<PAGE> 1
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THIS PROSPECTUS RELATES TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THIS PROSPECTUS IS NOT AN OFFER TO
SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
File Pursuant to Rule 424(b)5
Registration No. 333-80109
SUBJECT TO COMPLETION DATED JUNE 9, 2000
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JUNE 9, 2000
KEYCORP LOGO
$550,000,000
KEYCORP STUDENT LOAN TRUST 2000-A
KEY BANK USA, NATIONAL ASSOCIATION
Seller and Master Servicer
FLOATING RATE ASSET-BACKED NOTES
SECURITIES OFFERED
- classes of notes listed in the table below
ASSETS
- student loans
- certain student loans guaranteed by federal or private guarantors
CREDIT ENHANCEMENT
- guaranty insurance policy
- reserve account
- excess interest
- interest rate swap
You should carefully consider the risk factors beginning on page S-11 of this
prospectus supplement and page 6 of the prospectus.
The notes are obligations only of the trust and are payable solely from the
student loans and other assets of the trust. The initial principal balance of
the student loans will be less than the initial principal balance of the
notes. The notes are not guaranteed by any person. The notes are not bank
deposits.
The notes will have the benefit of an irrevocable and unconditional guaranty
insurance policy issued by MBIA Insurance Corporation, as note insurer,
guaranteeing timely payment of interest and ultimate payment of principal to the
holders of the notes.
(LOGO)
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the prospectus to which it relates is truthful or
complete. Any representation to the contrary is a criminal offense.
<TABLE>
<CAPTION>
ORIGINAL PRINCIPAL INTEREST RATE FINAL MATURITY PRICE TO UNDERWRITING PROCEEDS TO THE
AMOUNT (PER ANNUM)(1) DATE PUBLIC(2) DISCOUNT SELLER
------------------ -------------- -------------- --------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Class A-1 Notes...... $100,000,000 May 2007 % % %
Class A-2 Notes...... $450,000,000 May 2029 % % %
Total................ $550,000,000 $ (3)
</TABLE>
---------------
(1) Subject to an interest rate cap.
(2) Plus accrued interest, if any, from , 2000.
(3) Before deducting expenses estimated to be $ .
Delivery of the notes will be made on or about June , 2000, against
payment in immediately available funds.
<TABLE>
<S> <C>
JOINT LEAD MANAGER AND GLOBAL JOINT LEAD MANAGER
BOOKRUNNER
DEUTSCHE BANC ALEX. BROWN MCDONALD INVESTMENTS
a KeyCorp Company
</TABLE>
Prospectus Supplement dated June , 2000
<PAGE> 2
YOU SHOULD RELY ON INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES.
THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS
DOCUMENT.
We provide information to you about the securities in two separate
documents that progressively provide more detail: (1) the accompanying
prospectus, which provides general information, some of which may not apply
to your securities and (2) this prospectus supplement, which describes the
specific terms of your securities.
If the descriptions of the terms of the securities vary between
this prospectus supplement and the accompanying prospectus, you should rely
on the information in this prospectus supplement.
This prospectus supplement and the accompanying prospectus include
cross-references to captions in these materials where you can find further
related discussions. The following table of contents and the table of
contents in the accompanying prospectus provide the pages on which these
captions are located.
UNTIL SEPTEMBER ___, 2000 ALL DEALERS THAT EFFECT TRANSACTIONS IN
THE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE
REQUIRED TO DELIVER A PROSPECTUS AND PROSPECTUS SUPPLEMENT. THIS
REQUIREMENT IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A
PROSPECTUS AND PROSPECTUS SUPPLEMENT WHEN ACTING AS UNDERWRITERS WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
We are not offering the securities in any state where the offer is
not permitted. We do not claim the accuracy of the information in this
prospectus supplement and the accompanying prospectus as of any date other
than the dates stated on their respective covers.
<PAGE> 3
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT PROSPECTUS
<S> <C>
Summary of Terms................................S-3 RISK FACTORS..................................6
Risk Factors...................................S-11 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE13
Formation of the Trust.........................S-22 FORMATION OF THE TRUSTS......................13
Use of Proceeds................................S-25 USE OF PROCEEDS..............................15
The Master Servicer and the Sub-Servicers......S-25 THE SELLER, THE ADMINISTRATOR, THE MASTER
The Financed Student Loan Pool.................S-27 SERVICER AND THE SUB-SERVICERS..........15
Description of the Securities..................S-62 THE STUDENT LOAN POOLS.......................18
Description of the Transfer and Servicing THE STUDENT LOAN FINANCING BUSINESS..........19
Agreements............................S-69 WEIGHTED AVERAGE LIVES OF THE SECURITIES.....47
The Security Guaranty Insurance Policy and the POOL FACTORS AND TRADING INFORMATION.........50
Securities Insurer....................S-96 DESCRIPTION OF THE NOTES.....................50
Income Tax Consequences.......................S-102 DESCRIPTION OF THE CERTIFICATES..............59
ERISA Considerations..........................S-102 CERTAIN INFORMATION REGARDING THE SECURITIES.60
Underwriting..................................S-103 DESCRIPTION OF THE TRANSFER AND SERVICING
Experts .....................................S-105 AGREEMENTS..............................68
Legal Matters.................................S-105 CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS...87
Index of Principal Terms......................S-106 INCOME TAX CONSEQUENCES......................94
Appendix A-Report of Independent Auditors.......A-1 FEDERAL TAX CONSEQUENCES FOR TRUSTS FOR WHICH
Appendix B-Form of Securities Guaranty Insurance A PARTNERSHIP ELECTION IS MADE..........95
Policy.................................B-1 FEDERAL TAX CONSEQUENCES FOR TRUSTS IN WHICH
ALL CERTIFICATES ARE RETAINED BY THE
SELLER.................................105
PENNSYLVANIA STATE TAX CONSEQUENCES.........106
ERISA CONSIDERATIONS........................107
PLAN OF DISTRIBUTION........................109
LEGAL MATTERS...............................111
INDEX OF PRINCIPAL TERMS....................112
</TABLE>
S-1
<PAGE> 4
[INTENTIONALLY LEFT BLANK]
S-2
<PAGE> 5
SUMMARY OF TERMS
- This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you
need to consider in making your investment decision. To understand
all of the terms of the offering of the securities, you should
read carefully this entire prospectus supplement and accompanying
prospectus.
- This summary provides an overview to aid your understanding and is
qualified by the full description of this information in this
prospectus supplement and the accompanying prospectus.
- You can find a listing of the pages where capitalized terms used
in this prospectus supplement are defined under the caption "Index
of Defined Terms" beginning on page S-106 in this prospectus
supplement.
PRINCIPAL PARTIES
THE TRUST
- KeyCorp Student Loan Trust 2000-A
THE SELLER, MASTER SERVICER AND ADMINISTRATOR
- Key Bank USA, National Association
THE SUB-SERVICERS
- Pennsylvania Higher Education Assistance Agency
- Great Lakes Educational Loan Services, Inc.
THE SECURITIES INSURER
- MBIA Insurance Corporation
THE SWAP COUNTERPARTY
- Key Bank USA, National Association
THE CAP PROVIDER
- Key Bank USA, National Association
THE ELIGIBLE LENDER TRUSTEE
- Bank One, National Association
THE INDENTURE TRUSTEE
- Bankers Trust Company
THE FEDERAL GUARANTORS
- American Student Assistance
- California Student Aid Commission
- Educational Credit Management Corporation
- Great Lakes Higher Education Guaranty Corporation
- Michigan Higher Education Assistance Agency
- Nebraska Student Loan Program
- New York State Higher Education Services
- Pennsylvania Higher Education Assistance Agency
- United Student Aid Funds, Inc.
THE PRIVATE GUARANTOR
- The Education Resources Institute, Inc.
DATES
DISTRIBUTION DATES
The 25th day of each February, May, August, and November or if the 25th is
not a business day, the next business day. The first distribution date is
November 27th, 2000.
CUTOFF DATE
- June 1, 2000 for the initial pool student loans.
- The trust will be entitled to receive all collections and proceeds on
the initial pool student loans on and after the cutoff date.
S-3
<PAGE> 6
SUBSEQUENT CUTOFF DATE
- The date specified in the related subsequent transfer agreement for
subsequent pool student loans and certain other student loans.
- The trust will be entitled to receive all collections and proceeds on
the subsequent pool student loans on and after the related subsequent
cutoff date.
STATISTICAL CUTOFF DATE
- May 1, 2000 for the initial pool student loans. - May 1, 2000 for the
subsequent pool student loans.
- All statistical information relating to the pools of student loans is
presented as of the statistical cutoff date.
CLOSING DATE
On or about June ___, 2000.
DESCRIPTION OF THE SECURITIES
OFFERED SECURITIES - Two classes of notes.
- Original principal amounts and interest rates are on the cover page of
this prospectus supplement.
- Notes issued in book-entry form through The Depository Trust Company,
Clearstream Banking, societe anonyme, and the Euroclear System.
- Minimum denominations of $1,000.
LIBOR INDEXED SECURITIES
- __________________________
TREASURY BILL INDEXED SECURITIES
- __________________________
NON-OFFERED SECURITIES
- The trust will also issue a single class of certificates to the seller.
- The certificates will not have a principal balance and will not bear
interest.
- The certificates will only be entitled to distributions on any
distribution date after all other required distributions are made
- Any information in this prospectus supplement relating to the
certificates is solely for informational purposes to further a better
understanding of the notes.
INTEREST PAYMENTS
- Each interest rate is subject to a maximum rate described in this
prospectus supplement under the caption "Description of the Securities"
herein.
- The maximum rate for any interest period will be reduced based on swap
payments made by the trust to Key Bank USA, National Association, as
swap counterparty and increased based on swap payments made by the swap
counterparty to the trust.
- Key Bank USA, National Association, will provide an interest rate cap
for the benefit of the class A-1 notes and class A-2 notes. The
interest rate cap will eliminate the effect of the maximum rate on the
interest rate of your securities. Your right to receive payments under
the interest rate cap is not rated by any rating agency.
- Interest calculations
- actual/360 for the LIBOR indexed
securities
- actual/365 or 366 as applicable
for the Treasury-Bill indexed securities
- Interest not paid on a distribution date due to the effect of the
maximum rate and not paid because of a default by the cap provider may
be paid on future distribution dates as described in this prospectus
supplement
S-4
<PAGE> 7
under the caption "Description of the Securities" herein.
- The securities insurer will guarantee timely payment of interest, up to
the maximum rate, on each class of notes.
PRINCIPAL PAYMENTS
Principal payments on the securities will be made on each distribution date
in an amount described in this prospectus supplement under the caption
"Description of the Securities" herein.
CREDIT ENHANCEMENT
- securities guaranty insurance policy
- reserve account
- excess interest
- interest rate swap
SECURITIES GUARANTY INSURANCE POLICY
MBIA Insurance Corporation will issue a financial guaranty insurance policy
for the benefit of the notes.
The policy will unconditionally and irrevocably guarantee the timely
payment of interest on, and the ultimate payment of the principal amount of
the notes.
On each distribution date, the indenture trustee will calculate to what
extent the funds available to make the payments of principal and interest
are insufficient to pay current interest on the notes. If an insufficiency
exists, then the indenture trustee, on behalf of the noteholders, will make
a draw on the policy. In addition, the policy will guarantee the full
payment of the principal balance of each class of notes on the related
final maturity date.
The policy does not guarantee:
- any shortfalls in interest payments resulting from the application of
the maximum rate;
- payments by the swap counterparty; or
- payments by the cap provider.
If for any reason the securities insurer does not make the payments
required by the policy, you will have to rely on the student loans, the
reserve account, the interest rate swap and the other credit enhancement
available to the notes for your payments of interest and principal and you
may suffer a loss.
PRIORITY OF PAYMENTS
On each distribution date, the indenture trustee will make the following
distributions and deposits to the extent of available funds in the order
indicated:
1. to the master servicer certain fees;
2. to the administrator, certain fees;
3. to the securities insurer, the premiums under the securities guaranty
insurance policy;
4. pro-rata (x) to the holders of the class A-1 and class A-2 notes,
interest on a pro rata basis, subject to the maximum rate, and (y) to
the swap counterparty, amounts due from the trust pursuant to the
interest rate swap for such distribution date and certain termination
payments;
5. to the securities insurer, provided that a securities insurer default
has not occurred, reimbursement for all amounts owed pursuant to
draws with respect to any payments of interest under the securities
guaranty insurance policy, plus interest thereon;
S-5
<PAGE> 8
6. to the reserve account, an amount, if any, necessary to reinstate the
balance of the reserve account to a specified amount;
7. to the holders of the notes and the securities insurer, in the
following order:
(a) to reduce the principal of the class A-1 notes until paid in full;
then
(b) to the securities insurer, provided that a securities insurer
default has not occurred, reimbursement for all amounts owed pursuant
to draws with respect to any payments of principal under the
securities guaranty insurance policy made to the holders of the class
A-1 notes, plus interest thereon; then
(c) to reduce the principal of the class A-2 notes until paid in full;
and then
(d) to the securities insurer, provided that a securities insurer
default has not occurred, reimbursement for all amounts owed pursuant
to draws with respect to any payments of principal under the
securities guaranty insurance policy made to the holders of the class
A-2 notes, plus interest thereon;
8. to the securities insurer, reimbursement for all amounts owed pursuant
to draws made under the securities guaranty insurance policy, not
previously reimbursed as provided above, and all other amounts due
under the related insurance agreement;
9. to the holders of the class A-1 and class A-2 notes, interest due in
excess of the maximum rate, if any, on a pro rata basis, to the extent
not paid by the cap provider;
10. to the swap counterparty, any termination payments not paid pursuant
to clause 4. above;
11. to the cap provider, an amount sufficient to reimburse the cap
provider for previous payments under the interest rate cap; and
12. to the holder of the certificates, any remaining amounts.
If the interest rate on any class of notes for any interest period is capped at
the maximum rate, the cap provider will be obligated to pay until the
termination of the cap agreement the difference between interest that would have
been due without giving effect to the maximum rate and interest due at the
maximum rate. The securities guaranty insurance policy does not guaranty any
payments by the cap provider.
FINAL MATURITY DATES
The unpaid principal amount of each class of notes will be payable in full on
the applicable final maturity date listed on the cover page of this prospectus
supplement.
AUCTION SALE
Any student loans remaining in the trust as of the end of the collection period
immediately preceding the August 2010 distribution date will be offered for
sale. The proceeds of any sale will be used to redeem your securities. The
auction price must at least equal the unpaid principal amount of the notes, plus
accrued and unpaid interest thereon (including interest accrued and unpaid in
excess of the maximum rate), plus all amounts due and owing to the Securities
Insurer, the Swap Counterparty and the Cap Provider.
OPTIONAL PURCHASE
The master servicer may repurchase all remaining student loans when the
principal balance of the pool of student loans is equal to 5% or less of the
initial principal balance of the pool of the aggregate of the initial financed
student loans and subsequent pool student loans
S-6
<PAGE> 9
at a price equal to the unpaid principal balance of the securities, plus accrued
and unpaid interest thereon (including interest accrued and unpaid in excess of
the maximum rate), plus all amounts due and owing to the securities insurer, the
swap counterparty and the cap provider.
TRUST PROPERTY
THE INITIAL POOL STUDENT LOANS
The initial pool student loans consist of certain graduate and undergraduate
student loans.
The initial pool student loans have the characteristics set forth below as of
May 1, 2000. Unless otherwise specified, percentages are of the initial pool
principal balance (including certain interest accrued to be capitalized).
Aggregate Characteristics
- Aggregate principal
amount:............................$321,839,714
- Weighted average annual
percentage rate:..........................7.72%
- Weighted average original
term:..................................217 mths
- Weighted average remaining
term: .................................198 mths
Guarantees
- Percent reinsured by the
Department of Education..................65.81%
- Percent not reinsured by the
Department of Education..................34.19%
- Percent guaranteed by federal
guarantors...............................65.81%
- Percent guaranteed by the
Pennsylvania Higher
Education Assistance
Agency..............................18.38%
- Percent guaranteed by Great
Lakes Higher Education
Guaranty Corporation.................0.04%
o
- Percent guaranteed by American Student
Assistance..........................13.07%
- Percent guaranteed by
Michigan Higher Education
Assistance Agency....................0.02%
- Percent guaranteed by
Nebraska Student Loan
Program ............................30.49%
- Percent guaranteed by
Educational Credit
Management Corporation...............0.02%
- Percent guaranteed by
California Student Aid Commission....2.88%
- Percent guaranteed by New
York State Higher Education
Services Corporation.................0.05%
- Percent guaranteed by United
Student Aid Funds, Inc...............0.88%
- Percent guaranteed by private
guarantors...................................0%
- Percent guaranteed by The
Educational Resources
Institute, Inc..........................0%
- Percent not guaranteed by any party or
reinsured by Department of
Education................................34.19%
THE SUBSEQUENT POOL STUDENT LOANS
The subsequent pool student loans consist of certain graduate and
undergraduate student loans originated by Fleet National Bank (or BankBoston
prior to its merger into Fleet National Bank). Key Bank USA, National
Association, has entered into a definitive agreement to purchase all of the
subsequent pool student loans from Fleet National Bank during June 2000. Key
Bank USA has agreed to sell the subsequent pool student loans to the trust in
one or more negotiated transactions prior to July 31, 2000. The student loans
in the subsequent pool will be purchased by the
S-7
<PAGE> 10
trust with funds on deposit in the prefunding account, may be purchased on
different dates and may have different subsequent cutoff dates.
The subsequent pool student loans have the characteristics set forth below as of
May 1, 2000. Unless otherwise specified, percentages are of the subsequent pool
principal balance (including certain interest accrued to be capitalized).
Aggregate Characteristics
- Aggregate principal
amount:............................$181,730,598
- Weighted average annual
percentage rate: .........................9.84%
- Weighted average original
term:..................................258 mths
- Weighted average remaining
term: .................................209 mths
- Percent reinsured by the
Department of Education......................0%
- Percent not reinsured by the
Department of Education....................100%
Guarantees
- Percent guaranteed by federal
guarantors...................................0%
- Percent guaranteed by private
guarantors.................................100%
- Percent guaranteed by The
Educational Resources
Institute, Inc........................100%
- Percent not guaranteed by any
party or reinsured by Department
of Education.................................0%
PRE-FUNDING ACCOUNT
There will be a pre-funding account of approximately $216,730,598. The trust
expects to use those amounts (1) on or prior to July 31, 2000, to purchase the
subsequent pool student loans, and (2) on or prior to August 25, 2002, to
purchase consolidation loans and serial loans, to pay capitalized interest on
the pool of student loans and to pay advances for certain fees related to the
student loans.
THE RESERVE ACCOUNT
There will be a reserve account to cover servicing fees, administration fees,
fees due the securities insurer, interest on the notes and payments due to swap
counterparty. The reserve account will also be used to make principal payments
on the notes in the same order of priority as described above under "Priority of
Payments", generally to the extent realized losses on the financed student loans
during any collection period exceed excess interest available to be distributed
as principal on the notes. Amounts on deposit in the reserve account also will
be available, if necessary, to pay principal on each class of notes on its
respective final maturity date.
Initially, the amount in the reserve account will be approximately $9,625,000.
On each distribution date, any available funds remaining after making all prior
required distributions will be deposited into the reserve account up to the
specified reserve account balance.
INTEREST RATE SWAP
Certain of the subsequent pool student loans require the borrower to pay
interest monthly based on a prime rate. To reduce the risk that the rate of
interest received on the prime rate student loans would not be sufficient to pay
the related rate of interest on the notes, on the closing date, the trust will
enter an interest rate swap with Key Bank USA, National Association, as the swap
counterparty.
On each distribution date, the trust will owe the swap counterparty the sum of
the following amounts for each of the monthly
S-8
<PAGE> 11
periods in the related collection period beginning with the monthly period
commencing July 1, 2000:
The product of:
(1) the prime rate as determined in accordance with the prime rate
loans as of the first day of the related monthly period;
(2) the principal balance of the subsequent pool student loans that pay
interest based on the prime rate as determined as of the first day of the
related monthly period; and
(3) a fraction, the numerator of which is the actual number of days in
the related monthly period and the denominator of which is 360.
On each distribution date, the swap counterparty will owe the trust an amount
equal to the sum of the following amounts for the monthly periods in the related
collection period beginning with the monthly period commencing July 1, 2000 (to
the extent prime rate loans are included in the pool on such date):
The product of:
(1) three-month LIBOR (calculated in the same manner and on such dates
as such index is calculated for the LIBOR indexed securities for the related
interest accrual period) plus 2.60%;
(2) the principal balance of the subsequent pool student loans that pay
interest based on the prime rate as determined as of the first of the related
monthly period; and
(3) a fraction, the numerator of which is the actual number of days in
the related monthly period and the denominator of which is 360.
Payments will be made on a net basis between the trust and the swap
counterparty.
The swap counterparty has long-term unsecured debt ratings of A+, A1 and A by
Fitch, Inc., Moody's Investors Service, Inc. and Standard and Poor's Ratings
Services, a division of The McGraw-Hill Companies Inc., respectively. The
obligations of the swap counterparty are not guaranteed by the securities
insurer.
If the rating of the swap counterparty is withdrawn, suspended or reduced below
A3 or its equivalent by any rating agency, the swap counterparty is required, no
later than the 30th day following such rating withdrawal, suspension or
downgrade, at the swap counterparty's expense, either to (i) obtain a substitute
swap counterparty, acceptable to the securities insurer, that has a long-term
debt rating of at least A3 or its equivalent by each such rating agency or (ii)
enter into arrangements reasonably satisfactory to the indenture trustee and the
securities insurer, including collateral arrangements, guarantees or letters of
credit, which arrangements in the view of such rating agency will result in the
elimination of the effect or impact of such rating withdrawal, suspension or
downgrade on the noteholders and the securities insurer.
TAX STATUS
Thompson Hine & Flory LLP, as federal tax counsel to the trust, is of the
opinion that (1) the trust will not be classified as an association or a
publicly traded partnership taxable as a corporation for federal income tax
purposes and (2) the notes will be characterized as debt for federal income tax
purposes. Each noteholder, by
S-9
<PAGE> 12
accepting a note, will agree to treat the notes as indebtedness. Kirkpatrick &
Lockhart LLP, as Pennsylvania tax counsel to the trust, is of the opinion that
the same characterizations of the notes and the trust would apply for
Pennsylvania state income tax purposes as for federal income tax purposes.
ERISA CONSIDERATIONS
Subject to the considerations discussed under "ERISA Considerations" herein the
notes are eligible for purchase by employee benefit plans.
RATINGS
At least two nationally recognized rating agencies must rate each class of notes
in the highest investment rating category.
S-10
<PAGE> 13
RISK FACTORS
We recommend that you consider the following risk factors together with
all the information contained in this prospectus supplement (this "Prospectus
Supplement") and the related prospectus (the "Prospectus") in deciding whether
to purchase any of the notes.
<TABLE>
<S> <C>
YOU MAY HAVE DIFFICULTY
SELLING YOUR SECURITIES The notes will not be listed on any securities exchange. As
a result, if you want to sell your notes you must locate a
purchaser that is willing to purchase them. The underwriters
intend to make a secondary market for the notes. The
underwriters will do so by offering to buy the notes from
investors that wish to sell. However, the underwriters will
not be obligated to make offers to buy the notes and may stop
making offers at any time. In addition, the prices offered,
if any, may not reflect prices that other potential
purchasers would be willing to pay, were they to be given the
opportunity. There have been times in the past where there
have been very few buyers of asset backed securities, and
there may be such times in the future. As a result, you may
not be able to sell your notes when you want to do so or you
may not be able to obtain the price that you wish to receive.
IF THE TRUST ASSETS ARE
INSUFFICIENT TO MAKE
PAYMENTS ON THE SECURITIES,
YOU MAY INCUR A LOSS The trust is not permitted to have any significant assets or
sources of funds other than the student loans, the securities
guaranty insurance policy, the guarantee agreements, the
reserve account, the escrow account, the pre-funding account,
the interest rate swap and, to a limited extent, the interest
rate cap. Consequently, you must rely for repayment upon
payments only from the trust's assets. If for any reason the
securities insurer fails to make payments due under the
securities guaranty insurance policy and if the reserve
account and the pre-funding account are exhausted, the trust
will depend solely on payments with respect to the student
loans and payments by the swap counterparty to make payments
on the notes and you could suffer a loss. You will have no
claim to any amounts properly distributed to Key Bank USA,
National Association, in its capacities as seller,
administrator, swap counterparty, cap provider or
</TABLE>
S-11
<PAGE> 14
<TABLE>
<S> <C>
master servicer, or to any of the sub-servicers, from time to
time.
THE TRUST'S PURCHASE OF
STUDENT LOANS AT A
PREMIUM MAY RESULT
IN LOSSES The sum of the outstanding principal balance of the initial
pool student loans as of the cutoff date and the amount
deposited in the pre-funding account, the reserve account and
the collection account on the closing date will equal
approximately 100.49% of the original principal balance of
the notes. However, the above percentage without giving
effect to amounts initially on deposit in the reserve account
is approximately 98.74%. In addition, each subsequent pool
student loan will be purchased by the trust for an amount
equal to 100% of the principal balance thereof. There can be
no assurance that the aggregate principal amount of the notes
at all times will be equal to or less than the sum of the
principal amount of the pool of student loans and the amounts
on deposit in the reserve account. If an event of default
occurs under the indenture, the securities insurer defaults
under the securities guaranty insurance policy and the
student loans are liquidated at a time when the outstanding
principal amount of the notes exceeded the sum of the
principal amount of the student loans, the amount on deposit
in the pre-funding account and the amounts on deposit in the
reserve account, you may suffer a loss.
THE CHARACTERISTICS OF THE
STUDENT LOANS MAY CHANGE Certain characteristics of the student loans will vary from
the characteristics of the initial pool student loans and
the subsequent pool student loans due to payments received
and other changes in the student loans that occur from the
statistical cutoff date to the cutoff date or the related
subsequent cutoff date, as applicable, and due to the trust's
purchase of consolidation loans and serial loans. The
distribution by loan type and weighted average interest rates
may vary as a result of variations in the effective rates of
interest applicable to the student loans after each transfer
of additional student loans to the trust and the remaining
term of the deferral and forbearance periods.
The seller currently makes available and may in the future make
available certain incentive programs to borrowers.
</TABLE>
S-12
<PAGE> 15
<TABLE>
<S> <C>
The effect of these incentive programs may be to reduce the
yield on the initial pool of student loans.
