amount thereof is paid in full. However, prior to the date the
borrower begins repaying the principal of such Stafford Loan and during any
applicable Deferral Period, the borrower has no obligation to make interest
payments. Instead, the Department makes quarterly Interest Subsidy Payments to
the holder of the Stafford Loan on behalf of the borrower during such periods,
in amounts equal to the accrued and unpaid interest for the previous quarter
with respect to such Stafford Loan. During a Forbearance Period, the Department
will not make any Interest Subsidy Payments; instead, at the borrower's option,
interest on each Stafford Loan may be paid currently or capitalized and added to
the outstanding principal balance of such Stafford Loan at the end of such
Forbearance Period. See "-- (6) Interest Subsidy Payments."
"91-day Treasury Bill Rate" means, on any date of determination, the
weighted average per annum discount rate (expressed on a bond equivalent basis
and applied on a daily basis) for 91-day Treasury Bills at the most recent
91-day Treasury 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 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 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
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(varying from six months to three years) when the borrower has joined the
military or certain volunteer organizations (for all loans made prior to July 1,
1993, or loans made after such date to borrowers with loans already outstanding
on such date), for periods when the borrower is unable to secure employment (up
to three years) or for periods during which the borrower is experiencing
economic hardship (for loans made after July 1, 1993, to borrowers with no
outstanding loans on such date) (each, a "Deferral Period"). In addition, the
lender may, and in some circumstances must, allow, in accordance with standards
and guidelines approved by the applicable guarantor and the Department, periods
of forbearance during which the borrower may defer principal and/or interest
payments because of temporary financial hardship (a "Forbearance Period").
(6) Interest Subsidy Payments. Interest Subsidy Payments are payments made
quarterly to the holder of a 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"; "Risk Factors -- Risk of Loss
of Federal Guarantor and Department Payments for Failure to Comply with Loan
Origination and Servicing Procedures;" "Formation of the Trust -- Eligible
Lender Trustee" and "Description of the Transfer and Servicing
Agreements -- Servicing Procedures." The Seller expects that each of the
subsidized Stafford Loans that are part of the pool of Financed Student Loans
will be eligible to receive Interest Subsidy Payments.
(7) Special Allowance Payments. The Higher Education Act requires, subject
to certain conditions, the Department to make quarterly Special Allowance
Payments to holders of qualifying Federal Loans (including Stafford Loans), in
an amount equal to a specified percentage of the average outstanding principal
amount of each such Federal Loan during each quarter.
The percentage or rate used to determine the Special Allowance Payments for
a particular loan varies based on a number of factors, including when the loan
was disbursed and the period of enrollment with respect to which it was made.
Generally, the Special Allowance Payment with respect to a loan such as any
Financed Federal Loan for a quarter will be equal to the excess, if any, of (i)
the amount of interest that would be payable on such loan at a rate per annum
equal to the average bond equivalent rates of (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 in-school, grace, or deferment status, or 2.8% while borrowers are in the
repayment period, over (ii) the stated amount of interest payable on such loan.
The Higher Education Act provides that a holder of a qualifying loan who is
entitled to receive Special Allowance Payments has a contractual right against
the United States to receive those Special Allowance Payments (including the
right to receive interest on any Special Allowance Payments not timely paid).
Receipt of Special Allowance Payments, however, is conditioned on compliance
with the requirements of the Higher Education Act, including satisfaction of
certain need-based criteria (and the delivery of sufficient information by the
borrower and the lender to the Department to confirm the foregoing) and
continued eligibility for federal reinsurance. Such eligibility may be lost,
however, if the loans are not
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originated and serviced, or are not held by an eligible lender, in accordance
with the requirements of the Higher Education Act and the applicable guarantee
agreement. See "-- (1) Eligibility Requirements"; "Risk Factors -- Risk of Loss
of Federal Guarantor and Department Payments for Failure to Comply with Loan
Origination and Servicing Procedures;" "Formation of the Trust -- Eligible
Lender Trustee" and "Description of the Transfer and Servicing
Agreements -- Servicing Procedures." The Seller expects that each of the
Stafford Loans that are part of the pool of Financed Student Loans will be
eligible to receive Special Allowance Payments, if any are payable from time to
time.
Interest Subsidy Payments and Special Allowance Payments are generally
received within 45 to 60 days after submission to the Department of the
applicable claims forms for any given calendar quarter, although there can be no
assurance that such payments will in fact be received from the Department within
that period. See "Risk Factors -- Inability of Indenture Trustee to Liquidate
Financed Student Loans" and "--Variability of Actual Cash Flows." The
Administrator has agreed to prepare and file with the Department all such claims
forms and any other required documents or filings on behalf of the Eligible
Lender Trustee as owner of the Financed Federal Loans on behalf of the Trust.
The Administrator has also agreed to assist the Eligible Lender Trustee in
monitoring, pursuing and obtaining such Interest Subsidy Payments and Special
Allowance Payments, if any, with respect to such Financed Federal Loans. Except
under certain conditions described herein, the Eligible Lender Trustee will be
required to remit Interest Subsidy Payments and Special Allowance Payments it
receives with respect to the Financed Federal Loans within two Business Days of
receipt thereof to the Collection Account.
SLS Loans. In addition to the Federal Stafford Loan Program, the Higher
Education Act provides a separate program to facilitate additional loans to
graduate and professional students and independent undergraduate students. This
program is referred to as the "Federal Supplemental Loans for Students Program"
(the "SLS Program"). The basic framework and principal provisions of the Federal
Stafford Loan Program as described above are similar in many respects to those
that are applicable to loans under the SLS Program ("SLS Loans"). In particular,
SLS Loans are subject to similar eligibility requirements and, provided that
such requirements are satisfied, are entitled to the same guarantee and federal
reinsurance arrangements. SLS Loans differ significantly from Stafford Loans,
however, in the context of the Interest Subsidy Payments and Special Allowance
Payments discussed above.
The annual and aggregate limitations that are applicable to SLS Loans in
the case of those constituting Financed Student Loans are as follows: SLS Loans
to a single borrower cannot exceed $4,000 per academic year (or $10,000 for
loans first disbursed on or after July 1, 1993) and $20,000 in aggregate
principal amount (or $73,000 for loans first disbursed on or after July 1, 1993)
(exclusive of any capitalized interest) at any one time outstanding. SLS Loans
are also limited, generally, to the cost of attendance minus other financial aid
for which the borrower is eligible. A determination of a borrower's eligibility
for the Federal Stafford Loan Program, among other programs, is a condition to
the making of an SLS Loan.
As specified by the Higher Education Act, the applicable interest rate for
an SLS Loan depends upon the date of issuance of the loan and the period of
enrollment for which the loan is made. The interest rate per annum for SLS Loans
made and disbursed on or after July 1, 1987 is fixed each July 1 for each
succeeding 12-month period at a rate equal to the sum of (i) the bond equivalent
rate of 52-week Treasury bills auctioned at the final auction held prior to the
preceding June 1 and (ii) 3.25% (3.10% for loans first disbursed on and after
October 1, 1992), with a maximum rate of 12% per annum (11% for loans first
disbursed on or after October 1, 1992).
Although holders of SLS Loans are not entitled to receive Interest Subsidy
Payments with respect thereto, interest on such SLS Loans accrues from the date
each such SLS Loan is made and may either be paid currently by a borrower or may
be capitalized and added to the outstanding principal amount of such SLS Loan at
the time the borrower begins repayment. SLS Loans are eligible for Special
Allowance Payments only if and to the extent that the interest rate for such SLS
Loans calculated based on the 52-week Treasury bill rate referred to above would
exceed the applicable maximum borrower interest rate. Because the basis for
determining the amount, if any, of Special Allowance Payments due to lenders
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is based on the 91-day Treasury Bill Rate while the interest rate for SLS Loans
is based on the 52-week Treasury bill rate (which may differ from the 91-day
Treasury Bill Rate), there can be no assurance that any Special Allowance
Payments will be due and payable with respect to SLS Loans even though such SLS
Loans are deemed to be eligible therefor. See "-- (7) Special Allowance
Payments."
A borrower of an SLS Loan is required to begin repayment of the principal
of such SLS Loan within 60 days after the date the last installment of such SLS
Loan is advanced, subject to deferral so long as such borrower remains an
Eligible Student or as a result of any applicable Deferral Period or Forbearance
Period. In addition, any borrower of an SLS Loan made and advanced after July
23, 1992, who also has Stafford Loans outstanding may defer commencing repayment
of such SLS Loan for the Grace Period applicable to such Stafford Loans. For SLS
Loans entering repayment on or after October 1, 1995, borrowers may choose among
several repayment options, including the option to make interest only payments
for limited periods.
As of July 1, 1994, the SLS 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 Federal Loans,
together with such borrowers' other education loans that are made or guaranteed
by the federal government, into a single loan (a "Federal Consolidation Loan").
Subject to the satisfaction of certain conditions set forth in the Higher
Education Act, including limitations on the timing and payment of principal and
interest with respect to Federal Consolidation Loans and a requirement that the
proceeds of Federal Consolidation Loans are to be used to repay the respective
Underlying Federal Loans (and any other loans consolidated thereunder) of any
borrower, each holder of a Federal Consolidation Loan will be entitled to
substantially the same guarantee and federal reinsurance arrangements as are
available on Stafford Loans and SLS Loans. Federal Consolidation Loans, like
Stafford Loans, are also eligible for Interest Subsidy Payments and Special
Allowance Payments. Under this program, an eligible borrower of Federal
Consolidation Loans such as those that may be Additional Student Loans means a
borrower (i) with outstanding Underlying Federal Loans and (ii) who has begun
repaying, who is in a grace period preceding repayment of, or who is a
delinquent or defaulted borrower who will, through such loan consolidation,
recommence repayment of, such Underlying Federal Loans. A married couple, each
of whom has outstanding Underlying Federal Loans, may apply for and obtain a
single Federal Consolidation Loan so long as both individuals agree to be held
jointly and severally liable on such Federal Consolidation Loan.
Under this program, a lender may make a Federal Consolidation Loan to an
eligible borrower at the request of the borrower if the lender holds an
outstanding Underlying Federal Loan of the borrower or the borrower certifies
that he or she has been unable to obtain a Federal Consolidation Loan from any
of the holders of the outstanding Underlying Federal Loans of the borrower. The
lender making any Federal Consolidation Loan will pay the amount thereof to the
various lenders of the respective Underlying Federal Loans and other loans being
consolidated thereby. The 1998 Reauthorization Bill allows lenders to make
Federal Consolidation Loans to borrowers with other or multiple holders even if
the lender does not own an underlying loan.
The Trust may be affected by Federal Consolidation Loans in two ways.
First, the Trust may own Underlying Federal Loans with respect to which an
institution other than the Seller (or the Seller if after the Funding Period,
either there are insufficient Available Loan Purchase Funds at the time of
origination of such Federal Consolidation Loan or the Loan Purchase Termination
Date has occurred), including the Department (under the Federal Direct Loan
Program) makes the Federal Consolidation Loan, in which case such Underlying
Federal Loans will be prepaid in full and such prepayment amount will be deemed
collections for the applicable Collection Period. See "Description of the
Transfer and Servicing Agreements -- Distributions." Second, the Seller may make
a Federal Consolidation Loan either during the Funding Period or prior to the
Loan Purchase Termination Date, in which case it will acquire the related
Underlying Federal Loans from the Eligible Lender Trustee, simultaneously
deposit the Purchase Amount thereof in the Escrow Account, and subsequently sell
the Federal Consolidation Loan back to the Eligible
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Lender Trustee, to the extent that the conditions with respect to such Federal
Consolidation Loan are satisfied (including the cap on the aggregate dollar
amount of Consolidation Loans which can be purchased by the Eligible Lender
Trustee) and funds are available in the Escrow Account and, during the Funding
Period, the Pre-Funding Account or after the Funding Period until the Loan
Purchase Termination Date, in the Escrow Account and the Collection Account from
amounts which constitute Available Loan Purchase Funds, for the purchase
thereof. An amount equal to the excess of the outstanding principal balance of
such Federal Consolidation Loan will be withdrawn first from the Escrow Account
to the extent funds are then available and then, if during the Funding Period
from the Pre-Funding Account or after the Funding Period until the Loan Purchase
Termination Date, from the Collection Account from amounts which constitute
Available Loan Purchase Funds, and, in each case, paid to the Seller, and the
Pool Balance will increase accordingly. See "Description of the Transfer and
Servicing Agreements -- Additional Fundings."
The Federal Direct Consolidation Loan Program provides borrowers with the
opportunity to consolidate outstanding student loans at interest rates below,
and income-contingent repayment terms that some borrowers may find preferable
to, those that would be available from the Seller on a loan originated by the
Seller under the Federal Consolidation Loan Program. The 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 Consolidation Loan with respect to borrowers with
Financed Federal Loans, as well as increase the likelihood that a Financed
Federal Loan in the Trust will be prepaid through the issuance of a Federal
Direct Consolidation Loan. The volume of existing loans that may be prepaid in
this fashion is not determinable at this time.
In accordance with the Higher Education Act, Federal Consolidation Loans
may bear interest, as negotiated between the individual borrower and lender, at
a rate per annum up to the weighted average of the interest rates on the
Underlying Federal Loans (rounded up to the nearest whole percent) or, for loans
made before July 1, 1994, 9%, whichever is greater. 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 of one 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 9%/8.25% 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.
50
<PAGE> 51
The Omnibus Budget Reconciliation Act of 1993 made a number of changes to
the Federal Consolidation Loan Program, including (i) requiring holders of
Federal Consolidation Loans made on or after October 1, 1993, to pay to the
Department a monthly fee equal to 1.05% per annum on the outstanding balance of
such loans (the "Federal Consolidation Loan Rebate"), (ii) requiring lenders of
Federal Consolidation Loans made on or after July 1, 1994, to offer borrowers
income-sensitive repayment schedules, (iii) repealing the $7,500 minimum
indebtedness requirement, and (iv) removing the 9% interest rate floor for
Federal Consolidation Loans made on or after July 1, 1994. In addition, with
respect to any Federal Loan (including Federal Consolidation Loans) made on or
after October 1, 1993, the lender must pay to the Department an origination fee
equal to 0.50% on the initial principal balance of such loan (the "Federal
Origination Fee"). With respect to any Federal Consolidation Loan originated by
the Seller and purchased by the Eligible Lender Trustee on behalf of the Trust,
the Trust must pay to the Department the Federal Origination Fee, which fee will
be deducted by the Department out of Interest Subsidy Payments and Special
Allowance Payments. If sufficient Interest Subsidy Payments and Special
Allowance Payments are not due to the Trust to cover the amount of the Federal
Origination Fee, the balance of such Federal Origination Fee may be deferred by
the Department until sufficient Interest Subsidy Payments and Special Allowance
Payments accrue to cover such fee. If such amounts never accrue, the Trust would
be obligated to pay any remaining fee from other assets of the Trust prior to
making distributions to Noteholders or Certificateholders. The offset of
Interest Subsidy Payments and Special Allowance Payments, and the payment of any
remaining fee from other Trust assets, will further reduce the amount of
collections from which payments to Noteholders and Certificateholders may be
made. Furthermore, any offset of Interest Subsidy Payments and Special Allowance
Payments will further reduce the Student Loan Rate.
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.
PRIVATE LOANS UNDER THE PROGRAMS
General. In addition to the Federal Loans, the Programs also provide for
Private Loans, which provide financial assistance to help pay for the costs of
attending law, medical, dental, graduate business, or other graduate school, of
passing one or more state bar examinations upon graduation from law school, or
participating in one or more medical or dental residency programs upon
graduating from medical or dental school, to be issued to Eligible Students who
satisfy certain creditworthiness criteria. The Private Loans under the Programs
consist of loans associated with the above-mentioned fields of study (including
Bar Exam Loans and Residency Loans) and Private Consolidation Loans. Subject to
the satisfaction of the conditions imposed by the Programs and the applicable
Guarantee Agreement, all Financed Private Loans are fully guaranteed or insured
against nonpayment of principal and interest as a result of a borrower's
default, death, disability or bankruptcy by TERI or HICA. Holders of Private
Loans, however, are not entitled to receive any Federal Assistance with respect
thereto. See "The Financed Student Loan Pool -- Insurance of Student Loans;
Guarantors of Student Loans." In order to qualify for the guarantee or insurance
coverage from TERI or HICA, Private Loans may not be made to a single borrower
in excess of the annual and aggregate limits imposed by the Programs and may
only be made to borrowers who qualify pursuant to credit underwriting standards
established by the Seller and approved by TERI (in the case of Private Loans to
be guaranteed by TERI) and who otherwise satisfy the eligibility
51
<PAGE> 52
requirements discussed above under "--The Graduate Loan Programs." The following
table summarizes the annual, aggregate and cumulative loan limits for each
Private Loan guaranteed by TERI:
<TABLE>
<CAPTION>
TYPE OF ANNUAL AGGREGATE CUMULATIVE
PROGRAM YEAR LOAN MAXIMUM MAXIMUM MAXIMUM(2)
------------ ------- ------- --------- ----------
<S> <C> <C> <C> <C>
1991-1992............ Law Loan $14,500 $43,500 $ 78,000
Bar Exam Loan $ 5,000 $ 5,000 $ 83,000
1992-1993............ Law Loan $15,000 $45,000 $ 79,500
Bar Exam Loan $ 5,000 $ 5,000 $ 84,500
1993-1994............ Law Loan $15,000 $45,000 $ 87,500
Bar Exam Loan $ 5,000 $ 5,000 $ 87,500
1994-1995............ Law Loan $15,000 $45,000 $ 92,000
Bar Exam Loan $ 5,000 $ 5,000 $ 92,000
1995-1996 through
1997-1998.......... Law Loan Up to the cost of attendance N/A $120,000
Business Loan Up to the cost of attendance(1) N/A $120,000
Dental Loan Up to the cost of attendance N/A $135,000
Graduate Loan Up to the cost of attendance N/A $120,000
Medical Loan Up to the cost of attendance N/A $165,000
Bar Exam Loan $ 5,000 $ 5,000
Residency Loan $ 8,000 $ 8,000
</TABLE>
- ---------------
(1) Students enrolled less than half-time can borrow a maximum annual amount of
the combined cost of tuition, fees, and a maximum of $500 for books and
supplies.
(2) Including graduate and undergraduate debt.
Payment Terms. Each Financed Private Loan guaranteed by TERI 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 Financed Private Loan
guaranteed by TERI:
<TABLE>
<CAPTION>
INTEREST MARGIN
OVER 91-DAY
TREASURY BILL RATE
----------------------------
INTERIM (1) REPAYMENT (2)
----------- -------------
<S> <C> <C>
Law...................................................... 3.25% 3.40%
Medical.................................................. 2.50 2.75
Dental................................................... 2.50 3.00
Business................................................. 3.25 3.40
Graduate................................................. 3.25 3.40
Bar Exam Loan............................................ 3.25 3.40
Residency Loan........................................... 2.50 2.75
</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.
Interest accrues on the outstanding principal amount of each Private Loan
from the date the lender makes such Private Loan and is payable monthly by each
borrower commencing approximately six
52
<PAGE> 53
months after such borrower ceases to be an Eligible Student (or, with respect to
each Private 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 Loans (other than Private Consolidation Loans) may receive the benefits
of certain deferral periods (either prior to commencing repayment or thereafter)
similar to those applicable to Stafford Loans, during which borrowers are
permitted to defer principal payments and to capitalize the interest accruing on
such Private Loans. Borrowers 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
Loans (other than Private Consolidation Loans) may, subject to certain
conditions, qualify, at the discretion of the lender (in accordance with
standards and guidelines approved by TERI or HICA), for periods of forbearance
because of temporary financial hardship, during which borrowers may defer or
make reduced principal payments on such Private Loans. Interest on each Private
Loan that accrues prior to the Private Loan Repayment Commencement Date may, at
the option of the borrower, be paid currently or be capitalized and added to the
principal amount outstanding for such Private Loan on that date. Each student
with outstanding Private Loans (other than Private Consolidation Loans) is
obligated to make scheduled payments of principal at the same time that he or
she makes interest payments in an amount sufficient to repay such Private Loan
in full over a period not to exceed 15 years (or, with respect to each Private
Loan made since the commencement of the 1990-1991 Program Year, 20 years) after
the Private Loan Repayment Commencement Date with respect to such Private 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. The Programs presently
require a minimum annual principal and interest payment with respect to a
Private Loan of $600 in the aggregate (but in no event less than accrued
interest), unless the borrower and the lender agree to a lesser amount. For
Private Loans entering repayment on or after October 1, 1995, borrowers may
choose among several repayment options, including the option to make interest
only payments for limited periods.
With respect to each Private Loan guaranteed by TERI (other than Private
Consolidation Loans) and made to a student since the commencement of the
1992-1993 Program Year, a fee equal to 2% of the original principal amount of
such Private Loan is charged to such student on the applicable Private Loan
Repayment Commencement Date. Commencing with the 1996-1997 Program Year, a fee
of 4% of the original principal amount of each such Law Loan and 3% of each such
Graduate School Loan and Bar Exam Loan is charged to such student on the
applicable Private Loan Repayment Commencement Date. The fee will remain at 2%
for Medical Loans, Dental Loans, Business Loans, and Residency Loans. At the
option of such student, the Seller will make an additional loan (a "Guarantee
Fee Advance") to such student in an amount equal to such fee, which will be
added to the principal balance of such Private Loan guaranteed by TERI and
repaid over the term thereof. See "Description of the Transfer and Servicing
Agreements -- Additional Fundings" for a discussion of the transfer of such
Guarantee Fee Advance to the Trust. With respect to each Private Loan guaranteed
by TERI, approximately 12% of each such fee is payable to TERI while the
remaining amount is held in trust for a specified period to secure TERI's
guarantee obligation with respect to all Private Loans guaranteed since the
commencement of the 1992-1993 Program Year. See "The Financed Student Loan
Pool -- Insurance of Student Loans; Guarantors of Student Loans -- Guarantors
for the Financed Private Loans," and "-- Segregated Reserves for Private Loans
Under the Programs."
ADEAL (Alternative Dental Education Assistance Loan) loans insured by HICA
are similar to the Dental Loans outlined above. ADEAL loans 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
53
<PAGE> 54
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 as part of the Programs, to facilitate the ability of
eligible borrowers of Private Loans ("Underlying Private Loans") to consolidate
such Private Loans into a single loan (a "Private Consolidation Loan"; together
with Federal Consolidation Loans, sometimes referred to herein collectively as
"Consolidation Loans"). The Private Consolidation Loan program commenced in
November, 1994. Subject to the satisfaction of certain conditions set forth
under the Programs, including limitations on the timing and payment of principal
and interest with respect to Private Consolidation Loans and a requirement that
the proceeds of a Private Consolidation Loan be used to repay the respective
Underlying Private Loans of any borrower, each holder of a Private Consolidation
Loan will be entitled to substantially the same guarantee or insurance
arrangements as are available on the Underlying Private Loans. Under this
program, an eligible borrower of Private Consolidation Loans such as those that
may be Additional Student Loans means a borrower (i) with outstanding Underlying
Private Loans of at least $7,500 and (ii) who has begun repaying and is not more
than 45 days delinquent in required payments on any Underlying Private Loan. A
borrower of a Private Consolidation Loan must consolidate all of his or her
eligible loans and in doing so will forgo all opportunities for deferment or
forbearance (except in certain limited circumstances).
Private Consolidation Loans originated during the 1995 through 1998 Program
years will bear interest at the rate applicable to the Loan type for which the
greatest principal amount of 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 Loans. With
respect to each Private Consolidation Loan, a fee equal to 1% of the amount paid
to discharge the Underlying Private Loans will be charged to the borrower and
included in the original principal amount of such Private Consolidation Loan (a
"Private Consolidation Guarantee Fee").
The Trust may be affected by Private Consolidation Loans in two ways.
First, following the Loan Purchase Termination Date, the Seller may make Private
Consolidation Loans in which case the Underlying Private Loans will be prepaid
in full and such prepayment amount will be available for distribution to
Noteholders and Certificateholders for the applicable Collection Period. See
"Description of the Transfer and Servicing Agreements -- Distributions." Second,
the Seller may make a Private Consolidation Loan either during the Funding
Period or prior to the Loan Purchase Termination Date, in which case it will
acquire the related Underlying Private Loans from the Eligible Lender Trustee,
simultaneously deposit the Purchase Amount thereof in the Escrow Account, and
subsequently sell the Private Consolidation Loan back to the Eligible Lender
Trustee, to the extent that conditions with respect to such Private
Consolidation Loan are satisfied (including the cap on the aggregate dollar
amount of Consolidation Loans which can be purchased by the Eligible Lender
Trustee) and funds are available in Escrow Account and during the Funding
Period, the Pre-Funding Account or after the Funding Period until the Loan
Purchase Termination Date, from Available Loan Purchase Funds, for the purchase
thereof. An amount equal to the outstanding principal balance of such Private
Consolidation Loan will be withdrawn first from the Escrow Account to the extent
funds are then available and then, if during the Funding Period, from the
Pre-Funding Account or after the Funding Period until the Loan Purchase
Termination Date, from Available Loan Purchase Funds, and paid to the Seller,
and the Pool Balance will increase accordingly. See "Description of the Transfer
and Servicing Agreements -- Additional Fundings."
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<PAGE> 55
THE FINANCED STUDENT LOAN POOL
GENERAL
The pool of Financed Student Loans will include the Initial Financed
Student Loans purchased by the Eligible Lender Trustee on behalf of the Trust as
of the Statistical Cutoff Date and any Additional Student Loans purchased by the
Eligible Lender Trustee on behalf of the Trust from the Seller as of the
applicable Subsequent Cutoff Dates.
The Financed Student Loans will be selected from the Seller's portfolio of
Student Loans by several criteria, including, as of the Statistical Cutoff Date
or the applicable Subsequent Cutoff Date, as the case may be, the following:
each Financed Student Loan (i) was originated in the United States or its
territories or possessions under and in accordance with the Programs (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 from or otherwise leave graduate
school by August 31, 1998, (ii) contains terms in accordance with those required
by the Programs, the Guarantee Agreements and other applicable requirements and
(iii) 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. 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. Although there can
be no assurance that a borrower of an Initial Financed Student Loan has not
become involved in a bankruptcy proceeding or deceased subsequent to such date,
each such Financed Student Loan is guaranteed as to principal and interest by a
Guarantor in the event of any such bankruptcy or death of a borrower. 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.
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. No selection procedures believed
by the Seller to be adverse to the Securityholders were used or will be used in
selecting the Financed Student Loans. The 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. 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
55
<PAGE> 56
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 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 Guarantee Fee
Advances, 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 Guarantee Fee Advances must be made to a borrower
who has, immediately prior to the date of any such conveyance, outstanding
Student Loans that are part of the pool of Financed Student Loans. Each such
Additional Student Loan is otherwise required to comply with the criteria set
forth above. See "Description of the Transfer and Servicing
Agreements -- Additional Fundings."
However, except for the criteria described in the preceding paragraphs,
there will be no required characteristics of the Additional Student Loans.
Therefore, following the transfer of the Subsequent 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 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> 57
COMPOSITION AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
KEYCORP SLT 1999-A INITIAL POOL SUBSEQUENT POOL TOTAL
------------------ --------------- --------------- ---------------
<S> <C> <C> <C>
Aggregate Outstanding Balance(1).... $767,111,823.09 $32,180,803.50 $799,292,626.59
Number of Borrowers................. 22,904 965 23,869
Average Outstanding Balance Per
Borrower.......................... $ 33,492.48 $ 33,347.98 $ 33,486.64
Number of Loans..................... 78,613 3,841 82,454
Average Outstanding Balance Per
Loan.............................. $ 9,758.08 $ 8,378.24 $ 9,693.80
Weighted Average Remaining Term to
Maturity(2)....................... 200.04 122.53 196.92
Weighted Average Annual Borrower
Interest Rate(3).................. 8.06% 8.24% 8.07%
</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 $32,098,853.82 with respect to the Initial Financed Student Loans and
$293.86, 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 or
forbearance periods that may be granted in the future. See "The Student Loan
Financing Business."
(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." The weighted average spread, including Special Allowance
Payments, to the 91-day or 52-week Treasury Bill Rate, as applicable, was
3.12% as of the Statistical Cutoff Date and would have been 3.20% 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 or 52-week Treasury Bill
Rate, as applicable, was 3.10% as of the Statistical Cutoff Date and would
have been 3.10% if all of the Student Loans were in repayment as of the
Statistical Cutoff Date with respect to the Subsequent Pool Student Loans.
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<PAGE> 58
DISTRIBUTION BY LOAN TYPE AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL TOTAL
------------------------------------------ -------------------------------------------- ---------
AGGREGATE AGGREGATE
OUTSTANDING PERCENT OF OUTSTANDING PERCENT OF
NUMBER OF PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL SUBSEQUENT POOL NUMBER OF
LOANS BALANCE(1) BALANCE LOANS BALANCE(2) BALANCE LOANS
--------- --------------- ------------ --------- -------------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Stafford Subsidized
Loans.............. 20,367 $159,199,954.40 20.75% 2,170 $15,518,826.84 48.22% 22,537
Stafford Unsubsidized
Loans.............. 19,879 192,490,183.34 25.09% 1,642 15,906,742.39 49.43% 21,521
Federal Consolidation
Loans.............. 3,877 122,240,260.94 15.94% 29 755,234.27 2.35% 3,906
SLS Loans............ 63 320,415.41 0.04% 63
Bar Examination
Loans.............. 4,512 21,412,421.76 2.79% 4,512
Business Loans....... 972 10,649,939.35 1.39% 972
Private Consolidation
Loans.............. 1,001 27,303,005.23 3.56% 1,001
Dental Loans......... 254 3,510,062.71 0.46% 254
Graduate Loans....... 1,848 15,330,517.35 2.00% 1,848
Law Loans............ 23,832 198,501,669.21 25.88% 23,832
Medical Loans........ 342 2,772,075.01 0.36% 342
Residency Loans...... 769 5,532,712.37 0.72% 769
ADEAL Loans.......... 897 7,848,606.01 1.02% 897
------ --------------- ------ ----- -------------- ------ ------
Total.......... 78,613 $767,111,823.09 100.00% 3,841 $32,180,803.50 100.00% 82,454
====== =============== ====== ===== ============== ====== ======
<CAPTION>
TOTAL
----------------------------
AGGREGATE
OUTSTANDING PERCENT OF
PRINCIPAL POOL
BALANCE BALANCE
--------------- ----------
<S> <C> <C>
Stafford Subsidized
Loans.............. $174,718,781.24 21.86%
Stafford Unsubsidized
Loans.............. 208,396,925.73 26.07%
Federal Consolidation
Loans.............. 122,995,495.21 15.39%
SLS Loans............ 320,415.41 0.04%
Bar Examination
Loans.............. 21,412,421.76 2.68%
Business Loans....... 10,649,939.35 1.33%
Private Consolidation
Loans.............. 27,303,005.23 3.42%
Dental Loans......... 3,510,062.71 0.44%
Graduate Loans....... 15,330,517.35 1.92%
Law Loans............ 198,501,669.21 24.83%
Medical Loans........ 2,772,075.01 0.35%
Residency Loans...... 5,532,712.37 0.69%
ADEAL Loans.......... 7,848,606.01 0.98%
--------------- ------
Total.......... $799,292,626.59 100.00%
=============== ======
</TABLE>
- ---------------
(1) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$32,098,853.82 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
$293.86 as of the Statistical Cutoff Date.
DISTRIBUTION BY BORROWER INTEREST RATE AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL TOTAL
------------------------------------------ -------------------------------------------- ---------
AGGREGATE AGGREGATE
OUTSTANDING PERCENT OF OUTSTANDING PERCENT OF
NUMBER OF PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL SUBSEQUENT POOL NUMBER OF
LOANS BALANCE(2) BALANCE LOANS BALANCE(3) BALANCE LOANS
--------- --------------- ------------ --------- -------------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Less than 7.50%(1)... 2,539 $ 22,920,087.98 2.99% 6 $ 32,049.27 0.10% 2,545
7.50% to 7.99%....... 37,397 318,361,065.95 41.50% 1 5,000.00 0.02% 37,398
8.00% to 8.49%....... 37,988 393,411,950.83 51.28% 3,834 32,143,754.23 99.88% 41,822
8.50% to 8.99%....... 106 2,519,195.79 0.33% 106
9.00% and above...... 583 29,899,522.54 3.90% 583
------ --------------- ------ ----- -------------- ------ ------
Total.......... 78,613 $767,111,823.09 100.00% 3,841 $32,180,803.50 100.00% 82,454
====== =============== ====== ===== ============== ====== ======
<CAPTION>
TOTAL
----------------------------
AGGREGATE
OUTSTANDING PERCENT OF
PRINCIPAL POOL
BALANCE BALANCE
--------------- ----------
<S> <C> <C>
Less than 7.50%(1)... $ 22,952,137.25 2.87%
7.50% to 7.99%....... 318,366,065.95 39.83%
8.00% to 8.49%....... 425,555,705.06 53.24%
8.50% to 8.99%....... 2,519,195.79 0.32%
9.00% and above...... 29,899,522.54 3.74%
--------------- ------
Total.......... $799,292,626.59 100.00%
=============== ======
</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."
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$32,098,853.82 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
$293.86 as of the Statistical Cutoff Date.
58
<PAGE> 59
DISTRIBUTION BY OUTSTANDING PRINCIPAL BALANCE AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL TOTAL
--------------------------------------- ------------------------------------ ------------------------
AGGREGATE PERCENT OF AGGREGATE PERCENT OF AGGREGATE
NUMBER OUTSTANDING INITIAL NUMBER OUTSTANDING SUBSEQUENT NUMBER OUTSTANDING
OF PRINCIPAL POOL OF PRINCIPAL POOL OF PRINCIPAL
LOANS(1) BALANCE(2) BALANCE LOANS BALANCE(3) BALANCE LOANS BALANCE
-------- --------------- ---------- ------ -------------- ---------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Less than $1,000....... 1,215 $ 736,372.24 0.10% 75 $ 42,984.61 0.13% 1,290 $ 779,356.85
$1,000 to $1,999....... 2,756 4,213,398.04 0.55% 147 205,521.98 0.64% 2,903 4,418,920.02
$2,000 to $2,999....... 3,345 8,324,757.02 1.09% 220 555,793.36 1.73% 3,565 8,880,550.38
$3,000 to $3,999....... 3,649 12,759,145.07 1.66% 157 545,801.23 1.70% 3,806 13,304,946.30
$4,000 to $4,999....... 4,130 18,479,886.63 2.41% 120 530,374.94 1.65% 4,250 19,010,261.57
$5,000 to $5,999....... 7,100 38,430,607.44 5.01% 154 844,735.29 2.62% 7,254 39,275,342.73
$6,000 to $6,999....... 3,042 19,700,255.51 2.57% 100 646,409.75 2.01% 3,142 20,346,665.26
$7,000 to $7,999....... 3,199 24,017,490.82 3.13% 168 1,260,123.89 3.92% 3,367 25,277,614.71
$8,000 to $8,999....... 19,430 164,798,128.16 21.48% 1,515 12,837,861.34 39.89% 20,945 177,635,989.50
$9,000 to $9,999....... 3,258 31,082,402.74 4.05% 113 1,084,357.14 3.37% 3,371 32,166,759.88
$10,000 to $10,999..... 6,526 69,417,628.50 9.05% 253 2,659,435.92 8.26% 6,779 72,077,064.42
$11,000 to $11,999..... 5,877 67,665,511.25 8.82% 264 3,042,938.72 9.46% 6,141 70,708,449.97
$12,000 to $12,999..... 4,524 55,933,626.17 7.29% 368 4,641,712.64 14.42% 4,892 60,575,338.81
$13,000 to $13,999..... 1,273 17,067,339.06 2.22% 100 1,326,756.90 4.12% 1,373 18,394,095.96
$14,000 to $14,999..... 951 13,747,974.37 1.79% 5 73,425.41 0.23% 956 13,821,399.78
$15,000 to $15,999..... 773 11,971,776.44 1.56% 10 155,221.90 0.48% 783 12,126,998.34
$16,000 to $16,999..... 767 12,637,565.96 1.65% 6 99,687.01 0.31% 773 12,737,252.97
$17,000 to $17,999..... 767 13,446,067.12 1.75% 7 123,758.41 0.38% 774 13,569,825.53
$18,000 to $18,999..... 593 10,974,373.98 1.43% 8 148,231.91 0.46% 601 11,122,605.89
$19,000 to $19,999..... 615 11,975,938.26 1.56% 3 59,637.69 0.19% 618 12,035,575.95
$20,000 to $20,999..... 364 7,452,250.83 0.97% 6 124,078.46 0.39% 370 7,576,329.29
$21,000 to $21,999..... 398 8,544,886.00 1.11% 5 106,625.65 0.33% 403 8,651,511.65
$22,000 to $22,999..... 254 5,701,017.43 0.74% 4 90,771.12 0.28% 258 5,791,788.55
$23,000 to $23,999..... 236 5,551,999.45 0.72% 2 47,301.90 0.15% 238 5,599,301.35
$24,000 to $24,999..... 266 6,527,250.05 0.85% 6 146,531.50 0.46% 272 6,673,781.55
$25,000 to $25,999..... 287 7,321,913.13 0.95% 4 100,991.36 0.31% 291 7,422,904.49
$26,000 to $26,999..... 218 5,784,064.21 0.75% 2 52,335.41 0.16% 220 5,836,399.62
$27,000 to $27,999..... 222 6,098,782.01 0.80% 2 54,939.43 0.17% 224 6,153,721.44
$28,000 to $28,999..... 184 5,240,379.46 0.68% 0 0.00 0.00% 184 5,240,379.46
$29,000 to $29,999..... 132 3,892,923.50 0.51% 2 58,765.30 0.18% 134 3,951,688.80
$30,000 and above...... 2,262 97,616,112.24 12.73% 15 513,693.33 1.60% 2,277 98,129,805.57
------ --------------- ------ ----- -------------- ------ ------ ---------------
Total........... 78,613 $767,111,823.09 100.00% 3,841 $32,180,803.50 100.00% 82,454 $799,292,626.59
====== =============== ====== ===== ============== ====== ====== ===============
<CAPTION>
TOTAL
-------
PERCENT
OF
POOL
BALANCE
-------
<S> <C>
Less than $1,000....... 0.10%
$1,000 to $1,999....... 0.55%
$2,000 to $2,999....... 1.11%
$3,000 to $3,999....... 1.66%
$4,000 to $4,999....... 2.38%
$5,000 to $5,999....... 4.91%
$6,000 to $6,999....... 2.55%
$7,000 to $7,999....... 3.16%
$8,000 to $8,999....... 22.22%
$9,000 to $9,999....... 4.02%
$10,000 to $10,999..... 9.02%
$11,000 to $11,999..... 8.85%
$12,000 to $12,999..... 7.58%
$13,000 to $13,999..... 2.30%
$14,000 to $14,999..... 1.73%
$15,000 to $15,999..... 1.52%
$16,000 to $16,999..... 1.59%
$17,000 to $17,999..... 1.70%
$18,000 to $18,999..... 1.39%
$19,000 to $19,999..... 1.51%
$20,000 to $20,999..... 0.95%
$21,000 to $21,999..... 1.08%
$22,000 to $22,999..... 0.72%
$23,000 to $23,999..... 0.70%
$24,000 to $24,999..... 0.83%
$25,000 to $25,999..... 0.93%
$26,000 to $26,999..... 0.73%
$27,000 to $27,999..... 0.77%
$28,000 to $28,999..... 0.66%
$29,000 to $29,999..... 0.49%
$30,000 and above...... 12.28%
------
Total........... 100.00%
======
</TABLE>
- ---------------
(1) Borrowers generally have more than one outstanding loan. The average
aggregate outstanding principal balance of loans per borrower is $33,492.48,
with respect to the Initial Financed Student Loans, and $33,347.98, 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 23,869 and the
average outstanding principal balance per borrower would be $33,486.64.
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$32,098,853.82 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
$293.86 as of the Statistical Cutoff Date.
59
<PAGE> 60
DISTRIBUTION BY REMAINING TERM TO SCHEDULED MATURITY AS OF THE STATISTICAL
CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL TOTAL
------------------------------------------ -------------------------------------------- ---------
AGGREGATE AGGREGATE PERCENT OF
OUTSTANDING PERCENT OF OUTSTANDING SUBSEQUENT
NUMBER OF PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL POOL NUMBER OF
LOANS BALANCE(2) BALANCE LOANS BALANCE(3) BALANCE LOANS
--------- --------------- ------------ --------- -------------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
12 and below(1)...... 156 $ 210,101.16 0.03% 9 $ 2,821.75 0.01% 165
13 to 24............. 186 194,184.63 0.03% 9 8,010.35 0.02% 195
25 to 48............. 404 744,526.80 0.10% 25 48,721.84 0.15% 429
49 to 60............. 262 739,182.31 0.10% 17 39,729.10 0.12% 279
61 to 72............. 230 730,051.22 0.10% 51 141,773.60 0.44% 281
73 to 84............. 252 987,559.03 0.13% 20 62,500.98 0.19% 272
85 to 96............. 303 1,256,488.32 0.16% 21 75,500.54 0.23% 324
97 to 108............ 1,035 7,027,112.34 0.92% 106 638,596.26 1.98% 1,141
109 to 120........... 27,460 240,579,897.91 31.36% 3,462 29,557,157.64 91.85% 30,922
121 to 180........... 14,851 127,151,739.81 16.58% 92 850,757.17 2.64% 14,943
181 to 240........... 3,864 39,296,723.83 5.12% 5 87,739.10 0.27% 3,869
241 and above........ 29,610 348,194,255.73 45.39% 24 667,495.17 2.07% 29,634
------ --------------- ------ ----- -------------- ------ ------
Total........ 78,613 $767,111,823.09 100.00% 3,841 $32,180,803.50 100.00% 82,454
====== =============== ====== ===== ============== ====== ======
<CAPTION>
TOTAL
----------------------------
AGGREGATE
OUTSTANDING PERCENT OF
PRINCIPAL POOL
BALANCE BALANCE
--------------- ----------
<S> <C> <C>
12 and below(1)...... $ 212,922.91 0.03%
13 to 24............. 202,194.98 0.03%
25 to 48............. 793,248.64 0.10%
49 to 60............. 778,911.41 0.10%
61 to 72............. 871,824.82 0.11%
73 to 84............. 1,050,060.01 0.13%
85 to 96............. 1,331,988.86 0.17%
97 to 108............ 7,665,708.60 0.96%
109 to 120........... 270,137,055.55 33.80%
121 to 180........... 128,002,496.98 16.01%
181 to 240........... 39,384,462.93 4.93%
241 and above........ 348,861,750.90 43.65%
--------------- ------
Total........ $799,292,626.59 100.00%
=============== ======
</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."
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$32,098,853.82 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
$293.86 as of the Statistical Cutoff Date.
DISTRIBUTION BY BORROWER PAYMENT STATUS AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL TOTAL
------------------------------------------ -------------------------------------------- ---------
AGGREGATE AGGREGATE PERCENT OF
OUTSTANDING PERCENT OF OUTSTANDING SUBSEQUENT
NUMBER OF PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL POOL NUMBER OF
LOANS BALANCE(2) BALANCE LOANS BALANCE(3) BALANCE LOANS
--------- --------------- ------------ --------- -------------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
In School(1)......... 2,131 $ 18,360,760.78 2.39% 2,131
Grace................ 25,705 214,642,526.63 27.98% 25,705
Deferral............. 3,628 32,798,674.10 4.28% 3,628
Forbearance.......... 10,783 116,972,051.45 15.25% 3 $ 40,316.00 0.13% 10,786
Repayment
First year in
repayment.......... 30,613 320,694,904.71 41.81% 3,778 31,782,436.52 98.76% 34,391
Second year in
repayment.......... 3,393 50,674,867.16 6.61% 50 327,540.90 1.02% 3,443
More than two years
in repayment....... 2,360 12,968,038.26 1.69% 10 30,510.08 0.09% 2,370
------ --------------- ------- ----- -------------- ------- ------
Total........ 78,613 $767,111,823.09 100.00% 3,841 $32,180,803.50 100.00% 82,454
====== =============== ======= ===== ============== ======= ======
<CAPTION>
TOTAL
----------------------------
AGGREGATE
OUTSTANDING PERCENT OF
PRINCIPAL POOL
BALANCE BALANCE
--------------- ----------
<S> <C> <C>
In School(1)......... $ 18,360,760.78 2.30%
Grace................ 214,642,526.63 26.85%
Deferral............. 32,798,674.10 4.10%
Forbearance.......... 117,012,367.45 14.64%
Repayment
First year in
repayment.......... 352,477,341.23 44.10%
Second year in
repayment.......... 51,002,408.06 6.38%
More than two years
in repayment....... 12,998,548.34 1.63%
--------------- -------
Total........ $799,292,626.59 100.00%
=============== =======
</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 ("Repay-
60
<PAGE> 61
ment") or may have temporarily ceased repaying such loan through a deferral
("Deferral") or a forbearance ("Forbearance") period. See "The Student Loan
Financing Business."
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$32,098,853.82 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
$293.86 as of the Statistical Cutoff Date.
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
--------- ----- -------- ----------- --------- --------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
In-School............ 11.26 7.55 171.05 --
Grace................ 2.43 233.66 --
Deferral............. 7.85 135.20 --
Forbearance.......... 6.62 184.42
Repayment............ 188.80
----- ---- ---- ---- ------ -- -- --
Total......... 11.26 2.83 7.85 6.62 197.97 -- -- --
===== ==== ==== ==== ====== == == ==
<CAPTION>
SUBSEQUENT POOL TOTAL
----------------------- ------------------------------------------------------
FORBEARANCE REPAYMENT IN-SCHOOL GRACE DEFERRAL FORBEARANCE REPAYMENT
----------- --------- --------- ----- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
In-School............ -- 11.26 7.55 -- -- 171.05
Grace................ -- -- 2.43 -- -- 233.66
Deferral............. -- -- -- 7.85 -- 135.20
Forbearance.......... 10.21 119.52 -- -- -- 6.62 184.40
Repayment............ 122.52 -- -- -- -- 183.69
----- ------ ----- ---- ---- ---- ------
Total......... 10.21 122.51 11.26 2.83 7.85 6.62 194.93
===== ====== ===== ==== ==== ==== ======
</TABLE>
- ------------------
(1) Determined without giving effect to any deferral or forbearance periods that
may be granted in the future.