YOUR YIELD TO MATURITY MAY BE
REDUCED BY PREPAYMENTS,
DELINQUENCIES AND
DEFAULTS The pre-tax return on your investment is uncertain and will
depend on a number of factors including the following:
- THE RATE OF RETURN OF PRINCIPAL IS UNCERTAIN. The amount of
distributions of principal on the notes and the time when you
receive those distributions depends on the amount and the times
at which borrowers make principal payments on the student loans.
Those principal payments may be regularly scheduled payments or
unscheduled payments resulting from prepayments, defaults or
consolidations of the student loans. In addition, as a result of
certain triggers required by the rating agencies relating to
losses on unguaranteed and privately guaranteed student loans,
you may receive accelerated payments of principal. You will bear
any reinvestment risk resulting from these accelerated payments
of principal.
- YOU MAY RECEIVE A LARGE PRINCIPAL PREPAYMENT ON AUGUST 25,
2000. The trust will allocate an identified portion of the
student loans to a separate subsequent pool to be purchased by
the trust from $181,730,598 deposited in a subaccount of the
pre-funding account on the closing date. If the amount in this
subaccount of the pre-funding account is not substantially used
to purchase subsequent pool student loans by July 31, 2000 you
may receive a principal prepayment on August 25, 2000. If the
amount remaining in this subaccount on such date is $10,000,000
or less, the indenture trustee will distribute such amount on
the class A-1 notes; otherwise the indenture trustee will
distribute the amount to each class of notes, pro rata, based on
the initial principal balance of each class of notes.
- YOU MAY RECEIVE A PREPAYMENT OF PRINCIPAL AT THE END OF THE
FUNDING PERIOD. Approximately $35,000,000 will be deposited on
the closing date in a subaccount of the pre-funding account to
be used primarily to purchase student loans that are
consolidation loans or serial loans that are eligible to be
purchased by the trust during the funding period. If amounts on
deposit in this subaccount are not
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fully utilized by the end of the funding period, you may receive
a principal prepayment. Any such amount will be distributed on
the next distribution date.
- YOU MAY NOT BE ABLE TO REINVEST DISTRIBUTIONS IN COMPARABLE
INVESTMENTS. Asset backed securities, like the securities
offered hereby, usually produce more returns of principal to
investors when market interest rates fall below the interest
rates on the student loans and produce less returns of principal
when market interest rates are above the interest rates on the
student loans. As a result, you are likely to receive more money
to reinvest at a time when other investments generally are
producing a lower yield than that on the notes, and are likely
to receive less money to reinvest when other investments
generally are producing a higher yield than that on the notes.
You will bear the risk that the timing and amount of
distributions on your notes will prevent you from attaining your
desired yield.
- AN EARLY TERMINATION WILL SHORTEN THE LIFE OF YOUR INVESTMENT
WHICH MAY REDUCE YOUR YIELD TO MATURITY. Your investment in the
notes may end before you desire if (1) the indenture trustee
successfully conducts an auction sale or (2) the seller
exercises its option to purchase all of the assets of the trust.
Because your notes will no longer be outstanding, you will not
receive the additional interest payments that you would have
received had the notes remained outstanding. In addition, you
may not be able to reinvest the principal you receive at a rate
comparable to that on your notes.
RISKS WITH RESPECT TO THE INTEREST
RATE SWAP In certain circumstances following a default under the swap or a
termination (each as more fully described under "The Transfer
and Servicing Agreements--The Interest Rate Swap") the interest
rate swap is subject to early termination. In the event of an
early termination of the swap, the trust or the swap
counterparty may be liable to pay the other a termination
payment (regardless of which party has caused the termination),
which will be based on the value of the interest rate swap
computed in accordance with the procedures set forth in the
interest rate swap. Any such termination payment required to be
made by the trust could be substantial, and could reduce the
amounts otherwise payable to you. In
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addition, if the swap counterparty defaults on its obligations,
the maximum rate on the notes will be lower than it would have
been had the swap counterparty made its required payment and
consequently, the interest rate on each class of notes is more
likely to be subject to the maximum rate. In this event, the
liquidity and marketability of your notes may decline. The
securities insurer does not guarantee payments by the swap
counterparty or the payment of interest on the notes in excess
of the maximum rate.
YOU MAY NOT RECEIVE CURRENT
PAYMENTS AT THE APPLICABLE
INTEREST RATE You may not be paid interest at the related note rate because
payments of interest are subject to the maximum rate. The
maximum rate may be triggered for any of the following reasons:
- Due to market forces, the applicable index used to calculate
interest on the notes (plus the applicable margin) becoming
greater than the indices used to calculate interest on the
student loans.
- The principal balance of the student loans will initially be
less than the aggregate principal amount of the notes.
Consequently, the aggregate principal balances of the student
loans on which interest will be collected will be less than the
principal amount of the notes.
- The maximum rate will be reduced as a result of the trust's
obligation to pay certain amounts to the Department of Education
or to repay certain amounts to borrowers.
The securities guaranty insurance policy guarantees payments of
interest on the notes only up to the maximum rate. As a result
you may realize a lower than anticipated yield on your
investment.
Although the cap provider is obligated to pay the difference
between the applicable note rate and the maximum rate, the
obligations of the cap provider under the interest rate cap are
dependent on the cap provider's ability to make the necessary
payments and are not rated by any rating agency. If your
interest rate is subject to the maximum rate and the cap
provider defaults or the cap agreement is terminated,
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you may receive interest not previously paid because of the
application of the maximum rate on subsequent distribution dates
on a subordinated basis. We cannot assure you that there will be
sufficient funds available for that purpose. The securities
guaranty insurance policy does not guaranty the payments by the
cap provider. If the note rate is limited by the maximum rate,
the market value and liquidity of your notes may decline. In
addition, there can be no assurance the cap agreement will not
terminate in accordance with its terms before the outstanding
principal balance of your class of notes is reduced to zero.
RELIANCE ON SUB-SERVICERS
FOR SERVICING STUDENT
LOANS Although the master servicer is obligated to cause the
student loans to be serviced in accordance with the terms of
the transaction agreements, the timing of payments will be
directly affected by the ability of the sub-servicers to
adequately service the student loans. In addition, you will
be relying on each of the sub-servicers' compliance with
applicable, federal and private program regulations to ensure
that the guarantors are obligated to maintain guaranteed
payments and that any reinsurance by the Department of
Education is maintained. If a sub-servicer defaults on its
obligations and is terminated, you will be relying on the
ability of the master servicer to find an alternative
sub-servicer to service the student loans and you may suffer
a delay in the timing of payments until any transfer of
servicing is completed or effective.
SUBSERVICERS MAY MAKE IT
MORE DIFFICULT TO FIND A
SUCCESSOR MASTER SERVICER The master servicer or any successor master servicer may only
terminate a subservicer for cause or by paying a deconversion
fee. Moreover, a successor master servicer is responsible
for any breaches by the subservicer of the subservicing
agreement. As a result, it may be more difficult to find a
successor master servicer than if the successor master
servicer were able to terminate the subservicer without the
payment of a deconversion fee or if the successor master
servicer were not liable for breaches by the subservicer.
Any delay in finding a successor master servicer may cause
the market value and liquidity of your notes to decline, and
if the securities insurer defaults, cause you to suffer a
loss on your investment.
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NO PERFORMANCE HISTORY ON
UNGUARANTEED STUDENT LOANS The seller has only been originating unguaranteed student
loans for a limited time and an immaterial number of these
loans have entered repayment status. As a result, the seller
does not have any meaningful prepayment, loss or delinquency
data on the unguaranteed student loans. You bear the
prepayment and yield risk that prepayments on the
unguaranteed student loans are faster or slower than you
anticipated. In addition, if the securities insurer
defaults, you will also bear the risk that the level of
losses and delinquencies on the unguaranteed student loans
will exceed the other limited credit enhancement of the
financing structure.
RISK OF DEFAULT OF UNGUARANTEED
STUDENT LOANS Approximately 34.19% of the initial pool student loans are
not guaranteed or insured by any federal or private
guarantor, or by any other party or governmental agency. In
addition, these student loans are generally dischargeable by
a borrower in bankruptcy unless it is determined that such
student loan has been made under any program funded in whole
or in part by a governmental unit or non-profit institution.
If the securities insurer defaults, you will bear any risk of
loss resulting from the default by any borrower of an
unguaranteed student loan to the extent the amount of the
default is not covered by the other limited credit
enhancement of the financing structure.
RISK OF DEFAULT BY PRIVATE
GUARANTORS As of June 1, 2000, The Educational Resources Institute, Inc.
(also known as TERI) has an investment grade credit rating
issued by at least one national statistical rating
organization. However, recent developments regarding TERI
could affect TERI's ability to satisfy its guarantee
obligations. On March 23, 2000, TERI was notified by Access
Group, a promoter of legal and other postgraduate education
through affordable financing and related services, that it
intends to discontinue its lending-guarantee relationship
with TERI effective May 1, 2000. As a result, TERI will not
guarantee new Access Group loans originated after April 30,
2000. TERI will, however, continue to retain its guarantee
obligation and its right to receive guarantee fees for loans
originated prior to May 1, 2000. During 1999 and 1998, TERI
recognized guarantee fees of $26,057,526 and $21,544,182,
respectively, on
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loans originated by Access Group. This represented approximately
62% of the 1999 guarantee fee volume for that year. In addition,
TERI recognized $1,063,429 of Access Group administrative fee
income in 1999, which represented 8.2% of its total
administrative expenses. At December 31, 1999, $3,008,676 of
deferred guarantee fees relating to Access Group loans are
reported on TERI's consolidated statement of financial position.
TERI management expects these deferred guarantee fees to be
recognized as revenue over the next ten years. TERI's management
has advised us that it has prepared operational and financial
plans for the remainder of fiscal 2000 and for subsequent years
to reflect the reduced fee volume and have hired external
financial advisors to assist in their review of their operating
plans. However, the termination of TERI's guarantee relationship
with Access Group may have a material adverse effect on TERI's
future financial condition.
If TERI defaults on its guarantee obligations, you will rely
solely on payments from the related borrower for payments on the
related private guaranteed loan. In addition, these student
loans are generally dischargeable by a borrower in bankruptcy
unless it is determined that such student loan has been made
under any program funded in whole or in part by a governmental
unit or non-profit institution. In these circumstances, you will
bear the risk of loss resulting from the failure of any borrower
of a private guaranteed student loan if the securities insurer
has defaulted on the securities guaranty insurance policy and
the other limited credit enhancement of the financing structure
is inadequate to cover such loss. Moreover, if a TERI trigger
event occurs, payments on the notes may be accelerated and you
will bear the risk of reinvestment and any adverse effect on the
weighted average life and yield on your notes.
THE SECURITIES INSURER
HAS CONTROLLING RIGHTS For so long as no securities insurer default has occurred, the
securities insurer will be deemed to be treated as a 100% holder
of the notes. As a result, the securities insurer will have the
right to exercise all of the rights of the noteholders including
the right to declare an event of default under the indenture,
accelerate the notes, direct the indenture trustee to liquidate
the collateral, direct the trust to terminate the interest rate
swap in the event of a swap counterparty default, and remove the
master
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servicer following a servicer termination event, and will have
the right to consent to the appointment of any successor master
servicer or administrator and to consent to all amendments and
actions that require noteholder consent, on behalf of the
noteholders, except for certain amendments and consents that
could affect the amount or timing of distributions required to
be made.
MASTER PROMISSORY NOTE For periods of enrollment beginning on or after July 1, 1999, a
master promissory note may evidence any student loan made to a
borrower under the Federal Family Education Loan program. Under
the master promissory note, each borrower executes only one
promissory note with each lender. Subsequent student loans from
that lender are evidenced by a confirmation sent to the student.
Therefore, if a lender originates multiple student loans to the
same student, all the student loans are evidenced by a single
promissory note.
Pursuant to the Higher Education Act of 1965, as amended, each
student loan made under a master promissory note may be sold
independently of any other student loan note under the same
master promissory note and each such student loan is separately
enforceable on the basis of an original or copy of the master
promissory note. Also, a security interest in such student loans
may be perfected either through the secured party taking
possession of the original or a copy of the master promissory
note, or the filing of a financing statement. Prior to the
master promissory note, each student loan made under the Federal
Family Education Loan program was evidenced by a separate note.
Delivery of the original note was required to effect a transfer
or assignment.
Certain of the initial pool student loans or subsequent pool
student loans have been originated under a master promissory
note, it is expected that serial loans or consolidation loans
purchased during the funding period will be originated under a
master promissory note. If through negligence or otherwise the
master servicer (or a sub-servicer on its behalf) were to
deliver a copy of the master promissory note, in exchange for
value, to a third party that did not have knowledge of the
indenture trustee's lien, that third party may also claim an
interest in such
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student loan. Such third party's interest may be prior to or on
a parity with the interest of the indenture trustee.
WITHDRAWAL OR DOWNGRADING
OF INITIAL RATINGS WILL
ADVERSELY AFFECT THE PRICES
FOR THE NOTES The rating of the notes will depend primarily on an assessment
of the financial strength of the securities insurer, the long
term debt rating of the swap counterparty and on an assessment
by the rating agencies of the student loans. Any reduction in a
rating assigned to the financial strength of the securities
insurer or the long term debt rating of the swap counterparty
below the rating initially given to the securities may result in
a reduction in the rating of the notes.
A security rating is not a recommendation to buy, sell or hold
securities. Similar ratings on different types of securities do
not necessarily mean the same thing. We recommend that you
analyze the significance of each rating independently from any
other rating. Any rating agency may change its rating of the
notes after the notes are issued if that rating agency believes
that circumstances have changed. Any subsequent withdrawal or
downgrading of a rating will likely reduce the price that a
subsequent purchaser will be willing to pay for the applicable
notes. The ratings do not address the likelihood of the ultimate
payment to you of any interest in excess of the maximum rate,
including amounts required to be paid by the cap provider.
Any downgrade in the rating of the securities insurer or swap
counterparty will likely result in the downgrade of the rating
of the notes. None of the trust, the seller, the master
servicer, any sub-servicer, the indenture trustee or the
eligible lender trustee is required to maintain the rating of
the notes. Any downgrade in the ratings assigned to your notes
could result in a decline in the market value of your
securities.
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THE NOTES ARE NOT
SUITABLE INVESTMENTS
FOR ALL INVESTORS The notes are not a suitable investment if you require a
regular or predictable schedule of payments or payment on any
specific date. The notes are complex investments that should
be considered only by investors who, either alone or with
their financial, tax and legal advisors, have the expertise
to analyze the prepayment, reinvestment, default and market
risk, the tax consequences of an investment, and the
interaction of these factors.
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FORMATION OF THE TRUST
THE TRUST
KeyCorp Student Loan Trust 2000-A (the "Trust") is a business trust
formed under the laws of the State of Delaware pursuant to the Trust Agreement,
dated as of May 31, 2000, as amended and restated by the Amended and Restated
Trust Agreement dated as of June 1, 2000 (as further amended and supplemented
from time to time, the "Trust Agreement") between Key Bank USA, National
Association (the "Seller") and Bank One, National Association, as trustee (the
"Eligible Lender Trustee") for the transactions described in this Prospectus
Supplement. A Certificate of Trust forming the Trust was filed with the Delaware
Secretary of State on May 31, 2000. The assets of the Trust will include certain
graduate and undergraduate student loans (collectively "Student Loans"). Such
Student Loans will be acquired by the trust from the Seller on June ___, 2000
(the "Closing Date") and from time to time thereafter (collectively, the
"Financed Student Loans"). The Financed Student Loans will consist of (i)
Financed Student Loans that are reinsured by the United States Department of
Education (the "Department") (collectively, "Financed Federal Loans"), (ii)
Financed Student Loans that are not reinsured by the Department or any other
government agency but are guaranteed by a private guarantor (collectively,
"Guaranteed Private Loans"), and (iii) certain Financed Student Loans that are
not guaranteed by any party nor reinsured by the Department (collectively
"Non-Guaranteed Private Loans," and together with the Guaranteed Private Loans,
the "Financed Private Loans").
The Trust will not engage in any activity other than:
- acquiring, holding and managing the Financed Student Loans and the
other assets of the Trust and proceeds therefrom;
- issuing the Notes and Certificates;
- making payments thereon;
- entering into and performing its obligations under the Interest Rate
Swap and the Cap Agreement; and
- engaging in other activities that are related to the activities
listed above.
The Trust will be initially capitalized with equity of approximately
$9,625,000 representing the amounts deposited in the Reserve Account in the name
of the Indenture Trustee by the Seller on the Closing Date (the "Reserve Account
Initial Deposit"). The net proceeds from the sale of the Notes will be used by
the Eligible Lender Trustee to purchase on behalf of the Trust the Initial Pool
Student Loans (also referred to herein as the "Initial Financed Student Loans")
from the Seller pursuant to the Sale and Servicing Agreement dated as of June 1,
2000 among the Trust, the Seller, the Administrator, the Master Servicer, and
the Eligible Lender Trustee (the "Sale and Servicing Agreement"), to fund the
deposit of approximately $216,730,598 (the "Pre-Funded Amount") into an account
to be maintained by the Indenture Trustee (the "Pre-Funding Account").
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Upon the consummation of such transactions, the property of the Trust
will consist of
(a) a pool of Financed Student Loans, legal title to which is held by
the Eligible Lender Trustee on behalf of the Trust,
(b) all funds collected in respect thereof on or after the Cutoff
Date;
(c) all Guarantee Agreements and other relevant rights under certain
collateral agreements with respect to the Guaranteed Private
Loans, to the extent guaranteed or insured by third parties, and
assigned to the Trust by the Seller (the "Assigned Rights"), and
(d) all moneys and investments on deposit in an account in the name of
the Indenture Trustee (the "Collection Account") which on the
Closing Date will be approximately $4,522,937 the Pre-Funding
Account, an account in the name of the Indenture Trustee (the
"Escrow Account") and the Reserve Account.
In addition, on the Closing Date portions of the net proceeds from the
sale of the Initial Financed Student Loans (i) will be paid to Key Bank USA,
National Association (in such capacity, the "Swap Counterparty") in
consideration for the Swap Counterparty entering into the interest rate swap
agreement with the Trust (the "Interest Rate Swap") for the benefit of the
holders of the Notes and (ii) will be paid to Key Bank USA, National Association
(in such capacity, the "Cap Provider") in consideration for the Cap Provider
entering into the interest rate cap agreement with the Trust (the "Cap
Agreement") for the benefit of the holders of the Notes.
On the Closing Date, a portion of the net proceeds from the sale of the
Initial Financed Student Loans also will be paid to MBIA Insurance Corporation
(the "Securities Insurer") in payment for the issuance of the Class A Note
Guaranty Insurance Policy (the "Securities Guaranty Insurance Policy").
To facilitate servicing and to minimize administrative burden and
expense, the Master Servicer will be appointed by the Eligible Lender Trustee as
the custodian, and the Master Servicer will then appoint the Sub-Servicers as
the custodians on behalf of the Indenture Trustee and Trust, of the promissory
notes representing the Financed Student Loans that each services on behalf of
the Master Servicer.
"Initial Pool Student Loans" means the Student Loans identified as such
in the Sale and Servicing Agreement and transferred by the Seller as of the
Closing Date and having an aggregate principal balance of approximately
$321,839,714 as of the Statistical Cutoff Date.
"Statistical Cutoff Date" means May 1, 2000 with respect to both the
Initial Pool Student Loans and the Subsequent Pool Student Loans.
ELIGIBLE LENDER TRUSTEE
Bank One, National Association is the Eligible Lender Trustee for the
Trust under the Trust Agreement pursuant to which the Eligible Lender Trustee
acts as holder of legal title to the Financed Student Loans on behalf of the
Trust. Bank One, National Association, principal offices
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are located at 1 Bank One Plaza, Suite IL1-0126, Chicago, Illinois 60607 and its
New York offices are located at First Chicago Trust Company of New York, 14 Wall
Street, New York, New York 10005.
The Eligible Lender Trustee will acquire on behalf of the Trust legal
title to all the Financed Student Loans acquired from time to time pursuant to
the Sale and Servicing Agreement. The Eligible Lender Trustee on behalf of the
Trust will enter into a guarantee agreement or comparable arrangement with each
of the Guarantors with respect to the Financed Student Loans that are guaranteed
or insured (each a "Guarantee Agreement" and collectively, the "Guarantee
Agreements"). The Eligible Lender Trustee qualifies as an eligible lender and
owner of all Student Loans that are reinsured by the Department (the "Federal
Loans") and all student loans that are not reinsured by the Department, whether
or not guaranteed by a private guarantor (the "Private Loans") for all purposes
under the Higher Education Act of 1965 (the "Higher Education Act") and the
Guarantee Agreements. Failure of the Financed Federal Loans to be owned by an
eligible lender would result in the loss of any Guarantee Payments (as defined
in the Prospectus) from any of California Student Aid Commission ("CSAC"), New
York State Higher Education Services Corporation ("HESC"), Great Lakes Higher
Education Guaranty Corporation ("GLHEC"), United Student Aid Funds, Inc.
("USAF"), Pennsylvania Higher Education Assistance Agency ("PHEAA"), American
Student Assistance ("ASA"), Michigan Higher Education Assistance Agency
("MHEAA"), Nebraska Student Loan Program ("NSLP") or Educational Credit
Management Corporation ("ECMC") (collectively, the "Federal Guarantors") and any
Federal Assistance (as defined in the Prospectus) with respect to such Financed
Federal Loans. See "The Financed Student Loan Pool--Insurance of Student Loans;
Guarantors of Student Loans" herein.
The Eligible Lender Trustee's liability in connection with the issuance
and sale of the Floating Rate Class A-1 Asset Backed Notes (the "Class A-1
Notes"), Floating Rate Class A-2 Asset Backed Notes (the "Class A-2 Notes" and
together with the Class A-1 Notes, the "Class A Notes" or the "Notes") and the
issuance of a single class of certificates (the "Certificates") is limited
solely to the express obligations of the Eligible Lender Trustee set forth in
the Trust Agreement and the Sale and Servicing Agreement. See "Description of
the Securities" and "Description of the Transfer and Servicing Agreements"
herein. The Seller plans to maintain normal commercial banking relations with
the Eligible Lender Trustee.
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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 Notes, less the
initial deposit to the Collection Account, the fees paid to the Swap
Counterparty and the Cap Provider and certain amounts paid to the Securities
Insurer to acquire the Securities Guaranty Insurance Policy, will be paid by the
Trust to the Seller in consideration for the purchase by the Trust of the
Initial Financed Student Loans on the Closing Date. The Seller will use such
proceeds paid to it (x) to make the Reserve Account Initial Deposit and (y) to
make an initial deposit into the Collection Account (the "Closing Date
Deposit").
THE MASTER SERVICER AND THE SUB-SERVICERS
KEY BANK USA, NATIONAL ASSOCIATION
Key Bank USA, National Association ("KBUSA"), in its capacity as Master
Servicer under the Sale and Servicing Agreement (the "Master Servicer"), will be
responsible for master servicing the Financed Student Loans. The Master Servicer
will arrange for and oversee the performance by PHEAA and Great Lakes
(collectively the "Sub-Servicers" and each a "Sub-Servicer") of their respective
servicing obligations with respect to the Financed Student Loans. The Master
Servicer will be entitled to receive the Master Servicing Fee, but will in turn
be solely responsible for all compensation due to the Sub-Servicers for the
performance of their respective obligations pursuant to the related
Sub-Servicing Agreements.
KBUSA is a national banking association and a wholly owned subsidiary
of KeyCorp. KBUSA is engaged in consumer loan activities nationally, including,
automobile lending and leasing, home equity financing of both first- and
second-home mortgages, education lending, and marine and recreational vehicle
financing. As of March 31, 2000, KBUSA had total assets of approximately $5.0
billion, total liabilities of approximately $3.9 billion and approximately $1.0
billion in stockholder's equity. The principal executive offices of KBUSA are
located at Key Tower, 127 Public Square, Cleveland, Ohio 44114 and its telephone
number is (216) 689-6300.
PHEAA
PHEAA is a body corporate and politic constituting a public corporation
and government instrumentality created pursuant to an act of the Pennsylvania
Legislature. Under its enabling legislation, PHEAA is authorized to issue bonds
or notes, with the approval of the Governor of the Commonwealth of Pennsylvania
for the purpose of purchasing, making, or guaranteeing loans. Its enabling
legislation also authorizes PHEAA to undertake the origination and servicing of
loans made by PHEAA and others. PHEAA's headquarters are located in Harrisburg,
Pennsylvania with regional offices located throughout Pennsylvania and
additional offices located in California, Delaware and West Virginia. As of
March 31, 2000 it had approximately 2,100 employees.
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PHEAA has been guaranteeing student loans since 1964 and has guaranteed
a total of approximately $21.8 billion principal amount of Stafford Loans (as
defined in the Prospectus) and approximately $2.3 billion principal amount of
Parent Loans for Undergraduate Students ("PLUS Loans") and SLS Loans (as defined
in the Prospectus) under the Higher Education Act. In addition to guaranteeing
loans under the Higher Education Act, PHEAA also operates certain guarantee
programs for which it receives no federal reinsurance. PHEAA has outstanding
guarantee obligations of such loans in the amount of approximately $29.3 million
as of March 31, 2000.
Pursuant to a Sub-Servicing Agreement with the Master Servicer, PHEAA
has agreed to service, and perform all other related tasks with respect to,
certain of the Financed Student Loans. PHEAA is required to perform all services
and duties customary to the servicing of such Financed Student Loans in
compliance with all applicable standards and procedures. See "Description of the
Transfer and Servicing Agreements--Servicing Procedures."
The above information relating to PHEAA has been obtained from PHEAA
and neither KBUSA nor the Underwriters have conducted any independent
verification of such information. PHEAA has agreed that it will provide a copy
of its most recent audited financial statements to holders of Notes and
Certificates (collectively, "Securityholders") upon receipt of a written request
directed to Mr. Tim Guenther, Chief Financial Officer, Financial Management,
1200 North Seventh Street, Harrisburg, Pennsylvania 17102.
GREAT LAKES
As of March 31, 2000, Great Lakes Educational Loan Services, Inc.
("Great Lakes") and its affiliates serviced 947,820 student and parental
accounts with an outstanding balance of $7.5 billion for 1,231 lenders
nationwide.
Pursuant to a Sub-Servicing Agreement with the Master Servicer, Great
Lakes has agreed to service, and perform all other related tasks with respect
to, certain of the Financed Student Loans. Great Lakes is required to perform
all services and duties customary to the servicing of such Financed Student
Loans in compliance with all applicable standards and procedures. See
"Description of the Transfer and Servicing Agreements--Servicing Procedures."
The above information relating to Great Lakes has been obtained from
Great Lakes and neither KBUSA nor the Underwriters have conducted any
independent verification of such information. Great Lakes has agreed that it
will provide a copy of its most recent audited financial statements on receipt
of a written request directed to 2401 International Lane, Madison, Wisconsin
53704, Attention: Vice President and Chief Financial Officer.