GEOGRAPHIC DISTRIBUTION OF STATES REPRESENTING MORE THAN 4%
OF THE AGGREGATE POOL BALANCE AS OF THE STATISTICAL CUTOFF DATE(1)
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
------------------------------------------ --------------------------------------------
AGGREGATE AGGREGATE PERCENT OF
OUTSTANDING PERCENT OF OUTSTANDING SUBSEQUENT
NUMBER OF PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL POOL
LOANS BALANCE(2) BALANCE LOANS BALANCE(3) BALANCE
--------- --------------- ------------ --------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
New York........ 13,732 $141,297,353.91 18.42% California...... 698 $ 6,259,716.16 19.45%
California...... 12,020 117,363,028.86 15.30% Massachusetts... 429 3,865,666.39 12.01%
Virginia........ 3,777 37,683,807.74 4.91% New York........ 319 2,701,433.17 8.39%
Texas........... 3,933 35,022,948.84 4.57% New Jersey...... 238 1,820,186.96 5.66%
Pennsylvania.... 3,649 34,563,412.06 4.51% Virginia........ 196 1,543,555.35 4.80%
Florida......... 3,446 33,999,956.30 4.43%
Massachusetts... 3,349 33,574,399.72 4.38%
New Jersey...... 3,046 30,734,173.96 4.01%
All Other
States (4)..... 31,661 302,872,741.70 39.48% 1,961 15,990,245.47 49.69%
------ --------------- ------- ----- -------------- -------
Total..... 78,613 $767,111,823.09 100.00% 3,841 $32,180,803.50 100.00%
====== =============== ======= ===== ============== =======
<CAPTION>
TOTAL
----------------------------------------
AGGREGATE
OUTSTANDING PERCENT OF
NUMBER OF PRINCIPAL POOL
LOANS BALANCE BALANCE
--------- --------------- ----------
<S> <C> <C> <C>
New York........ 14,051 $143,998,787.08 18.02%
California...... 12,718 123,622,745.02 15.47%
Virginia........ 3,973 39,227,363.09 4.91%
Massachusetts... 3,778 37,440,066.11 4.68%
Texas........... 4,008 35,705,847.83 4.47%
Pennsylvania.... 3,769 35,589,099.82 4.45%
Florida......... 3,545 34,858,518.40 4.36%
New Jersey...... 3,284 32,554,360.92 4.07%
All Other
States (4)..... 33,622 378,862,997.17 39.57%
------ --------------- -------
Total..... 82,454 $799,292,626.59 100.00%
====== =============== =======
</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 $32,098,853.82 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 $293.86 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 Total Pool
Balance.
61
<PAGE> 62
DISTRIBUTION BY LOAN REPAYMENT TERM AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
------------------------------------------ --------------------------------------------
AGGREGATE PERCENT OF AGGREGATE PERCENT OF
NUMBER OUTSTANDING INITIAL NUMBER OUTSTANDING SUBSEQUENT
LOAN OF PRINCIPAL POOL OF PRINCIPAL POOL
REPAYMENT TERMS LOANS BALANCE(1) BALANCE LOANS BALANCE(2) BALANCE
--------------- --------- --------------- ------------ --------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Level Payment................... 36,268 $350,637,788.31 45.71% 3,704 $30,839,004.42 95.83%
Interest Only (3)............... 8,522 111,982,567.17 14.60% 27 340,435.19 1.06%
Graduated Payment (4)........... 251 2,632,226.54 0.34% 16 156,528.02 0.49%
Other (5)....................... 33,572 301,859,241.07 39.35% 94 844,835.87 2.63%
------ --------------- ------ ----- -------------- ------
Total.................... 78,613 $767,111,823.09 100.00% 3,841 $32,180,803.50 100.00%
====== =============== ====== ===== ============== ======
<CAPTION>
TOTAL
----------------------------------------
AGGREGATE PERCENT
NUMBER OUTSTANDING OF
LOAN OF PRINCIPAL POOL
REPAYMENT TERMS LOANS BALANCE BALANCE
--------------- --------- --------------- ----------
<S> <C> <C> <C>
Level Payment................... 39,972 $381,476,792.73 47.73%
Interest Only (3)............... 8,549 112,323,002.36 14.05%
Graduated Payment (4)........... 267 2,788,754.56 0.35%
Other (5)....................... 33,666 302,704,076.94 37.87%
------ --------------- ------
Total.................... 82,454 $799,292,626.59 100.00%
====== =============== ======
</TABLE>
- ---------------
(1) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$32,098,853.82 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
$293.86 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.
DISTRIBUTION OF FINANCED FEDERAL LOANS BY DATE OF DISBURSEMENT
AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
------------------------------------------ --------------------------------------------
AGGREGATE PERCENT OF AGGREGATE PERCENT OF
NUMBER OUTSTANDING INITIAL NUMBER OUTSTANDING SUBSEQUENT
DATE OF OF PRINCIPAL POOL OF PRINCIPAL POOL
DISBURSEMENT(1) LOANS BALANCE(2) BALANCE LOANS BALANCE(3) BALANCE
--------------- --------- --------------- ------------ --------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Pre October 1, 1993............. 930 $ 4,949,835.64 0.65% 82 $ 539,299.43 1.68%
October 1, 1993 to Present...... 77,683 762,161,987.45 99.35% 3,759 31,641,504.07 98.32%
------ --------------- ------ ----- -------------- ------
Total.................... 78,613 $767,111,823.09 100.00% 3,841 $32,180,803.50 100.00%
====== =============== ====== ===== ============== ======
<CAPTION>
TOTAL
----------------------------------------
AGGREGATE PERCENT
NUMBER OUTSTANDING OF
DATE OF OF PRINCIPAL POOL
DISBURSEMENT(1) LOANS BALANCE BALANCE
--------------- --------- --------------- ----------
<S> <C> <C> <C>
Pre October 1, 1993............. 1,012 $ 5,489,135.07 0.69%
October 1, 1993 to Present...... 81,442 793,803,491.52 99.31%
------ --------------- ------
Total.................... 82,454 $799,292,626.59 100.00%
====== =============== ======
</TABLE>
- ---------------
(1) Federal Loans disbursed prior to October 1, 1993 are 100% guaranteed by the
applicable Federal Guarantor, and reinsured against default by the
Department up to 100% of the Guarantee Payments. Federal Loans disbursed on
or after October 1, 1993 (but before October 1, 1998) are 98% guaranteed by
the applicable Federal Guarantor, and reinsured against default by the
Department up to a maximum of 98% of the Guarantor Payments. Federal Loans
first disbursed on or after October 1, 1998 are 98% guaranteed by the
applicable Federal Guarantor, and reinsured against default by the
Department up to 95% of the Guarantee Payments. See "The Student Loan
Financing Business -- Federal Loans Under the Programs" and " -- Insurance
of Student Loans; Guarantors of Student Loans."
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$32,098,853.82 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
$293.86 as of the Statistical Cutoff Date.
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<PAGE> 63
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
NUMBER OUTSTANDING PERCENT OF NUMBER OUTSTANDING SUBSEQUENT NUMBER OUTSTANDING
OF PRINCIPAL INITIAL POOL OF PRINCIPAL POOL OF PRINCIPAL
LOANS BALANCE(1) BALANCE LOANS BALANCE(2) BALANCE LOANS BALANCE
------ --------------- ------------ ------ -------------- ---------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Days Delinquent
0 - 30.............. 75,698 $737,082,634.88 96.09% 3,507 $29,295,835.50 91.04% 79,205 $766,378,470.38
31 - 60.............. 2,571 25,903,238.61 3.38% 317 2,748,065.04 8.54% 2,888 28,651,303.65
61 - 90.............. 344 4,125,949.60 0.54% 17 136,902.96 0.43% 361 4,262,852.56
------ --------------- ------ ----- -------------- ------ ------ ---------------
Total........ 78,613 $767,111,823.09 100.00% 3,841 $32,180,803.50 100.00% 82,454 $799,292,626.59
====== =============== ====== ===== ============== ====== ====== ===============
<CAPTION>
TOTAL
-------
PERCENT
OF
POOL
BALANCE
-------
<S> <C>
Days Delinquent
0 - 30.............. 95.88%
31 - 60.............. 3.58%
61 - 90.............. 0.53%
------
Total........ 100.00%
======
</TABLE>
- ---------------
(1) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$32,098,853.82 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
$293.86 as of the Statistical Cutoff Date.
MATURITY AND PREPAYMENT ASSUMPTIONS
The rate of payment of principal of the Notes and the Certificates and the
yield on the Notes and the Certificates will be affected by prepayments of the
Financed Student Loans that may occur as described below. All the Financed
Student Loans are prepayable in whole or in part by the borrowers at any time
(including by means of Federal Consolidation Loans or consolidation loans made
under the Federal Direct Student Loan Program as discussed below) or as a result
of a borrower's default, death, disability or bankruptcy and subsequent
liquidation or collection of Guarantee Payments with respect thereto. The rate
of such prepayments cannot be predicted and may be influenced by a variety of
economic, social and other factors, including 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
(i) after the Loan Purchase Termination Date or (ii) from another lender at any
time, Noteholders (and after the Notes have been paid in full,
Certificateholders) will collectively receive as a prepayment of principal the
aggregate principal amount of such Financed Student Loans; 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
were 100% guaranteed. See "The Student Loan Financing Business-Federal Loans
Under the Programs -- Federal Consolidation Loans." There can be no assurance
that borrowers with Financed Student Loans will not seek to obtain Consolidation
Loans with respect to such Financed Student Loans 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
63
<PAGE> 64
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 such Financed Student Loan, in each case where such breach materially
adversely affects the interests of the Certificateholders or the Noteholders in
that Financed Student Loan and is not cured within the applicable cure period
(it being understood that any such breach that does not affect any Guarantor's
obligation to guarantee payment of such Financed Student Loan will not be
considered to have a material adverse effect for this purpose). See "Description
of the Transfer and Servicing Agreements -- Sale of Financed Student Loans;
Representations and Warranties" and " -- Servicer Covenants." See also
"Description of the Transfer and Servicing Agreements -- Additional Fundings"
regarding the prepayment of principal to Noteholders and Certificateholders if
as of the Special Determination Date the Subsequent Pool Pre-Funded Amount has
not been reduced to zero and the prepayment of principal to Noteholders as a
result of excess funds remaining on deposit in the Pre-Funding Account at the
end of the Funding Period, " -- Insolvency Event" regarding the sale of the
Financed Student Loans if a Seller Insolvency Event occurs and " -- Termination"
regarding the Seller's option to purchase the Financed Student Loans when the
aggregate Pool Balance is less than or equal to 5% of the Initial Pool Balance
and the auction of the Financed Student Loans occurs on or after the March 2009
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,
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,
and any reinvestment risks resulting from a faster or slower incidence of
prepayment of Financed Student Loans will be borne entirely by the
Securityholders. Such reinvestment risks may include the risk that interest
rates and the relevant spreads above particular interest rate bases are lower at
the time Securityholders receive payments from the Trust than such interest
rates and such spreads would otherwise have been had such prepayments not been
made or had such prepayments been made at a different time.
INSURANCE OF STUDENT LOANS; GUARANTORS OF STUDENT LOANS
General. Each Financed Federal Loan will be required to be guaranteed as
to principal and interest by PHEAA, ASA, NSLP, or ECMC and reinsured by the
Department under the Higher Education Act and must be eligible for Special
Allowance Payments and, with respect to each Financed Federal Loan that is a
Stafford Loan (excluding any Unsubsidized Stafford Loan) or Consolidation Loan
where none of the Underlying Loans were Unsubsidized Stafford Loans, must be
eligible for Interest Subsidy Payments paid by the Department. Each Financed
Private Loan will be required to be guaranteed or insured as to principal and
interest by TERI or HICA.
64
<PAGE> 65
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
NUMBER OUTSTANDING PERCENT OF NUMBER OUTSTANDING SUBSEQUENT NUMBER OUTSTANDING
NAME OF OF PRINCIPAL INITIAL POOL OF PRINCIPAL POOL OF PRINCIPAL
GUARANTEE AGENCY LOANS BALANCE(1) BALANCE LOANS BALANCE(2) BALANCE LOANS BALANCE(2)
---------------- ------ --------------- ------------ ------ -------------- ---------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASA.................. 18,345 $193,496,960.19 25.22% 17 $ 147,040.12 0.46% 18,362 $193,644,000.31
PHEAA................ 25,841 280,753,853.90 36.60% 29 506,107.75 1.57% 25,870 281,259,961.65
TERI................. 33,530 285,012,402.99 37.15% 0 0.00 0.00% 33,530 285,012,402.99
HICA................. 897 7,848,606.01 1.02% 0 0.00 0.00% 897 7,848,606.01
NSLP................. 0 0.00 0.00% 3,720 30,882,480.31 95.97% 3,720 30,882,480.31
ECMC................. 0 0.00 0.00% 75 645,175.32 2.00% 75 645,175.32
------ --------------- ------ ----- -------------- ------ ------ ---------------
Total........ 78,613 $767,111,823.09 100.00% 3,841 $32,180,803.50 100.00% 82,454 $799,292,626.59
====== =============== ====== ===== ============== ====== ====== ===============
<CAPTION>
TOTAL
-------
PERCENT
OF
NAME OF POOL
GUARANTEE AGENCY BALANCE
---------------- -------
<S> <C>
ASA.................. 24.23%
PHEAA................ 35.19%
TERI................. 35.66%
HICA................. 0.98%
NSLP................. 3.86%
ECMC................. 0.08%
------
Total........ 100.00%
======
</TABLE>
- ---------------
(1) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$32,098,853.82 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
$293.86 as of the Statistical Cutoff Date.
Federal Reinsurance. Under the Higher Education Act, each Federal
Guarantor is reimbursed by the Department pursuant to certain agreements between
the Department and such Federal Guarantor for amounts paid under its Guarantee
Agreement. The amount of reimbursement by the Department for Federal Loans for
each fiscal year commencing October 1 varies for each Federal Guarantor
depending on the annual claims rate for that Federal Guarantor (i.e., the dollar
amount of reimbursement claims filed by that Federal Guarantor during that
fiscal year as a percentage of the outstanding aggregate principal amount of
those Federal Loans it guarantees whose borrowers were repaying such Federal
Loans at the end of the preceding fiscal year) and the date on which the loan is
made as follows:
<TABLE>
<CAPTION>
REIMBURSEMENT BY THE
CLAIMS RATE OF FEDERAL GUARANTORS 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, 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
65
<PAGE> 66
reimburse for loans first disbursed on or after October 1, 1993, reducing
substantially the premiums and default collections that Federal Guarantors are
entitled to receive and/or retain and giving the Department broad powers over
Federal Guarantors and their reserves. These powers include the authority to
require a Federal Guarantor to return all reserve funds to the Department if the
Department determines such action is necessary to 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 significant risk that the resources available to the Federal
Guarantors to meet their guarantee obligations will be significantly reduced.
Such changes could result in a reduction of the Trust's ability to pay principal
and interest on the Notes, as a result of a reduction in the ability of the
Federal Guarantors to make Guarantee Payments to the Eligible Lender Trustee
with respect to the Financed Student Loans. In addition, this legislation sought
to greatly expand the Federal Direct Student Loan Program volume 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 loans made under the Federal Programs. Such changes
could have an adverse effect on the financial condition of the Federal
Guarantors and on the ability of a Federal Guarantor to satisfy its obligations
under its Guarantee Agreement with respect to the Financed Federal Loans. See
"Risk Factors -- Changes in Legislation May Adversely Affect Financed Student
Loans and Guarantors." 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% and thereby increasing guarantor risk sharing from 2% to 5%.
In issuing guarantees with respect to Student Loans, each Federal Guarantor
is required by the Higher Education Act to review loan applications to verify
the completion of required information and to make a determination that the
applicant has not borrowed amounts in excess of any applicable annual and
aggregate limits imposed by the Higher Education Act.
Pursuant to the 1992 Amendments and additional changes made in 1997 and
1998, each Federal Guarantor is required to maintain a current minimum reserve
level of at least .25% of the aggregate principal amount of all outstanding
Federal Loans guaranteed by such Federal Guarantor. Annually, the Department
will collect information from each Federal Guarantor to determine the amount of
such Federal Guarantor's reserves and other information regarding its solvency.
If a Federal Guarantor's current reserve level falls below the required minimum
for any two consecutive years, that Federal Guarantor's annual claims rate
exceeds 5% or the Department determines that a Federal Guarantor's
administrative or financial condition jeopardizes that Federal Guarantor's
continued ability to perform its responsibilities, then that Federal Guarantor
must submit and implement a management plan acceptable to the Department. The
1992 Amendments also provide that under certain circumstances the Department is
authorized, on terms and conditions satisfactory to the Department, but is not
obligated, to terminate its reimbursement agreement with any Federal Guarantor.
In that event, however, the Department is required to assume the functions of
such Federal Guarantor and in connection therewith is authorized to do one or
more of the following: to assume the guarantee obligations of, to assign to
other guarantors the guarantee obligations of, or to make advances to, a Federal
Guarantor in order to assist such Federal Guarantor in meeting its immediate
cash needs and to ensure uninterrupted payment of default claims to lenders or
to take any other action the Department deems necessary to ensure the continued
availability of student loans and the full honoring of guarantee claims
thereunder. In addition, the 1992 Amendments provide that if the Department
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
66
<PAGE> 67
meeting such obligations or until a successor guarantor assumes such
obligations. There can be no assurance that the Department would under any given
circumstances assume such obligation to ensure satisfaction of a guarantee
obligation by exercising its right to terminate a reimbursement agreement with a
Federal Guarantor or by making a determination that such Federal Guarantor is
unable to meet its guarantee obligations.
Guarantors for the Financed Federal Loans. The Higher Education Act
requires every state to designate a guarantee agency, either by establishing its
own or by designating another guarantee agency. A Guarantor who has been
designated by a particular state is obligated to guarantee loans for students
who reside or attend school in such state and must agree to provide loans to any
such students who are otherwise unable to obtain a loan from any other lender.
Guarantee agencies may guarantee a loan made to any eligible borrower and are
not limited to guaranteeing loans for students attending institutions in their
particular state or region or for their residents attending schools in another
state or region. The Eligible Lender Trustee has entered into a Guarantee
Agreement with each of PHEAA, ASA, NSLP 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 Seller, the
Administrator and the Servicers -- the Servicers -- PHEAA." 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 36.60%, 25.22%, 0.00% and 0.00% of the
aggregate outstanding principal balance of the Initial Financed Student Loans
which are Financed Federal Loans and approximately 1.57%, 0.46%, 95.97% and
2.00% of the Subsequent Pool Student Loans which are Financed Federal Loans were
guaranteed by PHEAA, ASA, NSLP and ECMC, respectively. Neither NSLP nor ECMC
guarantee any of the Initial Financed Student Loans.
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 Federal bankruptcy code, as
amended;
(c) the closure of, or false certification of borrower eligibility by,
the School;
(d) the death of the borrower thereof;
(e) the total and permanent disability of the borrower thereof to work
and earn money or attend school, as certified by a qualified physician; or
(f) the failure of the borrower's school to pay a refund owed to the
borrower, to the extent of the amount of the refund that is allocable to
the loan.
When these conditions are satisfied, the Higher Education Act requires the
Guarantor generally to pay the claim within 90 days of its submission by the
lender. The obligations of 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: (i) the origination and
servicing of such Financed Federal Loan being performed in accordance with the
Programs, the Higher
67
<PAGE> 68
Education Act and other applicable requirements, (ii) 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, (iii) 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 (iv) 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 "Description of the Transfer and Servicing Agreements -- Sale of Financed
Student Loans; Representations and Warranties" and "-- Servicer Covenants."
Set forth below is certain current and historical information with respect
to each of the Federal Guarantors (excluding ECMC) in its capacity as a
Guarantor of all education loans guaranteed by each of them. No such information
is provided with respect to ECMC because the aggregate principal amount of
Financed Student Loans guaranteed by ECMC is approximately .08% 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 to Undergraduate Students (PLUS) program but excluding Federal
Consolidation Loans) that have first become guaranteed by each Federal Guarantor
(excluding ECMC) and by all federal guarantors in each of the last five federal
fiscal years:*
<TABLE>
<CAPTION>
STAFFORD, SLS AND PLUS LOANS GUARANTEED
---------------------------------------
(DOLLARS IN MILLIONS)
FEDERAL FISCAL ---------------------------------------
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 (i) sources of funds (including insurance
premiums, state appropriations, federal advances, federal reinsurance payments,
administrative cost allowances, collections on claims paid and investment
earnings) minus (ii) uses of funds (including claims paid to lenders, operating
expenses, lender fees, the Department's share of collections on claims paid,
returned advances and reinsurance fees). The "original principal amount of
outstanding loans" consists of the original principal amount of loans guaranteed
by such Federal Guarantor minus (i) the original principal amount of loans
canceled, claims paid, loans paid in full and loan guarantees transferred
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<PAGE> 69
from such Federal Guarantor to other guarantors, plus (ii) the original
principal amount of loan guarantees transferred to such Federal Guarantor from
other guarantors. ECMC has advised the Seller that ECMC's Agreements with the
Department require that on an annual basis, ECMC calculate the amount of reserve
funds and the amount of its expenses during the fiscal year in accordance with
directions of the Secretary. Unless the Secretary directs otherwise, if the
amount of ECMC's reserve funds exceeds 60 percent of the expenses, ECMC shall
return the excess reserves to the Secretary at the time of submitting the annual
report. The following tables set forth for 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 RECOVERY RATE
FISCAL -----------------------------
YEAR PHEAA ASA NSLP
- ------- ----- ---- ----
<S> <C> <C> <C>
1994 52.9 43.3 19.8
1995 53.3 43.4 21.3
1996 55.0 41.3 26.6
1997 54.8 42.7 31.5
1998 59.2 49.0 38.0
</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
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.
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<PAGE> 70
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.
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
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 Private Loan when due, provided such
failure continues for a period of 120 days (150 days for HICA);
(b) any filing by or against the borrower thereof of a petition in
bankruptcy pursuant to any chapter of the Federal bankruptcy code, as
amended, (with respect to the 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 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 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: (i) the origination and servicing of such Financed Private Loan being
performed in accordance with the Programs and other applicable requirements,
(ii) the timely payment to TERI or HICA, as the case may be, of all guarantee
fees or premiums payable with respect to such Financed Private Loan, (iii) 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
Private Loan and (iv) the transfer and endorsement of the promissory note
evidencing such Financed 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 Private Loan. In
addition, in the event that any Financed Private Loan is determined to be
unenforceable
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<PAGE> 71
because the terms of such Financed Private Loan or the forms of the application
or promissory note related thereto violate any provisions of applicable state
law, TERI's guarantee obligation is reduced to 50% and HICA's insurance
obligation is reduced to 0% of principal (including capitalized interest and
fees) and accrued interest with respect to such Financed 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 Private Loan or of the
applicable Servicer to purchase such Financed Private Loan. See "Description of
the Transfer and Servicing Agreements -- Sale of Financed Student Loans;
Representations and Warranties" and "-- Servicer Covenants."
TERI 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 Private Loans. 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 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 Private Loans 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; 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:
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 170 people, as of September
30, 1998.
Guaranty Volume. The following table sets forth the non-federally
reinsured education loans that have first become guaranteed by TERI in each of
the five calendar years and the nine-month period referred to below; such
information is not guaranteed as to accuracy or completeness and is not to be
construed as a representation by the Seller or any of the Underwriters:
<TABLE>
<CAPTION>
PRIVATE LOANS
CALENDAR YEAR GUARANTEED BY YEAR
------------- ------------------
(DOLLARS IN MILLIONS)
<S> <C>
1993........................................................ $342.9
1994........................................................ 292.2
1995........................................................ 303.4
1996........................................................ 339.7
1997........................................................ 332.6
1998*....................................................... 267.9
======
</TABLE>
- ---------------
* For the nine-month period ending September 30, 1998.
Proprietary School Loans. Default rates for Student Loans made to students
attending proprietary or vocational schools are significantly higher than those
made to students attending other 2-year and 4-year institutions. Except for a
few selected, accredited proprietary schools which grant degrees, TERI does not
guarantee student loans made to students attending proprietary or vocational
schools.
Reserve Ratio. Unlike the Federal Guarantors, TERI computes its reserve
ratio by dividing the "Total Amounts Available To Meet Guarantee Commitments" by
the "total loans outstanding." TERI defines "Total Amounts Available to Meet
Guarantee Commitments" as the sum of the amounts set forth below under the
caption "Amounts Available To Meet Guarantee Commitments" (which amounts include
71
<PAGE> 72
for this purpose the segregated reserves described below under the caption
"Segregated Reserves for Private Loans Under the Programs"). TERI defines "total
loans outstanding" as the total outstanding principal amount of all loans it has
agreed to guarantee as of December 31 of each year. Consequently, the reserve
ratio information provided above for the Federal Guarantors is not comparable to
that provided for TERI below. The following table sets forth TERI's reserve
ratio as of December 31 for the five calendar years and the nine-month period
referred to below; such information is not guaranteed as to accuracy or
completeness and is not to be construed as a representation by the Seller 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>
1993.............................................. $ 75,974 7.0%
1994.............................................. 73,624 6.1%
1995.............................................. 83,937 5.7%
1996.............................................. 96,362 5.7%
1997.............................................. 102,201 5.4%
1998*............................................. 103,223 5.1%
</TABLE>
- ---------------
* For the nine-month period ending September 30, 1998.
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. For a more detailed discussion of such amendments and the related
risks, see "Risk Factors -- Dependence on Guarantors as Security for Financed
Student Loans." 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. The
unrestricted and/or temporarily unrestricted net assets consist of amounts in
the Designated Purposes Fund, the Guarantee Reserve Fund and the Operating Fund
set forth below.
As of the end of each of the five calendar years and the nine-month period
referred to below, TERI had available the following funds and reserves to meet
its loan guarantee commitments; such information is not guaranteed as to
accuracy or completeness and is not to be construed as a representation by the
Seller or any of the Underwriters:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------ SEPTEMBER 30,
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- -------- -------------
(AS RESTATED)
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Deferred Guarantee Fees........ $ 5,564 $ 5,269 $ 5,234 $ 5,140 $ 5,032 $ 4,526
Loan Loss Reserve.............. 38,269 29,629 29,092 57,006 56,999 54,667
Unrestricted -- Board
Designated................... 22,876 33,151 46,063 31,169 33,951 33,944
Unrestricted -- Undesignated... 9,264 5,579 3,548 3,047 6,219 10,086
------- ------- ------- ------- -------- --------
Total Amounts Available To Meet
Guarantee Commitments........ $75,974 $73,624 $83,937 $96,362 $102,201 $103,223
======= ======= ======= ======= ======== ========
</TABLE>
72
<PAGE> 73
Subject to the minimum restrictions imposed by lending institutions and the
segregated reserves discussed below under "Segregated Reserves for Private Loans
Under the Programs," 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 and the nine-month period referred to below are as follows;
such information is not guaranteed as to accuracy or completeness and is not to
be construed as a representation by the Seller or any of the Underwriters:
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD OF CASH RECOVERY RATE
DEFAULT (UNAUDITED)
--------- ------------------
<S> <C> <C>
1993.......................................... 52% (January 1, 1993--September 30, 1998)
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>
- ---------------
* For the nine-month period ending September 30, 1998.
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 five calendar years and the nine-month period
referred to below; such
73
<PAGE> 74
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 $ LOANS TOTAL DEFAULTS PAID FOR
GUARANTEED LOANS GUARANTEED IN COHORT
COHORT YEAR IN COHORT YEAR COHORT YEAR DEFAULT RATE
----------- -------------- ----------------------- ------------
(DOLLARS IN (UNAUDITED)
THOUSANDS) (DOLLARS IN THOUSANDS)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
1993.......................................... $342,938 $22,446 6.55%
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*......................................... 267,920 96 0.04%
</TABLE>
- ---------------
* For the nine-month period ending September 30, 1998.
The declining trend reflected above in the claims rates experienced by TERI
can largely be attributed to the fact that in each succeeding cohort year fewer
loans guaranteed by TERI were in repayment. As the number of loans entering
repayment increases, the percentage of loans becoming delinquent and
subsequently defaulting also tends to increase. There can be no assurance that
the claims rate experience of TERI for any future year will be similar to the
historical claims rate experience set forth above.
Segregated Reserves for Private Loans Under the Programs Guaranteed by
TERI. A portion of the reserves described above that are maintained by TERI have
been segregated solely to support its guarantee obligations under the Programs.
These segregated reserves, which are not available to cover TERI-guaranteed
loans outside of the Programs, are equally available to all holders of TERI
guaranteed Private Loans made 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 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 such Financed
Private Loans. The Seller will assign the portion of its rights under the
agreement implementing these segregated reserves that is attributable to such
Financed Private Loans to the Trust.
TERI has agreed that it will provide a copy of its most recent audited
financial statements to Securityholders upon receipt of a written request
directed to 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 30 people as of September 30, 1998. 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
74
<PAGE> 75
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>
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.
POOL FACTORS AND TRADING INFORMATION
Each of the "Class A-1 Note Pool Factor," the "Class A-2 Note Pool Factor"
and the "Certificate Pool Factor" (each, a "Pool Factor") is a seven-digit
decimal which the Administrator will compute for each Distribution Date
indicating the remaining outstanding principal balance of each class of Notes or
the Certificate Balance of each class of Certificates, respectively, as of that
Distribution Date (after giving effect to distributions on such Distribution
Date), as a fraction of the initial outstanding principal balance of each class
of Notes or each 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 balance of each class of Notes or the
Certificate Balance, as applicable. A Securityholder's portion of the aggregate
outstanding principal balance of each class of Notes or the Certificate Balance,
as applicable, is the product of (i) the original denomination of that
Securityholder's Note or Certificate and (ii) the applicable Pool Factor.
Pursuant to the Indenture and the Trust Agreement, the Securityholders will
receive quarterly reports concerning the payments received on the Financed
Student Loans, the reduction of the Pre-Funded Amount resulting from Additional
Fundings, the Pool Balance, the Pool Factor and various other items of
information. Securityholders of record during any calendar year will be
furnished information for tax reporting purposes not later than the latest date
permitted by law. See "Description of the Securities -- Reports to
Securityholders."
DESCRIPTION OF THE SECURITIES
Terms used in this section and not previously defined and not defined
herein are defined under "Description of the Transfer and Servicing Agreements
-- Distributions."
GENERAL
The Notes will be issued pursuant to the terms of the Indenture and the
Certificates will be issued pursuant to the terms of the Trust Agreement. The
following summary describes certain terms of the Notes, the Certificates, the
Indenture and the Trust Agreement. The summary does not purport to be complete
and is qualified in its entirety by reference to the provisions of the Notes,
the Certificates, the Indenture and the Trust Agreement.
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 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
75
<PAGE> 76
thereof in book-entry form only. The Trust has been informed by DTC that DTC's
nominee will be Cede. Accordingly, Cede is expected to be the holder of record
of the Securities. Unless and until Definitive Notes or Definitive Certificates
are issued under the limited circumstances described herein, no Noteholder or
Certificateholder will be entitled to receive a physical certificate
representing a Note or Certificate. All references herein to actions by
Noteholders or Certificateholders refer to actions taken by DTC upon
instructions from its participating organizations (the "Participants") and all
references herein to distributions, notices, reports and statements to
Noteholders or Certificateholders refer to distributions, notices, reports and
statements to DTC or Cede, as the registered holder of the Notes or the
Certificates, as the case may be, for distribution to Noteholders or
Certificateholders in accordance with DTC's procedures with respect thereto. See
" -- Book-Entry Registration" and " -- Definitive Securities."
THE NOTES
Distributions of Interest. Interest will accrue on the principal balance of
each class of Notes at a rate per annum equal to the lesser of the Formula Rate
for such Notes and the Student Loan Rate (each such interest rate being a "Note
Interest Rate"). Interest will accrue from and including the Closing Date or
from the most recent Distribution Date on which interest has been paid to but
excluding the current Distribution Date (each, an "Interest Period") and will be
payable to the Noteholders on each Distribution Date. Interest accrued as of any
Distribution Date but not paid on such Distribution Date will be due on the next
Distribution Date together with an amount 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." 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).
"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 T-Bill Indexed Securities,
the daily weighted average of the T-Bill Rates within such Interest Period
(determined as described under "--Determination of the T-Bill Rate") or (y) in
the case of the LIBOR Indexed Securities, Three Month LIBOR (determined as
described under "--Determination of LIBOR").
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 March 29, 1999 based on Three Month LIBOR as determined on the initial
LIBOR Determination Date and for the period from March 29, 1999 to but excluding
June 28, 1999 based on Three Month LIBOR as determined on the LIBOR
Determination Date in March 1999. See "-- Determination of LIBOR."
The "Margin" for each class of Securities is as set forth under "Summary of
Terms -- Transaction Overview -- Interest."
The "Student Loan Rate" for any class of Securities for any Interest Period
will equal the product of (a) the quotient obtained by dividing (i) 365 (or 366
in a leap year) by (ii) the actual number of days elapsed in such Interest
Period and (b) the percentage equivalent of a fraction, (i) the numerator of
which is equal to Expected Interest Collections for the Collection Period
relating to such Interest Period less the Servicing Fees and the Administration
Fee 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 (ii) 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> 77
"Expected Interest Collections" means, with respect to any Collection
Period, the sum of (i) the amount of interest accrued, net of amounts required
by the Higher Education Act to be paid to the Department or to be repaid to
borrowers, with respect to the Financed Student Loans for such Collection Period
(whether or not such interest is actually paid), (ii) all Interest Subsidy
Payments and Special Allowance Payments expected to be received by the Eligible
Lender Trustee for such Collection Period (whether or not actually received)
with respect to the Financed Federal Loans and (iii) Investment Earnings for
such Collection Period.
Any Noteholders' Interest Index Carryover 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." 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 Note Final
Maturity Date will never become due and payable and will be discharged on such
date.
Distributions of Principal. Principal payments will be made to the 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," 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 such
remaining amount of Available Funds is insufficient to pay the Noteholders'
Priority Principal Distribution Amount, for any Distribution Date, such
shortfall will be distributable to the Noteholders on subsequent Distribution
Dates and (except with respect to the Final Maturity Date for such classes of
Notes), such shortfall will not constitute an Event of Default. 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 March 2009 Distribution Date, the Specified Collateral Balance
shall 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
Administrative 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."
Principal payments on the Notes will be applied on each Distribution Date,
first, to the principal balance of the Class A-1 Notes until such principal
balance is reduced to zero and then to the principal balance of the Class A-2
Notes until such principal balance is reduced to zero. The aggregate outstanding
principal amount of each class of Notes will be payable in full on the
respective Final Maturity Dates for each such class of Notes. The dates on which
the Final Maturity Dates occur for each class of Notes are set forth in "Summary
of Terms -- Transaction Overview -- Maturity Dates." 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
such class of Notes to zero. Although the maturity of many of the Financed
Student Loans will extend well beyond such 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 such class of
Notes, based on a variety of factors, including those described above under
"Risk Factors -- Prepayment Risk from Pre-Funded
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Amount," "-- Prepayment, Maturity and Yield Risks," "-- Prepayment Risks Differ
Between the Notes and the Certificates" and "The Financed Student Loan
Pool -- Maturity and Prepayment Assumptions."
Mandatory Redemption. If, as of the Special Determination Date, the
Subsequent Pool Pre-Funded Amount has not been reduced to zero, then the
remaining Subsequent Pool Pre-Funded Amount, if greater than $10,000,000, will
be distributed on the first Distribution Date thereafter to redeem each class of
Notes and prepay the Certificates on a pro rata basis, based on the initial
principal amount of each class of Notes and the initial Certificate Balance of
the Certificates; if such amount is $10,000,000 or less, it will be distributed
on the first Distribution Date thereafter only to holders of the Class A-1
Notes.
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").
Such amount 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 such 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" for such
Distribution Date. See "Description of the Transfer and Servicing
Agreements -- Distributions," "-- Credit Enhancement -- Reserve Account" and
"-- Additional Fundings."
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." 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". See
"Description of the Transfer and Servicing Agreements -- Distributions" and
"-- Credit Enhancement -- Reserve Account."
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 in "Summary of Terms -- Transaction Overview -- Maturity Dates." 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, including those described above under "Risk
Factors -- Prepayment Risk from Pre-Funded Amount," "-- Prepayment, Maturity and
Yield Risks," "-- Prepayment Risks Differ Between the Notes and the
Certificates" and "The Financed Student Loan Pool -- Maturity and Prepayment
Assumptions."
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
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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 (i)
an Event of Default occurs and is continuing under the Indenture or (ii) an
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 T-BILL RATE
"T-Bill Rate" means, on any day, the weighted average per annum discount
rate (expressed on a bond equivalent basis and applied on a daily basis) for
91-day Treasury bills sold at the most recent 91-day Treasury bill auction prior
to such date, as reported by the U.S. Department of the Treasury. In the event
that the results of the auctions of 91-day Treasury bills cease to be reported
as provided above, or that no such auction is held in a particular week, then
the T-Bill Rate in effect as a result of the last such publication or report
will remain in effect until such time, if any, as the results of auctions of
91-day Treasury bills shall again be reported or such an auction is held, as the
case may be. The T-Bill Rate will be subject to a Lock-In Period of six Business
Days.
"Lock-In Period" means the 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
T-Bill Indexed Securities from and including the Closing Date or the preceding
Distribution Date, as applicable, to but excluding the current Distribution Date
is calculated by multiplying the principal amount of the Notes (or the
Certificate Balance) by an "accrued interest factor." This factor is calculated
by adding the interest rates applicable to each day on which each Note has been
outstanding since the Closing Date or the preceding Distribution Date, as
applicable, and dividing the sum by 365 (or by 366 in the case of accrued
interest which is payable on a Distribution Date in a leap year) and rounding
the resulting number to nine decimal places.
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The following table sets forth the accrued interest factors that would have
been applicable to any Notes which are T-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> <C>
1st ..................................... 5.00000% 0.000000000
2nd ..................................... 1 5.00000 0.000136986
3rd ..................................... 2 5.00000 0.000273973
4th ..................................... 3 5.00000 0.000410959
5th* ..................................... 4 5.15000 0.000547945
6th ..................................... 5 5.15000 0.000689041
7th ..................................... 6 5.15000 0.000830137
8th ..................................... 7 5.15000 0.000971233
9th ..................................... 8 5.15000 0.001112329
10th ..................................... 9 5.15000 0.001253425
</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 T-Bill
Indexed Securities. A similar factor calculated in the same manner is applicable
to the return on Certificates which are T-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 Transfer 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 March 29, 1999 and as determined on the
second Business Day prior to March 29, 1999 for the period from March 29, 1999
to but excluding June 28, 1999 (each, a "LIBOR Determination Date"). For
purposes of calculating Three-Month LIBOR, a Business Day is any day on which
banks in London and New York City are open for the transaction of business.
Interest due for any Interest Period will be determined based on the actual
number of days in such Interest Period over a 360-day year.
"Three-Month LIBOR" means the London interbank offered rate 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,
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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 LIBOR
Reset Period will be Three-Month LIBOR in effect for the previous LIBOR Reset
Period.
"Telerate Page 3750" means the display page so designated on the Dow Jones
Telerate Service (or such other page as may replace that page on that service
for the purpose of displaying comparable rates or prices).
"Reference Bank" means a leading bank (i) engaged in transactions in
Eurodollar deposits in the international Eurocurrency market, (ii) not
controlling, controlled by or under common control with the Administrator and
(iii) having an established place of business in London.
THE INDENTURE
Modification of Indenture. With the consent of the holders of a majority of
the outstanding Notes, the Indenture Trustee and the Trust may execute a
supplemental indenture to add provisions to, or change in any manner or
eliminate any provisions of, the Indenture with respect to the Notes, or to
modify (except as provided below) in any manner the rights of the Noteholders.
Without the consent of the holder of each outstanding Note affected
thereby, however, no supplemental indenture will (i) change the due date of any
installment of principal of or interest on any Note or reduce the principal
amount thereof, the interest rate specified thereon or the redemption price with
respect thereto or change any place of payment where or the coin or currency in
which any Note or any interest thereon is payable, (ii) impair the right to
institute suit for the enforcement of certain provisions of the Indenture
regarding payment, (iii) reduce the percentage of the aggregate amount of the
outstanding Notes the consent of the holders of which is required for any such
supplemental indenture or the consent of the holders of which is required for
any waiver of compliance with certain provisions of the Indenture or of certain
defaults thereunder and their consequences as provided for in the Indenture,
(iv) modify or alter the provisions of the Indenture regarding the voting of
Notes held by the Trust, the Seller, an affiliate of either of them or any
obligor on the Notes, (v) reduce the percentage of the aggregate outstanding
amount of the Notes the consent of the holders of which is required to direct
the Eligible Lender Trustee on behalf of the Trust to sell or liquidate the
Financed Student Loans if the proceeds of such sale would be insufficient to pay
the principal amount and accrued but unpaid interest on the outstanding Notes,
(vi) decrease the percentage of the aggregate principal amount of the Notes
required to amend the sections of the Indenture which specify the applicable
percentage of aggregate principal amount of the Notes necessary to amend the
Indenture or certain other related agreements or (vii) permit the creation of
any lien ranking prior to or on a parity with the lien of the Indenture with
respect to any of the collateral for the Notes or, except as otherwise permitted
or contemplated in the Indenture, terminate the lien of the Indenture on any
such collateral or deprive the holder of any Note of the security afforded by
the lien of the Indenture.
The Trust and the Indenture Trustee may also enter into supplemental
indentures, without obtaining the consent of Noteholders for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Indenture or of modifying in any manner the rights of
Noteholders so long as such action will not, in the opinion of counsel
satisfactory to the Indenture Trustee, materially and adversely affect the
interest of any Noteholder.
Events of Default; Rights Upon Event of Default. An "Event of Default" with
respect to the Notes is defined in the Indenture as consisting of the following
(except as described in the remaining sentences of this paragraph): (i) a
default for five days or more in the payment of any interest on any Note after
the same becomes due and payable; (ii) a default in the payment of the principal
of or any installment of the principal of any Note when the same becomes due and
payable; (iii) a default in the observance or performance of any covenant or
agreement of the Trust made in the Indenture and the continuation of any such
default for a period of thirty days after notice thereof is given to the Trust
by the Indenture Trustee or
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to the Trust and the Indenture Trustee by the holders of at least 25% in
principal amount of the Notes then outstanding; (iv) any representation or
warranty made by the Trust in the Indenture or in any certificate delivered
pursuant thereto or in connection therewith having been incorrect in a material
respect as of the time made, and such breach not having been cured within thirty
days after notice thereof is given to the Trust by the Indenture Trustee or to
the Trust and the Indenture Trustee by the holders of at least 25% in principal
amount of the Notes then outstanding or (v) certain events of bankruptcy,
insolvency, receivership or liquidation of the Trust. However, the amount of
principal required to be distributed to Noteholders on any Distribution Date is
limited to the amount of Available Funds on such date after payment of the
Servicing Fee, the Administration Fee and the Noteholders' Interest Distribution
Amount, up to an amount necessary to reduce the aggregate principal balance of
the Notes and the Certificate Balance to the Specified Collateral Balance.
Consequently, the failure to pay the entire unpaid principal amount of any class
of Notes on the applicable Final Maturity Date will result in an Event of
Default. The failure to pay the Noteholders' Principal Distribution Amount on
any class of Notes on any Distribution Date shall not result in the occurrence
of an Event of Default until the Final Maturity Date for such class of Notes. In
addition, the failure to pay the Noteholders' Interest Index Carryover or the
Certificateholders' Interest Index Carryover as a result of insufficient
Available Funds will not result in the occurrence of an Event of Default.
If an Event of Default should occur and be continuing with respect to the
Notes, the Indenture Trustee or holders of a majority in principal amount of the
Notes then outstanding may declare the principal of the Notes to be immediately
due and payable. Such declaration may be rescinded by the holders of a majority
in principal amount of the Notes then outstanding at any time prior to the entry
of judgment for the payment of such amount if (i) the Trust has paid to the
Indenture Trustee a sum equal to all amounts then due with respect to the Notes
(without giving effect to such acceleration) and (ii) all Events of Default
(other than nonpayment of amounts due solely as a result of such acceleration)
have been cured or waived.