SERVICES AND FEES OF MASTER SERVICER AND THE SUB-SERVICERS
Pursuant to the Sale and Servicing Agreement KBUSA will act as Master
Servicer and will enter into one or more sub-servicing agreements (each a
"Sub-Servicing Agreement") with each of PHEAA and Great Lakes with respect to,
all the Financed Student Loans acquired by the Eligible Lender Trustee on behalf
of the Trust. The Securities Insurer will have the right to approve the
appointment of any additional or replacement Sub-Servicers not agreed upon as
being acceptable on
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the Closing Date. In accordance with the Sub-Servicing Agreements, each
Sub-Servicer will service and perform all related tasks with respect to the
Financed Student Loans on behalf of the Master Servicer and the Trust. The Trust
will be an intended third-party beneficiary of each Sub-Servicing Agreement.
With respect to the Financed Student Loans it is servicing for the Master
Servicer and the Trust, each Sub-Servicer is required to perform the services
and duties customary to the servicing of Student Loans it is required to service
with reasonable care and to do so in the same manner as such Sub-Servicer has
serviced Student Loans on behalf of the Seller or the Master Servicer, as
applicable, and otherwise in compliance with all applicable standards and
procedures. In addition, each Sub-Servicer is required to maintain its
eligibility as a third-party servicer, to the extent applicable, under the
Higher Education Act. See "Description of the Transfer and Servicing
Agreements--Servicing Procedures" herein.
In consideration for performing its obligations under the Sale and
Servicing Agreement, the Master Servicer will receive a monthly fee payable by
the Trust on or about the twenty-fifth day of each month (the "Monthly Servicing
Payment Date") equal to 0.50% on an annualized basis (the "Master Servicing Fee
Percentage") of the principal balance of the Financed Student Loans as of the
last day of the preceding calendar month together with late fees, administrative
fees and similar charges. In consideration for the Master Servicing Fee, the
Master Servicer will be solely responsible for the fees due to the Sub-Servicers
pursuant to the terms of the related Sub-Servicing Agreements except under
certain limited circumstances following an auction sale as described under
"Description of Transfer and Servicing Agreements--Termination" herein. See
"Description of Transfer and Servicing Agreements--Master Servicing
Compensation" herein.
THE FINANCED STUDENT LOAN POOL
GENERAL
The pool of Financed Student Loans will include the Initial Financed
Student Loans purchased by the Eligible Lender Trustee on behalf of the Trust as
of the applicable Cutoff Date and any Additional Student Loans purchased by the
Eligible Lender Trustee on behalf of the Trust from the Seller as of the
applicable Subsequent Cutoff Dates.
The Initial Financed Student Loans will consist of the Initial Pool
Student Loans. The "Cutoff Date" for the Initial Pool Student Loans is June 1,
2000. Consequently, the Trust will be entitled to collections on and proceeds of
the Initial Pool Student Loans on and after June 1, 2000.
On or prior to July 31, 2000, the Trust is required to purchase the
Subsequent Pool Student Loans from funds on deposit in a subaccount of the
Pre-Funding Account. The "Subsequent Pool Student Loans" are Student Loans that
will be purchased by the Seller in negotiated transactions during June 2000 from
Fleet National Bank ("Fleet"), pursuant to a Forward Commitment Student Loan
Purchase and Sale Agreement, (the "Fleet Sale Agreement") dated as of May 2,
2000, between Fleet and the Seller. The Subsequent Pool Student Loans
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<PAGE> 30
have, as of the Statistical Cutoff Date, the characteristics described below
under "--Subsequent Pool Student Loans."
In addition to the Subsequent Pool Student Loans the Trust may acquire
with certain funds on deposit in the Pre-Funding Account certain other Student
Loans that are either Serial Loans or Consolidation Loans (collectively, the
"Other Subsequent Student Loans"). Other Subsequent Student Loans may be
acquired by the Trust any time prior to the end of the Funding Period. The term
"Additional Student Loans" refers collectively to the Subsequent Pool Student
Loans, Other Subsequent Student Loans and Fee Advances (as defined in the
Prospectus).
The Financed Student Loans will be either purchased from Fleet, with
respect to the Subsequent Pool Student Loans, or selected from the Seller's
portfolio of Student Loans by several criteria, including, as of the Statistical
Cutoff Date or the applicable Subsequent Cutoff Date, as the case may be, the
following:
1. Each Financed Student Loan
(a) was originated in the United States or its
territories or possessions, either by the Seller
under and in accordance with the Programs (as defined
in the Prospectus) or by Fleet (as more described
under "--Characteristics of the Subsequent Pool
Student Loans") (including, in the case of borrowers
of Financed Federal Loans, a financial need analysis
and, in the case of borrowers of Financed Private
Loans, a creditworthiness evaluation) to a borrower
who (or with respect to PLUS Loans to a parent of a
student who), with respect to the Initial Financed
Student Loans and Subsequent Pool Student Loans, (i)
with respect to undergraduate loans, has graduated or
otherwise left an undergraduate institution or is
expected to graduate or otherwise leave an
undergraduate institution by August 31, 2000, and
(ii) with respect to graduate loans, has graduated or
otherwise left graduate school or is expected to
graduate or otherwise leave graduate school by August
31, 2000,
(b) contains terms in accordance with those required by
the Programs, the applicable Guarantee Agreements and
other applicable requirements, and
(c) with respect to the Initial Financed Student Loans
and Subsequent Pool Student Loans, is not more than
180 days past due as of the Cutoff Date or, with
respect to the Other Subsequent Student Loans not
more than 90 days past due as of the applicable
Subsequent Cutoff Date, as the case may be.
2. As of the Statistical Cutoff Date, no Initial Financed Student
Loan and no Subsequent Pool Student Loan had a borrower who
was noted in the related records of the Master Servicer,
Fleet, or a Sub-Servicer as being currently involved in a
bankruptcy proceeding or deceased since the date the Trust was
created. Any Subsequent Pool Student Loan in respect of which
a claim is made on a Guarantor
S-28
<PAGE> 31
following the Statistical Cutoff Date and prior to the date
such Student Loan is to be transferred to the Trust will not
be eligible for transfer to the Trust.
3. No Initial Financed Student Loan as of the Statistical Cutoff
Date consists of, and no Subsequent Pool Student Loan as of
the date of its transfer to the Trust will consist of, a
Student Loan that was subject to the Seller's prior obligation
to sell such loan to a third party.
4. No selection procedures believed by the Seller to be adverse
to the Securityholders were used or will be used in selecting
the Financed Student Loans.
5. The Financed Student Loans do not and will not include any
non-prime or sub-prime Student Loans. Non-prime or sub-prime
Student Loans are Student Loans originated to individuals who
have previously defaulted on their Student Loans.
6. As of the Statistical Cutoff Date, none of the Initial
Financed Student Loans and none of the Subsequent Pool Student
Loans are non-performing Student Loans. Non-performing Student
Loans are Student Loans which are in default and the Seller
expects to write-off as a loss.
Each of the Financed Student Loans provides or will provide for the
amortization of the outstanding principal balance of such Financed Student Loan
over a series of regular payments. Each regular payment consists of an
installment of interest which is calculated on the basis of the outstanding
principal balance of such Financed Student Loan multiplied by the applicable
interest rate and further multiplied by the period elapsed (as a fraction of a
calendar year) since the preceding payment of interest was made. As payments are
received in respect of such Financed Student Loan, the amount received is
applied first to interest accrued to the date of payment and the balance is
applied to reduce the unpaid principal balance. Accordingly, if a borrower pays
a regular installment before its scheduled due date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be less than it would have been had the payment been made as scheduled, and the
portion of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if a borrower pays a monthly installment
after its scheduled due date, a late fee will be assessed where applicable and
the portion of the payment allocable to interest for the period since the
preceding payment was made will be greater than it would have been had the
payment been made as scheduled, and the portion of the payment applied to reduce
the unpaid principal balance will be correspondingly less. In either case,
subject to any applicable Deferral Periods (as defined in the Prospectus) or
Forbearance Periods (as defined in the Prospectus), the borrower pays a regular
installment until the final scheduled payment date, at which time the amount of
the final installment is increased or decreased as necessary to repay the then
outstanding principal balance of and any accrued but unpaid interest on such
Financed Student Loan.
Approximately 92.81% of the Subsequent Pool Student Loans (the "Prime
Rate Loans"), with an aggregate unpaid principal balance as of the Statistical
Cut-off Date of approximately $168,670,094, bear interest at the Prime Rate. The
"Prime Rate" is defined in each related
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<PAGE> 32
borrower's note as the rate published as the Prime Rate in The Wall Street
Journal in its Money Rates section, or if more than one Prime Rate is published
by The Wall Street Journal, the highest such rate is used, and interest on each
Prime Rate Loan is calculated for each calendar month using the Prime Rate for
the last business day of the prior calendar month.
The Additional Student Loans to be conveyed to the Eligible Lender
Trustee on behalf of the Trust during the Funding Period are required to consist
of Subsequent Pool Student Loans, Other Subsequent Student Loans or Fee Advances
(as defined in the Prospectus), in each case originated by the Seller in
accordance with the Programs and other applicable requirements. The Subsequent
Pool Student Loans are identified in this Prospectus Supplement. The Other
Subsequent Student Loans and Fee Advances must be made to a borrower who has,
immediately prior to the date of any such conveyance, outstanding Student Loans
that are part of the pool of Financed Student Loans. Each such Additional
Student Loan is otherwise required to comply with the criteria set forth above.
See "Description of the Transfer and Servicing Agreements--Additional Fundings"
herein.
Except for the criteria described in the preceding paragraphs, there
will be no required characteristics of the Additional Student Loans. Therefore,
following the transfer of the Subsequent Pool Student Loans and other Additional
Student Loans to the Eligible Lender Trustee on behalf of the Trust, the
aggregate characteristics of the entire pool of Financed Student Loans,
including the composition of the Financed Student Loans, the distribution by
weighted average interest rate and the distribution by principal amount
described in the following tables, may vary significantly from those of the
Initial Financed Student Loans and Subsequent Pool Student Loans as of the
Statistical Cutoff Date. In addition, the distribution by weighted average
interest rate applicable to the Financed Student Loans on any date following the
Statistical Cutoff Date may vary significantly from that set forth in the
following tables as a result of variations in the effective rates of interest
applicable to the Financed Student Loans. Moreover, the remaining term to
maturity of the Initial Financed Student Loans and Subsequent Pool Student Loans
as of the Statistical Cutoff Date may vary significantly from the actual term to
maturity of any of the Financed Student Loans as a result of the granting of
Deferral Periods and Forbearance Periods with respect thereto.
CHARACTERISTICS OF THE SUBSEQUENT POOL STUDENT LOANS
The Subsequent Pool Student Loans are being acquired from Fleet and are
guaranteed by TERI. The loans were originated by Fleet (or by BankBoston prior
to its merger into Fleet) under one of the programs described below that are
sponsored by TERI.
TERI Alternative Program. The TERI Alternative Program is a private
loan program and designed to offer loans to students enrolled in accredited
degree-granting undergraduate institutions in the United States and Canada. To
be eligible for a loan under the Alternative Program ("TERI Alternative Loans"),
a student must be deemed creditworthy or provide a creditworthy co-borrower.
Also, at least one applicant must be a U.S. citizen or a certified permanent
resident of the United States.
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<PAGE> 33
In determining whether a student or co-borrower is creditworthy, a
credit bureau report is obtained for each applicant, including the student. A
satisfactory credit history has generally been defined by TERI and Fleet as the
making of continuous and prompt payment by the borrower on all credit
obligations such as mortgages, personal loans, credit cards, auto loans, and
especially, student loans. There should be no record of charged off loans which
were in excess of $200 within the past five years (exceptions may be granted)
nor a record of foreclosure, repossession, open judgment or suit, unpaid tax
lien, unpaid prior student loan defaults or other negative public record items
in the past seven years with respect to the applicant. The applicant should not
have a record of bankruptcy within the past 10 years (exceptions may be granted
where the applicant provides written documentation demonstrating that the
circumstances leading up to the bankruptcy were beyond the applicant's control).
Eligible borrowers of a TERI Alternative Loan may borrow from $500 up
to the cost of education, less any financial aid received per academic year. A
5% guaranty fee for borrowers making either interest only or principal and
interest payments while the student is in school, or a 6.5% guaranty fee for
borrowers deferring payments of principal and interest while the student is in
school full-time or maintains at least a half time status is deducted from the
loan proceeds.
Interest rates on TERI Alternative Loans will be variable either on a
monthly or quarterly basis. The rate is equal to Fleet's prime or base rate plus
a margin of between 0% and 2%.
The TERI Alternative Loan may be repaid in up to 25 years, depending on
the total amount borrowed. For borrowers who do not elect deferment, repayment
of the TERI Alternative Loan begins within 45 days after the disbursement date.
However, subject to certain exceptions, deferment of principal is allowed for up
to four years, with only interest being paid, while the student is in school.
Payment of principal and interest begins within 45 days after graduation or
withdrawal from school. In addition, in some cases, deferment of principal and
interest is permitted for up to four years, while the student is in school.
Payment of principal and interest begins 45 days after graduation or withdrawal
from school. Once principal payments commence, the monthly principal and
interest payment remains fixed throughout the life of the loan. Therefore, for
variable rate loans, fluctuations in the interest rate are reflected in the
length of the repayment term, not the monthly amount, unless an increase in the
monthly amount is needed to keep the repayment period within 25 years. TERI
Alternative Loans may be prepaid at any time without penalty.
Each TERI Alternative Loan is guaranteed by TERI. The terms of the TERI
guaranty for loans in the TERI Alternative Program are as described below in "--
Insurance of Student Loans; Guarantors of Student Loans--Guarantor for the
Guaranteed Private Loans."
PEP Program. The PEP Program is a private loan program designed to
offer loans ("PEP Loans") to graduate and professional school students enrolled
at least half-time in an accredited degree-granting (masters and/or doctorate,
or the equivalent) institution in the United States and Canada. The credit
criteria for the PEP Program are substantially the same as described above for
the TERI Alternative Program.
S-31
<PAGE> 34
Eligible borrowers of PEP Loans may borrow a minimum of $500 up to
$15,000 per academic year on their own signature provided they have no adverse
credit history or, if the student has a creditworthy co-borrower, up to the full
cost of attendance less the estimated other financial aid the student is
eligible to receive. The aggregate total amount of borrowings is based on future
income projections. In general, an 8% guarantee fee (6% with a co-borrower) is
deducted from the loan proceeds. In addition, for those borrowers who have no
co-borrower, an additional 2% guarantee fee is charged at the time the PEP Loan
goes into repayment, which is added to the principal amount of the loan.
The interest rate on PEP Loans will be variable either on a monthly or
quarterly basis. The rate is generally equal to the Fleet's prime or base rate
plus a margin of between 0% and 2%, or with respect to certain PEP Loans, based
on the Treasury bill rate plus a margin of between 2.4% and 2.7%.
PEP Loans may be repaid in up to 25 years, depending on the total
amount borrowed. Repayment of the PEP Loan begins six months after the student
has graduated or separated from school or has caused his enrolled status to be
less than half time. Both principal and interest are deferred for up to 4-1/2
years while the student is in school (any such deferred interest will be
capitalized and added to principal). Medical students may defer after graduation
for up to four years while completing a residency program. Once principal
payments commence, the monthly principal and interest payment remains fixed
throughout the life of the loan. Therefore, for variable rate loans,
fluctuations in the interest rate are reflected in the length of the repayment
term, not the monthly amount, unless an increase in the monthly amount is needed
to keep the repayment period within 25 years.
Each PEP Loan is guaranteed by TERI. The terms of the TERI guaranty for
loans in the PEP Program are as described below in "-- Insurance of Student
Loans; Guarantors of Student Loans--Guarantor for the Guaranteed Private Loans."
DUAL Undergraduate Alternative Program. The DUAL Program is a private
loan program established by TERI and is designed to offer loans ("DUAL Loans")
to degreed undergraduate students pursuing an additional undergraduate degree or
to teachers completing a credentialing program, enrolled at least half-time in a
degree-granting program and completing a second bachelor's degree, or the
student can be enrolled in the Education Credentials Certificate program
(considered a fifth-year undergraduate student). The credit criteria are
substantially the same as described above for the TERI Alternative Program.
Eligible Borrowers of DUAL Loans may borrow a minimum of $500 up to
$15,000 per academic year on their own signature provided they have no adverse
credit history or, if the student has a creditworthy co-borrower up to the full
cost of attendance less the estimated other financial aid the student is
eligible to receive. In general, an 8% guarantee fee (6% with a co-borrower) is
deducted from the loan proceeds. In addition, for those borrowers who have no
co-borrower, an additional 2% guaranty fee is charged at the time the DUAL Loan
goes into
S-32
<PAGE> 35
repayment, which is initially paid to TERI by Fleet, who in turn adds such
amount to the principal amount of the loan.
The interest rate on DUAL Loans will be variable either on a monthly or
a quarterly basis. The rate is equal to the lender's prime or base rate plus a
margin of between 0% and 2%.
DUAL Loans may be repaid in up to 25 years depending on the total
amount borrowed. Repayment of DUAL Loans begins six months after the student has
graduated or separated from school or has caused his enrollment status to be
less than half-time. Both the principal and interest are deferred for the years
while the student is in school (any such deferred interest will be capitalized
and added to the principal). Once principal payments have commenced the monthly
principal and interest payment remains fixed throughout the life of the loan.
Therefore, for variable rate loans, fluctuations in the interest rate are
reflected in the length of the payment term, not the monthly amount, unless an
increase in the monthly amount is needed to keep the repayment period within 25
years.
Each DUAL Loan is guaranteed by TERI. The terms of the TERI guaranty
for loans in the DUAL program are as described below in "-- Insurance of Student
Loans; Guarantors of Student Loans--Guarantor for the Guaranteed Private Loans."
THE FINANCED STUDENT LOANS
Set forth below in the following tables is a description of certain
additional characteristics of the Initial Pool Student Loans and the Subsequent
Pool Student Loans, each as of the Statistical Cutoff Date. Unless otherwise
specified, percentages are of the related pool principal balances (including
certain interest accrued to be capitalized). Regularly scheduled payments and
prepayments of such Subsequent Pool Student Loans (which are prepayable at any
time) between the Statistical Cutoff Date and the date as of which such Student
Loans are transferred to the Eligible Lender Trustee on behalf of the Trust will
affect the balances and percentages set forth herein. Moreover, such Subsequent
Pool Student Loans may become delinquent (or more delinquent) between the
Statistical Cutoff Date and the date of transfer to the Trust. While the
statistical distribution of the final characteristics of the Subsequent Pool
Student Loans when transferred to the Trust will vary somewhat from the
statistical information presented below, the Seller does not believe that the
characteristics of such Subsequent Pool Student Loans will vary materially.
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<PAGE> 36
COMPOSITION OF THE POOL AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
KEYCORP STUDENT LOAN TRUST INITIAL POOL SUBSEQUENT POOL TOTAL
-------------------------- ------------ --------------- -----
<S> <C> <C> <C>
Aggregate Outstanding Balance(1) $321,839,714 $181,730,598 $503,570,312
Number of Borrowers 15,267 13,760 28,985
Average Outstanding Balance Per Borrower $21,081 $13,207 $17,373
Number of Loans 33,658 18,947 52,605
Average Outstanding Balance Per Loan $9,562 $9,592 $9,573
Weighted Average Remaining Term to Maturity(2) 198 209 202
Weighted Average Annual Borrower Interest Rate(3) 7.72% 9.84% 8.49%
</TABLE>
(1) Includes the net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $24,222,447 as of the Statistical Cutoff Date.
(2) Determined from the Statistical Cutoff Date, to the stated maturity
date of the Financed Student Loans, assuming repayment commences
promptly upon expiration of the typical grace period following the
expected graduation date and without giving effect to any Deferral
Periods or Forbearance Periods that may be granted in the future. See
"The Student Loan Financing Business" in the Prospectus.
(3) Determined using the borrower interest rates exclusive of Special
Allowance Payments applicable to the Initial Pool Student Loans as of
the Statistical Cutoff Date. However, because all the Financed 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
Student Loans at any time after the Statistical Cutoff Date. See "The
Student Loan Financing Business" in the Prospectus.
The weighted average spread for Financed Student Loans (including Special
Allowance Payments), if they were in repayment as of the Statistical Cutoff
Date, are as follows:
<TABLE>
<CAPTION>
Aggregate Outstanding
Type of Loan/Index Principal Balance Weighted Average Spread
------------------ ----------------- -----------------------
<S> <C> <C>
Financed Federal Loans/Treasury Bill Rate $170,327,276 2.97%
Financed Federal Loans/CP Rate $ 41,486,995 2.63%
Financed Private Loans/Treasury Bill Rate $123,085,946 3.12%
Financed Private Loans/Prime Rate $168,670,094 1.97%
Total $503,570,312
</TABLE>
The weighted average spread for Financed Student Loans (including Special
Allowance Payments), with respect to borrowers that are still in school, or in
grace or deferment periods, as of the Statistical Cutoff Date, are as follows:
<TABLE>
<CAPTION>
Aggregate Outstanding
Type of Loan/Index Principal Balance Weighted Average Spread
------------------ ----------------- -----------------------
<S> <C> <C>
Financed Federal Loans/Treasury Bill Rate $170,327,276 2.54%
Financed Federal Loans/CP Rate $ 41,486,995 2.62%
Financed Private Loans/Treasury Bill Rate $123,085,946 2.94%
Financed Private Loans/Prime Rate $168,670,094 1.97%
Total $503,570,312
</TABLE>
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<PAGE> 37
DISTRIBUTION BY LOAN TYPE AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
------------------------------------- ------------------------------------
AGGREGATE PERCENT OF AGGREGATE PERCENT OF
OUTSTANDING INITIAL OUTSTANDING SUBSEQUENT
GUARANTEED OR NUMBER PRINCIPAL POOL NUMBER PRINCIPAL POOL
LOAN TYPE UNGUARANTEED OF LOANS BALANCE(1) BALANCE OF LOANS BALANCE(2) BALANCE
--------- ------------ -------- ---------- ------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
ADEAL Best Bet - private dental loan Unguaranteed 586 $4,322,426 1.34% 0 $0 0.00%
Alternative Dental Education Unguaranteed 1,070 11,577,373 3.60 0 0 0.00
Assistance Loan - private dental
loan
Alternative Loan Program - private Guaranteed 0 0 0.00 10,955 90,373,098 49.73
undergraduate loan
International Health Education Loan Guaranteed 0 0 0.00 683 10,329,718 5.68
Program - private loan for
international students
Key Alternative Loans Unguaranteed 14,990 81,461,318 25.31 0 0 0.00
MedAchiever - private medical loan Unguaranteed 911 8,024,723 2.49 0 0 0.00
MedChoice - private medical loan Guaranteed 0 0 0.00 176 2,299,640 1.27
MedFind - private medical loan Guaranteed 0 0 0.00 833 10,760,863 5.92
Medical Residency Loan - private Unguaranteed 614 4,639,603 1.44 0 0 0.00
medical loan
Private loan for students attending Guaranteed 0 0 0.00 125 2,179,465 1.20
SABA University
Professional Education Plan - Guaranteed 0 0 0.00 6,175 65,787,814 36.20
private graduate loan
Subsidized Consolidation Loan - Guaranteed 1,162 32,902,906 10.22 0 0 0.00
Title IV
Subsidized Spousal Consolidation Guaranteed 16 515,568 0.16 0 0 0.00
Loan - Title IV
Subsidized Stafford Loan - Title IV Guaranteed 6,540 51,066,807 15.87 0 0 0.00
Unsubsidized Consolidation Loan - Guaranteed 1,165 37,820,054 11.75 0 0 0.00
Title IV
Unsubsidized Spousal Consolidation Guaranteed 16 575,435 0.18 0 0 0.00
Loan - Title IV
Unsubsidized Stafford Loan - Title IV Guaranteed 6,588 88,933,501 27.63 0 0 0.00
TOTAL 33,658 $321,839,714 100.00% 18,947 $181,730,598 100.00%
</TABLE>
<TABLE>
<CAPTION>
TOTAL
----------------------------------
AGGREGATE PERCENT OF
OUTSTANDING TOTAL
GUARANTEED OR NUMBER PRINCIPAL POOL
LOAN TYPE UNGUARANTEED OF LOANS BALANCE BALANCE
--------- ------------ -------- ------- -------
<S> <C> <C> <C> <C>
ADEAL Best Bet - private dental loan Unguaranteed 586 $4,322,426 0.86%
Alternative Dental Education Unguaranteed 1,070 11,577,373 2.30
Assistance Loan - private dental
loan
Alternative Loan Program - private Guaranteed 10,955 90,373,098 17.95
undergraduate loan
International Health Education Loan Guaranteed 683 10,329,718 2.05
Program - private loan for
international students
Key Alternative Loans Unguaranteed 14,990 81,461,318 16.18
MedAchiever - private medical loan Unguaranteed 911 8,024,723 1.59
MedChoice - private medical loan Guaranteed 176 2,299,640 0.46
MedFind - private medical loan Guaranteed 833 10,760,863 2.14
Medical Residency Loan - private Unguaranteed 614 4,639,603 0.92
medical loan
Private loan for students attending Guaranteed 125 2,179,465 0.43
SABA University
Professional Education Plan - Guaranteed 6,175 65,787,814 13.06
private graduate loan
Subsidized Consolidation Loan - Guaranteed 1,162 32,902,906 6.53
Title IV
Subsidized Spousal Consolidation Guaranteed 16 515,568 0.10
Loan - Title IV
Subsidized Stafford Loan - Title IV Guaranteed 6,540 51,066,807 10.14
Unsubsidized Consolidation Loan - Guaranteed 1,165 37,820,054 7.51
Title IV
Unsubsidized Spousal Consolidation Guaranteed 16 575,435 0.11
Loan - Title IV
Unsubsidized Stafford Loan - Title IV Guaranteed 6,588 88,933,501 17.66
TOTAL 52,605 $503,570,312 100.00%
</TABLE>
(1) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$17,232,402 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
$6,990,045 as of the Statistical Cutoff Date.
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<PAGE> 38
DISTRIBUTION BY BORROWER INTEREST RATE AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
-------------------------------------------------- -------------------------------------------
AGGREGATE PERCENT OF AGGREGATE PERCENT OF
OUTSTANDING INITIAL OUTSTANDING SUBSEQUENT
NUMBER PRINCIPAL POOL NUMBER PRINCIPAL POOL
LOAN RATE OF LOANS BALANCE(2) BALANCE OF LOANS BALANCE(3) BALANCE
--------- -------- ---------- ------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Less than 7.50%(1) 12,340 $136,303,813 42.35% 28 $222,077 0.12%
7.50% to 7.99% 2,777 65,988,702 20.50 564 7,727,394 4.25
8.00% to 8.49% 3,525 37,809,600 11.75 443 5,293,498 2.91
8.50% to 8.99% 27 282,007 0.09 0 0 0.00
9.00% to 9.49% 14,797 80,256,600 24.94 7,515 76,921,753 42.33
9.50% and above 192 1,198,991 0.37 10,397 91,565,877 50.39
TOTAL 33,658 $321,839,714 100.00% 18,947 $181,730,598 100.00%
</TABLE>
<TABLE>
<CAPTION>
TOTAL
----------------------------------------------------
AGGREGATE PERCENT OF
OUTSTANDING TOTAL
NUMBER PRINCIPAL POOL
LOAN RATE OF LOANS BALANCE BALANCE
--------- -------- ------- -------
<S> <C> <C> <C>
Less than 7.50%(1) 12,368 $136,525,890 27.11%
7.50% to 7.99% 3,341 73,716,096 14.64
8.00% to 8.49% 3,968 43,103,098 8.56
8.50% to 8.99% 27 282,007 0.06
9.00% to 9.49% 22,312 157,178,352 31.21
9.50% and above 10,589 92,764,868 18.42
TOTAL 52,605 $503,570,312 100.00%
</TABLE>
(1) Determined using the interest rates applicable to the Initial Financed
Student Loans as of the Statistical Cutoff Date. However, because all
the Initial Financed Student Loans effectively bear interest at a
variable rate per annum, there can be no assurance that the foregoing
information will remain applicable to the Initial Financed Student
Loans at any time after the Statistical Cutoff Date. See "The Student
Loan Financing Business" in the Prospectus.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $17,232,402 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 $6,990,045 as of the Statistical Cutoff Date.
S-36
<PAGE> 39
DISTRIBUTION BY OUTSTANDING PRINCIPAL BALANCE AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
---------------------------------------------- ---------------------------------------------
AGGREGATE PERCENT OF AGGREGATE PERCENT OF
OUTSTANDING INITIAL OUTSTANDING SUBSEQUENT
NUMBER PRINCIPAL POOL NUMBER PRINCIPAL POOL
OUTSTANDING PRINCIPAL BALANCE OF LOANS BALANCE(1) BALANCE OF LOANS BALANCE(2) BALANCE
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Less than $1,000.00 815 $243,217 0.08% 330 $246,600 0.14%
$1,000 to $1,999.99 1,664 2,467,416 0.77 831 1,287,519 0.71
$2,000 to $2,999.99 2,246 5,576,978 1.73 1,124 2,829,701 1.56
$3,000 to $3,999.99 2,391 8,255,103 2.56 1,320 4,621,863 2.54
$4,000 to $4,999.99 2,254 10,001,182 3.11 1,613 7,335,738 4.04
$5,000 to $5,999.99 2,659 14,573,298 4.53 1,715 9,466,759 5.21
$6,000 to $6,999.99 2,126 13,678,849 4.25 1,490 9,651,144 5.31
$7,000 to $7,999.99 1,499 11,242,537 3.49 1,372 10,297,565 5.67
$8,000 to $8,999.99 7,881 66,787,180 20.75 1,241 10,539,678 5.80
$9,000 to $9,999.99 1,246 11,737,916 3.65 1,100 10,442,773 5.75
$10,000 to $10,999.99 2,344 24,787,908 7.70 906 9,511,714 5.23
$11,000 to $11,999.99 1,187 13,512,841 4.20 785 9,024,707 4.97
$12,000 to $12,999.99 768 9,615,244 2.99 662 8,267,880 4.55
$13,000 to $13,999.99 296 3,991,924 1.24 531 7,167,610 3.94
$14,000 to $14,999.99 153 2,216,896 0.69 468 6,782,102 3.73
$15,000 to $15,999.99 143 2,215,716 0.69 447 6,929,225 3.81
$16,000 to $16,999.99 149 2,458,915 0.76 406 6,707,277 3.69
$17,000 to $17,999.99 119 2,083,552 0.65 425 7,435,273 4.09
$18,000 to $18,999.99 141 2,601,547 0.81 356 6,596,236 3.63
$19,000 to $19,999.99 138 2,678,152 0.83 316 6,155,614 3.39
$20,000 to $20,999.99 149 3,057,458 0.95 233 4,774,776 2.63
$21,000 to $21,999.99 132 2,840,956 0.88 187 4,018,928 2.21
$22,000 to $22,999.99 118 2,657,463 0.83 145 3,258,816 1.79
$23,000 to $23,999.99 160 3,759,131 1.17 128 3,011,461 1.66
$24,000 to $24,999.99 118 2,892,146 0.90 144 3,527,808 1.94
$25,000 to $25,999.99 220 5,610,402 1.74 130 3,307,384 1.82
$26,000 to $26,999.99 131 3,469,418 1.08 89 2,357,994 1.30
$27,000 to $27,999.99 165 4,537,893 1.41 68 1,870,776 1.03
$28,000 to $28,999.99 137 3,896,884 1.21 39 1,112,016 0.61
$29,000 to $29,999.99 156 4,597,097 1.43 48 1,420,297 0.78
$30,000 and above 1,953 73,794,493 22.93 298 11,773,365 6.48
TOTAL 33,658 $321,839,714 100.00% 18,947 $181,730,598 100.00%
</TABLE>
<TABLE>
<CAPTION>
TOTAL
-------------------------------------------
AGGREGATE PERCENT OF
OUTSTANDING TOTAL
NUMBER PRINCIPAL POOL
OUTSTANDING PRINCIPAL BALANCE OF LOANS BALANCE BALANCE
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $1,000.00 1,145 $489,818 0.10%
$1,000 to $1,999.99 2,495 3,754,935 0.75
$2,000 to $2,999.99 3,370 8,406,678 1.67
$3,000 to $3,999.99 3,711 12,876,967 2.56
$4,000 to $4,999.99 3,867 17,336,920 3.44
$5,000 to $5,999.99 4,374 24,040,057 4.77
$6,000 to $6,999.99 3,616 23,329,993 4.63
$7,000 to $7,999.99 2,871 21,540,102 4.28
$8,000 to $8,999.99 9,122 77,326,859 15.36
$9,000 to $9,999.99 2,346 22,180,690 4.40
$10,000 to $10,999.99 3,250 34,299,622 6.81
$11,000 to $11,999.99 1,972 22,537,548 4.48
$12,000 to $12,999.99 1,430 17,883,124 3.55
$13,000 to $13,999.99 827 11,159,533 2.22
$14,000 to $14,999.99 621 8,998,998 1.79
$15,000 to $15,999.99 590 9,144,940 1.82
$16,000 to $16,999.99 555 9,166,192 1.82
$17,000 to $17,999.99 544 9,518,825 1.89
$18,000 to $18,999.99 497 9,197,783 1.83
$19,000 to $19,999.99 454 8,833,766 1.75
$20,000 to $20,999.99 382 7,832,234 1.56
$21,000 to $21,999.99 319 6,859,884 1.36
$22,000 to $22,999.99 263 5,916,280 1.17
$23,000 to $23,999.99 288 6,770,591 1.34
$24,000 to $24,999.99 262 6,419,953 1.27
$25,000 to $25,999.99 350 8,917,787 1.77
$26,000 to $26,999.99 220 5,827,412 1.16
$27,000 to $27,999.99 233 6,408,669 1.27
$28,000 to $28,999.99 176 5,008,900 0.99
$29,000 to $29,999.99 204 6,017,393 1.19
$30,000 and above 2,251 85,567,858 16.99
TOTAL 52,605 $503,570,312 100.00%
</TABLE>
S-37
<PAGE> 40
(1) Borrowers generally have more than one outstanding loan. The average
aggregate outstanding principal balance of loans per borrower is
$21,081 with respect to the Initial Financed Student Loans, as of the
Statistical Cutoff Date. Some borrowers have both loans which are
Initial Financed Student Loans.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $17,232,402 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 $6,990,045 as of the Statistical Cutoff Date.
S-38
<PAGE> 41
DISTRIBUTION BY REMAINING TERM TO SCHEDULED MATURITY AS OF THE STATISTICAL
CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
------------------------------------------ -------------------------------------------
AGGREGATE PERCENT OF AGGREGATE PERCENT OF
OUTSTANDING INITIAL OUTSTANDING SUBSEQUENT
NUMBER PRINCIPAL POOL NUMBER PRINCIPAL POOL
MONTHS TO SCHEDULED MATURITY OF LOANS BALANCE(2) BALANCE OF LOANS BALANCE(3) BALANCE
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
23 and below(1) 15 $6,457 0.00% 309 $284,846 0.16%
24 to 47 10 30,910 0.01 692 1,264,316 0.70
48 to 71 27 177,804 0.06 840 2,526,003 1.39
72 to 95 58 390,138 0.12 969 3,897,598 2.14
96 to 119 1,899 11,139,559 3.46 881 4,183,159 2.30
120 to 143 21,855 180,641,039 56.13 1,021 6,192,593 3.41
144 to 167 77 434,411 0.13 1,675 13,470,231 7.41
168 to 191 4,271 30,867,472 9.59 1,973 18,047,960 9.93
192 to 215 27 190,209 0.06 2,980 30,189,029 16.61
216 to 239 110 2,029,870 0.63 3,218 40,608,396 22.35
240 and above 5,309 95,931,845 29.81 4,389 61,066,467 33.60
TOTAL 33,658 $321,839,714 100.00% 18,947 $181,730,598 100.00%
</TABLE>
<TABLE>
<CAPTION>
TOTAL
-------------------------------------------
AGGREGATE PERCENT OF
OUTSTANDING TOTAL
NUMBER PRINCIPAL POOL
MONTHS TO SCHEDULED MATURITY OF LOANS BALANCE BALANCE
----------------------------------------------------------------------------
<S> <C> <C> <C>
23 and below(1) 324 $291,303 0.06%
24 to 47 702 1,295,226 0.26
48 to 71 867 2,703,807 0.54
72 to 95 1,027 4,287,736 0.85
96 to 119 2,780 15,322,718 3.04
120 to 143 22,876 186,833,631 37.10
144 to 167 1,752 13,904,642 2.76
168 to 191 6,244 48,915,433 9.71
192 to 215 3,007 30,379,238 6.03
216 to 239 3,328 42,638,266 8.47
240 and above 9,698 156,998,312 31.18
TOTAL 0% 52,605 $503,570,312 100.00%
</TABLE>
(1) Determined from the Statistical Cutoff Date to the stated maturity date
of the applicable Initial Financed Student Loan, assuming repayment
commences promptly upon expiration of the typical grace period
following the expected graduation date and without giving effect to any
deferral or forbearance periods that may be granted in the future. See
"The Student Loan Financing Business" in the Prospectus.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $17,232,402 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 $6,990,045 as of the Statistical Cutoff Date.
S-39
<PAGE> 42
DISTRIBUTION BY BORROWER PAYMENT STATUS AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
---------------------------------------------- -------------------------------------------
AGGREGATE PERCENT OF AGGREGATE PERCENT OF
OUTSTANDING INITIAL OUTSTANDING SUBSEQUENT
NUMBER PRINCIPAL POOL NUMBER PRINCIPAL POOL
PAYMENT STATUS OF LOANS BALANCE(2) BALANCE OF LOANS BALANCE(3) BALANCE
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
In School 21,652 $193,907,938 60.25% 319 $4,519,897 2.49%
Grace 5,269 30,319,224 9.42 164 2,542,491 1.40
Deferral 475 5,939,580 1.85 3,828 47,254,819 26.00
Forbearance 1,233 18,093,101 5.62 385 4,866,669 2.68
Repayment
First Year in Repayment 4,750 70,760,890 21.99 767 8,285,975 4.56
Second Year in Repayment 158 1,984,514 0.62 1,390 15,026,722 8.27
More than Two Years in Repayment 121 834,466 0.26 12,094 99,234,025 54.61
TOTAL 33,658 $321,839,714 100.00% 18,947 $181,730,598 100.00%
</TABLE>
<TABLE>
<CAPTION>
TOTAL
-----------------------------------------
AGGREGATE PERCENT OF
OUTSTANDING TOTAL
NUMBER PRINCIPAL POOL
PAYMENT STATUS OF LOANS BALANCE BALANCE
------------------------------------------------------------------------------------
<S> <C> <C> <C>
In School 21,971 $198,427,835 39.40%
Grace 5,433 32,861,716 6.53
Deferral 4,303 53,194,399 10.56
Forbearance 1,618 22,959,770 4.56
Repayment
First Year in Repayment 5,517 79,046,865 15.70
Second Year in Repayment 1,548 17,011,235 3.38
More than Two Years in Repayment 12,215 100,068,491 19.87
TOTAL 52,605 $503,570,312 100.00%
</TABLE>
(1) Refers to the status of the borrower of each Initial Financed Student
Loan to be added, as of the Statistical Cutoff Date: such borrower may
still be attending an undergraduate institution or a graduate school
("In-School"), may be in a grace period prior to repayment commencing
("Grace"), may be repaying such loan ("Repayment") or may have
temporarily ceased repaying such loan through a deferral ("Deferral")
or a forbearance ("Forbearance") period. See "The Student Loan
Financing Business" in the Prospectus.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $17,232,402 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 $6,990,045 as of the Statistical Cutoff Date.
S-40
<PAGE> 43
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
------------------------------------------------------- -----------------------------------------------------
PAYMENT STATUS IN-SCHOOL GRACE DEFERRAL FORBEARANCE REPAYMENT IN-SCHOOL GRACE DEFERRAL FORBEARANCE REPAYMENT
-------------- --------- ----- -------- ----------- --------- --------- ----- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
In School 1 9 0 0 152 1 9 0 0 244
Grace 0 3 0 0 143 0 3 0 0 244
Deferral 0 0 6 0 220 0 0 2 0 245
Forbearance 0 0 0 6 274 0 0 0 3 225
Repayment 0 0 0 0 291 0 0 0 0 191
</TABLE>
<TABLE>
<CAPTION>
TOTAL
----------------------------------------------------
PAYMENT STATUS IN-SCHOOL GRACE DEFERRAL FORBEARANCE REPAYMENT
-------------- --------- ----- -------------------- ---------
<S> <C> <C> <C> <C> <C>
In School 1 9 0 0 154
Grace 0 3 0 0 151
Deferral 0 0 3 0 242
Forbearance 0 0 0 5 264
Repayment 0 0 0 0 229
</TABLE>
(1) Determined without giving effect to any Deferral Periods or Forbearance
Periods that may be granted in the future.
S-41
<PAGE> 44
GEOGRAPHIC DISTRIBUTION OF STATES REPRESENTING MORE THAN 1%
OF THE AGGREGATE POOL BALANCE AS OF THE STATISTICAL CUTOFF DATE(1)
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
---------------------------------------------- -------------------------------------------
AGGREGATE PERCENT OF AGGREGATE PERCENT OF
OUTSTANDING INITIAL OUTSTANDING SUBSEQUENT
NUMBER PRINCIPAL POOL NUMBER PRINCIPAL POOL
STATE OF LOANS BALANCE(2) BALANCE OF LOANS BALANCE(3) BALANCE
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California 3,542 $41,743,946 12.97% 691 $7,052,486 3.88
Connecticut 1,007 9,985,418 3.10 758 7,357,732 4.05
District of Columbia 409 5,412,947 1.68 96 1,091,507 0.60
Florida 1,223 11,854,818 3.68 695 8,459,913 4.66
Georgia 405 4,430,693 1.38 525 6,278,942 3.46
Illinois 1,491 18,682,092 5.80 164 2,020,924 1.11
Maine 722 5,060,374 1.57 179 1,487,971 0.82
Maryland 800 9,053,480 2.81 420 4,569,896 2.51
Massachusetts 2,041 20,498,425 6.37 7,163 56,638,946 31.17
Michigan 833 6,495,832 2.02 101 1,163,215 0.64
New Hampshire 262 2,575,516 0.80 551 4,532,018 2.49
New Jersey 1,339 14,261,149 4.43 824 9,150,027 5.03
New York 7,087 61,060,424 18.97 2,603 27,217,497 14.98
North Carolina 408 4,552,912 1.41 284 2,657,683 1.46
Ohio 2,953 21,242,417 6.60 309 3,073,422 1.69
Other 22 412,982 0.13 557 8,884,422 4.89
Pennsylvania 1,727 13,911,497 4.32 807 8,852,315 4.87
Tennessee 495 5,564,028 1.73 50 526,539 0.29
Texas 726 8,497,231 2.64 161 1,568,724 0.86
Virginia 950 10,515,623 3.27 503 4,725,570 2.60
All Other States(4) 5,216 46,027,908 14.30 1,506 14,420,849 7.94
TOTAL 33,658 $321,839,714 100.00% 18,947 $181,730,598 100.00%
</TABLE>
<TABLE>
<CAPTION>
TOTAL
------------------------------------------
AGGREGATE PERCENT OF
OUTSTANDING TOTAL
NUMBER PRINCIPAL POOL
STATE OF LOANS BALANCE BALANCE
-----------------------------------------------------------------------------
<S> <C> <C> <C>
California 4,233 $48,796,432 9.69%
Connecticut 1,765 17,343,150 3.44
District of Columbia 505 6,504,455 1.29
Florida 1,918 20,314,731 4.03
Georgia 930 10,709,635 2.13
Illinois 1,655 20,703,016 4.11
Maine 901 6,548,345 1.30
Maryland 1,220 13,623,377 2.71
Massachusetts 9,204 77,137,371 15.32
Michigan 934 7,659,047 1.52
New Hampshire 813 7,107,535 1.41
New Jersey 2,163 23,411,177 4.65
New York 9,690 88,277,920 17.53
North Carolina 692 7,210,594 1.43
Ohio 3,262 24,315,840 4.83
Other 579 9,297,404 1.85
Pennsylvania 2,534 22,763,812 4.52
Tennessee 545 6,090,567 1.21
Texas 887 10,065,954 2.00
Virginia 1,453 15,241,192 3.03
All Other States(4) 6,722 60,448,757 12.00
TOTAL 52,605 $503,570,312 100.00%
</TABLE>
(1) Based on the permanent billing addresses of the borrowers of the
Initial Financed Student Loans shown on the Master Servicer's or a
Sub-Servicer's records as of the Statistical Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon of $17,232,402 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 $6,990,045 as of the Statistical Cut-Off Date to be
capitalized upon commencement of repayment.
(4) Includes all other states, none of which exceeds 1.10% of the Initial
Pool Balance.
S-42
<PAGE> 45
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
OUTSTANDING INITIAL OUTSTANDING SUBSEQUENT
NUMBER PRINCIPAL POOL NUMBER PRINCIPAL POOL
DATE OF DISBURSEMENT(1) OF LOANS BALANCE(2) BALANCE OF LOANS BALANCE(3) BALANCE
----------------------------- -------- ---------- ------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Pre October 1, 1993 52 $374,884 0.18% 0 $0 0.00%
October 1, 1993 to September 30, 1998 9,777 106,031,373 50.06 0 0 0.00
October 1, 1998 to Present 5,658 105,408,014 49.76 0 0 0.00
TOTAL 15,487 $211,814,271 100.00% 0 $0 0.00%
</TABLE>
<TABLE>
<CAPTION>
TOTAL
-------------------------------------------
AGGREGATE PERCENT OF
OUTSTANDING TOTAL
NUMBER PRINCIPAL POOL
DATE OF DISBURSEMENT(1) OF LOANS BALANCE BALANCE
----------------------------- -------- ------- -------
<S> <C> <C> <C>
Pre October 1, 1993 52 $374,884 0.18%
October 1, 1993 to September 30, 1998 9,777 106,031,373 50.06
October 1, 1998 to Present 5,658 105,408,014 49.76
TOTAL 15,487 $211,814,271 100.00%
</TABLE>
(1) Federal Loans disbursed prior to October 1, 1993 are 100% guaranteed by
the applicable Federal Guarantor, and reinsured against default by the
Department up to 100% of the Guarantee Payments. Federal Loans
disbursed on or after October 1, 1993 (but before October 1, 1998) are
98% guaranteed by the applicable Federal Guarantor, and reinsured
against default by the Department up to a maximum of 98% of the
Guarantor Payments. Federal Loans first disbursed on or after October
1, 1998 are 98% guaranteed by the applicable Federal Guarantor, and
reinsured against default by the Department up to 95% of the Guarantee
Payments. See "The Student Loan Financing Business--Description of
Federal Loans Under the Programs" and "--Insurance of Student Loans;
Guarantors of Student Loans" in the Prospectus.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $9,342,918 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 $0 as of the Statistical Cutoff Date.
S-43
<PAGE> 46
DISTRIBUTION BY
NUMBER OF DAYS OF DELINQUENCY AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
---------------------------------------------- ----------------------------------------------
AGGREGATE PERCENT OF AGGREGATE PERCENT OF
OUTSTANDING INITIAL OUTSTANDING SUBSEQUENT
NUMBER PRINCIPAL POOL NUMBER PRINCIPAL POOL
DAYS DELINQUENT OF LOANS BALANCE(1) BALANCE OF LOANS BALANCE(2) BALANCE
--------------- -------- ---------- ------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Current 33,512 $318,241,981 98.88% 18,405 $176,688,248 97.23%
31-60 89 2,479,106 0.77 346 3,257,028 1.79
61-90 56 1,098,904 0.34 196 1,785,322 0.98
91-120 1 19,722 0.01 0 0 0.00
TOTAL 33,658 $321,839,714 100.00% 18,947 $181,730,598 100.00%
</TABLE>
<TABLE>
<CAPTION>
TOTAL
------------------------------------------
AGGREGATE PERCENT OF
OUTSTANDING TOTAL
NUMBER PRINCIPAL POOL
DAYS DELINQUENT OF LOANS BALANCE BALANCE
--------------- -------- ------- -------
<S> <C> <C> <C>
Current 51,917 $494,930,230 98.28%
31-60 435 5,736,134 1.14
61-90 252 2,884,226 0.57
91-120 1 19,722 0.00%
TOTAL 52,605 $503,570,312 100.00%
</TABLE>
(1) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $17,232,402 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 $6,990,045 as of the Statistical Cutoff Date.
S-44
<PAGE> 47
DISTRIBUTION BY LOAN REPAYMENT TERM AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
---------------------------------------------- ------------------------------------------------
AGGREGATE PERCENT OF AGGREGATE PERCENT OF
OUTSTANDING INITIAL OUTSTANDING SUBSEQUENT
LOAN NUMBER PRINCIPAL POOL NUMBER PRINCIPAL POOL
REPAYMENT TERMS OF LOANS BALANCE(1) BALANCE OF LOANS BALANCE(2) BALANCE
--------------- -------- ---------- ------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Level Payment 3,964 $43,592,193 13.54% 13,927 $118,344,425 65.12%
Interest Only(3) 1,057 29,911,828 9.29 0 0 0.00
Graduated Payment(4) 8 75,848 0.02 324 4,202,296 2.31
Other (5) 28,629 248,259,844 77.14 4,696 59,183,876 32.57
TOTAL 33,658 $321,839,714 100.00% 18,947 $181,730,598 100.00%
</TABLE>
<TABLE>
<CAPTION>
TOTAL
---------------------------------------------
AGGREGATE PERCENT OF
OUTSTANDING TOTAL
LOAN NUMBER PRINCIPAL POOL
REPAYMENT TERMS OF LOANS BALANCE BALANCE
--------------- -------- ------- -------
<S> <C> <C> <C>
Level Payment 17,891 $161,936,619 32.16%
Interest Only(3) 1,057 29,911,828 5.94
Graduated Payment(4) 332 4,278,145 0.85
Other (5) 33,325 307,443,721 61.05
TOTAL 52,605 $503,570,312 100.00%
</TABLE>
(1) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $17,232,402 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 $6,990,045 as of the Statistical Cutoff Date.
(3) Student Loans with interest only repayment terms require borrowers to
make payments of interest only for the first two years after entering
repayment and thereafter to make level payments (made up of both
principal and interest) which will amortize the then outstanding
principal balance of the loan over the then remaining term.
(4) Student Loans with graduated repayment terms require borrowers to make
payments of interest only for the first two years after entering
repayment which increase over the next three years to a level payment
amount which will amortize the then outstanding principal balance of
the loan over the then remaining term.
(5) Loan not yet in repayment status, but to enter repayment status upon
receipt of a repayment schedule.
S-45
<PAGE> 48
MATURITY AND PREPAYMENT ASSUMPTIONS
The rate of payment of principal of the Notes and the yield on the
Notes will be affected by prepayments of the Financed Student Loans that may
occur as described below. All the Financed Student Loans are prepayable in whole
or in part by the borrowers at any time, including by means of Federal
Consolidation Loans (as defined in the Prospectus), Federal Direct Consolidation
Loans (as defined in the Prospectus) or Private Consolidation Loans (as defined
in the Prospectus) or as a result of a borrower's default, death, disability or
bankruptcy and subsequent liquidation or collection of Guarantee Payments with
respect thereto. The rate of such prepayments cannot be predicted and may be
influenced by a variety of economic, social and other factors, including those
described below. In general, the rate of prepayments may tend to increase to the
extent that alternative financing becomes available at prevailing interest rates
which fall significantly below the interest rates applicable to the Financed
Student Loans. However, because many of the Financed Student Loans bear interest
at a rate that either actually or effectively is floating, it is impossible to
determine whether changes in prevailing interest rates will be similar to or
vary from changes in the interest rates on the Financed Student Loans.
To the extent borrowers of Financed Student Loans elect to borrow
Consolidation Loans with respect to such Financed Student Loans from the Seller
after the end of the Funding Period or from another lender at any time,
Noteholders (as defined in the Prospectus ) will collectively receive as a
prepayment of principal the aggregate principal amount of such Financed Student
Loans. If the Seller makes any such Consolidation Loan during the Funding Period
(in which event the Seller will then sell that Consolidation Loan to the
Eligible Lender Trustee, to the extent that funds are available in the Escrow
Account and during the Funding Period, the Pre-Funding Account, for the purchase
thereof), the aggregate outstanding principal balance of Financed Student Loans
(after giving effect to the addition of such Consolidation Loans) will be at
least equal to and in most cases greater than such balance prior to such
prepayment, although the portion of the loan guaranteed will be 98% with respect
to any Federal Consolidation Loan disbursed on or after October 1, 1993 even if
the Underlying Federal Loans (as defined in the Prospectus) were 100%
guaranteed. See "The Student Loan Financing Business--Description of Federal
Loans Under the Programs--Federal Consolidation Loans" in the Prospectus. There
can be no assurance that borrowers with Financed Student Loans will not seek to
obtain Consolidation Loans with respect to such Financed Student Loans after the
end of the Funding Period or by another lender at any time.