If the Notes have been declared to be due and payable following an Event of
Default with respect thereto, the Indenture Trustee may, in its discretion,
either require the Eligible Lender Trustee to sell the Financed Student Loans,
subject to compliance with the rights of first offer held by PHEAA, or elect to
have the Eligible Lender Trustee maintain possession of the Financed Student
Loans and continue to apply collections with respect to such Financed Student
Loans as if there had been no declaration of acceleration. In addition, the
Indenture Trustee is prohibited from directing the Eligible Lender Trustee to
sell the Financed Student Loans following an Event of Default, other than a
default in the payment of principal on a Final Maturity Date for a class of
Notes or a default for five days or more in the payment of any interest on any
Note, unless (i) the holders of all outstanding Notes consent to such sale, (ii)
the proceeds of such sale are sufficient to pay in full the principal of and the
accrued interest on the outstanding Notes at the date of such sale or (iii) the
Indenture Trustee determines that the collections on the Financed Student Loans
would not be sufficient on an ongoing basis to make all payments on the Notes as
such payments would have become due if such obligations had not been declared
due and payable, and the Indenture Trustee obtains the consent of the holders of
66 2/3% of the aggregate principal amount of the Notes then outstanding;
provided, further that the Indenture Trustee may not sell or otherwise liquidate
the Financed Student Loans following an Event of Default, other than a default
in the payment of any principal on the Final Maturity Date for a class of Notes
or a default of five days or more on the payment of any interest on any Note,
unless (iv) the proceeds of the sale or liquidation of the Financed Student
Loans distributable to the Certificateholders are sufficient to pay to the
Certificateholders the outstanding Certificate Balance plus accrued and unpaid
interest thereon or (v) 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 Financed Student Loans following an Event of Default,
other than a default in the payment of any principal on the Final Maturity Date
for a class of Notes or a default of five days or more on the payment of any
interest on any Note unless (vi) proceeds of the sale or liquidation of the
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Financed Student Loans distributable from such sale are sufficient (a) to pay to
Noteholders, the outstanding principal balance of the Notes (other than the
Noteholders' Interest Index Carryover) and (b) to pay to Certificateholders, the
outstanding Certificate Balance plus accrued and unpaid interest thereon (other
than the Certificateholders' Interest Index Carryover) or (vii) after receipt of
notice from the Eligible Lender Trustee that the proceeds of such sale or
liquidation would not be sufficient (a) to pay to Noteholders, the outstanding
principal balance of the Notes (other than the Noteholders' Interest Index
Carryover) and (b) to pay to Certificateholders the outstanding Certificate
Balance plus accrued and unpaid interest thereon (other than the
Certificateholders' Interest Index 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 Indenture relating to the duties of the
Indenture Trustee, if an Event of Default should occur and be continuing with
respect to the Notes, the Indenture Trustee will be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of Notes, if the Indenture Trustee reasonably
believes it will not be adequately indemnified against the costs, expenses and
liabilities which might be incurred by it in complying with such request.
Subject to such provisions for indemnification and certain limitations contained
in the Indenture, the holders of a majority in principal amount of the
outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding or any remedy available to the Indenture Trustee and
the holders of a majority in principal amount of the Notes then outstanding may,
in certain cases, waive any default with respect thereto, except a default in
the payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the holders of the outstanding Notes.
No holder of any Note will have the right to institute any proceeding with
respect to the Indenture, unless (i) such holder previously has given to the
Indenture Trustee written notice of a continuing Event of Default, (ii) the
holders of not less than 25% in principal amount of the outstanding Notes have
requested in writing that the Indenture Trustee institute such proceeding in its
own name as Indenture Trustee, (iii) such holder or holders have offered the
Indenture Trustee reasonable indemnity, (iv) the Indenture Trustee has for 60
days failed to institute such proceeding and (v) no direction inconsistent with
such written request has been given to the Indenture Trustee during such 60-day
period by the holders of a majority in principal amount of the outstanding
Notes.
In addition, the Indenture Trustee and the Noteholders will covenant that
they will not at any time institute against the Trust any bankruptcy,
reorganization or other proceeding under any Federal or state bankruptcy or
similar law.
None of the Indenture Trustee, the Seller, the Administrator, the Servicers
or the Eligible Lender Trustee in its individual capacity, nor any holder of a
Certificate representing an ownership interest in the Trust, nor any of their
respective owners, beneficiaries, agents, officers, directors, employees,
successors or assigns will, in the absence of an express agreement to the
contrary, be personally liable for the payment of the principal of or interest
on the Notes or for the agreements of the Trust contained in the Indenture.
Certain Covenants. The Trust may not consolidate with or merge into any
other entity, unless (i) the entity formed by or surviving such consolidation or
merger is organized under the laws of the United States, any state or the
District of Columbia, (ii) such entity expressly assumes the Trust's obligation
to make due and punctual payments upon the Notes and the performance or
observance of every agreement and covenant of the Trust under the Indenture,
(iii) no Event of Default has occurred and is continuing immediately after such
merger or consolidation, (iv) the Trust has been advised that the rating of the
Notes and the Certificates would not be reduced or withdrawn by the nationally
recognized rating agencies rating the Securities as a result of such merger or
consolidation and (v) the Trust has received an opinion of counsel to the effect
that such consolidation or merger would have no material
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adverse federal or Pennsylvania state tax consequence to the Trust or to any
Certificateholder or Noteholder.
The Trust will not, among other things, (i) except as expressly permitted
by the Indenture, the Transfer and Servicing Agreements or certain related
documents (collectively, the "Related Documents"), sell, transfer, exchange or
otherwise dispose of any of the assets of the Trust, (ii) claim any credit on or
make any deduction from the principal and interest payable in respect of the
Notes (other than amounts withheld under the Code or applicable state law) or
assert any claim against any present or former holder of Notes because of the
payment of taxes levied or assessed upon the Trust, (iii) except as contemplated
by the Related Documents, dissolve or liquidate in whole or in part, (iv) permit
the validity or effectiveness of the Indenture to be impaired or permit any
person to be released from any covenants or obligations with respect to the
Notes under the Indenture except as may be expressly permitted thereby or (v)
permit any lien, charge, excise, claim, security interest, mortgage or other
encumbrance to be created on or extend to or otherwise arise upon or burden the
assets of the Trust or any part thereof, or any interest therein or the proceeds
thereof, except as expressly permitted by the Related Documents.
The Trust may not engage in any activity other than financing, purchasing,
owning, selling and managing the Financed Student Loans and the other assets of
the Trust and making Additional Fundings, in each case in the manner
contemplated by the Related Documents and activities incidental thereto.
The Trust will not incur, assume or guarantee any indebtedness other than
indebtedness incurred pursuant to the Notes and the Indenture or otherwise in
accordance with the Related Documents.
Annual Compliance Statement. The Trust will be required to file annually
with the Indenture Trustee a written statement as to the fulfillment of its
obligations under the Indenture.
Indenture Trustee's Annual Report. The Indenture Trustee will be required
to mail each year to all Noteholders a brief report relating to, among other
things, its eligibility and qualification to continue as the Indenture Trustee
under the Indenture, any amounts advanced by it under the Indenture, the amount,
interest rate and maturity date of certain indebtedness owing by the Trust to
the Indenture Trustee in its individual capacity, the property and funds
physically held by the Indenture Trustee as such and any action taken by it that
materially affects the Notes and that has not been previously reported.
Satisfaction and Discharge of Indenture. The Indenture will be discharged
with respect to the collateral securing the Notes upon the delivery to the
Indenture Trustee for cancellation of all the Notes or, with certain
limitations, upon deposit with the Indenture Trustee of funds sufficient for the
payment in full of all the Notes.
The Indenture Trustee. Bankers Trust Company, a New York banking
corporation, will be the Indenture Trustee under the Indenture. The Seller
maintains normal commercial banking relations with the Indenture Trustee.
BOOK-ENTRY REGISTRATION
Persons acquiring beneficial ownership interests in the Notes may hold
their interests through The Depository Trust Company ("DTC") in the United
States or Cedel or Euroclear in Europe and persons acquiring beneficial
ownership interests in the Certificates may hold their interests through DTC.
Securities will be registered in the name of Cede & Co. ("Cede") as nominee for
DTC. Cedel and Euroclear will hold omnibus positions with respect to the Notes
on behalf of Cedel Participants and the Euroclear Participants, respectively,
through customers' securities accounts in Cedel's and Euroclear's name on the
books of their respective depositaries (collectively, the "Depositaries") which
in turn will hold such positions in customers' securities accounts in the
Depositaries' names on the books of DTC.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC and a "clearing agency"
registered pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for its participating organizations ("Participants") and to
facilitate the clearance and
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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").
DTC management is aware that some computer applications, systems, and the
like for processing dates ("Systems") that are dependent upon calendar dates,
including dates before, on, and after January 1, 2000, may encounter "Year 2000
problems." DTC has informed its Participants and other members of the financial
community (the "Industry") that it has developed and is implementing a program
so that its Systems, as the same relates to the timely payment of distributions
(including principal and income payments) to securityholders, book-entry
deliveries, and settlement of trades within DTC ("DTC Services"), continue to
function appropriately. This program includes a technical assessment and a
remediation plan, each of which is complete. Additionally, DTC's plan includes a
testing phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to Issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to: (i)
impress upon them the importance of such services being Year 2000 compliant; and
(ii) determine the extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services. In addition, DTC is in the process of
developing such contingency plans as it deems appropriate.
According to DTC, the information set forth in the preceding two paragraphs
about DTC has been provided to the Industry by DTC for informational purposes
only and is not intended to serve as a representation, warranty or contract
modification of any kind.
Securityholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, the Securities may do so only through Participants and Indirect
Participants. In addition, Securityholders will receive all distributions of
principal and interest from the Indenture Trustee or the Eligible Lender
Trustee, as applicable (the "Applicable Trustee"), through Participants and
Indirect Participants. Under a book-entry format, Securityholders may experience
some delay in their receipt of payments, since such payments will be forwarded
by the Applicable Trustee to Cede, as nominee for DTC. DTC will forward such
payments to its Participants, which thereafter will forward them to Indirect
Participants or Securityholders. It is anticipated that the only
"Securityholder," "Certificateholder" and "Noteholder" will be Cede, as nominee
for DTC. Securityholders will not be recognized by the Applicable Trustee as
Noteholders or Certificateholders, as such terms are used in the Indenture and
the Trust Agreement, respectively, and Securityholders will be permitted to
exercise the rights of Securityholders only indirectly through DTC and its
Participants.
Transfers between DTC participants will occur in the ordinary way in
accordance with DTC Rules. Transfers between Cedel Participants and Euroclear
Participants will occur in the ordinary way in accordance with their applicable
rules and operating procedures.
Because of time-zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a DTC Participant will be made
during subsequent securities settlement processing and dated the Business Day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedel Participants on such Business Day. Cash received in Cedel or
Euroclear as a result of sales of securities by or through a Cedel Participant
or a Euroclear Participant to a DTC Participant will be received with value on
the DTC settlement date but will be available in the relevant Cedel or Euroclear
cash account only as of the Business Day following settlement in DTC.
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Cross-market transfers between persons holding Notes directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC Rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Cedel Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Securities among Participants on whose behalf it acts with respect to the
Securities and to receive and transmit distributions of principal of, and
interest on, the Securities. Participants and Indirect Participants with which
Securityholders have accounts with respect to the Securities similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Securityholders. Accordingly, although
Securityholders will not possess Securities, the Rules provide a mechanism by
which Participants will receive payments and will be able to transfer their
interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to such
Securities, may be limited due to the lack of a physical certificate for such
Securities.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 32
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations and may include any underwriters, agents or dealers with respect
to the Notes offered hereby. Indirect access to Cedel is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Cedel Participant, either directly
or indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may be settled in any of 32
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. The Euroclear
System is operated by Morgan Guaranty Trust Company of New York, Brussels,
Belgium office (the "Euroclear Operator" or "Euroclear"), under contract with
Euroclear Clearance Systems, S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for the Euroclear System on behalf of Euroclear Participants. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial
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intermediaries and may include any underwriters, agents or dealers with respect
to the Notes offered hereby. Indirect access to the Euroclear System is also
available to other firms that clear through or maintain a custodial relationship
with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawals of
securities and cash from the Euroclear System and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants and has no record
of or relationship with persons holding through Euroclear Participants.
Distributions with respect to Notes held through Cedel or Euroclear will be
credited to the cash accounts of Cedel Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by its Depositary. Such distributions will be subject to tax reporting
in accordance with relevant United States tax laws and regulations. Cedel or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a beneficial holder of Notes under the Indenture on behalf of a
Cedel Participant or Euroclear Participant only in accordance with its relevant
rules and procedures and subject to its Depositary's ability to effect such
actions on its behalf through DTC.
DTC has advised the Administrator that it will take any action permitted to
be taken by a Securityholder under the Indenture or the Trust Agreement, as the
case may be, only at the direction of one or more Participants to whose accounts
with DTC the Securities are credited. DTC may take conflicting actions with
respect to other undivided interests to the extent that such actions are taken
on behalf of Participants whose holdings include such undivided interests.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of interests in the Notes among Participants of
DTC, Cedel and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
NONE OF THE TRUST, THE SELLER, THE 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
The Notes and the Certificates will initially be issued in book-entry form.
The Notes and the Certificates will be issued in fully registered, certificated
form ("Definitive Notes" and "Definitive Certificates", respectively, and
collectively referred to herein as "Definitive Securities") to Noteholders or
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Certificateholders or their respective nominees, rather than to DTC or its
nominee, only if (i) the Administrator advises the Applicable Trustee in writing
that DTC is no longer willing or able to discharge properly its responsibilities
as depository with respect to the Securities and the Administrator is unable to
locate a qualified successor, (ii) the Administrator, at its option, elects to
terminate the book-entry system through DTC or (iii) after the occurrence of an
Event of Default, a Servicer Default or an Administrator Default,
Securityholders representing at least a majority of the outstanding principal
amount of the Notes or the Certificates, as the case may be, advise the
Applicable Trustee through DTC in writing that the continuation of a book-entry
system through DTC (or a successor thereto) with respect to such Notes or
Certificates is no longer in the best interest of the holders of such
Securities.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Applicable Trustee will be required to notify all applicable
Securityholders through Participants of the availability of Definitive
Securities. Upon surrender by DTC of the definitive security representing the
corresponding Securities and receipt of instructions for re-registration, the
Applicable Trustee will reissue such Securities as Definitive Securities to such
Securityholders.
Distributions of principal of, and interest on, such Definitive Securities
will thereafter be made by the Applicable Trustee in accordance with the
procedures set forth in the Indenture or the Trust Agreement, as the case may
be, directly to holders of Definitive Securities in whose names the Definitive
Securities were registered at the close of business on the Record Date. Such
distributions will be made by check mailed to the address of such holder as it
appears on the register maintained by the Applicable Trustee. The final payment
on any such Definitive Security, however, will be made only upon presentation
and surrender of such Definitive Security at the office or agency specified in
the notice of final distribution to Securityholders.
Definitive Securities will be transferable and exchangeable at the offices
of the Applicable Trustee or of a registrar named in a notice delivered to
holders of Definitive Securities. No service charge will be imposed for any
registration of transfer or exchange, but the Applicable Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
LIST OF SECURITYHOLDERS
Three or more holders of Notes or one or more holders of Notes evidencing
not less than 25% of the aggregate outstanding principal balance of the Notes
may, by written request to the Indenture Trustee, obtain access to the list of
all Noteholders maintained by the Indenture Trustee for the purpose of
communicating with other Noteholders with respect to their rights under the
Indenture or the Notes. The Indenture Trustee may elect not to afford the
requesting Noteholders access to the list of Noteholders if it agrees to mail
the desired communication or proxy, on behalf and at the expense of the
requesting Noteholders, to all Noteholders.
Three or more Certificateholders or one or more holders of Certificates
evidencing not less than 25% of the Certificate Balance may, by written request
to the Eligible Lender Trustee, obtain access to the list of all
Certificateholders for the purpose of communicating with other
Certificateholders with respect to their rights under the Trust Agreement or the
Certificates.
REPORTS TO SECURITYHOLDERS
On each Distribution Date, the Applicable Trustee will provide to
Securityholders of record as of the related Record Date a statement setting
forth substantially the same information as is required to be provided on the
related quarterly report provided to the Indenture Trustee and the Trust
described under "Description of the Transfer and Servicing Agreements --
Statements to Indenture Trustee and Trust."
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of the Indenture or the Trust
Agreement, as the case may be, the Applicable Trustee will mail to each person
who at any time during such calendar year was a Securityholder and received any
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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 certain 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, pursuant to which the Administrator will undertake
certain other administrative duties with respect to the Trust and the Financed
Student Loans; and the Trust Agreement, pursuant to which the Trust will be
created and the Certificates will be issued (collectively, the "Transfer and
Servicing Agreements"). However, the summary does not purport to be complete and
is qualified in its entirety by reference to the provisions of such Transfer and
Servicing Agreements.
SALE OF FINANCED STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
On or prior to the Closing Date, the Seller will sell and assign to the
Eligible Lender Trustee on behalf of the Trust, without recourse, its entire
interest in the Initial Financed Student Loans, all collections received and to
be received with respect thereto for the period on and after January 1, 1999 and
all the Assigned Rights pursuant to the Sale and Servicing Agreement. Each
Initial Financed Student Loan will be identified in schedules appearing as an
exhibit to the Sale and Servicing Agreement. The Eligible Lender Trustee will,
concurrently with such sale and assignment, execute, authenticate and deliver
the Notes. The net proceeds received from the sale of the Notes and the
Certificates will be applied to the purchase of the Financed Student Loans and
the Assigned Rights and to the deposit of the Pre-Funded Amount in the
Pre-Funding Account. See "--Additional Fundings" for a description of the
application of funds on deposit in the Pre-Funding Account during the Funding
Period.
In the Sale and Servicing Agreement, the Seller will make certain
representations and warranties with respect to the Financed Student Loans to the
Trust for the benefit of the Certificateholders and the Noteholders, including,
among other things, that (i) each Financed Student Loan, on the date on which
transferred to the Trust, is free and clear of all security interests, liens,
charges and encumbrances and no offsets, defenses or counterclaims have been
asserted or threatened; (ii) the information provided with respect to the
Initial Financed Student Loans is true and correct as of the Statistical Cutoff
Date and, in some cases, the Closing Date (iii) the information provided with
respect to the Subsequent Pool Student Loans is true and correct as of the
Statistical Cutoff Date and, as of the related Subsequent Cutoff Date, no claim
has been made to a Guarantor with respect to such Student Loans, and (iv) each
Financed Student Loan, at the time it was originated, complied and, at the
Closing Date or Transfer Date (as defined below), as applicable, complies in all
material respects with applicable federal and state laws (including, without
limitation, the Higher Education Act, consumer credit, truth in lending, equal
credit opportunity and disclosure laws) and applicable restrictions imposed by
the Programs or under any Guarantee Agreement.
Following the discovery by or notice to the Seller of a breach of any such
representation or warranty with respect to any Financed Student Loan that
materially and adversely affects the interests of the Certificateholders or the
Noteholders in such Financed Student Loan (it being understood that any such
breach that does not affect any Guarantor's obligation to guarantee or insure
payment of such Financed Student Loan will not be considered to have such a
material adverse effect), the Seller will, unless such breach is cured within 60
days, repurchase such Financed Student Loan from the Eligible Lender Trustee, as
of the first day following the end of such 60-day period that is the last day of
a Collection Period, at the related Purchase Price as of the day of repurchase
plus accrued interest thereon to the day of repurchase (the "Purchase Amount").
In addition, the Seller will reimburse the Trust with respect to a Financed
Federal Loan for any accrued interest amounts that a Federal Guarantor refuses
to pay
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pursuant to its Guarantee Agreement due to, or for any Interest Subsidy Payments
and Special Allowance Payments that are lost or that must be repaid to the
Department as a result of, a breach of any such representation or warranty by
the Seller. The repurchase and reimbursement obligations of the Seller will
constitute the sole remedy available to or on behalf of the Trust, the
Certificateholders or the Noteholders for any such uncured breach. The Seller's
repurchase and reimbursement obligations are contractual obligations pursuant to
the Sale and Servicing Agreement that may be enforced against the Seller, but
the breach of which will not constitute an Event of Default.
To assure uniform quality in servicing and to reduce administrative costs,
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.
ACCOUNTS
The Administrator will establish and maintain the Collection Account, the
Pre-Funding Account, the Escrow Account, and the Reserve Account, in the name of
the Indenture Trustee on behalf of the Noteholders and the Certificateholders.
Funds in the Collection Account, the Pre-Funding Account, the Escrow
Account 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), (i) 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 (ii) whose deposits are insured by
the 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
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the end of the Funding Period and ends on the Loan Purchase 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 Guarantee Fee Advances as provided in
the Sale and Servicing Agreement.
On the Closing Date, for administrative convenience, a portion of the
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
Pre-Funded Amount equal to $30,000,000 (the "Other Additional Pre-Funded
Amount") will be allocated to an administrative subaccount of the Pre-Funding
Account (the "Other Additional Pre-Funding Subaccount"). The Subsequent Pool
Pre-Funded Amount may only be used by the Trust on or prior to the Special
Determination Date to purchase from the Seller Subsequent Pool Student Loans.
The Subsequent Pool Pre-Funded Amount will be reduced on each date Subsequent
Pool Student Loans are transferred to the Trust by the aggregate Purchase Price
of such Subsequent Pool Student Loans transferred on such date.
The Trust intends to use funds on deposit in the Subsequent Pool
Pre-Funding Subaccount on or prior to the Special Determination Date to acquire
the Subsequent Pool Student Loans. In the event that the Subsequent Pool
Pre-Funded Amount is insufficient to pay the Purchase Price of the Subsequent
Pool Student Loans, as the case may be, 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 $30,000,000, (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 100% of the aggregate principal
balance thereof plus accrued interest (to the extent capitalized or to be
capitalized), Other Subsequent Student Loans, made by the Seller to those
eligible borrowers who have Student Loans that are part of the pool of Initial
Financed Student Loans as of the Statistical Cutoff Date or Subsequent Pool
Student Loans as of the related Subsequent Cutoff Date, to pay capitalized
interest on any Financed Student Loan and to pay Guarantee Fee Advances. See
"The Student Loan Financing Business -- Federal Loans Under the Programs --
Federal Consolidation Loans" and "--Private Loans Under the Programs -- Private
Consolidation Loans." "Serial Loans" constitute Student Loans which are made to
a borrower who is also a borrower under at least one outstanding Initial
Financed Student Loan or Subsequent 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. The Seller expects that
the total amount of Additional Fundings from the Pre-Funding Account will
approximate 100% of the Pre-Funded Amount by the last day of the Collection
Period preceding the March 2001 Distribution Date; however, there can be no
assurance that a sufficient amount of Additional Fundings will be made during
such time. If, on the Special Determination Date, the Subsequent Pool Pre-Funded
Amount has not been reduced to zero, then such amounts will be distributed to
Securityholders as described in "Description of the
Securities -- Notes -- Mandatory Redemption." 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
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of the Notes and the Certificates (other than the Noteholders' Interest Index
Carryover and the Certificateholders' Interest Index Carryover) for such
Distribution Date for which funds otherwise available therefor for such
Distribution Date are insufficient to make such 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 such purposes will not be replenished with
future available funds.
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: (i) such Additional
Student Loan must satisfy all applicable origination requirements and all other
requirements specified in the Sale and Servicing Agreement or elsewhere, (ii)
the Seller will not select such Additional Student Loan in a manner that it
believes is adverse to the interests of the Securityholders and (iii) the Seller
will deliver certain opinions of counsel to the Indenture Trustee and the Rating
Agencies with respect to the validity of the conveyance of such Additional
Student Loan. In addition, (a) no Consolidation Loan will be transferred to the
Trust unless at least one underlying Student Loan was held by the Eligible
Lender Trustee on behalf of the Trust at the time of consolidation and (b) no
Serial Loan will be transferred to the Trust unless the borrower of such loan is
the borrower for one or more Financed Student Loans already owned by the Trust.
On the fifteenth day (or, if such day is not a Business Day, the next succeeding
Business Day) of each month or on certain other dates designated by the Seller
during the Funding Period 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 (i) with respect to Subsequent
Pool Student Loans and Other Subsequent Student Loans, during the Funding
Period, from the Pre-Funding Account and (ii) 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. Notwithstanding the foregoing, because the Loan Purchase
Termination Date is defined as the last day of the Funding Period, the Trust
will not apply any Available Loan Purchase Funds to purchase Other Student
Loans.