In addition, the Seller is obligated to repurchase any Financed Student
Loan pursuant to the Sale and Servicing Agreement as a result of a breach of any
of its representations and warranties, and the Master Servicer is obligated to
purchase any Financed Student Loan pursuant to the Sale and Servicing Agreement
as a result of a breach of certain covenants with respect to such Financed
Student Loan, in each case where such breach materially adversely affects the
interests of the Noteholders, the Swap Counterparty or the Securities Insurer
(each as determined by the Securities Insurer) in that Financed Student Loan and
is not cured within the applicable cure period (it being understood that with
respect to any Financed Student Loan that has the benefit of a Guarantee
Agreement, any such breach that does not affect any Guarantor's obligation to
guarantee payment of such Financed Student Loan will not be considered to have a
material adverse effect for this purpose). See "Description of the Transfer and
Servicing
S-46
<PAGE> 49
Agreements--Sale of Student Loans; Representations and Warranties" and
"--Servicer Covenants" in the Prospectus. See also "Description of the Transfer
and Servicing Agreements--Additional Fundings" herein and in the Prospectus
regarding the prepayment of principal to Noteholders if as of July 31, 2000 (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, such prepayment to be made to the Noteholders on August 25, 2000
(the "Special Redemption Date"). See also, "--Termination" herein and in the
Prospectus regarding the Master Servicer's option to purchase the Financed
Student Loans when the aggregate Pool Balance is less than or equal to 5% of the
Adjusted Initial Pool Balance and the auction of the Financed Student Loans to
occur on or after the August 2010 Distribution Date. In addition, you will
receive accelerated payments of principal from excess interest collections in
the event of a Trigger Event or a failed auction. Any reinvestment risk from
such accelerated payment of principal will be borne by the holders of Notes
receiving such prepayment.
The "Adjusted Initial Pool Balance" will equal approximately
$321,839,714 plus the aggregate increase in the Pool Balance during the Funding
Period (by the Special Determination Date) occurring as a result of the purchase
of Subsequent Pool Student Loans.
On the other hand, scheduled payments with respect to, and maturities
of, the Financed Student Loans may be extended, including pursuant to Grace
Periods (as defined in the Prospectus, each a "Grace Period"), Deferral Periods
and, under certain circumstances, Forbearance Periods or as a result of the
conveyance of Serial Loans to the Eligible Lender Trustee on behalf of the Trust
prior to the end of the Funding Period or of refinancings through Consolidation
Loans to the extent such Consolidation Loans are sold to the Eligible Lender
Trustee on behalf of the Trust as described above. In that event, the fact that
such Consolidation Loans will likely have longer maturities than the Financed
Student Loans they are replacing may lengthen the remaining term of the Financed
Student Loans and the average life of the Notes and the Certificates. The rate
of payment of principal of the Notes and the yield on the Notes 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 certain of the
Financed Student Loans will extend well beyond the Final Maturity Date of the
Class A-2 Notes; provided, however, that the Securities Guaranty Insurance
Policy will guarantee the payment of the outstanding principal balance of the
related Class of Notes on its respective Final Distribution Date.
The rate of prepayment on the Financed Student Loans cannot be
predicted. You will bear any reinvestment risks resulting from a faster or
slower incidence of prepayment of Financed Student Loans. Reinvestment risks may
include the risk that interest rates and the relevant spreads above particular
interest rate bases are lower at the time you receive payments from the Trust
than the interest rates and the spreads that would otherwise have been had
prepayments not been made or had prepayments been made at a different time.
S-47
<PAGE> 50
INSURANCE OF STUDENT LOANS; GUARANTORS OF STUDENT LOANS
Each Financed Federal Loan will be required to be guaranteed by one of
the Federal Guarantors and reinsured by the Department under the Higher
Education Act and must be eligible for Special Allowance Payments (as defined in
the Prospectus) and, with respect to each Financed Federal Loan that is a
Stafford Loan (excluding any Unsubsidized Stafford Loan (as defined in the
Prospectus, each an Unsubsidized Stafford Loan ) or Consolidation Loan where
none of the Underlying Federal Loans were Unsubsidized Stafford Loans, must be
eligible for Interest Subsidy Payments (as defined in the Prospectus) paid by
the Department. As of the Statistical Cutoff Date, approximately 65.81% (by
aggregate principal balance) of the Initial Financed Student Loans and
approximately 0% of the Subsequent Pool Student Loans will be Financed Federal
Loans. As of the Statistical Cutoff Date, approximately 0% (by aggregate
principal balance) of the Initial Financed Student Loans and approximately 100%
(by aggregate principal balance) of the Subsequent Pool Student Loans will be
Guaranteed Private Loans that are required to be guaranteed or insured as to
principal and interest by The Educational Resources Institute, Inc. ("TERI"). As
of the Statistical Cutoff Date, approximately 34.19% (by aggregate principal
balance) of the Initial Financed Student Loans are and approximately 0% of the
Subsequent Pool Student Loans will be Non-Guaranteed Private Loans.
S-48
<PAGE> 51
The following tables provide information with respect to the portion of
the Financed Student Loans guaranteed by each Guarantor:
<TABLE>
<CAPTION>
DISTRIBUTION BY GUARANTORS AS OF THE STATISTICAL CUTOFF DATE
INITIAL POOL SUBSEQUENT POOL
---------------------------------------------- ------------------------------------------------
AGGREGATE PERCENT OF AGGREGATE PERCENT OF
OUTSTANDING INITIAL OUTSTANDING SUBSEQUENT
NUMBER PRINCIPAL POOL NUMBER PRINCIPAL POOL
OF LOANS BALANCE(1) BALANCE OF LOANS BALANCE(2) BALANCE
-------- ---------- ------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
FEDERAL
GUARANTORS
----------
ASAC 3,116 $42,049,133 13.07% 0 $0 0.00%
CSAC 1,012 9,257,470 2.88 0 0 0.00
ECMC 11 71,469 0.02 0 0 0.00
GLHEC 16 115,468 0.04 0 0 0.00
PHEAA 2,690 59,145,346 18.38 0 0 0.00
MHEAA 8 55,818 0.02 0 0 0.00
NSLP 8,223 98,132,242 30.49 0 0 0.00
USAF 396 2,842,392 0.88 0 0 0.00
HESC 15 144,932 0.05 0 0 0.00
PRIVATE
GUARANTOR
---------
TERI 0 0 0.00 18,947 181,730,598 100.00
UNGUARANTEED 18,171 110,025,443 34.19 0 0 0.00
------------
TOTAL 33,658 $321,839,714 100.00% 18,947 $181,730,598 100.00%
</TABLE>
<TABLE>
<CAPTION>
TOTAL
---------------------------------------------
AGGREGATE PERCENT OF
OUTSTANDING TOTAL
NUMBER PRINCIPAL POOL
OF LOANS BALANCE BALANCE
-------- ------- -------
<S> <C> <C> <C>
FEDERAL
GUARANTORS
----------
ASAC 3,116 $42,049,133 8.35%
CSAC 1,012 9,257,470 1.84
ECMC 11 71,469 0.01
GLHEC 16 115,468 0.02
PHEAA 2,690 59,145,346 11.75
MHEAA 8 55,818 0.01
NSLP 8,223 98,132,242 19.49
USAF 396 2,842,392 0.56
HESC 15 144,932 0.03
PRIVATE
GUARANTOR
---------
TERI 18,947 181,730,598 36.09
UNGUARANTEED 18,171 110,025,443 21.85
------------
TOTAL 52,605 $503,570,312 100.00%
</TABLE>
(1) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$17,232,402 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
$6,990,045 as of the Statistical Cutoff Date.
S-49
<PAGE> 52
Federal Reinsurance. Under the Higher Education Act, each Federal
Guarantor is reimbursed by the Department pursuant to certain agreements between
the Department and such Federal Guarantor up to 100% for amounts paid under its
Guarantee Agreement. The amount of such reimbursement is subject to reduction.
See "The Student Loan Financing Business--Insurance of Student Loans; Guarantors
of Student Loans" in the Prospectus for a description of the federal reinsurance
program and factors affecting the Federal Guarantors.
Guarantors for the Financed Federal Loans. The Higher Education Act
requires every state to designate a guarantee agency, either by establishing its
own or by designating another guarantee agency. A Guarantor who has been
designated by a particular state is obligated to guarantee loans for students
who reside or attend school in such state and must agree to provide loans to any
such students who are otherwise unable to obtain a loan from any other lender.
Guarantee agencies may guarantee a loan made to any eligible borrower and are
not limited to guaranteeing loans for students attending institutions in their
particular state or region or for their residents attending schools in another
state or region.
The Eligible Lender Trustee has entered into a Guarantee Agreement with
each of PHEAA, ASA, CSAC, GLHEC, HESC, USAF, MHEAA, NSLP and ECMC by which each
such Federal Guarantor has agreed to serve as Guarantor for certain Financed
Federal Loans. PHEAA is the designated Student Loan guarantor for Pennsylvania,
West Virginia and Delaware, and has an established operating center in
Harrisburg, Pennsylvania. For more information concerning PHEAA, see "The Master
Servicer and the Sub-Servicers--PHEAA" herein. ASA is the designated Student
Loan guarantor for Massachusetts and the District of Columbia and has an
established operating center in Boston, Massachusetts. CSAC is the designated
Student Loan guarantor for California, Arizona and Washington and has
established an operating center in Rancho Cordova, California. GLHEC is the
designated Student Loan guarantor for Minnesota, Wisconsin, Ohio, Puerto Rico
and the U.S. Virgin Islands and has established an operating center in Madison,
Wisconsin. HESC is the designated guarantor for New York, and has established an
operating center in Albany, New York. USAF is the designated Student Loan
guarantor for Indiana, Kansas, Alaska, Nevada, Wyoming, Maryland, Hawaii and
Mississippi and has established an operating center in Fishers, Indiana. MHEAA
is the designated Student Loan guarantor for Michigan and has established an
operating center in Lansing, Michigan. NSLP is the designated Student Loan
guarantor for Nebraska and has established an operating center in Lincoln,
Nebraska. ECMC is the designated Student Loan guarantor for Virginia and has
established operating centers in St. Paul, Minnesota and Richmond, Virginia. As
of the Statistical Cutoff Date, approximately 65.81% of the aggregate
outstanding principal balance of the Initial Financed Student Loans are Financed
Federal Loans and are guaranteed by Federal Guarantors. None of the Subsequent
Pool Student Loans are Financed Federal Loans or guaranteed by the Federal
Guarantors.
Pursuant to its respective Guarantee Agreement, currently each Federal
Guarantor guarantees payment of up to 98% of the principal (including any
interest capitalized from time to time) and accrued interest for each Financed
Federal Loan guaranteed by it as to which any one of the following events has
occurred:
S-50
<PAGE> 53
(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 statutorily determined
period of at least 180 days (or 270 days with respect to Financed
Federal Loans for which the first date of delinquency occurs on
or after October 7, 1998) (except that such guarantee against
such failures will be 98% of principal and accrued and unpaid
interest in the case of Financed Federal Loans first disbursed on
or after October 1, 1993);
(b) any filing by or against the borrower thereof of a petition in
bankruptcy pursuant to any chapter of the Bankruptcy Code (as
defined in the Prospectus);
(c) the loan application was falsely certified as to 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;
(f) the school closed thereby preventing the borrower from completing
his/her program of study; or
(g) 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 Financed Federal Loan.
When these conditions are satisfied, the Higher Education Act requires
the Federal Guarantor generally to pay the claim within 90 days of its
submission by the lender. The obligations of each Federal Guarantor pursuant to
their respective Guarantee Agreements are obligations solely of each such
Federal Guarantor respectively, and are not supported by the full faith and
credit of any state government. However, the Higher Education Act provides that
if the Secretary of Education (the "Secretary") determines that a guarantor is
unable to meet its insurance obligations, holders of loans may submit insurance
claims directly to the Department until the obligations are transferred to a new
Federal Guarantor capable of meeting the obligations or until a successor
Federal Guarantor assumes the obligations. No assurance can be made that the
Department would under any given circumstances assume the obligation to assure
satisfaction of a guarantee obligation by exercising its right to terminate a
reimbursement agreement with a Federal Guarantor or by making a determination
that the Federal Guarantor is unable to meet its guarantee obligations. The
Secretary is also authorized, among other things, to take those actions
necessary to ensure the continued availability of Student Loans to residents of
the state or states in which the guarantor did business, the full honoring of
all guarantees issued by the guarantor prior to the assumption by the
Secretary's of the functions of the guarantor, and the proper servicing of
Student Loans guaranteed by the guarantor prior to the Secretary's assumption of
the functions of the guarantor.
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:
S-51
<PAGE> 54
- the origination and servicing of such Financed Federal Loan being
performed in accordance with the Programs, the Higher Education
Act and other applicable requirements,
- the timely payment to the applicable Federal Guarantor, as the
case may be, of the guarantee fee payable with respect to such
Financed Federal Loan,
- the timely submission to the applicable Federal Guarantor, as the
case may be, of all required pre-claim delinquency status
notifications and of the claim with respect to such Financed
Federal Loan, and
- the transfer and endorsement of the promissory note evidencing
such Financed Federal Loan to the applicable Federal Guarantor,
upon and in connection with making a claim to receive Guarantee
Payments thereon.
Failure to comply with any of the applicable conditions, including the
foregoing, may result in the refusal of the applicable Federal Guarantor to
honor its respective Guarantee Agreement with respect to such Financed Federal
Loan, in the denial of guarantee coverage with respect to certain accrued
interest amounts with respect thereto or in the loss of certain Interest Subsidy
Payments and Special Allowance Payments with respect thereto. Under the Sale and
Servicing Agreement, such failure to comply would constitute a breach of the
Master Servicer's covenants or the Seller's representations and warranties, as
the case may be, and would create an obligation of the Seller or the Master
Servicer, as the case may be, to repurchase or purchase such Financed Federal
Loan or to reimburse the Trust for such non-guaranteed interest amounts or such
lost Interest Subsidy Payments and Special Allowance Payments with respect
thereto. See "Description of the Transfer and Servicing Agreements--Sale of
Financed Student Loans; Representations and Warranties" and "-- Master Servicer
Covenants" herein.
Set forth below is certain current and historical information with
respect to PHEAA, ASA and NSLP as of the Statistical Cutoff Date. No such
information is provided with respect to CSAC, GLHEC, HESC, USAF, MHEAA and ECMC
because the aggregate principal amount of Financed Student Loans guaranteed by
each of CSAC, GLHEC, HESC, USAF, MHEAA and ECMC respectively is less than 5% of
the sum of the Initial Financed Student Loans and the Subsequent Pool Student
Loans.
Guaranty Volume. The following table sets forth the approximate
aggregate principal amount of federally reinsured education loans (including
loans under the Parent Loans for Undergraduate Students program but excluding
Federal Consolidation Loans) that have first become guaranteed by PHEAA, ASA and
NSLP) and by all federal guarantors in each of the last five federal fiscal
years:*
S-52
<PAGE> 55
STAFFORD, SLS AND PLUS LOANS GUARANTEED
(DOLLARS IN MILLIONS)
FEDERAL FISCAL YEAR
ENDING SEPTEMBER 30 PHEAA ASA NSLP
------------------- ----- --- ----
1995 $1,808 $906 $351
1996 1,794 716 316
1997 1,869 682 397
1998 1,784 667 629
1999 1,796 680 674
FEDERAL FISCAL YEAR
ENDING SEPTEMBER 30 ALL GUARANTORS
------------------- --------------
1995 $20,951
1996 19,728
1997 21,409
1998 22,300
1999 N/A
* The information set forth in the table above for all guarantors has been
obtained from the Department of Education's Federal Student Loan Programs
Data Books and the Department of Education's Quarterly Volume Updates
(each, a "DOE Data Book"). Information for each Federal Guarantor was
provided by such Federal Guarantor.
Reserve Ratio. Each Federal Guarantor's reserve ratio is determined by
dividing its cumulative cash reserves, the Federal Student Loan Reserve Fund (as
defined in Section 422 of the Higher Education Act; the "Federal Reserve Fund")
by the original principal amount of the outstanding loans it has agreed to
guarantee.
On October 7, 1998, President Clinton signed a bill to reauthorize the
Higher Education Act for the next five years. The reauthorization bill requires
the Federal Guarantors to establish two separate funds, a Federal Reserve Fund
and an Agency Operating Fund (as defined in Section 422 of the Higher Education
Act; the "Agency Operating Fund"). Under the new funding model, the Federal
Reserve Fund is considered the property of the Federal government and the Agency
Operating Fund is considered the property of the related Federal Guarantor.
The Federal Reserve Fund was established through the deposit of all
existing funds, securities and other liquid assets under the FFELP (as defined
in the Prospectus). The Federal Guarantors will deposit into this fund all
guarantee fees, the reinsurance received from the Department of Education and
the recovery of the non-reinsured portion of default and investment earnings.
The Federal Reserve Fund is only to pay lender default claims and default
aversion fees, and under certain circumstances account maintenance fees.
S-53
<PAGE> 56
The term "cumulative cash reserves" is equal to the difference of
sources less uses of funds for the Federal Reserve Funds. Prior to enactment of
the new model, "cumulative cash reserves" referred to cash reserves plus (i) the
Federal Guarantor's quarterly report on 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) the Federal Guarantor's quarterly report on uses of funds
(including claims paid to lenders, operating expenses, lender fees, the
Department of Education'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 from such Federal Guarantor to other
guarantors, plus (ii) the original principal amount of loan guarantees
transferred to such Federal Guarantor, from other guarantors, excluding loan
guarantees transferred to another guarantor pursuant to a plan of the Secretary
in response to the insolvency a guarantor.
ECMC has advised the Seller that ECMC's Agreements with the Department
require that on an annual basis, ECMC calculate the amount of reserve funds and
the amount of its expenses during the fiscal year in accordance with directions
of the Secretary. Unless the Secretary directs otherwise, if the amount of
ECMC's reserve funds exceeds 60 percent of the expenses, ECMC shall return the
excess reserves to the Secretary at the time of submitting the annual report.
The following tables set forth for PHEAA, ASA and NSLP, their respective
cumulative cash reserves and corresponding reserve ratios and the national
average reserve ratio for all federal guarantors for the last five federal
fiscal years:*
<TABLE>
<CAPTION>
RESERVES
--------------------------------------------------------------------------------------------------------
PHEAA ASA NSLP**
------------------------------- ---------------------------- ---------------------------------------
FEDERAL FISCAL
YEAR ENDING CUMULATIVE CASH RESERVE RATIO CUMULATIVE CASH RESERVE CUMULATIVE CASH RESERVE NATIONAL
SEPTEMBER 30 RESERVES RESERVES RATIO RESERVES RATIO AVERAGE
-------------- --------------- ------------- --------------- -------- --------------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
1995 $166.31 1.5 $43.06 0.8 $18.53 1.3 1.6
1996 214.74 1.6 51.08 0.9 21.17 1.3 1.6
1997 189.35 1.4 39.29 0.7 24.07 1.2 1.5
1998 190.65 1.3 39.02 0.6 30.99 1.3 ***
1999 209.67 1.4 34.69 0.5 31.00 1.1 ***
</TABLE>
* The information set forth in the tables above with respect to each Federal
Guarantor has been obtained from such Federal Guarantor, respectively, and
the information with respect to the national average has been obtained from
the DOE Data Books.
** For purposes of determining guarantees outstanding, NSLP excludes loans
transferred in from the Higher Education Assistance Foundation ("HEAF"). To
determine reserves, NSLP includes cash and investments plus net short-term
receivables of its Federal Reserve Fund.
*** Not Available.
S-54
<PAGE> 57
Recovery Rates. A Federal Guarantor's recovery rate, which provides a
measure of the effectiveness of the collection efforts against defaulting
borrowers after the guarantee claim has been satisfied, is determined by
dividing the amount recovered from borrowers by the Federal Guarantor by the
aggregate amount of default claims paid by the Federal Guarantor during the
applicable federal fiscal year with respect to borrowers. The table below sets
forth the recovery rates for PHEAA, ASA and NSLP for the last five federal
fiscal years:*
<TABLE>
<CAPTION>
RECOVERY RATE
-------------------------------------------------------------------------
FEDERAL FISCAL YEAR
ENDING SEPTEMBER 30 PHEAA ASA NSLP
-------------------- ---------------------- -------------------- ---------------
<S> <C> <C> <C>
1995 53.3 43.4 21.3
1996 55.0 41.3 26.6
1997 54.8 42.7 31.5
1998 59.2 49.0 38.4
1999 62.1 56.4 46.9
</TABLE>
* The information set forth in the tables above with respect to each Federal
Guarantor was provided by such Federal Guarantor.
Loan Loss Reserve. In the event that a Federal Guarantor receives less
than full reimbursement of its guarantee obligations from the Department (see
"--Federal Reinsurance" above), such Federal Guarantor would be forced to look
to its existing assets to satisfy any such guarantee obligations not so
reimbursed. Because federal guarantors are no longer reinsured by the Department
at 100% (98% for loans disbursed between October 1, 1993 and September 30, 1998
and 95% for loans disbursed on and after October 1, 1998), many federal
guarantors have begun to maintain reserves for the 2% to 5% "risk-sharing"
associated with these guarantees. In general, the Federal Guarantors use
historical default and recovery rates to attempt to predict the reserves that
should be maintained for this purpose. As of September 30, 1999, PHEAA has not
specifically provided for this risk. PHEAA does have deferred guaranty fees of
$30.4 million and reserves of $125.1 million to cover this risk. As of September
30, 1999, ASA has a loan loss reserve in the amount of $10.19 million and as of
September 30, 1999, NSLP maintains a reserve of $4.63 million.
Claims Rate. For the past five federal fiscal years, none of PHEAA's,
ASA's, MHEAA's, NSLP's, CSAC's, HESC's, USAF's, GLHEC's or ECMC's claims rate
has exceeded 5.0%, and as a result, all claims of PHEAA, ASA, MHEAA, NSLP, CSAC,
HESC, USAF, GLHEC and ECMC have been reimbursed by the Department at the maximum
reinsurance rate permitted by the Higher Education Act. See "--Federal
Reinsurance" above. The most recent national default rate reported by the
Department of Education was 8.8% for the federal fiscal year 1997. As recently
as federal fiscal year 1990 this national default rate was over 22%. This trend,
coupled with the claims and recovery information listed in this section, shows
improvement in the repayment of Student Loans by borrowers. While, the Seller is
not currently aware of any circumstances which would cause the reimbursement
levels for these Federal Guarantors to be less than the maximum levels
permitted, nevertheless, there can be no assurance that any Federal Guarantor
will continue to
S-55
<PAGE> 58
receive such maximum reimbursement for such claims. The following table sets
forth the claims rates of PHEAA, ASA and NSLP for each of the last five federal
fiscal years:*
<TABLE>
<CAPTION>
CLAIMS RATE
--------------------------------------------------------------------------------
FEDERAL FISCAL YEAR
ENDING SEPTEMBER 30 PHEAA ASA NSLP
------------------- ---------------------------- ------------------- --------------
<S> <C> <C> <C>
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
1999 1.6 1.6 2.2
</TABLE>
* The information set forth in the tables above with respect to each Federal
Guarantor was provided by such Federal Guarantor
Guarantor for the Guaranteed Private Loans. The Eligible Lender Trustee
has entered into a Guarantee Agreement with TERI. As a result TERI has agreed to
guarantee the Guaranteed Private Loans.
Pursuant to its Guarantee Agreement, TERI guarantees payment of 100% of
the principal (including any interest or fees capitalized from time to time) and
accrued interest for each Guaranteed Private 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 Guaranteed Private Loan when due,
provided such failure continues for a period of 120 days;
(b) the discharge of the related student loan debt of a borrower as
part of any proceedings, in bankruptcy pursuant to any chapter of
the Bankruptcy Code;
(c) the death of the borrower thereof; or
(d) the total and permanent disability of the borrower thereof to be
employed on a full-time basis, as certified by two qualified
physicians.
TERI's guarantee obligation with respect to any Guaranteed Private Loan
is conditioned upon the satisfaction of all the conditions set forth in its
Guarantee Agreement. These conditions include, but are not limited to, the
following:
- the origination and servicing of such Guaranteed Private Loan
being performed in accordance with the Programs and other
applicable requirements,
- the timely payment to TERI of all guarantee fees payable with
respect to such Guaranteed Private Loan,
S-56
<PAGE> 59
- the timely submission to TERI of all required pre-claim
delinquency status notifications and of the claim with respect to
such Guaranteed Private Loan, and
- the transfer and endorsement of the promissory note evidencing
such Guaranteed Private Loan to TERI upon and in connection with
making a claim to receive Guarantee Payments thereon.
Failure to comply with any of the applicable conditions, including the
foregoing, may result in the refusal of TERI to honor its Guarantee Agreement
with respect to such Guaranteed Private Loan. In addition, in the event that any
Guaranteed Private Loan is determined to be unenforceable because the terms of
such Guaranteed Private Loan or the forms of the application or promissory note
related thereto violate any provision of applicable state law (other than
Massachusetts law), TERI's guarantee obligation is terminated. Under the Sale
and Servicing Agreement, such failure to comply or such unenforceability would
constitute a breach of the Master Servicer's covenants or the Seller's
representations and warranties, as the case may be, and would create an
obligation of the Seller to repurchase such Guaranteed Private Loan or of the
Master Servicer to purchase such Guaranteed Private Loan. See "Description of
the Transfer and Servicing Agreements--Sale of Financed Student Loans;
Representations and Warranties" and "--Master Servicer Covenants" herein.
TERI, as a Guarantor of Private Loans, is not entitled to any federal
reinsurance or assistance from the Department or any other governmental entity.
Although TERI maintains a loan loss reserve intended to absorb losses arising
from its guarantee commitments, there can be no assurance that the amount of
such reserve will be sufficient to cover the obligations of TERI over the term
of the Guaranteed Private Loan.
Certain organizational and summary financial information with respect
to TERI in its capacity as a Guarantor is set forth below. The information set
forth below relating to TERI is not guaranteed as to accuracy or completeness
and is not to be construed as a representation by the Seller, the Master
Servicer, any of the Underwriters, or any of their respective affiliates:
THE EDUCATION RESOURCES INSTITUTE, INC.
The Education Resources Institute, Inc. ("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 160 people, as of March 31, 2000.
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 three-month period referred to below; such
information is not guaranteed as to accuracy or completeness and is not to be
construed as a representation by the Seller, the Master Servicer, any of the
Underwriters or any of their respective affiliates:
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CALENDAR YEAR PRIVATE LOANS GUARANTEED BY YEAR
----------------- --------------------------------------
(DOLLARS IN MILLIONS) (UNAUDITED)
1995 $303.4
1996 $339.7
1997 $332.6
1998 $380.4
1999 $469.6
2000* $127.3
--------------
* For the three-month period ending March 31, 2000.
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." 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 three-month period
referred to below; such information is not guaranteed as to accuracy or
completeness and is not to be construed as a representation by the Seller, the
Master Servicer, any of the Underwriters, or any of their respective affiliates:
<TABLE>
<CAPTION>
AMOUNTS AVAILABLE TO
CALENDAR YEAR MEET GUARANTEE COMMITMENTS RESERVES RATIO
------------------- ---------------------------------------- ------------------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C>
1995 $ 83,937 5.9%
1996 $ 96,362 5.6%
1997 $102,201 5.4%
1998 $104,170 5.0%
1999 $115,861 4.8%
2000* $120,973 4.8%
</TABLE>
----------------
* For the three-month period ending March 31, 2000.
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Amounts Available To Meet Guarantee Commitments. As part of guarantee
agreements with lending institutions, 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 3.0 % in total TERI funds available as security
for the performance of TERI obligations. At March 31, 2000 the balance of loans
outstanding guaranteed directly by TERI amounted to approximately $2.5 billion.
At March 31, 2000, TERI was contractually required to have approximately $114
million in reserves (consisting of loan loss reserves, deferred revenue and
unrestricted and/or board designated unrestricted net assets) available as
security for TERI's performance as guarantor.
Of the amounts shown above as "Amounts Available To Meet Guarantee
Commitments," a portion of that amount as shown for each period (including
$42,482,957 at December 31, 1999 and $48,529,814 at March 31, 2000) is held in
segregated reserves pledged to satisfy guarantee obligations with to respect to
specific guaranteed student loans and is not available to meet other obligations
of TERI, including obligations with respect to any of the Financed Student
Loans. None of the Financed Student Loans are entitled to the benefit of any of
these segregated reserves.
As of the end of each of the five calendar years and the three-month
period referred to below, TERI had available the following funds and reserves to
meet its loan guarantee commitments; such information is not guaranteed as to
accuracy or completeness and is not to be construed as a representation by the
Seller, the Master Servicer, any of the Underwriters or any of their respective
affiliates:
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, MARCH 31,
----------------------------------------------------------------------- ---------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
1995 1996 1997 1998 1999 2000
--------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Deferred Guarantee Fees $ 5,234 $ 5,140 $ 5,032 $ 4,899 $ 5,357 $ 4,638
Loan Loss Reserve 29,092 57,006 56,999 54,186 60,248 63,205
Unrestricted--Board 46,063 31,169 33,951 33,929 33,808 33,929
Designated
Unrestricted--Undesignated 3,548 3,047 6,219 11,156 16,448 19,201
--------- --------- -------- -------- -------- --------
Total Amounts Available
To Meet
Guarantee Commitments $ 83,937 $ 96,362 $102,201 $104,170 $115,861 $120,973
========= ========= ======== ======== ======== ========
</TABLE>
Subject to the minimum restrictions imposed by lending institutions,
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 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.
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<PAGE> 62
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 March 31, 2000, with respect to loans defaulting in each of the five
calendar years and the three-month period referred to below are as follows; such
information is not guaranteed as to accuracy or completeness and is not to be
construed as a representation by the Seller, the Master Servicer, any of the
Underwriters or any of their respective affiliates:
<TABLE>
<CAPTION>
PERIOD OF DEFAULT CUMULATIVE CASH RECOVERY RATE (UNAUDITED)
------------------------------- ------------------------------------------------------
<S> <C> <C>
1995 53%.... (January 1, 1995--March 31, 2000)
1996 44%.... (January 1, 1996--March 31, 2000)
1997 46%.... (January 1, 1997--March 31, 2000)
1998 38%.... (January 1, 1998--March 31, 2000)
1999 20%.... (January 1, 1999--March 31, 2000)
2000* 2%.... (January 1, 2000--March 31, 2000)
</TABLE>
----------------
* For the three-month period ending March 31, 2000.
The appearance of a declining trend in the foregoing recovery rates can
largely be attributed to the fact that each succeeding default year listed above
includes one fewer year in which to obtain recoveries for the amounts paid out
on guarantee claims in the default year.
Claims Rate. Unlike the Federal Guarantors' calculation of claims rates
discussed above, which consists of an annual measure of claims made to
outstanding loan balances guaranteed at the start of that year, the claims rate
for TERI set forth below is based on the aggregate amount of claims, whenever
paid, on loans guaranteed by TERI in a particular year or period. The "Cohort
Default Rate" refers to the total principal amount of defaulted loans for which
guarantee payments were made by TERI (net of any subsequent recoveries by TERI)
for the cohort year (or period) as a percentage of the aggregate principal
amount of loans guaranteed by TERI for the cohort year (or period). As a result,
the claims rate information provided above for the Federal Guarantors is not
comparable to that provided for TERI below. The following table sets forth the
total loans guaranteed, total defaults paid (net of recoveries) and the net
cohort default rate as of December 31 for each of the five calendar years and
the three-month period referred to below; such information is not guaranteed as
to accuracy or completeness and is not to be construed as a representation by
the Seller, the Master Servicer, any of the Underwriters or any of their
respective affiliates:
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<PAGE> 63
<TABLE>
<CAPTION>
TOTAL NET DEFAULTS
TOTAL LOANS PAID FOR LOANS
COHORT GUARANTEED IN GUARANTEED IN NET COHORT
YEAR COHORT YEAR COHORT YEAR DEFAULT RATE
------ ------------- ------------------ ------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
1995 $303,369 $17,850 5.88%
1996 $339,675 $12,464 3.67%
1997 $332,530 $ 4,565 1.40%
1998 $380,357 $ 1,011 0.27%
1999 $469,573 $ 116 0.02%
2000* $127,342 $ 0 0%
</TABLE>
----------------
* For the three-month period ending March 31, 2000.
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.
Recent Developments. On March 23, 2000, TERI was notified by Access
Group, a promoter of legal and other postgraduate education through affordable
financing and related services, that it intends to discontinue its
lending-guarantee relationship with TERI effective May 1, 2000. As a result,
TERI will not guarantee new Access Group loans originated after April 30, 2000.
TERI will, however, continue to retain its guarantee obligation and its right to
receive guarantee fees for loans originated prior to May 1, 2000. During 1999
and 1998, TERI recognized guarantee fees of $26,057,526 and $21,544,182,
respectively, on loans originated by Access Group. This represented
approximately 62% of the 1999 guarantee fee volume for that year. In addition,
TERI recognized $1,063,429 of Access Group administrative fee income in 1999,
which represented 8.2% of its total administrative expenses. At December 31,
1999, $3,008,676 of deferred guarantee fees relating to Access Group loans are
reported on TERI's consolidated statement of financial position. TERI management
expects these deferred guarantee fees to be recognized as revenue over the next
ten years.
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.
NON-GUARANTEED PRIVATE LOANS
As of the Statistical Cutoff Date, approximately 34.19% of the Initial
Financed Student Loans are, and none of the Subsequent Pool Student Loans will
be, Non-Guaranteed Private Loans. The Non-Guaranteed Private Loans were
originated in accordance with the criteria set forth in the Prospectus under
"The Student Loan Financing Business--Description of the Private Loans Under
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the Programs." See also the discussion of the Key Alternative Loan Program in
the Prospectus under "The Student Loan Financing Business--Description of the
Private Loans Under the Programs."
DESCRIPTION OF THE SECURITIES
Terms used in this section and not previously defined and not defined
herein are defined under "Description of the Transfer and Servicing Agreements
--Distributions" herein.
GENERAL
The Notes will be issued pursuant to the terms of the Indenture, dated
as of June 1, 2000, between the Trust and the Indenture Trustee (the
"Indenture"). The Certificates will be issued pursuant to the terms of the Trust
Agreement. The following information supplements the summary of the material
terms of the Notes, the Certificates, the Indenture and the Trust Agreement set
forth in the Prospectus. The summary does not purport to be complete and is
qualified in its entirety by reference to the provisions of the Notes, the
Certificates, the Indenture and the Trust Agreement. Only the Notes are offered
by this Prospectus Supplement. Any information presented in this Prospectus
Supplement relating to the Certificates is for informational purposes only to
provide for a better understanding of the Notes.
The Class A-1 Notes and the Class A-2 Notes (each a "Class" will
initially be represented by one or more Notes registered in the name of the
nominee of the Depository Trust Company ("DTC") (together with any successor
depository selected by the Administrator, the "Depository"), except as set forth
below. The Notes will be available for purchase in denominations of $1,000 and
integral multiples of $1,000 in excess thereof in book-entry form only. The
Trust has been informed by DTC that DTC's nominee will be Cede & Co. ("Cede").
Accordingly, Cede is expected to be the holder of record of the Notes. Unless
and until Definitive Notes are issued under the limited circumstances described
herein, no Noteholder will be entitled to receive a physical certificate
representing a Note. All references herein to actions by Noteholders refer to
actions taken by DTC upon instructions from its participating organizations (the
"Participants") and all references herein to distributions, notices, reports and
statements to Noteholders refer to distributions, notices, reports and
statements to DTC or Cede, as the registered holder of the Notes, for
distribution to Noteholders in accordance with DTC's procedures with respect
thereto. See "Certain Information Regarding the Securities--Book-Entry
Registration" and "--Definitive Securities" in the Prospectus.
THE NOTES
Distributions of Interest. Interest will accrue on the principal
balance of each Class of Notes at a rate per annum equal to the lesser of the
Formula Rate for such Notes and the Student Loan Rate (each such interest rate
being a "Note Interest Rate"). Interest will accrue from and including the
Closing Date or from the most recent Distribution Date on which interest has
been paid to but excluding the current Distribution Date (each, an "Interest
Period") and will be payable to the Noteholders on each Distribution Date.
Interest accrued as of any Distribution Date but not
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<PAGE> 65
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 Master Servicing Fee for each of the two
immediately preceding Monthly Servicing Payment Dates and of the Master
Servicing Fee, the Administration Fee and the quarterly premium owing to the
Securities Insurer. If such sources are insufficient to pay the sum of the
Noteholders' Interest Distribution Amount with respect to the Class A Notes for
such Distribution Date and any Trust Swap Payment Amount, such shortfall will be
allocated pro rata (x) to the Class A Noteholders (based upon the total amount
of interest then due on each Class of Class A Notes) and (y) to the Swap
Counterparty (based on the Trust Swap Payment Amount due to the Swap
Counterparty on such Distribution Date). The Securities Guaranty Insurance
Policy will unconditionally guarantee the payment of the related Noteholders'
Interest Distribution on each Distribution 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 June 1,
2000 and ending on October 31, 2000).
"Formula Rate" means for any Class of Notes, the applicable Investor
Index plus the applicable Margin.
"Investor Index" means (x) in the case of the Treasury Bill Indexed
Securities, the daily weighted average of the 91-day Treasury Bill Rates within
such Interest Period (determined as described under "--Determination of the
91-day Treasury Bill Rate" below) or (y) in the case of the LIBOR Indexed
Securities, Three Month LIBOR (determined as described under "--Determination of
LIBOR" below).
In the case of any LIBOR Indexed Securities and the initial Interest
Period, interest will accrue for the period from the Closing Date to but
excluding August 25, 2000 based on Three Month LIBOR as determined on the
initial LIBOR Determination Date and for the period from August 25, 2000 to but
excluding November 27, 2000 based on Three Month LIBOR as determined on the
second Business Day prior to August 25, 2000. See "--Determination of LIBOR"
below.
The "Margin" for each Class of Notes is ____% for the Class A-1 Notes
and ____% for the Class A-2 Notes.
The "Student Loan Rate" for any Class of Notes for any Interest Period
will equal the product of (a) the quotient obtained by dividing (x) 365 (or 366
in a leap year) by (y) the actual number of days elapsed in such Interest Period
and (b) the percentage equivalent of a fraction, (i) the numerator of which is
equal to Expected Interest Collections for the Collection Period relating to
such Interest Period, plus any Net Trust Swap Receipt actually received by the
Trust with respect to the related Collection Period, less the sum of the Master
Servicing Fees, the premiums due to the Securities Insurer and the
Administration Fee payable on the related Distribution Date and any Master
Servicing Fees paid on the two preceding Monthly Servicing Payment Dates during
the related Collection Period, minus any Net Trust Swap Payment due to the Swap
Counterparty for the
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<PAGE> 66
related Collection Period, and (ii) the denominator of which is the outstanding
principal balance of the Notes as of the first day of such Interest Period.
"Expected Interest Collections" means, with respect to any Collection
Period, the sum of
- the amount of interest accrued, net of amounts required by
the Higher Education Act to be paid to the Department or to
be repaid to borrowers, with respect to the Financed Student
Loans for such Collection Period (whether or not such
interest is actually paid),
- all Interest Subsidy Payments and Special Allowance Payments
expected to be received by the Eligible Lender Trustee for
such Collection Period (whether or not actually received)
with respect to the Financed Federal Loans and
- Investment Earnings for such Collection Period.
To the extent for any Interest Period the rate for any Class of Notes
calculated on the basis of the Formula Rate exceeds the Student Loan Rate, the
Cap Provider will be obligated under the Cap Agreement to pay the amount of the
excess (the "Noteholders' Interest Index Carryover"). If the Cap Provider
defaults on its obligation under the Cap Agreement or the Cap Agreement is
terminated in accordance with its terms, any Noteholders' Interest Index
Carryover (together with the unpaid portion of any such Noteholders' Interest
Index Carryover from prior Distribution Dates and interest accrued thereon at
the weighted average of the Formula Rate for the Class A Notes) will be paid on
such Distribution Date or any subsequent Distribution Date on a subordinated
basis only to the extent funds are allocated and available therefor after making
all required prior allocations and distributions on such Distribution Date, as
described under "Description of the Transfer and Servicing Agreements--
Distributions" herein. Any Noteholders' Interest Index Carryover due with
respect to the Class A Notes as a result of such default or termination, as the
case may be, that may exist on any Distribution Date following a default by the
Cap Provider or a termination of the Cap Agreement, as applicable, will be
payable to holders of the Class A Notes on that Distribution Date on a pro rata
basis, based on the amount of the Noteholders' Interest Index Carryover then
owing with respect to the Class A Notes, and on any succeeding Distribution
Dates, solely out of the amount of Available Funds remaining on any such
Distribution Date after distribution of the amounts having a more senior payment
priority as described under "Description of the Transfer and Servicing
Agreements--Distributions" herein. No amounts on deposit in the Reserve Account
or the Pre-Funding Account will be available to pay any Noteholders' Interest
Index Carryover. Any amount of Noteholders' Interest Index Carryover due with
respect to the Notes remaining after distribution of all Available Funds on the
applicable Final Maturity Date will never become due and payable and will be
discharged on such date. The Securities Guaranty Insurance Policy does not
guarantee payment of any Noteholders' Interest Index Carryover or the
obligations of the Cap Provider under the Cap Agreement.
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
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distribution of the amounts set forth in "Description of the Transfer and
Servicing Agreements--Distributions" herein. 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 August 2010
Distribution Date, the Specified Collateral Balance will be reduced to zero and
all amounts on deposit in the Collection Account (after giving effect to all
prior distributions on such Distribution Date including the reinstatement of the
balance of the Reserve Account to the Specified Reserve Account Balance on such
Distribution Date) will be distributed first, to the Class A-1 Noteholders and
second, to the Class A-2 Noteholders, as principal until the outstanding
principal balance of each Class of Notes has been reduced to zero. See
"Description of the Transfer and Servicing Agreements--Termination" herein.
Except as described below, the Securities Guaranty Insurance Policy does not
guaranty payment of the Principal Distribution Amount on any Distribution Date.
Principal payments on the Notes will be applied on each Distribution
Date, first, to the principal balance of the Class A-1 Notes until the principal
balance is reduced to zero and then to the principal balance of the Class A-2
Notes until the principal balance is reduced to zero. The aggregate outstanding
principal amount of each Class of Notes will be payable in full on the Final
Maturity Date for that Class of Notes. The Final Maturity Date for the Class A-1
Notes is the Distribution Date in May 2007 (the "Class A-1 Notes Final Maturity
Date") and the Final Maturity Date for the Class A-2 Notes is the Distribution
Date in May 2029 (the "Class A-2 Notes Final Maturity Date"). 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. The Securities Guaranty
Insurance Policy will guarantee payment of the unpaid principal amount of the
Class A-1 Notes on the Class A-1 Notes Final Maturity Date and the Class A-2
Notes on the Class A-2 Notes Final Maturity Date. Although the maturity of
certain of the Financed Student Loans will extend well beyond the Final Maturity
Date of the Class A-2 Notes, the actual date on which the aggregate outstanding
principal and accrued interest of any Class of Notes are paid may be earlier
than the Final Maturity Date for the related Class of Notes, based on a variety
of factors. See "The Financed Student Loan Pool--Maturity and Prepayment
Assumptions" herein. In addition, prior to the Distribution Date on which the
principal balance of the Notes equals the sum of the Pool Balance and amounts on
deposit in the Pre-Funding Account as of the last day of the related Collection
Period (the "Parity Date"), the amount on deposit in the Reserve Account will be
used to pay principal on the Notes only to the extent the amount by which the
Pool Balance as of the last day of the second preceding Collection Period (or in
the case of the first Distribution Date, as of the Cutoff Date) minus the Pool
Balance as of the last day of the related Collection Period exceeds the
Available Funds remaining to be distributed on the Notes as principal as set
forth in "Description of the Transfer and Servicing Agreements--Distributions"
herein. On and after the Parity Date, amounts on deposit in the Reserve Account
will be used to pay principal to the extent that any Available Funds remaining
to be distributed on the Notes as principal as set forth in "Description of the
Transfer and Servicing Agreements--Distributions" herein is less than the
Noteholders' Principal Distribution Amount for such Distribution Date.
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<PAGE> 68
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 Special Redemption Date to redeem each Class of Notes, on
a pro rata basis, based on the initial principal amount of each Class of Notes.
If the remaining Subsequent Pool Pre-Funded Amount is $10,000,000 or less, it
will be distributed on the Special Redemption Date only to holders of the Class
A-1 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.
INDENTURE
Events of Default; Rights upon Event of Default. Upon an Event of
Default under the Indenture, the Securities Insurer as the deemed holder of 100%
of the Notes (unless a Securities Insurer Default has occurred) will have the
rights of the Noteholders set forth in the Prospectus under "Description of the
Notes--The Indenture--Events of Default; Rights Upon Event of Default." The
Indenture Trustee at the direction of the Securities Insurer may sell the
Financed Student Loans subject to certain conditions set forth in the Indenture
following an Event of Default, including a default in the payment of any
principal when due of or a default for three business days or more in the
payment of any interest on any Note (to the extent described in the following
paragraph). See "Description of the Notes--The Indenture--Events of Default;
Rights Upon Event of Default" in the Prospectus.
IN ADDITION, THE FAILURE TO PAY THE NOTEHOLDERS' PRINCIPAL DISTRIBUTION
AMOUNT ON ANY DISTRIBUTION DATE WILL NOT RESULT IN THE OCCURRENCE OF AN EVENT OF
DEFAULT UNTIL THE CLASS A-1 NOTES FINAL MATURITY DATE, IN THE CASE OF THE CLASS
A-1 NOTES OR THE CLASS A-2 NOTES FINAL MATURITY DATE, IN THE CASE OF THE CLASS
A-2 NOTES (EACH AS SET FORTH ON THE COVER PAGE HERETO). FURTHERMORE, THE FAILURE
TO PAY THE NOTEHOLDERS' INTEREST INDEX CARRYOVER AS A RESULT OF INSUFFICIENT
AVAILABLE FUNDS WILL NOT RESULT IN THE DECLARATION OF AN EVENT OF DEFAULT.
DETERMINATION OF THE TREASURY BILL RATE
"91-day Treasury Bill Rate" means, on any day, the weighted average per
annum discount rate (expressed on a bond equivalent basis and applied on a daily
basis) for 91-day Treasury Bills sold at the most recent 91-day Treasury Bill
auction prior to such date, as reported by the U.S. Department of the Treasury.
In the event that the results of the auctions of 91-day Treasury Bills cease to
be reported as provided above, or that no such auction is held in a particular
week, then the 91-day Treasury Bill Rate in effect as a result of the last such
publication or report will remain in effect until such time, if any, as the
results of auctions of 91-day Treasury Bills shall again be reported or such an
auction is held, as the case may be. The 91-day Treasury Bill Rate will be
subject to a Lock-In Period of six business days.
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<PAGE> 69
"Lock-In Period" means the number of days preceding any Distribution
Date during which the Note Interest Rate, 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 which are Treasury Bill Indexed
Securities from and including the Closing Date or the preceding Distribution
Date, as applicable, to but excluding the current Distribution Date is
calculated by multiplying the principal amount of the Notes by an "accrued
interest factor." This factor is calculated by adding the interest rates
applicable to each day on which each Note has been outstanding since the Closing
Date or the preceding Distribution Date, as applicable, and dividing the sum by
365 (or by 366 in the case of accrued interest which is payable on a
Distribution Date in a leap year) and rounding the resulting number to nine
decimal places.
The following table sets forth the accrued interest factors that would
have been applicable to any Notes which are Treasury Bill Indexed Securities
bearing interest at the indicated rates, assuming a 365-day year:
<TABLE>
<CAPTION>
ASSUMED INTEREST
-------------------------------------------------------
SETTLEMENT DATE DAYS OUTSTANDING RATE ON THE NOTES INTEREST FACTOR
--------------- ---------------- ------------------------ --------------------------
<S> <C>
1st
2nd 1
3rd 2
4th 3
5th* 4
6th 5
7th 6
8th 7
9th 8
10th 9
</TABLE>
* First interest rate adjustment (91-day Treasury Bills are generally
auctioned weekly).
The numbers in this table are examples given for information purposes
only and are in no way a prediction of interest rates on any Notes which are
Treasury Bill Indexed Securities. A similar factor calculated in the same manner
is applicable to the return on Certificates which are Treasury Bill Indexed
Securities.
The Administrator makes information concerning the current 91-day
Treasury Bill Rate and the accrued interest factor available through Bloomberg
L.P.
DETERMINATION OF LIBOR
Pursuant to the Sale and Servicing Agreement, the Administrator, in its
capacity as calculation agent, will determine Three-Month LIBOR for purposes of
calculating the interest due on the Notes which are LIBOR Indexed Securities and
the Noteholders' Interest Index Carryover, for each given Interest Period on (x)
the second business day prior to the commencement of each
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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 August 25, 2000 and as determined on the second business day prior to
August 25, 2000 for the period from August 25, 2000 to but excluding November
27, 2000 (each, a "LIBOR Determination Date"). For purposes of calculating
Three-Month LIBOR, a business day is any day on which banks in London and New
York City are open for the transaction of business. Interest due for any
Interest Period will be determined based on the actual number of days in such
Interest Period over a 360-day year.
"Three-Month LIBOR" means the London interbank offered rate ("LIBOR")
for deposits in U.S. dollars having a maturity of three months commencing on the
related LIBOR Determination Date (the "Index Maturity") which appears on
Telerate Page 3750 as of 11:00 a.m., London time, on such LIBOR Determination
Date. If such rate does not appear on Telerate Page 3750, the rate for that day
will be determined on the basis of the rates at which deposits in U.S. dollars,
having the Index Maturity and in a principal amount of not less than U.S.
$1,000,000, are offered at approximately 11:00 a.m., London time, on such LIBOR
Determination Date to prime banks in the London interbank market by the
Reference Banks. The Administrator will request the principal London office of
each of such Reference Banks to provide a quotation of its rate. If at least two
such quotations are provided, the rate for that day will be the arithmetic mean
of the quotations. If fewer than two quotations are provided, the rate for that
day will be the arithmetic mean of the rates quoted by major banks in New York
City, selected by the Administrator, at approximately 11:00 a.m., New York City
time, on such LIBOR Determination Date for loans in U.S. dollars to leading
European banks having the Index Maturity and in a principal amount equal to an
amount of not less than U.S. $1,000,000; provided that if the banks selected as
aforesaid are not quoting as mentioned in this sentence, Three-Month LIBOR in
effect for the applicable reset period will be Three-Month LIBOR in effect for
the previous reset period.
"Telerate Page 3750" means the display page so designated on the Bridge
Telerate Service (or such other page as may replace that page on that service
for the purpose of displaying comparable rates or prices) or such comparable
page on a comparable service.
"Reference Bank" means a leading bank (a) engaged in transactions in
Eurodollar deposits in the international Eurocurrency market, (b) not
controlling, controlled by or under common control with the Administrator and
(c) having an established place of business in London.
CERTIFICATES
On the Closing Date, the Trust will issue a single class of
Certificates to the Seller. The Certificates will represent the residual
interest in the Trust's assets. The Certificates will not have a principal
balance and will not bear interest. On each Distribution Date, the Certificates
will not be entitled to any distributions unless all other distributions have
been made on such Distribution Date. Once a distribution has been made in
respect of the Certificates, it will not be available to pay any of the
Noteholders.
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DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
GENERAL
The following information supplements the summary set forth in the
Prospectus of the material terms of the Sale and Servicing Agreement, pursuant
to which the Eligible Lender Trustee on behalf of the Trust will purchase, the
Master Servicer will service (or will cause the Sub-Servicers to service) and
the Administrator will perform certain administrative functions with respect to
the Financed Student Loans; the Administration Agreement, dated as of June 1,
2000 among the Administrator, the Trust and the Indenture Trustee (the
"Administration Agreement"), pursuant to which the Administrator will undertake
certain other administrative duties with respect to the Trust and the Financed
Student Loans; and the Trust Agreement, pursuant to which the Trust will be
created and the Certificates will be issued (collectively, the "Transfer and
Servicing Agreements"). However, the summary does not purport to be complete and
is qualified in its entirety by reference to the provisions of such Transfer and
Servicing Agreements.
SALE OF FINANCED STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
On or prior to the Closing Date, the Seller will sell and assign to the
Eligible Lender Trustee on behalf of the Trust, without recourse, its entire
interest in the Initial Financed Student Loans, all collections received and to
be received with respect thereto for the period on and after the Cutoff Date and
all the Assigned Rights pursuant to the Sale and Servicing Agreement. Each
Initial Financed Student Loan will be identified in schedules appearing as an
exhibit to the Sale and Servicing Agreement. The Eligible Lender Trustee will,
concurrently with such sale and assignment, execute, authenticate and deliver
the Notes. The net proceeds received from the sale of the Notes and the
Certificates will be applied to the purchase of the Financed Student Loans and
the Assigned Rights, to the deposit of the Pre-Funded Amount in the Pre-Funding
Account and the Reserve Account Initial Deposit to the Reserve Account and to
pay certain amounts owed to the Securities Insurer, the Swap Counterparty and
the Cap Provider. See "Use of Proceeds," and "--Additional Fundings" below for a
description of the application of funds on deposit in the Pre-Funding Account
during the Funding Period.