With respect to any Consolidation Loan to be made by the Seller to a given
borrower, the Eligible Lender Trustee on behalf of the Trust will convey to the
Seller all Underlying Federal Loans and Underlying Private Loans, as applicable,
held by it with respect to that borrower, as specified in a notice delivered by
or on behalf of the Seller. In exchange for and simultaneously with such
conveyance, the
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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") and will be used on the succeeding Transfer
Date, as described above, to purchase Additional Student Loans from the Seller.
Any of such amounts remaining in the Escrow Account on 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.
SERVICING PROCEDURES
Pursuant to the Sale and Servicing Agreement, PHEAA and EFS 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 TERI Maximum 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"), 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 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
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(i) there exists no Administrator Default (as described below) and (ii) each
other condition to making quarterly deposits as may be specified by the rating
agencies is satisfied, 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.
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 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.
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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 (i) the Servicing Fee Percentage (as defined below) of the Pool
Balance as of the last day of the immediately preceding calendar month and (ii)
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
Percentage" means, with respect to each Servicer, the per annum percentage
specified in a fee schedule for such Servicer delivered to the Eligible Lender
Trustee on the Closing Date. The Servicing Fee set forth in clause (i) above may
be subject to reasonable increase agreed to by the Administrator, the Eligible
Lender Trustee and the 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 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." 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 (i) any sale of the Financed Student Loans on behalf of the
Trust to any person (other than the Seller, the Administrator, PHEAA or the
Servicers) in which the purchaser elects to deconvert the Financed Student Loans
and not retain PHEAA or EFS, as the case may be, as Servicer or (ii) any
termination by the Trust of PHEAA or EFS, 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 EFS, as the case may be, the Trust shall pay to
PHEAA or EFS, 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.
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DISTRIBUTIONS
Deposits to Collection Account. On or about the third Business Day prior to
each Distribution Date (the "Determination Date"), the Administrator will
provide the Indenture Trustee with certain information with respect to the
distributions to be made on such Distribution Date.
On or before the Business Day preceding each Monthly Servicing Payment Date
that is not a Distribution Date, the Administrator will cause (or will cause the
Servicers and the Eligible Lender Trustee to cause) (i) any Guaranteed Payments
made by TERI in excess of the Maximum TERI Payments Amount and (ii) 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:
(i) 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 and Federal Consolidation Loan
Rebate payable to the Department on Federal Consolidation Loans disbursed
after October 1, 1993, and (y) any collections in respect of principal on
the Financed Student Loans applied by the Trust to repurchase guaranteed
loans from the Guarantors in accordance with the Guarantee Agreements;
(ii) any Interest Subsidy Payments and Special Allowance Payments
received by the Eligible Lender Trustee during the then elapsed portion of
such Collection Period with respect to the Financed Federal Loans;
(iii) 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;
(iv) 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;
(v) 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;
(vi) amounts deposited by the Seller into the Collection Account in
connection with the making of Consolidation Loans;
(vii) with respect to the first Distribution Date, the initial deposit
into the Collection Account;
(viii) Investment Earnings for such Distribution Date;
(ix) amounts withdrawn from the Reserve Account in excess of the
Specified Reserve Account Balance and deposited into the Collection
Account;
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(x) amounts withdrawn from the Escrow Account and deposited into the
Collection Account; and
(xi) 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;
provided that Available Funds will exclude (A) all payments and proceeds
(including Liquidation Proceeds) of any Financed Student Loans, the Purchase
Amount of which has been included in Available Funds for a prior 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 Guarantee Fee Advances during the period
following the preceding Distribution Date and ending on or prior to such
Distribution Date; provided, further, that 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 (1) to pay any of
the items specified in clauses (i) through (iii), respectively, under
"--Distributions from the Collection Account," for such Distribution Date and
(2) 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 (1) above such items specified in clauses (i) through (iii)
respectively and in the case of clause (2) 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 (i) 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 (ii) 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.
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:
(i) 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;
(ii) to the Servicers, the Servicing Fee due on such Distribution Date
and all prior unpaid Servicing Fees;
(iii) to the Administrator, the Administration Fee and all unpaid
Administration Fees from prior Collection Periods;
(iv) to the holders of the Notes, the Noteholders' Interest
Distribution Amount;
(v) to the holders of the Certificates, the Certificateholders'
Interest Distribution Amount;
(vi) 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;
(vii) to the holders of the Notes, the Noteholders' Principal
Distribution Amount;
(viii) 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;
(ix) to the Servicers, the aggregate unpaid amount, if any, of the
Excess Servicing Fee;
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(x) 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;
(xi) to the holders of the Certificates, the aggregate unpaid amount
of the Certificateholders' Interest Index Carryover, if any; and
(xii) to the Seller, any remaining amounts after application of
clauses (i) through (xi).
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 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 $34,600,000 as of the Closing Date and
thereafter, equals the initial Certificate Balance, reduced by all amounts
allocable to principal subsequently distributed to the Certificateholders.
"Certificateholders' Distribution Amount" means, with respect to any
Distribution Date, the Certificateholders' Interest Distribution Amount for such
Distribution Date plus, for each Distribution Date on and after which the Notes
have been paid in full, the Certificateholders' Principal Distribution Amount
for such Distribution Date.
"Certificateholders' Interest Carryover Shortfall" means with respect to
any Distribution Date, the excess of (i) the sum of the Certificateholders'
Interest Distribution Amount on the preceding Distribution Date over (ii) 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 (i) the amount of interest accrued at the
Certificate Rate for the related Interest Period on the outstanding Certificate
Balance on the immediately preceding Distribution Date, after giving effect to
all distributions of principal to holders of the Certificates on such
Distribution Date (or, in the case of the first Distribution Date, on the
Closing Date) and (ii) the Certificateholders' Interest Carryover Shortfall for
such Distribution Date; provided, 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.
"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.
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"Note Collateralization Amount" means, with respect to any Distribution
Date, the sum of (i) the Pool Balance as of the end of the related Collection
Period, (ii) the Pre-Funded Amount, as of the end of the related Collection
Period, (iii) the amount on deposit in the Reserve Account after giving effect
to distributions on such Distribution Date, and (iv) 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 (i) the sum of the Noteholders' Interest
Distribution Amount on the preceding Distribution Date over (ii) 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 (i) the aggregate amount of interest accrued at
the respective Note Interest Rate for the related Interest Period on the
outstanding principal balance of each class of the Notes on the immediately
preceding Distribution Date after giving effect to all principal distributions
to Noteholders on such date (or, in the case of the first Distribution Date, on
the Closing Date) and (ii) the Noteholders' Interest Carryover Shortfall for
such Distribution Date; provided, 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, (i) 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 (ii) on the
related Distribution Date following a sale of the Financed Student Loans in the
manner described under "--Termination," the principal required to be distributed
to the 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 (i) the aggregate outstanding principal
balance of such Notes (after giving effect to any distributions on such
Distribution Date) over (ii) 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: (i) 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"), (ii) all Purchase Amounts received by the Trust related to the
Financed Student Loans for such Collection Period from the Seller or the
Servicers, (iii) 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 (iv) all losses realized on Financed Student Loans
liquidated during such Collection Period.
"Principal Distribution Amount" means, with respect to any Distribution
Date, the amount by which the sum of the outstanding principal balance of the
Notes and the Certificate Balance exceeds the Specified Collateral Balance for
such Distribution Date.
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"Specified Collateral Balance" means, with respect to any Distribution
Date, the sum of (a) the Pool Balance as of the last day of the related
Collection Period plus (b) the Pre-Funded Amount as of the last day of the
related Collection Period for such Distribution Date. In the event that the
Financed Student Loans are not sold pursuant to the auction process described
under "--Termination," with respect to any Distribution Date occurring on or
after the March 2009 Distribution Date, the Specified Collateral Balance will be
zero. Following a TERI Trigger Event, the Specified Collateral Balance will
equal zero.
A "TERI Trigger Event" shall occur when (i) the Cumulative TERI Claims
Ratio (as defined below) exceeds 20% and (ii) a claim has been made under the
TERI 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 amounts set forth under "Description of the
Transfer and Servicing Agreements -- Distributions," all for such Distribution
Date.
"The Specified Reserve Account Balance" with respect to any Distribution
Date will be equal to the greater of (i) 0.30% 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
(ii) $1,297,500; 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 (i)
through (v) under " -- Distributions -- Distributions from Collection Account"
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 (i) through (v) on a Distribution Date. In
addition, on the Final Maturity Dates for the Securities, amounts on deposit in
the Reserve Account, if any, will be available, if necessary, to be applied to
reduce the principal balance of the Securities to zero. Amounts on deposit in
the Reserve Account will not be available to cover any reimbursement for 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
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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 (i)
an Event of Default should occur and be continuing under the Indenture or (ii)
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" and
"Risk Factors -- Subordination of Certificates to Notes."
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:
(i) the amount of the distribution allocable to principal of each
class of Securities;
(ii) 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 T-Bill Indexed Securities only, the
52 Week T-Bill Rate is 100 basis points less than the T-Bill Rate as of
such Determination Date);
(iii) the amount of the distribution, if any, allocable to any
Noteholders' Interest Index Carryover and any Certificateholders' Interest
Index Carryover, together with the outstanding amount, if any, of each
thereof after giving effect to any such distribution;
(iv) the Pool Balance as of the close of business on the last day of
the preceding Collection Period, after giving effect to payments allocated
to principal reported as described in clause (i) above;
(v) the aggregate outstanding principal balance of 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 (i) above;
(vi) 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
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Period, and the amount, if any, of the Excess Servicing Fee remaining
unpaid after giving effect to any such payment;
(vii) the amount of the aggregate Realized Losses, if any, for such
Collection Period and the balance of Financed Student Loans that are
delinquent in each delinquency period as of the end of such Collection
Period;
(viii) the balance of the Reserve Account on such Distribution Date,
after giving effect to changes therein on such Distribution Date;
(ix) for Distribution Dates during the Funding Period, the remaining
Pre-Funded Amount on such Distribution Date, after giving effect to changes
therein during the related Collection Period;
(x) for the first Distribution Date, the amount, if any, 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;
(xi) for the first Distribution Date on or following the end of the
Funding Period, the amount of any remaining Pre-Funded Amount that has not
been used to make Additional Fundings and is being paid out to the
Noteholders; and
(xii) the aggregate amount of TERI 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 T-Bill Rate" means, on any date of determination, the bond
equivalent rate of 52-week Treasury bills auctioned at the final auction held
prior to the preceding June 1.
EVIDENCE AS TO COMPLIANCE
The Sale and Servicing Agreement will provide that a firm of independent
public accountants will furnish to the Trust and the Indenture Trustee annually
a statement (based on a limited examination of certain documents and records and
on such accounting and auditing procedures considered appropriate under the
circumstances) as to compliance by the Servicers during the preceding calendar
year (or, in the case of the first such certificate, the period from the Closing
Date to December 31, 1999) with certain standards under the Sale and Servicing
Agreement relating to the servicing of the Financed Student Loans.
The Sale and Servicing Agreement will further provide that a firm of
independent public accountants (which may be the same firm referred to in the
immediately preceding paragraph) will furnish to the Trust and the Indenture
Trustee annually a statement (based on the examination of certain documents and
records and on such accounting and auditing procedures considered appropriate
under the circumstances) as to compliance by the Administrator during the
preceding calendar year (or, in the case of the first such certificate, the
period from the Closing Date to December 31, 1999) with all applicable standards
under the Sale and Servicing Agreement and the Administration Agreement relating
to the administration of the Trust and the Financed Student Loans.
The Sale and Servicing Agreement will also provide for delivery to the
Trust and the Indenture Trustee, concurrently with the delivery of each
statement of compliance referred to above, of a certificate signed by an officer
of 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 Closing Date to December 31, 1999) 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 has agreed to give the Indenture Trustee and the
Eligible Lender Trustee notice of certain Servicer Defaults and Administrator
Defaults, respectively, under the Sale and Servicing Agreement.
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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 SERVICERS
The Sale and Servicing Agreement will provide that neither PHEAA nor EFS
may resign from its obligations and duties as Servicers thereunder, except upon
determination that PHEAA's or EFS's, as the case may be, performance of such
duties is no longer permissible under applicable law. No such resignation will
become effective until the Indenture Trustee or a successor servicer has assumed
PHEAA's or EFS's, as the case may be, servicing obligations and duties under the
Sale and Servicing Agreement.
The Sale and Servicing Agreement will further provide that neither of the
Servicers nor any of their respective directors, officers, employees or agents
will be under any liability to the Trust, the Noteholders or the
Certificateholders for taking any action or for refraining from taking any
action pursuant to the Sale and Servicing Agreement, or for errors in judgment;
provided, that neither of the Servicers nor any such person will be protected
against any liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or negligence in the performance of its duties thereunder
or by reason of reckless disregard of its obligations or duties thereunder. In
addition, the Sale and Servicing Agreement will provide that the Servicers are
under no obligation to appear in, prosecute, or defend any legal action that is
not incidental to its servicing responsibilities under the Sale and Servicing
Agreement and that, in its opinion, may cause it to incur any expense or
liability.
Under the circumstances specified in the Sale and Servicing Agreement, any
entity into which a Servicer may be merged or consolidated, or any entity
resulting from any merger or consolidation to which a Servicer is a party, or
any entity succeeding to the business of a Servicer, which corporation or other
entity in each of the foregoing cases assumes the obligations of a Servicer,
will be the successor of a Servicer under the Sale and Servicing Agreement.
SERVICER DEFAULT; ADMINISTRATOR DEFAULT
"Servicer Default" under the Sale and Servicing Agreement will consist of
(i) any failure by 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 Financed
Student Loans, which failure continues unremedied for three Business Days after
written notice from the Indenture Trustee or the Eligible Lender Trustee is
received by such Servicer or after discovery by such Servicer; (ii) any failure
by a Servicer duly to observe or perform in any material respect any other
covenant or agreement in the Sale and Servicing Agreement which failure
materially and adversely affects the rights of Noteholders or Certificateholders
and which continues unremedied for 60 days after the giving of written notice of
such failure (1) to such Servicer by the Indenture Trustee, the Eligible Lender
Trustee, the other Servicer or the Administrator or (2) 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; (iii) 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 (iv) 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.
"Administrator Default" under the Sale and Servicing Agreement or the
Administration Agreement will consist of (i)(A) in the event that daily deposits
into the Collection Account are not required, any failure by the Administrator
to deliver to the Indenture Trustee for deposit in any of the Trust Accounts any
required payment on or before the Business Day prior to any Monthly Servicing
Payment Date or Distribution Date, as applicable, or (B) any failure by the
Administrator to direct the Indenture Trustee to make any required distributions
from any of the Trust Accounts on any Monthly Servicing Payment Date or any
Distribution Date, which failure in case of either clause (A) or (B) continues
unremedied for three
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Business Days after written notice from the Indenture Trustee or the Eligible
Lender Trustee is received by the Administrator or after discovery by the
Administrator; (ii) any failure by the Administrator duly to observe or perform
in any material respect any other covenant or agreement in the Administration
Agreement or the Sale and Servicing Agreement which failure materially and
adversely affects the rights of Noteholders or Certificateholders and which
continues unremedied for 60 days after the giving of written notice of such
failure (1) to the Administrator by the Indenture Trustee or the Eligible Lender
Trustee or (2) to the Administrator and to the Indenture Trustee and the
Eligible Lender Trustee by holders of Notes or Certificates, as applicable,
evidencing not less than 25% in principal amount of the outstanding Notes or
Certificates; and (iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities, or similar proceedings with respect to
the Administrator and certain actions by the Administrator indicating its
insolvency or inability to pay its obligations.
RIGHTS UPON SERVICER DEFAULT AND ADMINISTRATOR DEFAULT
As long as a Servicer Default under the Sale and Servicing Agreement or an
Administrator Default under the Sale and Servicing Agreement or the
Administration Agreement remains unremedied, the Indenture 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 Servicer under
the Sale and Servicing Agreement, or the Administrator under the Sale and
Servicing Agreement and the Administration Agreement, as the case may be,
whereupon a successor servicer or administrator appointed by the Indenture
Trustee, or the Indenture Trustee, will succeed to all of the responsibilities,
duties and liabilities of the applicable Servicer under the Sale and Servicing
Agreement, or the Administrator under the Sale and Servicing Agreement and the
Administration Agreement, as the case may be, and will be entitled to similar
compensation arrangements. If, however, a bankruptcy trustee or similar official
has been appointed for 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 the Indenture
Trustee is unwilling or unable to so act, it may appoint, or petition a court of
competent jurisdiction for the appointment of, a successor servicer whose
regular business includes the servicing of student loans or a successor
administrator whose regular business includes administering trusts containing
pools of loans or receivables. The Indenture Trustee may make such arrangements
for compensation to be paid, which in no event may be greater than the
compensation to the Servicers under the Sale and Servicing Agreement or the
Administrator under the Sale and Servicing Agreement and the Administration
Agreement, as the case may be, unless such compensation arrangements will result
in a downgrading of the Notes and the Certificates by any Rating Agency. In the
event a Servicer Default or an Administrator Default occurs and is continuing,
the Indenture Trustee or the holders of Notes, as described above, may remove
the applicable Servicer or the Administrator, as the case may be, without the
consent of the 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
The holders of Notes evidencing at least a majority in principal amount of
the then outstanding Notes (or the holders of Certificates evidencing not less
than a majority of the outstanding Certificate Balance, in the case of any
default which does not adversely affect the Indenture Trustee or the
Noteholders) may, on behalf of all Noteholders and Certificateholders, waive any
default by a Servicer in the performance of its obligations under the Sale and
Servicing Agreement, or any default by the Administrator of its obligations
under the Sale and Servicing Agreement and the Administration Agreement, as the
case may be, and their respective consequences, except a default in making any
required deposits to or payments from any of the Trust Accounts or giving
instructions regarding the same in accordance with the Sale and Servicing
Agreement. Therefore, the Noteholders have the ability, except as noted above,
to waive defaults by the Servicers and the Administrator which could materially
adversely affect the Certificate-
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holders. No such waiver will impair the Noteholders' or the Certificateholders'
rights with respect to subsequent defaults.
Unless and until Definitive Securities are issued, holders of Notes and
Certificates will not be recognized by the Indenture Trustee or the Eligible
Lender Trustee as "Noteholders" or "Certificateholders," as the case may be (as
such terms are used in the Indenture and the Trust Agreement, respectively).
Hence, until Definitive Securities are issued, holders of such Securities will
only be able to exercise the rights of Securityholders indirectly through DTC,
Cedel or Euroclear and their respective participating organizations.
AMENDMENT
The Transfer and Servicing Agreements may be amended by the parties
thereto, without the consent of the Noteholders or the Certificateholders, for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of the Transfer and Servicing Agreements or of modifying
in any manner the rights of Noteholders or Certificateholders; provided that
such action will not, in the opinion of counsel satisfactory to the Indenture
Trustee and the Eligible Lender Trustee, materially and adversely affect the
interest of any Noteholder or Certificateholder. The Transfer and Servicing
Agreements may also be amended by the Seller, the Administrator, the Servicers,
the Eligible Lender Trustee and the Indenture Trustee, as applicable, with the
consent of the holders of Notes evidencing at least a majority in principal
amount of the then outstanding Notes and the holders of Certificates evidencing
at least a majority of the Certificate Balance for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
such Transfer and Servicing Agreements or of modifying in any manner the rights
of the holders of Notes or the holders of Certificates; provided, that no such
amendment may (i) increase or reduce in any manner the amount of, or accelerate
or delay the timing of, collections of payments (including any Guarantee
Payments) with respect to the Financed Student Loans or distributions that are
required to be made for the benefit of the holders of Notes or the holders of
Certificates or (ii) reduce the aforesaid percentage of the Notes or
Certificates which are required to consent to any such amendment, without the
consent of the holders of all the outstanding Notes and Certificates.
INSOLVENCY EVENT
If any of certain events of insolvency or receivership, readjustment of
debt, marshalling of assets and liabilities, or similar proceedings with respect
to the Seller or certain actions by the Seller indicating its insolvency or
inability to pay its obligations (each, a "Seller Insolvency Event") occurs, the
Financed Student Loans will be liquidated and the Trust will be terminated 90
days after the date of such Seller Insolvency Event, unless, before the end of
such 90-day period, the Eligible Lender Trustee shall have received written
instructions from the holders of the Certificates (other than the Seller)
representing more than 50% of the aggregate unpaid principal amount of the
Certificates (not including the principal amount of Certificates held by the
Seller) to the effect that such group disapproves of the liquidation of the
Financed Student Loans and termination of the Trust. Promptly after the
occurrence of any Seller Insolvency Event, notice thereof is required to be
given to Noteholders and Certificateholders; provided that any failure to give
such required notice will not prevent or delay termination of the Trust. Upon
termination of the Trust, the Eligible Lender Trustee will direct the Indenture
Trustee promptly to sell the assets of the Trust (other than the Trust Accounts)
in a commercially reasonable manner and on commercially reasonable terms. Each
of PHEAA, TERI 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 Financed Student Loans and, if any such entity is the highest
bidder, the Financed Student Loans must be sold to that entity. The proceeds
from any such sale, disposition or liquidation of the Financed Student Loans
will be treated as collections thereon and deposited in the Collection Account.
If the proceeds from the liquidation of the Financed Student Loans and any
amounts on deposit in the Reserve Account are not sufficient to pay the Notes in
full, the amount of principal returned to the 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
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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.
The Trust Agreement provides that the Eligible Lender Trustee does not have
the power to commence a voluntary proceeding in bankruptcy relating to the Trust
without the unanimous prior approval of all 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 Trust is
insolvent.
PAYMENT OF NOTES
Upon the payment in full of all outstanding Notes and the satisfaction and
discharge of the Indenture, the Eligible Lender Trustee will succeed to all the
rights of the Indenture Trustee, and the holders of Certificates will succeed to
all the rights of the holders of Notes under the Sale and Servicing Agreement,
except as otherwise provided therein.
SELLER LIABILITY
Under the Trust Agreement, the Seller will agree to be liable directly to
an injured party for the entire amount of any losses, claims, damages or
liabilities (other than those incurred by a 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
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 (i) the maturity or other liquidation
of the last Financed Student Loan and the disposition of any amount received
upon liquidation of any remaining Financed Student Loans and (ii) the payment to
the 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 March 2009 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 (i) the Auction Purchase Amount, (ii)
the fair market value of such Financed Student Loans as of the end of the
Collection Period immediately preceding such Distribution Date and (iii) the
aggregate unpaid principal amount of the Notes and principal balance of the
Certificates plus, in each case, accrued and unpaid interest thereon payable on
such Distribution Date (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
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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 March 2009 Distribution Date or any subsequent Distribution Date.
In the event the Financed Student Loans are not sold in accordance with the
foregoing, on each Distribution Date on and after the March 2009 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.