In the Sale and Servicing Agreement, the Seller will make certain
representations and warranties with respect to the Financed Student Loans to the
Trust for the benefit of the Certificateholders and the Noteholders and will
have certain cure, repurchase and reimbursement obligations with respect to any
breaches. See "Description of the Transfer and Servicing Agreements" in the
Prospectus.
The "Purchase Price" of any Financed Student Loan will be (1) in the
case of Subsequent Pool Student Loans, an amount equal to 100% of the aggregate
principal balance thereof as of the related Subsequent Cutoff Date, and (2) in
the case of Other Subsequent Student Loans, an amount equal to 100% of the
aggregate principal balance thereof as of its Subsequent Cutoff Date. For
purposes of the foregoing calculations, the aggregate principal balance of each
Financed Student Loan includes accrued interest thereon from the date of
origination to, with respect to each Initial Financed Student Loan, the Cutoff
Date, and to, with respect to each Additional Student Loan, the related
Subsequent Cutoff Date, in each case expected to be
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capitalized upon entry into repayment and any lost Interest Subsidy Payments and
Special Allowance Payments with respect thereto.
To assure uniform quality in servicing and to reduce administrative
costs, each Sub-Servicer will be appointed custodian on behalf of the Indenture
Trustee and the Trust of the promissory notes representing the Financed Student
Loans which such Sub-Servicer is servicing on behalf of the Master Servicer. The
Seller's, the Master Servicer's and the each Sub-Servicers' accounting and other
records will reflect the sale and assignment of the Financed Student Loans to
the Eligible Lender Trustee on behalf of the Trust, and Uniform Commercial Code
financing statements reflecting such sale and assignment will be filed.
ACCOUNTS
The Administrator will establish and maintain four separate segregated
accounts as follows: the "Collection Account", the "Pre-Funding Account", the
"Escrow Account" and the "Reserve Account." Each such account will be
established in the name of the Indenture Trustee on behalf of the Noteholders.
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 Securities Insurer, and the
nationally recognized statistical rating agencies rating the Notes (each a
"Rating Agency" and together, 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
and is acceptable to the Securities Insurer. 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 (but only if all rights of set-off have been waived), the
Eligible Lender Trustee, or an affiliate
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thereof, or the Indenture Trustee or an affiliate thereof) organized under the
laws of the United States of America or any one of the states thereof or the
District of Columbia (or any domestic branch of a foreign bank) which has a
long-term unsecured debt rating and/or a short-term unsecured debt rating
acceptable to the Securities Insurer and the Rating Agencies and the deposits of
which are insured by the Federal Deposit Insurance Corporation ("FDIC").
ADDITIONAL FUNDINGS
The Trust may make expenditures (each, an "Additional Funding") from
the Pre-Funding Account and the Escrow Account on Transfer Dates during the
Funding Period consisting of amounts paid to the Seller to acquire Subsequent
Pool Student Loans and Other Subsequent Student Loans as of the applicable
Subsequent Cutoff Dates, to pay capitalized interest on the Financed Student
Loans and to pay Fee Advances as provided in the Sale and Servicing Agreement.
On the Closing Date, the Seller will deposit approximately $216,730,598
(the "Initial Pre-Funded Amount") into the Pre-Funding Account from the proceeds
of the sale of the Class A Notes. For administrative convenience, a portion of
the Initial Pre-Funded Amount equal to approximately $181,730,598 (the
"Subsequent Pool Pre-Funded Amount") will be allocated to an administrative
subaccount of the Pre-Funding Account (the "Subsequent Pool Pre-Funding
Subaccount"). The remaining portion of the Initial Pre-Funded Amount equal to
approximately $35,000,000 (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 the Subsequent Pool Student Loans. The Subsequent Pool
Pre-Funded Amount will be reduced on each date Subsequent Pool Student Loans are
transferred to the Trust by the aggregate Purchase Price of such Subsequent Pool
Student Loans transferred on such date.
The Trust intends to use funds on deposit in the Subsequent Pool
Pre-Funding Subaccount on or prior to the Special Determination Date to acquire
the Subsequent Pool Student Loans. In the event that the Subsequent Pool
Pre-Funded Amount is insufficient to pay the Purchase Price of the Subsequent
Pool Student Loans, then the amount of such deficiency may be withdrawn from the
Other Additional Pre-Funding Subaccount.
Pursuant to the Sale and Servicing Agreement, the Seller is obligated
to sell, and the Eligible Lender Trustee on behalf of the Trust is obligated to
purchase during the Funding Period, Other Subsequent Student Loans having an
aggregate principal balance (net of the aggregate principal balance of the
Financed Student Loans repaid by any Other Subsequent Student Loans that are
Consolidation Loans) of not less than approximately $35,000,000 (less the amount
thereof, if any, used by the Trust to fund shortfalls in the payment of interest
and principal on the Securities as described herein) to the extent that such
Other Subsequent Student Loans are available. Funds on deposit in the Other
Additional Pre-Funding Subaccount will be used from time to time during the
Funding Period, subject to certain limitations described below, together with
any amounts on deposit in the Escrow Account, to purchase from the Seller, for
an amount equal to 100% of the aggregate principal balance thereof plus accrued
interest (to the extent capitalized or to be capitalized), Other Subsequent
Student Loans made by the Seller to those eligible borrowers who have Student
Loans that are part of the pool of Initial Financed Student Loans as of the
Statistical
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Cutoff Date or Subsequent Pool Student Loans as of the related Subsequent Cutoff
Date, to pay capitalized interest on any Financed Student Loan and to pay Fee
Advances. See "The Student Loan Financing Business--Description of Federal Loans
Under the Programs--Federal Consolidation Loans" and "--Description of Private
Loans Under the Programs--Private Consolidation Loans" in the Prospectus. In
addition, funds on deposit in the Other Additional Pre-Funding Subaccount may be
used prior to the Special Determination Date to fund the purchase by the Trust
of Subsequent Pool Student Loans to the extent that amounts on deposit in the
Subsequent Pool Pre-Funding Subaccount are insufficient for such purpose.
The Seller expects that the total amount of Additional Fundings from
the Pre-Funding Account will approximate 100% of the Initial Pre-Funded Amount
by the last day of the Collection Period preceding the August 2002 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 Noteholders on the Special Redemption Date as
described in "Description of the Securities--The Notes--Mandatory Redemption"
herein. If the Pre-Funded Amount has not been reduced to zero by the end of the
Funding Period, any amounts remaining in the Pre-Funding Account will be
deposited into the Collection Account for distribution on the immediately
following Distribution Date. Such reduction in the Pre-Funded Amount will result
in a corresponding increase in the amount of principal distributable to the
Securities on such Distribution Date.
The Other Additional Pre-Funded Amount will also be available on each
Monthly Servicing Payment Date to cover any shortfalls in payments of the Master
Servicing Fee and on each Distribution Date to fund Interest and Expense Draws
and Realized Loss Draws to the extent funds on deposit in the Reserve Account
are insufficient to cover such amounts. Amounts withdrawn from the Pre-Funding
Account for the purposes described in this paragraph will not be replenished
with future available funds.
In addition to the conditions set forth under "The Financed Student
Loan Pool--General" herein, the obligation to purchase any Additional Student
Loan (including a Subsequent Pool Student Loan) by the Eligible Lender Trustee
on behalf of the Trust is subject to the following conditions, among others:
(a) such Additional Student Loan must satisfy all applicable
origination requirements and all other requirements specified in
the Sale and Servicing Agreement or related agreements;
(b) the Seller will not select such Additional Student Loan in a
manner that it believes is adverse to the interests of the
Noteholders, the Securities Insurer or the Swap Counterparty; and
(c) the Seller will deliver certain opinions of counsel to the
Indenture Trustee, the Securities Insurer, the Swap Counterparty
and the Rating Agencies with respect to the validity of the
conveyance of such Additional Student Loan.
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In addition, (a) no Consolidation Loan will be transferred to the Trust
unless at least one underlying Student Loan was held by the Eligible Lender
Trustee on behalf of the Trust at the time of consolidation and (b) no Serial
Loan will be transferred to the Trust unless the borrower of such loan is the
borrower for one or more Financed Student Loans already owned by the Trust.
On the fifteenth day (or, if such day is not a business day, the next
succeeding business day) of each month or on certain other dates designated by
the Seller during the Funding Period (each, a "Transfer Date"), the Seller will
sell and assign, without recourse, to the Eligible Lender Trustee on behalf of
the Trust, its entire interest in the Other Subsequent Student Loans made or,
with respect to Subsequent Pool Student Loans, owned during the period preceding
the applicable Transfer Date, in each case as of the date specified in the
applicable Transfer Agreement to be delivered on such Transfer Date (each, a
"Subsequent Cutoff Date"). Subject to the satisfaction of the foregoing
conditions, the Seller will convey the Additional Student Loans to the Eligible
Lender Trustee on behalf of the Trust on each such Transfer Date pursuant to the
Sale and Servicing Agreement and the applicable Transfer Agreement (a "Transfer
Agreement") executed by the Seller, the applicable Servicer, the Eligible Lender
Trustee and the Administrator on such Transfer Date. Each such Transfer
Agreement will include as an exhibit a schedule identifying each Additional
Student Loan transferred on such Transfer Date. Upon such conveyance of
Additional Student Loans to the Eligible Lender Trustee on behalf of the Trust,
the Pool Balance will increase in an amount equal to the aggregate principal
balances of such Additional Student Loans (less any existing Financed Student
Loans being repaid pursuant to any Consolidation Loans included within such
Additional Student Loans) and an amount equal to the Purchase Price of such
Additional Student Loans will be withdrawn first from the Escrow Account to the
extent amounts are available therein and then with respect to Subsequent Pool
Student Loans and Other Subsequent Student Loans, during the Funding Period,
from the Pre-Funding Account on such date and transferred to the Seller. Amounts
in the Escrow Account will not be available to purchase any Subsequent Pool
Student Loan.
With respect to any Consolidation Loan to be made by the Seller to a
given borrower, the Eligible Lender Trustee on behalf of the Trust will convey
to the Seller all Underlying Federal Loans and Underlying Private Loans, as
applicable (each as defined under "The Student Loan Financing Business" in the
Prospectus, the "Underlying Federal Loans" and the "Underlying Private Loans,"
respectively), held by it with respect to that borrower, as specified in a
notice delivered by or on behalf of the Seller. In exchange for and
simultaneously with such conveyance, the Seller will deposit into the Escrow
Account an amount of cash equal to the principal balances of all such Underlying
Federal Loans and Underlying Private Loans, plus accrued interest thereon to the
date of such conveyance. Each purchase of a Serial Loan will be funded by means
of a transfer during the Funding Period, from the Pre-Funding Account of an
amount equal to the Purchase Price of such Serial Loan.
Amounts on deposit in the Escrow Account will be invested in Eligible
Investments (see "--Accounts" above) and will be used on the succeeding Transfer
Date, as described above, to purchase Additional Student Loans from the Seller.
Any of such amounts remaining in the Escrow 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.
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For purposes of the foregoing, the following terms have the respective
meanings set forth below:
The "Funding Period" means the period from the Closing Date until
the first to occur of:
(1) an Event of Default occurring under the Indenture, a Master
Servicer Default (as defined in the Prospectus) occurring under
the Sale and Servicing Agreement or an Administrator Default
occurring under the Sale and Servicing Agreement or the
Administration Agreement;
(2) certain events of insolvency with respect to the Seller;
(3) the date on which the amounts on deposit in the Pre-Funding
Account would be reduced to zero after giving effect to purchases
of Other Subsequent Student Loans on such date; or
(4) the last day of the Collection Period preceding the August 2002
Distribution Date.
"Other Subsequent Student Loans means Consolidation Loans and
Serial Loans made to a borrower which is also a borrower under at
least one outstanding Financed Student Loan which the Trust is
obligated to purchase from the Seller during the Funding Period with
funds on deposit in the Escrow Account and funds on deposit in the
Pre-Funding Account and allocated to the Other Additional Pre-Funding
Subaccount.
"Serial Loans" constitute Student Loans which are made to a
borrower who is also a borrower under at least one outstanding Initial
Financed Student Loan or Subsequent Pool Student Loan.
The "Subsequent Pool" means the pool of Student Loans, consisting
of the Subsequent Pool Student Loans, that will be purchased by the
Seller from Fleet, in negotiated transactions during June 2000,
pursuant to the Fleet Sale Agreement. The Subsequent Pool Student
Loans have, as of the Statistical Cutoff Date, the characteristics
described herein under "The Financed Student Loan Pool--Subsequent
Pool Student Loans," and are to be purchased by the Trust from the
Seller with funds on deposit in the Subsequent Pool Pre-Funding
Subaccount on or before July 31, 2000.
SERVICING PROCEDURES
Pursuant to the Sale and Servicing Agreement, the Master Servicer has
agreed to service and perform all other related tasks (or to cause the
Sub-Servicers to service and perform all other related tasks) with respect to
the Financed Student Loans acquired from time to time. So long as no claim is
being made against a Guarantor for any Financed Student Loan, the Sub-Servicers
will hold, as custodian on behalf of the Trust, the notes evidencing, and other
documents relating to, that Financed Student Loan. The Master Servicer is
required pursuant to the Sale and Servicing Agreement (or shall cause a
Sub-Servicer) to perform all services and duties customary to the servicing of
Student Loans (including all collection practices) with reasonable care, and in
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compliance with all standards and procedures provided for in the Higher
Education Act, the Guarantee Agreements and all other applicable federal and
state laws.
Without limiting the foregoing, the responsibilities of the Master
Servicer under the Sale and Servicing Agreement (or of a Sub-Servicer pursuant
to a Sub-Servicing Agreement) include, but are not limited to, the following:
collecting and depositing into the Collection Account (or, in the event that
daily deposits into the Collection Account are not required, paying to the
Administrator) all payments with respect to the Financed Student Loans the
Master Servicer (or a Sub-Servicer) is servicing, including claiming and
obtaining any Guarantee Payments (subject to the Maximum TERI Payments Amount)
with respect thereto but excluding such tasks with respect to Interest Subsidy
Payments and Special Allowance Payments (as to which the Administrator and the
Eligible Lender Trustee have agreed to perform, see "--Administrator" below),
responding to inquiries from borrowers on such Financed Student Loans,
investigating delinquencies and sending out statements, payment coupons and tax
reporting information to borrowers. In addition, the Master Servicer will (or
will cause each Sub-Servicer to) keep ongoing records with respect to such
Financed Student Loans and collections thereon and will furnish periodic
statements to the Administrator with respect to such information, in accordance
with the Master Servicer's (or such Sub-Servicer's) customary practices with
respect to the Seller and as otherwise required in the Sale and Servicing
Agreement. Without being released from its obligations under the Sale and the
Servicing Agreement, the Master Servicer may cause the Sub-Servicers to perform
some or all of its duties listed above on its behalf pursuant to the
Sub-Servicing Agreements, and in the event that any such duties require
consents, approvals or licenses under the Higher Education Act or otherwise, the
Master Servicer shall appoint one or more Sub-Servicer that possesses such
consents, approvals and licenses to act on its behalf; provided, however, that
the Master Servicer shall remain responsible for the failure of any Sub-Servicer
to perform these activities. In its capacity as a Sub-Servicer, PHEAA will from
time to time be required on behalf of the Trust to file claims against, and
pursue the receipt of Guarantee Payments from, itself as a Federal Guarantor.
PAYMENTS ON FINANCED STUDENT LOANS
Except as provided below, the Master Servicer or a Sub-Servicer, as
applicable, will deposit all payments on Financed Student Loans (from whatever
source), and all proceeds of Financed Student Loans collected by it during each
Collection Period into the Collection Account within two business days of
receipt thereof. Except as provided below, the Eligible Lender Trustee will
deposit all Interest Subsidy Payments and all Special Allowance Payments with
respect to the Financed Student Loans received by it during each Collection
Period into the Collection Account within two business days of receipt thereof.
However, for so long as KBUSA is an Eligible Institution, satisfies
certain requirements for quarterly remittances, the Rating Agencies affirm their
ratings of the Notes at the initial level, and KBUSA is the Administrator, and
provided that (x) there exists no Administrator Default (as described below) and
(y) each other condition to making quarterly deposits as may be specified by the
Rating Agencies is satisfied, the Master Servicer, each Sub-Servicer and the
Eligible Lender Trustee will pay all the amounts referred to in the preceding
paragraph that would otherwise be deposited into the Collection Account to the
Administrator, and the Administrator will not be required to deposit such
amounts into the Collection Account until on or before the business day
immediately preceding each Monthly Servicing Payment Date (to the extent of the
Master Servicing Fee payable on such date) and on or before the business day
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immediately preceding each Distribution Date (to the extent of the remainder of
such amounts). In such event, the Administrator will deposit the aggregate
Purchase Amounts of Financed Student Loans repurchased by the Seller and
purchased by the Master Servicer into the Collection Account on or before the
third business day preceding each Distribution Date.
"Purchase Amount" means, as of the close of business on the last day of
a Collection Period, (1) 101.75% of the amount required to repay in full a
Financed Federal Student Loan, and (2) 100% of the amount required to repay in
full a Financed Student Loan that is not a Financed Federal Loan, in each case
under the terms thereof including all accrued interest thereon expected to be
capitalized upon entry into repayment and any lost Interest Subsidy Payments and
Special Allowance Payments with respect thereto.
MASTER SERVICER COVENANTS
In the Sale and Servicing Agreement, the Master Servicer covenants
that:
(a) it will or will cause each Sub-Servicer to duly satisfy all
obligations on its part to be fulfilled under or in connection
with the Financed Student Loans the Master Servicer or a
Sub-Servicer is servicing, maintain in effect all qualifications
required in order to service such Financed Student Loans and
comply in all material respects with all requirements of law in
connection with servicing such Financed Student Loans, the
failure to comply with which would have a materially adverse
effect on the Securities Insurer, the Swap Counterparty or the
Noteholders;
(b) it will not permit nor permit a Sub-Servicer to permit any
rescission or cancellation of a Financed Student Loan the Master
Servicer or a Sub-Servicer is servicing except as ordered by a
court of competent jurisdiction or other government authority or
as otherwise consented to by the Eligible Lender Trustee, the
Securities Insurer, the Swap Counterparty and the Indenture
Trustee;
(c) it will do nothing nor permit a Sub-Servicer to impair the rights
of the Securities Insurer, the Swap Counterparty or the
Noteholders in such Financed Student Loans; and
(d) it will not nor permit a Sub-Servicer to reschedule, revise,
defer or otherwise compromise with respect to payments due on any
such Financed Student Loan except pursuant to any applicable
deferral or forbearance periods or otherwise in accordance with
its guidelines for servicing student loans in general and those
of the Seller in particular and any applicable Programs
requirements.
Under the terms of the Sale and Servicing Agreement, if the Seller or
the Master Servicer discovers, or receives written notice, that any covenant of
the Master Servicer (or covenants made by the Master Servicer relating to either
of the Sub-Servicers), set forth above has not been complied with by the Master
Servicer (or a Sub-Servicer) in all material respects and such
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noncompliance has not been cured within 60 days thereafter and has a materially
adverse effect on the interest of Securities Insurer, the Swap Counterparty, or
the Noteholders in any Financed Student Loan (it being understood that in the
case of any Financed Federal Loan any such breach that does not affect any
Guarantor's obligation to guarantee or insure payment of such Financed Student
Loan will not be considered to have such a material adverse effect), unless such
breach is cured, the Master Servicer will purchase such Financed Student Loan as
of the first day following the end of such 60-day period that is the last day of
a Collection Period. In that event, the Master Servicer will be obligated to
deposit into the Collection Account an amount equal to the Purchase Amount of
such Financed Student Loan and the Trust's interest in any such purchased
Financed Student Loan will be automatically assigned to the Master Servicer. In
addition, the Master Servicer will reimburse the Trust with respect to any
Financed Federal Loan for any accrued interest amounts that a Federal Guarantor
refuses to pay pursuant to its Guarantee Agreement due to, or for any Interest
Subsidy Payments and Special Allowance Payments that are lost or that must be
repaid to the Department as a result of, a breach of any such covenant of the
Master Servicer.
INCENTIVE PROGRAMS
Certain incentive programs currently or hereafter made available by the
Seller to borrowers may also be made available by the Master Servicer or a
Sub-Servicer to borrowers with Financed Student Loans. Except for Financed
Student Loans eligible for the "Keys2Repay Program," which allows certain
borrowers to choose repayment terms of 10, 15 or 25 years at interest rates that
vary in accordance with the selected term, any incentive program that
effectively reduces borrower payments on Financed Student Loans and, with
respect to Financed Federal Loans, is not required by the Higher Education Act
will be applicable to the Financed Student Loans only if and to the extent that
the Master Servicer or a Sub-Servicer receives payment on behalf of the Trust
from the Seller in an amount sufficient to offset such effective yield
reductions. See "The Student Loan Financing Business -- Incentive Programs" in
the Prospectus.
SERVICING COMPENSATION
The Master Servicer will be entitled to receive, subject to the
limitations set forth in the following paragraph, the Master Servicing Fee
monthly in an amount equal to the Master Servicing Fee Percentage of the Pool
Balance as of the last day of the immediately preceding calendar month together
with applicable administrative fees, late fees and similar charges, as
compensation for performing the functions as master servicer for the Trust
described above. The Master Servicing Fee Percentage may be subject to
reasonable increase agreed to by the Administrator, the Eligible Lender Trustee,
the Securities Insurer and the Master Servicer to the extent that a demonstrable
and significant increase occurs in the costs incurred by the Master Servicer in
providing the services to be provided under the Sale and Servicing Agreement,
whether due to changes in applicable governmental regulations, guarantor program
requirements or regulations, United States Postal Service postal rates or some
other identifiable cost increasing event with respect to the Master Servicer or
a Sub-Servicer. The Master Servicing Fee (together with any portion of the
Master Servicing Fee that remains unpaid from prior Distribution Dates) will be
payable on each Monthly Servicing Payment Date and will be paid solely out of
Available Funds and amounts on deposit in the Reserve Account on such Monthly
Servicing Payment Date. In return for receiving the Master
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Servicing Fee, the Sub-Servicers will be paid solely by the Master Servicer,
pursuant to the Sub-Servicing Agreements.
The Master Servicing Fee will compensate the Master Servicer for
performing (or for arranging the performance by the Sub-Servicers of) the
functions of a third party servicer of student loans as agent for their
beneficial owner, including collecting and posting all payments, responding to
inquiries of borrowers on the Financed Student Loans, investigating
delinquencies, pursuing, filing and collecting any Guarantee Payments,
accounting for collections and furnishing monthly and annual statements to the
Administrator. The Master Servicing Fee also will reimburse the Master Servicer
for certain taxes, accounting fees, outside auditor fees, data processing costs
and other costs incurred in connection with administering the Financed Student
Loans.
DISTRIBUTIONS
Deposits to Collection Account. On or about the third business day
prior to each Distribution Date (the "Determination Date"), the Administrator
will provide the Indenture Trustee with certain information with respect to the
distributions to be made on such Distribution Date.
On or before the business day preceding each Monthly Servicing Payment
Date that is not a Distribution Date, the Administrator will cause (or will
cause the Master Servicer and the Eligible Lender Trustee to cause) (x) any
Guaranteed Payments made by TERI in excess of the Maximum TERI Payments Amount
and (y) a portion of the amount of the Available Funds equal to the Master
Servicing Fee, payable on such date to be deposited into the Collection Account
for payment to the Seller in the case of such excess Guarantee Payments and to
the Master Servicer in the case of the Master Servicing Fee. On or before the
third business day prior to each Distribution Date, the Administrator will cause
(or will cause the Master Servicer and the Eligible Lender Trustee to cause) the
amount of Available Funds to be deposited into the Collection Account.
For purposes hereof, the term "Available Funds" means, with respect to
a Distribution Date or any Monthly Servicing Payment Date, the sum of the
following amounts received with respect to the related Collection Period (or, in
the case of a Monthly Servicing Payment Date, the applicable portion thereof) to
the extent not previously distributed:
(1) all collections received by Master Servicer (or the
Sub-Servicers) on the Financed Student Loans (including any
Guarantee Payments (subject to the Maximum TERI Payments Amount)
received with respect to such Financed Student Loans) but net of
(x) any Federal Origination Fee (as defined in the Prospectus)
and Federal Consolidation Loan Rebate (as defined in the
Prospectus) payable to the Department on Federal Consolidation
Loans disbursed after October 1, 1993, (y) any applicable
administrative fees, late fees or similar fees received from a
borrower, and (z) any collections in respect of principal on the
Financed Student Loans applied by the Trust to repurchase
guaranteed loans from the Guarantors in accordance with the
Guarantee Agreements;
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(2) any Interest Subsidy Payments and Special Allowance Payments
received by the Eligible Lender Trustee during the then elapsed
portion of such Collection Period with respect to the Financed
Federal Loans;
(3) all proceeds of the Financed Student Loans which were liquidated
("Liquidated Student Loans") during the then elapsed portion of
such Collection Period in accordance with the Master Servicer's
(or the Sub-Servicers') respective customary servicing
procedures, net of expenses incurred by the Master Servicer (or
the Sub-Servicers) in connection with such liquidation and any
amounts required by law to be remitted to the borrower on such
Liquidated Student Loans (and not including any Guarantee
Payments received with respect thereto) ("Liquidation Proceeds"),
and all Recoveries in respect of Liquidated Student Loans which
were written off in prior Collection Periods or prior months of
such Collection Period;
(4) the aggregate Purchase Amounts received for those Financed
Student Loans repurchased by the Seller or purchased by the
Master Servicer under an obligation which arose during the
elapsed portion of such Collection Period;
(5) the aggregate amounts, if any, received from the Seller or the
Master Servicer (or a Sub-Servicer), as the case may be, as
reimbursement of non-guaranteed interest amounts, or lost
Interest Subsidy Payments and Special Allowance Payments;
(6) amounts deposited by the Seller into the Collection Account in
connection with the making of Consolidation Loans;
(7) with respect to the first Distribution Date, the Closing Date
Deposit;
(8) Investment Earnings for such Distribution Date;
(9) amounts withdrawn from the Reserve Account in excess of the
Specified Reserve Account Balance and deposited into the
Collection Account;
(10) amounts withdrawn from the Escrow Account and deposited into the
Collection Account;
(11) with respect to the Distribution Date on or immediately after the
end of the Funding Period, the amount transferred from the
Pre-Funding Account to the Collection Account; and
(12) any Trust Swap Receipt Amount received from the Swap Counterparty
with respect to the related Interest Period and any termination
payment made by the Swap Counterparty to the Trust;
Available Funds will exclude all payments and proceeds (including
Liquidation Proceeds) of any Financed Student Loans, the Purchase Amounts of
which has been included in Available Funds for a prior Distribution Date. If on
any Distribution Date there would not be sufficient funds, after application of
Available Funds plus amounts available from the Reserve Account and the
Pre-
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Funding Account to pay any of the items specified in clauses (1) through (4),
respectively, under "--Distributions from the Collection Account" below 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, such items specified in
clauses (1) through (4) respectively.