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, pursuant to which the Administrator will agree, to the
extent provided therein, (i) in the event that daily deposits into the
Collection Account are not required, to deliver to the Indenture Trustee for
deposit in any of the Trust Accounts any required payment on or before the
Business Day prior to any Monthly Servicing Payment Date or any Distribution
Date, as applicable, (ii) to direct the Indenture Trustee to make the required
distributions from the Trust Accounts on each Monthly Servicing Payment Date and
each Distribution Date, (iii) 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 Financed Federal Loans, (iv) 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 (v) to provide the
notices and to perform other administrative obligations required by the
Indenture, the Trust Agreement and the Sale and Servicing Agreement. As
compensation for the performance of the Administrator's obligations under the
Administration Agreement and the Sale and Servicing Agreement and as
reimbursement for its expenses related thereto, the Administrator will be
entitled to an administration fee in an amount equal to $3,000 per quarter (the
"Administration Fee").
CERTAIN LEGAL ASPECTS OF THE FINANCED STUDENT LOANS
TRANSFER OF FINANCED STUDENT LOANS
The Seller intends that the transfer of the Financed Student Loans by it to
the Eligible Lender Trustee on behalf of the Trust constitutes a valid sale and
assignment of such Financed Student Loans. In addition, the Seller has taken and
will take all actions that are required under applicable state law to perfect
the Eligible Lender Trustee's ownership interest in the Financed Student Loans
and the collections with respect thereto. Notwithstanding the foregoing, if the
transfer of the Financed Student Loans is deemed to be an assignment of
collateral as security for the benefit of the Trust, the Financed Student Loans
would be considered general intangibles for purposes of the applicable Uniform
Commercial Code (the "UCC"). If such transfer is deemed to create a security
interest, the UCC applies and filing an appropriate financing statement or
statements is also required in order to perfect the Eligible Lender Trustee's
security interest. A financing statement or statements covering the Financed
Student Loans will be filed under the UCC to protect the interest of the
Eligible Lender Trustee in the event the transfer by the Seller is deemed to be
subject to the UCC. If a transfer of general intangibles is deemed to
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be a sale, then the UCC is not applicable and no further action under the UCC is
required to protect the Eligible Lender Trustee's interest from third parties.
If the transfer of the Financed Student Loans is deemed to be an assignment
as security for the benefit of the Trust, there are certain limited
circumstances under the UCC in which prior or subsequent transferees of Financed
Student Loans coming into existence after the Closing Date could have an
interest in such Financed Student Loans with priority over the Eligible Lender
Trustee's interest. A tax or other government lien on property of the Seller
arising prior to the time a Financed Student Loan comes into existence may also
have priority over the interest of the Eligible Lender Trustee in such Financed
Student Loan. Furthermore, if the FDIC were appointed as a receiver or
conservator of the Seller, the FDIC's administrative expenses may also have
priority over the interest of the Eligible Lender Trustee in such Financed
Student Loans. Under the Sale and Servicing Agreement, however, the Seller will
warrant that it has transferred the Financed Student Loans to the Eligible
Lender Trustee on behalf of the Trust free and clear of the lien of any third
party. In addition, the Seller will covenant that it will not sell, pledge,
assign, transfer or grant any lien on any Financed Student Loan (or any interest
therein) other than to the Eligible Lender Trustee on behalf of the Trust,
except as provided below.
Pursuant to the Sale and Servicing Agreement, the Servicers as custodians
on behalf of the Trust will have custody of the promissory notes evidencing the
Financed Student Loans such Servicers are servicing following the sale of the
Financed Student Loans to the Eligible Lender Trustee. Although the accounts of
the Seller will be marked to indicate the sale and although the Seller will
cause UCC financing statements to be filed with the appropriate authorities, the
Financed Student Loans will not be physically segregated, stamped or otherwise
marked to indicate that such Financed Student Loans have been sold to the
Eligible Lender Trustee. If, through inadvertence or otherwise, any of the
Financed Student Loans were sold to another party, or a security interest
therein were granted to another party, that purchased (or took such security
interest in) any of such Financed Student Loans in the ordinary course of its
business and took possession of such Financed Student Loans, then the purchaser
(or secured party) would acquire an interest in such Financed Student Loans
superior to the interest of the Eligible Lender Trustee if the purchaser (or
secured party) acquired (or took a security interest in) such Financed Student
Loans for new value and without actual knowledge of the Eligible Lender
Trustee's interest. See "Description of the Transfer and Servicing
Agreements -- Sale of Financed Student Loans; Representations and Warranties"
and " -- Servicer Covenants."
CERTAIN MATTERS RELATING TO RECEIVERSHIP
The FDIA, as amended by FIRREA, sets forth certain powers that the FDIC
could exercise if it were appointed as receiver or conservator of the Seller.
Subject to clarification by FDIC regulations or interpretations, it would
appear from the positions taken by the FDIC that the FDIC, in its capacity as a
receiver or conservator for the Seller, would not interfere with the timely
transfer to the Trust of collections with respect to the Financed Student Loans.
To the extent that the transfer of the Financed Student Loans is deemed to
create a security interest, and that interest was validly perfected before the
Seller's insolvency and was not taken in contemplation of insolvency or with the
intent to hinder, delay or defraud the Seller or its creditors, based upon
opinions and statements of policy issued by the general counsel of the FDIC
addressing the enforceability against the FDIC, as conservator or receiver for a
depository institution, of a security interest in collateral granted by such
depository institution, such security interest should not be subject to
avoidance and payments to the Trust with respect to the Financed Student Loans
should not be subject to recovery by the FDIC as receiver or conservator of the
Seller. If, however, the FDIC were to assert a contrary position, certain
provisions of the FDIA which, at the request of the FDIC, have been applied in
recent lawsuits to avoid security interests in collateral granted by depository
institutions, would permit the FDIC to avoid such security interest, thereby
resulting in possible delays and reductions in payments on the Notes and the
Certificates. In addition, if the FDIC were to require the Indenture Trustee or
the Eligible Lender Trustee to establish its right to such payments by
submitting to and completing the administrative claims procedure
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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
provisions. In certain circumstances, the Trust may be liable for certain
violations of consumer protection laws that apply to the Financed Student Loans,
either as assignee from the Seller or as the party directly responsible for
obligations arising after the transfer. For a discussion of the Trust's rights
if the Financed Student Loans were not originated or serviced in compliance in
all material respects with applicable laws, see "Description of the Transfer and
Servicing Agreements -- Sale of Financed Student Loans; Representations and
Warranties" and "-- Servicer Covenants."
LOAN ORIGINATION AND SERVICING PROCEDURES APPLICABLE TO FINANCED STUDENT LOANS
The Higher Education Act, including the implementing regulations thereunder
(in the case of Federal Loans), and the Programs impose specified requirements,
guidelines and procedures with respect to originating and servicing Student
Loans such as the Financed Student Loans. Generally, those procedures require
that completed loan applications be processed, a determination of whether an
applicant is an eligible borrower under applicable standards (including a review
of a financial need analysis in the case of Federal Loans and the performance of
a creditworthiness evaluation in the case of Private Loans) be made, the
borrower's responsibilities under the loan be explained to him or her, the
promissory note evidencing the loan be executed by the borrower and then that
the loan proceeds be disbursed in a specified manner by the lender. After the
loan is made, the lender must establish repayment terms with the borrower,
properly administer deferrals and forbearances and credit the borrower for
payments made thereon. If a borrower becomes delinquent in repaying a loan, a
lender or a servicing agent must perform certain collection procedures
(primarily telephone calls and demand letters) which vary depending upon the
length of time a loan is delinquent. The Servicers have agreed pursuant to the
Sale and Servicing Agreement to perform collection and servicing procedures on
behalf of the Trust with respect to the Financed Student Loans each is
servicing. However, failure to follow these procedures or failure of the Seller
to follow procedures relating to the origination of any Financed Federal Loans
could result in adverse consequences. In the case of any such Financed Federal
Loans, any such failure could result in the Department's refusal to make
reinsurance payments to the Federal Guarantors or to make Interest Subsidy
Payments and Special Allowance Payments to the Eligible Lender Trustee with
respect to such Financed Federal Loans or in the Federal Guarantors' refusal to
honor their Guarantee Agreements with the Eligible Lender Trustee with respect
to such Financed Federal Loans. Failure of the Federal Guarantors to receive
reinsurance payments from the Department could adversely affect the Federal
Guarantors' ability or legal obligation to make Guarantee Payments to the
Eligible Lender Trustee with respect to such Financed Federal Loans. In the case
of the Financed Private Loans, failure to make or service properly such Private
Loans in accordance with such procedures could adversely affect the Eligible
Lender Trustee's ability to obtain Guarantee Payments from TERI or HICA with
respect to such Financed Private Loans.
Loss of any such Guarantee Payments, Interest Subsidy Payments or Special
Allowance Payments could adversely affect the amount of Available Funds on any
Distribution Date and the Trust's ability to
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pay principal and interest on the Notes and to make distributions in respect of
the Certificates. Under certain circumstances, pursuant to the Sale and
Servicing Agreement, the Seller is obligated to repurchase any Financed Student
Loan, or a Servicer is obligated to purchase any Financed Student Loan, if a
breach of the representations, warranties or covenants of the Seller or such
Servicer, as the case may be, with respect to such Financed Student Loan has a
material adverse effect on the interest of the Trust therein and such breach is
not cured within any applicable cure period (it being understood that any such
breach that does not affect any Guarantor's obligation to guarantee or insure
payment of such Financed Student Loan will not be considered to have such a
material adverse effect). See "Description of the Transfer and Servicing
Agreements -- Sale of Financed Student Loans; Representations and Warranties"
and " -- Servicer Covenants." The failure of the Seller or a Servicer to so
purchase a Financed Student Loan would constitute a breach of the Sale and
Servicing Agreement, enforceable by the Eligible Lender Trustee on behalf of the
Trust or by the Indenture Trustee on behalf of the Noteholders, but would not
constitute an Event of Default under the Indenture.
STUDENT LOANS GENERALLY NOT SUBJECT TO DISCHARGE IN BANKRUPTCY
Neither Financed Federal Loans nor Financed Private Loans guaranteed by
TERI are generally dischargeable by a borrower in bankruptcy pursuant to the
Bankruptcy Code, unless excepting such debt from discharge will impose an undue
hardship on the debtor and the debtor's dependents. However, Financed Private
Loans guaranteed by HICA are generally dischargeable by a borrower in
bankruptcy.
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. Federal Tax Counsel has reviewed this summary with
respect to federal income tax matters and is of the opinion that the
descriptions of the law and legal conclusions contained herein are correct in
all material respects and the discussions hereunder fairly summarize the federal
income tax considerations that are likely to be material to Noteholders and
Certificateholders. 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 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. The Trust
will be provided with an opinion of Federal Tax Counsel, regarding certain
federal income tax matters. 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.
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SCOPE OF THE TAX OPINIONS
Federal Tax Counsel will, prior to the issuance of the Notes and
Certificates, deliver its opinion that the Trust will not be classified as an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. Further, Federal Tax Counsel will advise the Trust
that the Notes will be characterized as debt for federal income tax purposes.
Pennsylvania Tax Counsel will, prior to the issuance of the Notes and
Certificates, deliver its 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.
FEDERAL TAX CONSEQUENCES WITH RESPECT TO THE NOTES
Tax Characterization of the Notes and the Trust. Federal Tax Counsel will,
prior to the issuance of the Notes, deliver its opinion that based on the terms
of the Notes and the transactions relating to the Financed Student Loans as set
forth herein, the Notes will be treated as debt for federal income tax purposes.
There is, however, no specific authority with respect to the characterization
for federal income tax purposes of securities having the same terms as the
Notes.
Federal Tax Counsel will also deliver its opinion that based on the
applicable provisions of the Trust Agreement and related documents, the Trust
will not be classified as an association (or publicly traded partnership)
taxable as a corporation for federal income tax purposes. If the Trust were
taxable for federal income tax purposes as a corporation, the income from the
Financed Student Loans (reduced by deductions, possibly including interest on
the Notes) would be subject to federal income tax at corporate rates, which
would reduce the amounts available to make payments on the Notes.
If, contrary to the opinion of Federal Tax Counsel, the IRS successfully
asserted that one or more of the Notes did not represent debt for federal income
tax purposes, the Notes might be treated as equity interests in the Trust. If so
treated, the Trust might be treated as a publicly traded partnership but it
would not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including pension
funds) would be "unrelated business taxable income," income to foreign holders
generally would be subject to U.S. tax and U.S. tax return filing and
withholding requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of Trust expenses.
Furthermore, such a characterization could subject holders to state and local
taxation in jurisdictions in which they are not currently subject to tax.
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, state and local income and franchise tax purposes. The discussion
below assumes that all payments on the Notes are denominated in U.S. dollars,
and that the Notes are not Strip Notes. Moreover, the discussion assumes that
the interest formula for the Notes meets the requirements for "qualified stated
interest" under Treasury Regulations (the "OID regulations") relating to
original issue discount ("OID"), and that any OID on the Notes (i.e., any excess
of the principal amount of the Notes over their issue price) does not exceed a
de minimis amount (i.e., 1/4% of their principal amount multiplied by the
number of full years included in their term), all within the meaning of the OID
regulations.
Interest Income on the Notes. The stated interest on the Notes will be
taxable to a Noteholder as ordinary income when received or accrued in
accordance with such Noteholder's method of tax accounting. Based on the above
assumptions, the Notes will not be considered issued with original issue
discount. However, because of limitations on the payment of interest on the
Notes to the extent of the Trust's having insufficient Available Funds the IRS
may contend that the Notes should be treated as having been issued with OID. In
such case, Noteholders (regardless of whether they otherwise use the cash or
accrual method of accounting) would be required to include interest on the Notes
in taxable income on an accrual basis. However, until the IRS determines
otherwise, the Trust intends to take the
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position that the Notes are not issued with OID. A holder who purchases a Note
at a discount that exceeds a statutorily defined de minimis amount will be
subject to the "market discount" rules of the Code, and a holder who purchases a
Note at a premium will be subject to the premium amortization rules of the Code.
Sale or Other Disposition. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any OID, market discount and gain previously
included by such Noteholder in income with respect to the Note and decreased by
the amount of 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. Capital losses generally may
be used by a corporate taxpayer only to offset capital gains, and by an
individual taxpayer only to the extent of capital gains plus $3,000 of other
income.
Foreign Holders. If interest paid (or accrued) to a Noteholder who is a
nonresident alien, foreign corporation or other non-United States person (a
"foreign person") is not effectively connected with the conduct of a trade or
business within the United States by the foreign person, the interest generally
will be considered "portfolio interest", and generally will not be subject to
United States federal income tax and withholding tax, if the foreign person (i)
is not actually or constructively a "10 percent shareholder" of the Trust or the
Seller (including a holder of 10% of the outstanding Certificates) or a
"controlled foreign corporation" with respect to which the Trust or the Seller
is a "related person" within the meaning of the Code and (ii) provides the
Trustee or other person who is otherwise required to withhold U.S. tax with an
appropriate statement (on Form W-8 or similar form), signed under penalties of
perjury, certifying that the beneficial owner of the Note is a foreign person
and providing the foreign person's name and address. If a Note is held through a
securities clearing organization or certain other financial institutions, the
organization or institution may provide a relevant signed statement to the
withholding agent. However, in that case, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the foreign person that
owns the Note. If such interest is not portfolio interest, then it will be
subject to United States federal income and withholding tax at a rate of 30%,
unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) the gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
If the interest, gain or income on a Note held by a foreign person is
effectively connected with the conduct of a trade or business in the United
States by the foreign person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement), the
holder generally will be subject to United States Federal income tax on the
interest, gain or income at regular federal income tax rates. In addition, if
the foreign person is a foreign corporation, it may be subject to a branch
profits tax equal to 30% of its "effectively connected earnings and profits"
within the meaning of the Code for the taxable year, as adjusted for certain
items, unless it qualifies for a lower rate under an applicable tax treaty.
On October 6, 1997, Treasury Regulations (the "New Withholding Tax
Regulations") were issued which alter the rules described above in certain
respects. The New Withholding Tax Regulations generally will be effective with
respect to payments made after December 31, 1999, regardless of the issue date
of the instrument with respect to which such payments are made. Prospective
investors should consult their tax advisors concerning the requirements imposed
by the New Withholding Tax Regulations and their effect on the holding of the
Notes.
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Information Reporting and Backup Withholding. The Trust will be required to
report annually to the IRS, and to each Noteholder of record, the amount of
interest paid on the Notes (and the amount of interest withheld for Federal
income taxes, if any) for each calendar year, except as to exempt holders
(generally, holders that are corporations, tax-exempt organizations, qualified
pension and profit-sharing trusts, individual retirement accounts, or
nonresident aliens who provide certification as to their status as
nonresidents). Accordingly, each holder (other than exempt holders who are not
subject to the reporting requirements) will be required to provide, under
penalties of perjury, a certificate containing the holder's name, address,
correct federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt Noteholder fail to
provide the required certification, the Trust will be required to withhold 31%
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.
Prospective investors should consult with their tax advisors as to their
eligibility for exemption from backup withholding and the procedure for
obtaining the exemption, and the potential impact of the New Withholding Tax
Regulations.
PENNSYLVANIA INCOME AND FRANCHISE TAX CONSEQUENCES WITH RESPECT TO THE NOTES
The activities to be undertaken by PHEAA, as Servicer in servicing and
collecting the Financed Student Loans it is servicing will take place in
Pennsylvania. There is no authority in Pennsylvania addressing the question of
whether the Notes will be treated as debt or equity for Pennsylvania purposes.
Furthermore, Pennsylvania does not necessarily adopt Federal income tax
definitions in characterizing income for state tax purposes. Nonetheless,
subject to the foregoing uncertainties, 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.
FEDERAL TAX CONSEQUENCES WITH RESPECT TO THE CERTIFICATES
Tax Characterization of the Trust. Federal Tax Counsel will, prior to the
issuance of the Certificates, deliver its opinion that the Trust will not be
classified as an association (or publicly traded partnership) taxable as a
corporation 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 Certificates (and
Certificateholders could be liable for any such tax that is unpaid by the
Trust).
Partnership Taxation. As a partnership, the Trust will not be subject to
federal income tax, but each Certificateholder will be required to separately
take into account such holder's accruals of guaranteed payments from the Trust
and its allocated share of other income, gains, losses, deductions and credits
of the Trust. The Trust's income will consist primarily of interest earned on
the Financed Student Loans (including appropriate adjustments for market
discount, OID and bond premium), investment income from Eligible Investments in
the Trust Accounts and any gain upon collection or disposition of the Financed
Student Loans. The Trust's deductions will consist primarily of interest
accruing with respect to the Notes, guaranteed payments on the Certificates,
servicing and other fees, and losses or deductions upon collection or
disposition of the Financed 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). Under the Trust Agreement, payments on
the Certificates at the Certificate Rate (including accruals on amounts
previously due on the Certificates but not yet distributed) will be treated as
"guaranteed payments" under Section 707(c) of the Code. Guaranteed payments are
payments to partners for the use of their capital and, in the present
circumstances, are treated as deductible to the Trust and ordinary income to the
Certificateholders. The Trust will have a calendar year tax year and will deduct
the guaranteed payments under the accrual method of accounting.
Certificateholders with a calendar year tax year are required to include the
accruals of guaranteed payments in income in their taxable year that corresponds
to the year in which the Trust deducts the payments, and the Certificateholders
with a different taxable year are required to include the payments in income in
their taxable year that includes the December 31 of the year in which the Trust
deducts the payments. It is possible that guaranteed payments will not be
treated as interest for all purposes of the Code.
In addition, the Trust Agreement will provide, in general, that the
Certificateholders will be allocated taxable income of the Trust for each
Collection Period equal to the sum of (i) prepayment premium, if any, payable to
the Certificateholders for such month, and (ii) any Trust income attributable to
discount on the Financed Student Loans that corresponds to any excess of the
principal amount of the Certificates over their initial issue price. Such
allocation will be reduced by any amortization by the Trust of premium on
Financed Student Loans that corresponds to any excess of the issue price of
Certificates over their principal amount. All remaining taxable income of the
Trust will be allocated to the Seller. It is believed that this allocation will
be valid under applicable Treasury Regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to Certificateholders. Moreover, 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
Certificate Rate plus the other items described above even though the Trust
might not have sufficient cash to make current cash distributions of such
amount. Thus, cash basis Certificateholders will, in effect, be required to
report income from the Certificates on the accrual basis. In addition, because
tax allocations and tax reporting will be done on a uniform basis for all
Certificateholders but Certificateholders may be purchasing Certificates at
different times and at different prices, Certificateholders may be required to
report on their tax returns taxable income that is greater or less than the
amount reported to them by the Trust.
Additionally, all of the guaranteed payments and the taxable income
allocated to a Certificateholder that is a tax-exempt entity will constitute
"unrelated business taxable income," which, under the Code, is generally taxable
to such a holder despite the holder's tax exempt status.
An individual taxpayer may generally deduct miscellaneous itemized
deductions (which do not include interest expenses) only to the extent they
exceed two percent of the individual's adjusted gross income. Those limitations
would apply to an individual Certificateholder's share of expenses of the Trust
(including fees paid to the Servicers) 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. It is not clear whether
these rules would be applicable to a Certificateholder accruing guaranteed
payments.
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each of the Financed
Student Loans, the Trust might be required to incur additional expense, but it
is believed that there would not be a material adverse affect on
Certificateholders.
Discount and Premium. It is believed that the Financed Student Loans will
not be issued with OID, and, therefore, the Trust should not have OID income.
However, the purchase price paid by the Trust for the Financed Student Loans may
be greater or less than the remaining principal balance of the Financed Student
Loans at the time of purchase. If so, the Financed Student Loans will have been
acquired at a premium or discount, as the case may be. (As indicated above, the
Trust will make this calculation on an aggregate basis, but might be required to
recompute it on a loan by loan basis.) The Trust will make an
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election that will result in any such market discount on the Financed Student
Loans being included in income currently as such discount accrues over the life
of the loans. As indicated above, a portion of such market discount income will
be allocated to Certificateholders. Similarly, the Trust will make an election
to amortize any market premium over the life of the Financed Student Loans,
which could result in additional deductions allocated to the Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust (which include the Certificates and
the Seller's interest) are sold or exchanged within a 12-month period. If such a
termination occurs the Trust will be considered to contribute all of its assets
and its liabilities to the Trust, as a new partnership (the "New Partnership"),
for an interest in the New Partnership; and immediately thereafter, the Trust,
as the former partnership (the "Terminated Partnership"), will be considered to
distribute interests in the New Partnership to the Certificateholders in
proportion to their respective interests in the Terminated Partnership in
liquidation of the Terminated Partnership. The Trust will not comply with
certain technical requirements that might apply when such a constructive
termination occurs. As a result, the Trust may be subject to certain tax
penalties and may incur additional expenses if it is required to comply with
those requirements. Furthermore, the Trust might not be able to comply due to
lack of data.
Disposition of Certificates. Subject to the discussion in the immediately
following paragraph, generally, capital gain or loss will be recognized on a
sale of a Certificate in an amount equal to the difference between the amount
realized and the seller's tax basis in the Certificate sold. A
Certificateholder's tax basis in a Certificate will generally equal his cost
increased by his share of Trust income that is includable in his gross income
and decreased by any distributions received with respect to such Certificate. In
addition, both the tax basis in the Certificate and the amount realized on a
sale of a Certificate would include the holder's share of the Notes and other
liabilities of the Trust. A holder acquiring Certificates at different prices
may be required to maintain a single aggregate adjusted tax basis in such
Certificates, and, upon sale or other disposition of some of the Certificates,
allocate a pro rata portion of such aggregate tax basis to the Certificates sold
(rather than maintaining a separate tax basis in each Certificate for purposes
of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Financed Student Loans would
generally be treated as ordinary income to the holder and would give rise to
special tax reporting requirements. The Trust does not expect to have any other
assets that would give rise to such special reporting requirements. Thus, to
avoid these special reporting requirements, the Trust will elect to include any
such market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed miscellaneous itemized
deductions described above) over the life of the Certificates that exceeds the
aggregate cash distributions with respect thereto, such excess will generally
give rise to a capital loss upon the retirement of the Certificates.
Allocations Between Transferor and Transferee. In general, the Trust's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the close
of the last day of such month. As a result, a holder purchasing Certificates may
be allocated tax items (which will affect the tax liability and tax basis of the
holder) attributable to periods before the actual purchase takes place.
The use of such a monthly convention may not be permitted by existing
Treasury Regulations. If a monthly convention is not allowed (or is allowed only
for transfers of less than all of the partner's interest), taxable income or
losses of the Trust might be reallocated among the Certificateholders. The
Seller is authorized to revise the Trust's method of allocation between
transferors and transferees to conform to a method permitted by any future
authority.
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Section 754 Election. In the event that a Certificateholder sells a
Certificate at a profit (or loss), the purchasing Certificateholder will have a
higher (or lower) basis in the Certificate than the selling Certificateholder
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust files an election under Section 754 of
the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust will not make such an election. As
a result, Certificateholders might be allocated a greater or lesser amount of
Trust income than would be appropriate based on their own purchase price for
Certificates.
Administrative Matters. The Eligible Lender Trustee is required to keep or
cause to be kept complete and accurate books of the Trust. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and the
taxable year of the Trust will be the calendar year. The Eligible Lender Trustee
will file a partnership information return (IRS Form 1065) with the IRS for each
taxable year of the Trust and will report to holders (and to the IRS) each
Certificateholder's allocable share of items of Trust income and expense on
Schedule K-1. The Trust will provide the Schedule K-1 information to nominees
that fail to provide the Trust with the information statement described below
and such nominees will be required to forward such information to the beneficial
owners of the Certificates. Generally, holders must file tax returns that are
consistent with the information returns filed by the Trust or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee on behalf of another person at any time during a calendar year is
required to furnish the Trust with a statement containing certain information on
the nominee, the beneficial owners and the Certificates so held. Such
information includes (i) the name, address and taxpayer identification number of
the nominee and (ii) as to each beneficial owner (x) the name, address and
taxpayer identification number of such person, (y) whether such person is a
United States person, a tax-exempt entity or a foreign government, an
international organization, or any wholly-owned agency or instrumentality of
either of the foregoing and (z) certain information concerning Certificates that
were held, acquired or transferred on behalf of such person throughout the year.
In addition, brokers and financial institutions that hold Certificates through a
nominee are required to furnish directly to the Trust information as to
themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act that holds Certificates as a nominee is
not required to furnish any such information statement to the Trust. The
information referred to above for any calendar year must be furnished to the
Trust on or before the following January 31. Nominees, brokers and financial
institutions that fail to provide the Trust with the information described above
may be subject to penalties. The Trust will provide the Schedule K-1 information
to nominees that fail to provide the Trust with the information described above
and such nominees will be required to forward such information to the beneficial
owners of the Certificates.
The Seller, will be designated as the tax matters partner in the Trust
Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust by the appropriate taxing authorities could
result in an adjustment of the returns of the Certificateholders, and, under
certain circumstances, a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Trust. An adjustment could
also result in an audit of a Certificateholder's returns and adjustments of
items not related to the income and losses of the Trust.
Tax Consequences to Foreign Certificateholders. If the Trust is considered
to be engaged in a trade or business in the United States, it may be required to
withhold taxes on income allocable to non-U.S. Certificateholders. It is not
clear whether the Trust would be considered to be engaged in a trade or business
in the United States for purposes of Federal withholding taxes with respect to
non-U.S. persons because there is no clear authority dealing with that issue
under facts substantially similar to those described herein. Because it is
unclear whether the Trust would be engaged in a trade or business in the
116
<PAGE> 117
United States for such purposes, the Trust will withhold as if it were so
engaged in order to protect the Trust from possible adverse consequences of a
failure to withhold. The Trust expects to withhold on the portion of its taxable
income that is allocable to foreign Certificateholders pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign holders. Subsequent adoption of Treasury
Regulations or the issuance of other administrative pronouncements may require
the Trust to change its withholding procedures. In determining a holder's
nonforeign status, the Trust may rely on IRS Form W-8, IRS Form W-9 or the
holder's certification of nonforeign status signed under penalties of perjury.
Each foreign Certificateholder might be required to file a U.S. individual
or corporate income tax return (including, in the case of a corporation, the
computation of the branch profits tax) on its share of accruals of guaranteed
payments and the Trust's income. Each foreign Certificateholder must obtain a
taxpayer identification number from the IRS and submit that number to the Trust
on Form W-8 in order to assure appropriate crediting of the taxes withheld. A
foreign Certificateholder 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. The Trust will cooperate in any such refund claim if it can
do so without incurring any out-of-pocket cost. No assurance can be given as to
whether any such refund claim would be granted.
The New Withholding Tax Regulations modify certain of the filing
requirements with which foreign persons must comply in order to be entitled to
an exemption from U.S. withholding tax or a reduction to the applicable U.S.
withholding tax rate. The New Withholding Tax Regulations generally are
effective for payments of interest due after December 31, 1999. Prospective
investors are urged to consult their tax advisors with respect to the effect of
the New Withholding Tax Regulations.
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. Certificateholders should consult with their
tax advisors as to their eligibility for exemption to backup withholding and the
procedure for obtaining the exemption, and the potential impact of the New
Withholding Tax Regulations.
PENNSYLVANIA INCOME AND FRANCHISE TAX CONSEQUENCES WITH RESPECT TO THE
CERTIFICATES
Because state and local income and franchise tax laws vary greatly, it is
impossible to predict the income and franchise tax consequences to the
Certificateholders in all of the state and local taxing jurisdictions in which
they are already subject to tax. Certificateholders are urged to consult their
own advisors with respect to state and local income and franchise taxes.
However, Pennsylvania Tax Counsel will, prior to the issuance of the Notes and
Certificates, deliver its opinion that the Trust will not be subject to
Pennsylvania corporate net income tax or capital stock franchise tax or any
other Pennsylvania entity level income or franchise tax. There is no assurance,
however, that this conclusion will not be challenged by the Pennsylvania taxing
authorities or, if challenged, that the taxing authorities will not be
successful. If the Trust were subject to an entity level tax in Pennsylvania,
any such tax could materially reduce or eliminate cash that would otherwise be
distributable with respect to the Certificates (and Certificateholders could be
liable for any such tax that is unpaid by the Trust). Certificateholders not
otherwise subject to taxation in Pennsylvania should not become subject to
taxation in Pennsylvania solely because of a holding ownership of Certificates.
However, for Pennsylvania resident Certificateholders otherwise subject to
Pennsylvania tax, the distributions on the Certificates will be included in
Pennsylvania taxable income.
THE FEDERAL AND PENNSYLVANIA TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED
FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
NOTEHOLDER'S OR CERTIFICATEHOLDER'S PARTICULAR TAX SITUATION. PROSPECTIVE
INVESTORS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSE-
117
<PAGE> 118
QUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES AND
CERTIFICATES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND
OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Section 406 of ERISA, and/or Section 4975 of the Code, prohibit a pension,
profit-sharing or other employee benefit plan, as well as individual retirement
accounts, and certain types of Keogh Plans, and other plans subject to Section
4975 of the Code (each a "Benefit Plan") from engaging in certain transactions
with persons that are "parties in interest" under ERISA or "disqualified
persons" under the Code with respect to such Benefit Plan. A violation of these
"prohibited transaction" rules may result in an excise tax or other penalties
and liabilities under ERISA and the Code for such persons. Title I of ERISA also
requires that fiduciaries of a Benefit Plan subject to ERISA make investments
that are prudent, diversified (except if prudent not to do so) and in accordance
with governing plan documents.
Certain transactions involving the purchase, holding or transfer of the
Notes might be deemed to constitute prohibited transactions under ERISA and the
Code if assets of the Trust were deemed to be assets of a Benefit Plan. Under a
regulation issued by the United States Department of Labor (the "Plan Assets
Regulation"), the assets of the Trust would be treated as plan assets of a
Benefit Plan for the purposes of ERISA and the Code only if the Benefit Plan
acquires an "Equity Interest" in the Trust and none of the exceptions contained
in the Plan Assets Regulation is 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.
If the Securities are Certificates, the purchaser 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. If the Securities are Notes, the
purchaser 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.
118
<PAGE> 119
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>
Credit Suisse First Boston
Corporation............... $130,000,000 $285,200,000 $17,300,000 $432,500,000
McDonald Investments........ $130,000,000 $285,200,000 $17,300,000 $432,500,000
------------ ------------ ----------- ------------
Total.................. $260,000,000 $570,400,000 $34,600,000 $865,000,000
============ ============ =========== ============
</TABLE>
In the respective Underwriting Agreements, the Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase (i) all the
Notes offered hereby if any of the Notes are purchased and (ii) all the
Certificates offered hereby if any of the Certificates are purchased. The Seller
has been advised by the Underwriters that the Underwriters propose initially to
offer the Securities to the public at the respective public offering prices set
forth on the covering page of this Prospectus, and to certain dealers at such
prices less a concession not in excess of 0.130% per Class A-1 Note, 0.215% per
Class A-2 Note and 0.315% per Certificate. The Underwriters may allow and such
dealers may reallow to other dealers a discount not in excess of 0.100% per
Class A-1 Note, 0.150% per Class A-2 Note and 0.250% per Certificate. After the
initial public offering, such public offering prices, concessions and
reallowances may be changed.
Credit Suisse First Boston Corporation has informed the Seller that it does
not expect discretionary sales by the Underwriters to exceed 5% of the aggregate
principal amount of the Notes and the Certificates being offered hereby.
The Seller does not intend to apply for listing of the Securities on a
national securities exchange, but has been advised by Credit Suisse First Boston
Corporation that it intends to, and by McDonald Investments that it may, make a
market in the Securities. The Underwriters are not obligated, however, to make a
market in the Securities and may discontinue market-making at any time without
notice. No assurance can be given as to the liquidity of the trading market for
the Securities.
The Underwriting Agreements provide that the Seller will indemnify the
Underwriters against certain liabilities, including liabilities under applicable
securities laws, or contribute to payments the Underwriters may be required to
make in respect thereof.
The Trust may, from time to time, invest the funds in the Trust Accounts in
Eligible Investments acquired from the Underwriters.
The closing of the sale of the Certificates is conditioned on the closing
of the sale of the Notes and the closing of the sale of the Notes is conditioned
on the closing of the sale of the Certificates.
Credit Suisse First Boston Corporation is engaged from time to time by
KeyCorp, the parent corporation of the Seller, to provide investment banking
services.
After the initial distribution of the Securities by the Underwriters, this
Prospectus 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.
119
<PAGE> 120
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 headquarted 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 $864,567.
LEGAL MATTERS
Certain legal matters relating to the Securities will be passed upon for
the Trust, the Seller and the Administrator by Forrest F. Stanley, Esq., General
Counsel and Assistant Secretary of the Seller, as counsel for the Seller, and by
Thompson Hine & Flory LLP, Cleveland, Ohio and for the Underwriters by Stroock &
Stroock & Lavan LLP, New York, New York. Certain federal income tax and other
matters will be passed upon for the Trust by Thompson Hine & Flory LLP. Certain
Pennsylvania state income tax matters will be passed upon for the Trust by
Kirkpatrick & Lockhart LLP.
120
<PAGE> 121
INDEX OF PRINCIPAL TERMS
Set forth below is a list of the defined terms used in this Prospectus and
the pages on which the definitions of such terms may be found herein.
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
1992 Amendments............................................. 23
1998 Amendments............................................. 26
1998 Reauthorization Bill................................... 26
52 Week T-Bill Rate......................................... 102
91-day Treasury Bill Rate................................... 46
AACSB....................................................... 41
accrued interest factor..................................... 79
Additional Funding.......................................... 90
Additional Student Loans.................................... 12
Administration Agreement.................................... 4
Administration Fee.......................................... 37, 107
Administrator............................................... 2, 4
Administrator Default....................................... 103
Applicable Trustee.......................................... 85
ASA......................................................... 8
Assigned Rights............................................. 21
Auction Purchase Amount..................................... 19
Available Funds............................................. 96
Available Loan Purchase Funds............................... 15
Bank........................................................ 37
Bar Exam Loan............................................... 41
Benefit Plan................................................ 118
Capped Amount............................................... 18, 95
Cede........................................................ 2, 84
Cedel....................................................... 3
Cedel Participants.......................................... 86
Certificate Balance......................................... 98
Certificate Pool Factor..................................... 75
Certificate Rate............................................ 78
Certificateholder........................................... 85
Certificateholders.......................................... 36
Certificateholders' Distribution Amount..................... 98
Certificateholders' Interest Carryover Shortfall............ 98
Certificateholders' Interest Distribution Amount............ 98
Certificateholders' Interest Index Carryover................ 6
Certificateholders' Principal Distribution Amount........... 98
Certificates................................................ 1, 3
Class A-1 Note Pool Factor.................................. 75
Class A-1 Notes............................................. 1, 3
</TABLE>
121
<PAGE> 122
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Class A-2 Note Pool Factor.................................. 75
Class A-2 Notes............................................. 1, 3
Code........................................................ 110
Cohort Default Rate......................................... 73
Collection Account.......................................... 13
Collection Period........................................... 10
Commission.................................................. 2
Consolidation Loans......................................... 54
Cooperative................................................. 86
cumulative cash reserves.................................... 68
Cumulative TERI Claims Ratio................................ 7, 100
Deferral.................................................... 61
Deferral Period............................................. 47
Definitive Certificates..................................... 87
Definitive Notes............................................ 87
Definitive Securities....................................... 87
Department.................................................. 4, 9
Depositaries................................................ 84
Depository.................................................. 75
Determination Date.......................................... 96
DOE Data Book............................................... 68
2, 3,
DTC......................................................... 84
DTC Services................................................ 85
ECMC........................................................ 8
EFS......................................................... 1, 3, 38
Eligible Deposit Account.................................... 90
Eligible Institution........................................ 90
Eligible Investments........................................ 90
Eligible Lender Trustee..................................... 3
Eligible Student............................................ 40
Equity Interest............................................. 118
ERISA....................................................... 20
Escrow Account.............................................. 13
Euroclear................................................... 3, 86
Euroclear Operator.......................................... 86
Euroclear Participants...................................... 86
Event of Default............................................ 81
Excess Servicing Fee........................................ 18, 95
Exchange Act................................................ 2
Expected Interest Collections............................... 77
FDIA........................................................ 31
FDIC........................................................ 31
Federal Assistance.......................................... 44
</TABLE>
122
<PAGE> 123
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Federal Consolidation Loan.................................. 49
Federal Consolidation Loan Rebate........................... 51
Federal Consolidation Loans................................. 40
Federal Direct Student Loan Program......................... 25
Federal Guarantee Agreements................................ 39
Federal Guarantors.......................................... 8
Federal Loans............................................... 23
Federal Origination Fee..................................... 25
Federal Programs............................................ 25
Federal Tax Counsel......................................... 19
FFELP....................................................... 30
Financed Federal Loans...................................... 4, 8
Financed Private Loans...................................... 4, 9
Financed Student Loans...................................... 4
FIRREA...................................................... 31
Forbearance................................................. 61
Forbearance Period.......................................... 47
foreign person.............................................. 112
Formula Rate................................................ 5, 76
Funding Period.............................................. 12
Grace....................................................... 60
Grace Period................................................ 46
Graduate Loan Programs...................................... 39
Graduate Schools............................................ 39
Guarantee Agreement......................................... 24
Guarantee Agreements........................................ 40
Guarantee Fee Advance....................................... 53
Guarantee Payments.......................................... 24
Guarantor................................................... 40
Guarantors.................................................. 9, 40
HICA........................................................ 9
Higher Education Act........................................ 9, 39
Indenture................................................... 4
Indenture Trustee........................................... 3
Index Maturity.............................................. 80
Indirect Participants....................................... 85
Industry.................................................... 85
Initial Financed Student Loans.............................. 12
Initial Pool Balance........................................ 10
In-School................................................... 60
Interest Period............................................. 76
Interest Subsidy Payments................................... 44
Interim..................................................... 52
</TABLE>
123
<PAGE> 124
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Investment Earnings......................................... 90
Investor Index.............................................. 5, 76
IRS......................................................... 110
LIBOR Determination Date.................................... 80
Liquidated Student Loans.................................... 96
Liquidation Proceeds........................................ 96
Loan Purchase Termination Date.............................. 12
Lock-In Period.............................................. 79
Margin...................................................... 5, 76
Maximum TERI Payments Amount................................ 15, 23
McDonald.................................................... 119
McDonald Investments........................................ 1
Minimum Purchase Amount..................................... 18, 106
Monthly Rebate Fee.......................................... 25
Monthly Servicing Payment Date.............................. 14
Net Government Receivable................................... 98
new borrowers............................................... 45
New Partnership............................................. 115
New Withholding Tax Regulations............................. 112
Note Collateralization Amount............................... 99
Note Interest Rate.......................................... 76
Noteholder.................................................. 85
Noteholders................................................. 36
Noteholders' Distribution Amount............................ 99
Noteholders' Interest Carryover Shortfall................... 99
Noteholders' Interest Distribution Amount................... 99
Noteholders' Interest Carryover Shortfall................... 99
Noteholders' Interest Index Carryover....................... 6
Noteholders' Principal Distribution Amount.................. 99
Noteholders' Priority Principal Distribution Amount......... 99
Notes....................................................... 1, 3
NSLP........................................................ 8
Obligors.................................................... 99
OID......................................................... 111
OID regulations............................................. 111
original principal amount of outstanding loans.............. 68
Other Additional Pre-Funded Amount.......................... 11, 91
Other Additional Pre-Funding Subaccount..................... 11, 91
Other Student Loans......................................... 12
Other Subsequent Student Loans.............................. 12
Participants................................................ 76
Pennsylvania Tax Counsel.................................... 19
PHEAA....................................................... 1, 3, 37
</TABLE>
124
<PAGE> 125
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Plan Assets Regulation...................................... 118
Pool Balance................................................ 10, 99
Pool Factor................................................. 75
Pre-Funded Amount........................................... 11
Pre-Funding Account......................................... 11
Prepayments................................................. 32
Principal Distribution Amount............................... 7, 99
Private Consolidation Guarantee Fee......................... 54
Private Consolidation Loan.................................. 54
Private Consolidation Loans................................. 40
Private Guarantee Agreements................................ 40
Private Guarantors.......................................... 9, 40
Private Loan Repayment Commencement Date.................... 53
Private Loans............................................... 24
Programs.................................................... 40
PTCE........................................................ 118
Purchase Amount............................................. 89
Purchase Price.............................................. 11
Realized Losses............................................. 102
Reference Bank.............................................. 81
Registration Statement...................................... 2
Related Documents........................................... 84
Repayment................................................... 52
Reserve Account............................................. 15
Reserve Account Initial Deposit............................. 15
Residency Loan.............................................. 41
Rules....................................................... 86
Secretary................................................... 26
Securities.................................................. 1, 3
Securities Act.............................................. 2
Securityholder.............................................. 85
Seller...................................................... 1, 3
Seller Insolvency Event..................................... 105
Seller Trusts............................................... 28
Serial Loans................................................ 91
Servicer.................................................... 1, 3
Servicer Default............................................ 103
Servicers................................................... 3
Servicing Fee............................................... 17, 95
Servicing Fee Percentage.................................... 17, 95
SLS Loans................................................... 40
SLS Program................................................. 48
Special Allowance Payments.................................. 44
</TABLE>
125
<PAGE> 126
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Special Determination Date.................................. 8
Specified Collateral Balance................................ 7, 100
Specified Reserve Account Balance........................... 15, 100
Stafford Loans.............................................. 40, 44
Statistical Cutoff Date..................................... 8
Student Loan Rate........................................... 76
Student Loans............................................... 1, 4
Subsequent Cutoff Date...................................... 92
Subsequent Pool............................................. 8
Subsequent Pool Pre-Funded Amount........................... 8
Subsequent Pool Pre-Funding Subaccount...................... 11, 91
Subsequent Pool Student Loans............................... 12
Systems..................................................... 85
T-Bill Rate................................................. 79
Telerate Page 3750.......................................... 81
TERI........................................................ 9
TERI Trigger Event.......................................... 7, 100
Terminated Partnership...................................... 115
Terms and Conditions........................................ 87
Three-Month LIBOR........................................... 80
total loans outstanding..................................... 72
Transfer Agreement.......................................... 92
Transfer and Servicing Agreements........................... 89
Transfer Date............................................... 13, 92
Trust....................................................... 1, 3
Trust Accounts.............................................. 90
Trust Agreement............................................. 3
Underlying Federal Loan..................................... 49
Underlying Private Loans.................................... 54
Underwriters................................................ 1, 119
Underwriting Agreements..................................... 119
unrelated business taxable income........................... 111
Unsubsidized Stafford Loans................................. 44
UCC......................................................... 107
</TABLE>
126
<PAGE> 127
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SELLER, THE TRUST OR
THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION
BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR
IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO
OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Reports to Securityholders............ 2
Incorporation of Certain Documentation
by Reference........................ 2
Summary of Terms...................... 3
Risk Factors.......................... 21
Formation of the Trust................ 36
Use of Proceeds....................... 37
The Seller, the Administrator and the
Servicers........................... 37
The Student Loan Financing Business... 39
The Financed Student Loan Pool........ 55
Pool Factors and Trading
Information......................... 75
Description of the Securities......... 75
Description of the Transfer and
Servicing Agreements................ 89
Certain Legal Aspects of the Financed
Student Loans....................... 107
Income Tax Consequences............... 110
ERISA Considerations.................. 118
Underwriting.......................... 119
Legal Matters......................... 120
Index of Principal Terms.............. 121
</TABLE>
UNTIL MAY 4, 1999 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
$865,000,000
KEYCORP STUDENT LOAN
TRUST 1999-A
$260,000,000
FLOATING RATE CLASS A-1
ASSET BACKED NOTES
$570,400,000
FLOATING RATE CLASS A-2
ASSET BACKED NOTES
$34,600,000
FLOATING RATE
ASSET BACKED CERTIFICATES
KEY BANK USA,
NATIONAL ASSOCIATION
SELLER
-----------------------
PROSPECTUS
-----------------------
CREDIT SUISSE FIRST BOSTON
MCDONALD INVESTMENTS
A KEYCORP COMPANY
------------------------------------------------------
------------------------------------------------------