In addition, if there is any Noteholders' Interest Index Carryover with
respect to any Interest Period, the Cap Provider will be obligated under the Cap
Agreement to pay to the Indenture Trustee an amount equal to such Noteholders'
Interest Index Carryover for distribution to the applicable Notes on the related
Distribution Date.
Distributions from the Collection Account. On each Monthly Servicing
Payment Date that is not a Distribution Date, the Administrator will instruct
the Indenture Trustee to pay to (a) the Seller, any amounts on deposit in the
Collection Account which consist of Guarantee Payments made by TERI in excess of
the Maximum TERI Payments Amount and (b) the Master Servicer, the Master
Servicing Fee due with respect to the period from and including the preceding
Monthly Servicing Payment Date from amounts on deposit in the Collection
Account.
On each Distribution Date, the Administrator will instruct the
Indenture Trustee to make the following deposits and distributions, in the
amounts and in the order of priority specified below, to the extent of Available
Funds for the related Collection Period:
(1) to the Seller, any amounts on deposit in the Collection Account
which consist of Guarantee Payments made by TERI in excess of the
Maximum TERI Payments Amount;
(2) to the Master Servicer, the Master Servicing Fee due on such
Distribution Date and all prior unpaid Master Servicing Fees;
(3) to the Administrator, the Administration Fee and all unpaid
Administration Fees from prior Collection Periods;
(4) to the Securities Insurer, the amount of the quarterly insurance
premiums required under the Securities Guaranty Insurance Policy;
(5) pro rata (x) to the holders of the Class A Notes, the
Noteholders' Interest Distribution Amount for the Class A Notes,
and (y) to the Swap Counterparty, the Trust Swap Payment Amount,
if any, for such Distribution Date plus in certain circumstances
when the Trust is the defaulting party under the Interest Rate
Swap, the termination payment due the Swap Counterparty;
(6) to the Securities Insurer, provided that a Securities Insurer
Default has not occurred, reimbursement for all amounts owed
pursuant to draws with respect to any payments of interest under
any of the Securities Guaranty Insurance Policy, plus interest
thereon;
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(7) to the Reserve Account, an amount, up to the amount, if any,
necessary to reinstate the balance of the Reserve Account to the
Specified Reserve Account Balance;
(8) sequentially in the following order, first, to the holders of the
Class A-1 Notes, the applicable Noteholders' Principal
Distribution Amount, until their outstanding principal balance
has been reduced to zero, second, to the Securities Insurer,
provided that a Securities Insurer Default has not occurred,
reimbursement for all amounts owed pursuant to draws with respect
to any payments of principal under the Securities Guaranty
Insurance Policy made to the holders of the Class A-1 Notes, plus
interest thereon, third, to the holders of the Class A-2 Notes,
the applicable Noteholders' Principal Distribution Amount, until
their outstanding principal balance has been reduced to zero, and
fourth, to the Securities Insurer, provided that a Securities
Insurer Default has not occurred, reimbursement for all amounts
owed pursuant to draws with respect to any payments of principal
under the Securities Guaranty Insurance Policy made to the
holders of the Class A-2 Notes, plus interest thereon;
(9) to the Securities Insurer, an amount equal to all unreimbursed
Insured Payments made on prior Distribution Dates, together with
accrued interest thereon; as provided, not previously reimbursed
above, and all other amounts owed to the Securities Insurer under
the related insurance agreement.
(10) to the holders of the Class A Notes on a pro rata basis, based on
the amount of the Noteholders' Interest Index Carryover owing on
each such Class of Notes, the aggregate unpaid amount of the
Noteholders' Interest Index Carryover, if any, but only to the
extent not paid by the Cap Provider under the Cap Agreement;
(11) to the Swap Counterparty, all other amounts due and owing to the
Swap Counterparty not reimbursed pursuant to clause (5) above;
(12) to the Cap Provider, an amount sufficient to reimburse the Cap
Provider for all previous payments under the Cap Agreement and
any other amounts due to the Cap Provider under the Cap
Agreement; and
(13) to the Certificateholders, any remaining amounts after
application of clauses (1) through (12).
Upon any distribution to the Certificateholder of any amounts included
as Available Funds, the Noteholders will not have any rights in, or claims to,
such amounts.
For purposes hereof, the following terms have the following meanings:
"Maximum TERI Payments Amount" means 19% of the Adjusted Initial
Pool Balance.
"Monthly Servicing Payment Date" means the 25th day of each month
(or if such day is not a Business Day, the next succeeding Business
Day).
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The "Net Trust Swap Payment Carryover Shortfall" means, with
respect to any Distribution Date with respect to which there shall be
an amount owed by the Trust to the Swap Counterparty under the
Interest Rate Swap, the excess of (i) the Trust Swap Payment Amount on
the preceding Distribution Date over (ii) the amount actually paid to
the Swap Counterparty on such preceding Distribution Date, plus
interest on such excess from such preceding Distribution Date to the
current Distribution Date in respect of the Trust Swap Payment Amount
at the rate of Three-Month LIBOR for the related Interest Period.
The "Net Trust Swap Receipt Carryover Shortfall" means, with
respect to any Distribution Date with respect to which there shall be
an amount owed by the Swap Counterparty to the Trust under the
Interest Rate Swap, the excess of (i) the Trust Swap Receipt Amount on
the preceding Distribution Date over (ii) the amount actually paid by
the Swap Counterparty to the Trust on such preceding Distribution
Date, plus interest on such excess from such preceding Distribution
Date to the current Distribution Date at the rate of Three-Month LIBOR
for the related Interest Period.
The "Trust Swap Payment Amount" means, with respect to any
Distribution Date, the sum of (i) the Net Trust Swap Payment for such
Distribution Date and (ii) the Net Trust Swap Payment Carryover
Shortfall for such Distribution Date.
The "Trust Swap Receipt Amount" means, with respect to any
Distribution Date, the sum of (i) the Net Trust Swap Receipt for such
Distribution Date and (ii) the Net Trust Swap Receipt Carryover
Shortfall for such Distribution Date.
"Noteholders' Distribution Amount" means, with respect to any
Distribution Date, the sum of the Noteholders' Interest Distribution
Amount and the Noteholders' Principal Distribution Amount for such
Distribution Date.
"Noteholders' Interest Carryover Shortfall" means, with respect
to any Distribution Date and any Class of Notes, the excess of (x) the
sum of the Noteholders' Interest Distribution Amount for such Class of
Notes on the preceding Distribution Date over (y) the amount of
interest actually distributed to the holders of such Class of Notes on
such preceding Distribution Date, plus interest on the amount of such
excess interest due to the holders of such Class of Notes, to the
extent permitted by law, at the weighted average of the applicable
Note Interest Rates, in the case of the Class A Notes from such
preceding Distribution Date to the current Distribution Date.
"Noteholders' Interest Distribution Amount" means, with respect
to any Distribution Date and any Class of Notes, the sum of (a) the
aggregate amount of interest accrued at the respective Note Interest
Rate for the related Interest Period on the outstanding principal
balance of such Class of the Notes on the immediately preceding
Distribution Date after giving effect to all principal distributions
to such Noteholders on such date (or, in the case of the first
Distribution Date, on the Closing Date) and (b) the Noteholders'
Interest Carryover Shortfall for such Class and such Distribution
Date; provided, that the
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Noteholders' Interest Distribution Amount will not include any
Noteholders' Interest Index Carryover for such Class.
"Noteholders' Principal Distribution Amount" means, with respect
to any Distribution Date, the Principal Distribution Amount for such
Distribution Date; provided, however, that the Noteholders' Principal
Distribution Amount will not exceed the outstanding principal balance
of the Notes. In addition, (a) on the Final Maturity Date for each
Class of Notes, the principal required to be distributed to the Class
of Notes will include the amount required to reduce the outstanding
principal balance of such Class of Notes to zero, and (b) on the
related Distribution Date following a sale of the Financed Student
Loans in the manner described under "--Termination" below, the
principal required to be distributed to the holders of Class A-2 Notes
will include the amount required to reduce the outstanding principal
balance of such Class A-2 Notes to zero.
"Pool Balance" means, at any time, the aggregate principal
balance of the Financed Student Loans at the end of the preceding
Collection Period (including accrued interest thereon for such
Collection Period to the extent such interest will be capitalized upon
commencement of repayment), after giving effect to the following
without duplication:
- all payments received by the Trust related to the Financed
Student Loans during such Collection Period from or on behalf of
borrowers, Guarantors (except with respect to any guarantee
payments made by TERI in excess of the Maximum TERI Payments
Amount) and, with respect to certain payments on certain Financed
Federal Loans, the Department (collectively, "Obligors"),
- all Purchase Amounts received by the Trust related to the
Financed Student Loans for such Collection Period from the
Seller, the Master Servicer or the Sub-Servicers,
- all Additional Fundings made from the Escrow Account and the
Pre-Funding Account with respect to such Collection Period, and
- all losses realized on Financed Student Loans liquidated during
such Collection Period.
"Principal Distribution Amount" means, with respect to any
Distribution Date, the amount by which the sum of the outstanding
principal balance of the Notes exceeds the Specified Collateral
Balance for such Distribution Date.
"Specified Collateral Balance" means, with respect to any
Distribution Date, the sum of (a) the Pool Balance as of the last day
of the related Collection Period plus (b) the Pre-Funded Amount as of
the last day of the related Collection Period for such Distribution
Date. In the event that (1) the Financed Student Loans are not sold
pursuant to the auction process described under "--Termination" below,
with respect to any Distribution Date occurring on or after the August
2010 Distribution Date, or (2) a Trigger Event has occurred and is
continuing, the Specified Collateral Balance will be zero.
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A "Trigger Event" shall occur, on any Distribution Date, when:
(1) a Non-Guaranteed Private Undergraduate Loan Trigger Event has
occurred, or (2) a Private Graduate Loan Trigger Event has occurred;
provided, however, that if the Securities Insurer and all three
Ratings Agencies consent in writing, no Trigger Event shall have
occurred with respect to such Distribution Date.
A " Non-Guaranteed Private Undergraduate Loan Trigger Event"
shall have occurred, on any Distribution Date, when cumulative
Realized Losses net of subsequent Recoveries with respect to the
Non-Guaranteed Undergraduate Private Loans exceeds 15% of the Initial
Financed Student Loan Pool Balance with respect to all Non-Guaranteed
Undergraduate Private Loans.
"Non-Guaranteed Undergraduate Private Loans" are Non-Guaranteed
Private Loans that have been made to undergraduate students.
"Initial Financed Student Loan Pool Balance" means at any time,
the Pool Balance of the Financed Student Loans, or specified subset
thereof, as of the related Cutoff Date (in the case of the Initial
Financed Student Loans, or specified subset thereof) or the related
Subsequent Cutoff Date (with respect to Additional Student Loans or
specified subset thereof).
"Recoveries" means, with respect to any Liquidated Student Loan,
moneys collected in respect thereof, from whatever source, during any
Collection Period following the Collection Period in which such
Financed Student Loan became a Liquidated Student Loan, net of the sum
of any amounts expended by the Master Servicer (or any Sub-Servicer
acting on its behalf) for the account of any related borrower on such
Financed Student Loan and any amounts required by law to be remitted
to such borrower on such Financed Student Loan.
A "Private Graduate Loan Trigger Event" shall have occurred, on
any Distribution Date, when: (1) a TERI Trigger Event, or (2) a
Non-Guaranteed Private Graduate Loan Trigger Event shall have
occurred.
A "TERI Trigger Event" shall have occurred when, on any
Distribution Date, the cumulative Realized Losses on any of the
Guaranteed Private Loans that are guaranteed by TERI exceeds 20% of
the Initial Financed Student Loan Pool Balance consisting of all
Guaranteed Private Loans that are guaranteed by TERI; provided,
however, that a TERI Trigger Event shall not have occurred if TERI is
continuing to pay claims with respect to all Guaranteed Private Loans
guaranteed by TERI.
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A "Non-Guaranteed Private Graduate Loan Trigger Event" shall have
occurred on any Distribution Date when, the cumulative Realized Losses
on the Non-Guaranteed Graduate Private Loans exceeds 20% of the
Initial Financed Student Loan Pool Balance consisting of all
Non-Guaranteed Graduate Private Loans.
"Non-Guaranteed Graduate Private Loans" are Non-Guaranteed
Private Loans that have been made to graduate students.
CREDIT ENHANCEMENT
Excess Interest. Excess interest is created when interest collections
on the Financed Student Loans received during a Collection Period (including
Interest Subsidy Payments and Special Allowance Payments), Investment Earnings
and Trust Swap Recipients exceeds the interest on the Notes at the related Note
Rate, fees due under the Program, the Master Servicing Fee, the Administration
Fee, the quarterly premium payable to the Security Insurer and any Trust Swap
Payment Amounts payable to the Swap Counterparty in respect of the related
Distribution Date. Excess interest is intended to provide "first loss"
protection for your Notes. Excess interest will first be deposited in the
Reserve Account until the Specified Reserve Account Balance is met. Excess
interest to the extent available after any required deposits to the Reserve
Account will be applied on each Distribution Date to cover realized losses on
the Financed Student Loans incurred during the related Collection Period. In
addition, prior to the Parity Date, excess interest will be applied as an
accelerated payment of principal on the Notes in sequential order until the
principal balance of the Financed Student Loans equals the outstanding principal
balance of the Notes. In the event of a Trigger Event or a failed auction
following the August 2010 Distribution Date, all excess interest will be applied
as an accelerated payment of principal on each Class of Notes in sequential
order until the principal balance of the Notes has been reduced to zero. There
can be no assurance as to the rate, timing or amount, if any, of excess
interest. The application of excess interest to the payment of principal on your
Notes will affect the weighted average life and yield on your investment. To the
extent excess interest is not sufficient to cover realized losses or to achieve
the Parity Date, you will rely solely on amounts in the Reserve Account,
payments under the Securities Guaranty Insurance Policy and other collections on
the Financed Student Loan for payments on your Notes. Excess interest not
applied to make required distributions on any Distribution Date will be paid to
the Certificateholders and will not be available on subsequent Distribution
Dates to make payments on the Notes.
Reserve Account. Pursuant to the Sale and Servicing Agreement, the
Reserve Account will be created with an initial deposit by the Seller on the
Closing Date of cash or Eligible Investments in an amount equal to approximately
$9,625,000 (the "Reserve Account Initial Deposit"). On the Closing Date, the
Reserve Account Initial Deposit will equal the Specified Reserve Account Balance
as of the Closing Date. The amounts on deposit in the Reserve Account to the
extent used will be replenished up to the Specified Reserve Account Balance on
each Distribution Date by deposit therein of the amount, if any, necessary to
reinstate the balance of the Reserve Account to the Specified Reserve Account
Balance from the amount of Available Funds remaining after payment of the prior
amounts set forth under "--Distributions" above, all for such Distribution Date.
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"Specified Reserve Account Balance" means, with respect to any
Distribution Date will be equal to the greater of (x) 1.75% of the aggregate
outstanding principal amount of the Notes on such Distribution Date before
giving effect to any distribution on such Distribution Date, and (y) $2.0
million; provided, however, that in no event will such balance exceed the sum of
the outstanding principal amount of the Notes. The Reserve Account may be used
to fund Interest and Expense Draws and Realized Loss Draws.
Funds will be withdrawn from the Reserve Account to the extent that the
amount of available funds is insufficient to pay the Master Servicing Fee on any
Monthly Servicing Payment Date and any of the items specified in clauses (2)
through (5) under "--Distributions--Distributions from Collection Account" above
on any Distribution Date (such amount, the "Interest and Expense Draw"). Such
funds will be paid from the Reserve Account to the Master Servicer on a Monthly
Servicing Payment Date, and to the persons and in the order of priority
specified for distributions out of the Collection Account in such clauses (2)
through (5) on a Distribution Date. In addition, on the Final Maturity Dates 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 the Notes to zero. Amounts on deposit in the Reserve Account will not
be available to cover any reimbursement for Noteholders' Interest Index
Carryover.
In addition, if on any Distribution Date prior to the Parity Date to
the extent the amount by which the Pool Balance as of the last day of the second
preceding Collection Period (or in the case of the first Distribution Date, as
of the Cutoff Date) minus the Pool Balance as of the last day of the related
Collection Period exceeds the amount remaining to be distributed as Noteholders'
Principal Distribution Amount will be withdrawn from the Reserve Account and
deposited in the Collection Account and distributed by the Indenture Trustee as
a payment in respect of the Noteholders' Principal Distribution Amount (and
distributed among the Notes in the order of priority as set forth under "--
Distributions--Distributions from the Collection Account"). If on any
Distribution Date on or after the Parity Date, the amount available to be
distributed as Noteholders' Principal Distribution Amount, is less than the
Noteholders' Principal Distribution Amount for such Distribution Date, such
amount will be withdrawn from the Reserve Account and deposited in the
Collection Account and distributed as a payment in respect of the Noteholders'
Principal Distribution Amount (and distributed among the Notes in the order of
priority as set forth under "-- Distributions--Distributions from the Collection
Account"). Any amounts withdrawn from the Reserve Account and applied as a
payment of principal of the Notes is referred to herein as a "Realized Loss
Draw."
If the amount on deposit in the Reserve Account on any Distribution
Date (after giving effect to all deposits or withdrawals therefrom on such
Distribution Date) is greater than the Specified Reserve Account Balance for
such Distribution Date, subject to certain limitations, the Administrator will
instruct the Indenture Trustee to deposit the amount of the excess into the
Collection Account for distribution as Available Funds on such Distribution
Date. Upon any distribution to the Certificateholder of any amounts included as
Available Funds, the Noteholders will have any rights in, or claims to, such
amounts. Subject to the limitation described in the preceding sentence, amounts
held from time to time in the Reserve Account will continue to be held for the
benefit of the Trust.
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The Reserve Account is intended to enhance the likelihood of timely
receipt by the holders of Notes 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.
Securities Guaranty Insurance Policy. On the Closing Date, the
Securities Insurer will issue the Securities Guaranty Insurance Policy, which
will be available under the terms described herein. The Securities Guaranty
Insurance Policy will unconditionally and irrevocably guarantee the timely
payment of the Noteholders' Interest Distribution Amount on each Distribution
Date for the Class A-1 and Class A-2 Notes and the aggregate unpaid principal
balance of such Classes of Notes on the Class A-1 Notes Final Maturity Date and
the Class A-2 Notes Final Maturity Date, respectively. See "The Securities
Guaranty Insurance Policy and the Securities Insurer."
INTEREST RATE SWAP
Payments Under the Interest Rate Swap. On the Closing Date, the Trust
will enter into the Interest Rate Swap with Key Bank USA, National Association,
as the swap counterparty (the "Swap Counterparty"). The Interest Rate Swap will
be documented according to a 1992 ISDA Master Agreement (Multicurrency-Cross
Border) (the "ISDA Master Swap Agreement"), modified to reflect the terms of the
Notes, the Certificates, the Indenture, the Sale and Servicing Agreement and the
Interest Rate Swap, and in a form acceptable to the Securities Insurer. The
Interest Rate Swap will terminate on the date that is the earliest to occur of
the date on which the Notes have been paid in full, the date on which all of the
Prime Rate Loans have been repaid in full, the occurrence and continuation of an
Event of Default resulting in a liquidation of the Financed Student Loans, and
the date on which the Interest Rate Swap is terminated in accordance with its
terms pursuant to an early termination; provided, however, that in the event of
any default by the Swap Counterparty under the Interest Rate Swap, the Trust may
only terminate the Interest Rate Swap at the direction of the Securities
Insurer.
In accordance with the terms of the Interest Rate Swap, on each
Distribution Date, the Trust will owe the Swap Counterparty the sum of the
following amounts for each of the monthly periods in the related Collection
Period, beginning with the monthly period commencing July 1, 2000 (each, a "Net
Trust Swap Payment"):
(I) the product of:
(1) the Prime Rate as determined as of the first day of the
related monthly period;
(2) the aggregate principal balance of Prime Rate Loans as
determined as of the first day of the related monthly period; and
(3) a fraction, the numerator of which is the actual number of
days in the related monthly period and the denominator of which is
360.
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And, in accordance with the terms of the Interest Rate Swap, on each
Distribution Date, the Swap Counterparty will owe the Trust an amount equal to
the sum of the following amounts for each of the monthly periods in the related
Collection Period beginning with the monthly period commencing July 1, 2000
(each, a "Net Trust Swap Receipt"):
(II) the product of:
(1) Three-Month LIBOR plus (calculated in the same manner and
on such dates as such index is calculated for the LIBOR Indexed
Securities for the related interest accrual period) plus 2.60%;
(2) the principal balance of the Prime Rate Loans as
determined as of the first of the related monthly period; and
(3) a fraction, the numerator of which is the actual number of
days in the related monthly period and the denominator of which is 360.
Payments will be made on a net basis between the Trust and the Swap
Counterparty, in an amount equal to the excess of (I) over (II) above for the
related Collection Period, in the case of a Net Trust Swap Payment, or the
excess of (II) over (I) above for the related Collection Period, in the case of
a Net Trust Swap Receipt.
In consideration for entering into the Interest Rate Swap, the Swap
Counterparty will be entitled to an upfront fee on the Closing Date and to all
Trust Swap Payment Amounts, in accordance with the payment priorities set forth
above under "--Distributions--Distributions from the Collection Account."
Conditions Precedent. The respective obligations of the Swap
Counterparty and the Trust to pay certain amounts due under the Swap Agreement
will be subject to the following conditions precedent: (i) no Swap Default
(as defined below) or event that with the giving of notice or lapse of time or
both would become a Swap Default shall have occurred and be continuing and
(ii) no Termination Event (as defined below) has occurred or been
effectively designated; provided, however, that the Swap Counterparty's
obligation to pay such amounts will not be subject to such conditions unless
principal of the Notes has been accelerated following an Event of Default under
the Indenture.
Defaults Under the Interest Rate Swap. "Events of Default" under the
Interest Rate Swap are limited to: (i) failure of the Swap Counterparty or the
Trust to pay any amount when due under the Interest Rate Swap after giving
effect to the applicable grace period; provided, however, that in the case of
the Trust, the Trust has Available Funds remaining to pay such obligations on
any Distribution Date after making all other required distributions with more
senior payment priorities in accordance with the priorities set forth above
under "--Distributions--Distributions from the Collection Account;" (ii) the
occurrence of certain events of insolvency or bankruptcy of the Trust or the
Swap Counterparty, (iii) an acceleration of the principal of the Notes following
an Event of Default under the Indenture, and (iv) the following other standard
events of default under the ISDA Master Swap Agreement: "Breach of Agreement"
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(not applicable to the Trust), "Credit Support Default" (not applicable to the
Trust), "Misrepresentation" (not applicable to the Trust), and "Merger Without
Assumption" (not applicable to the Trust), as described in Sections 5(a) (ii),
5(a) (iii), 5(a) (iv) and 5(a) (viii) of the ISDA Master Swap Agreement.
Termination Events. A "Termination Event" under the Interest Rate Swap
consists of the following event under the ISDA Master Swap Agreement:
"Illegality" (which generally relates to changes in law causing it to become
unlawful for a party to perform its obligations under the Interest Rate Swap),
and "Tax Event" (which generally relates to either party to the Interest Rate
Swap receiving a payment under the Interest Rate Swap from which an amount has
been deducted or withheld for or on account of taxes), as described in Sections
5(b) (i) and 5(b) (ii) of the ISDA Master Swap Agreement.
Early Termination of the Interest Rate Swap. Upon the occurrence of any
Event of Default under the Interest Rate Swap, the non-defaulting party will
have the right to designate an Early Termination Date (as defined in the
Interest Rate Swap) upon the occurrence of such Event of Default. With respect
to Termination Events, an Early Termination Date may be designated by one of the
parties (as specified in the Interest Rate Swap) and will occur only upon notice
and, in certain circumstances, after any Affected Party (as defined in the
Interest Rate Swap) has used reasonable efforts to transfer its rights and
obligations under the Interest Rate Swap to a related entity within a limited
period after notice has been given of such Termination Event, all as set forth
in the Interest Rate Swap. The occurrence of an Early Termination Date under the
Interest Rate Swap will constitute a "Swap Early Termination."
Upon any Swap Early Termination of the Interest Rate Swap, the Trust or
the Swap Counterparty may be liable to make a termination payment to the other
(regardless, if applicable, of which of the parties has caused such
termination). The amount of such termination payment will be based on the value
of the Interest Rate Swap computed in accordance with the procedures set forth
in the Interest Rate Swap. Any such payment could be substantial. In the event
that the Trust is required to make such a termination payment and the Trust is
the defaulting party (other than as a result of a failure to pay), such payment
will be payable in the same order of priority as any Trust Swap Payment Amount
payable to the Swap Counterparty (which is payable pari passu with the
Noteholders' Interest Distribution Amount for the Notes); provided, however,
that, in the event that a termination payment is owed to the Swap Counterparty
following an Event of Default resulting from a default of the Swap Counterparty
or a Termination Event, such termination payment will be subordinate to the
right of the Noteholders to receive full payment of principal of and interest on
the Notes. Accordingly, termination payments, if required to be made by the
Trust, could result in shortfalls to Noteholders if the Securities Insurer does
not make required payments on the Securities Guaranty Insurance Policy.
If, following an Early Termination Date, a termination payment is owed
by the Trust to the Swap Counterparty and the Trust receives a payment (an
"Assumption Payment") from a successor swap counterparty to assume the position
of the Swap Counterparty, the portion of the Assumption Payment that does not
exceed the amount of the termination payment owed by the Trust to the Swap
Counterparty will be paid by the Trust to the Swap Counterparty and
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will not be available to make distributions to Noteholders. Following such
payment, the amount of the termination payment owed by the Trust to the Swap
Counterparty will be reduced by the amount of such payment.
INTEREST RATE CAP AGREEMENT
Payments Under the Cap Agreement. On the Closing Date, the Trust will
enter into the Cap Agreement with Key Bank USA, as the Cap Provider. The Cap
Agreement will be documented according to a 1992 ISDA Master Agreement
(Multicurrency-Cross Border) (the " ISDA Master Cap Agreement"), modified to
reflect the terms of the Notes, the Certificates, the Indenture, the Sale and
Servicing Agreement and the Cap Agreement. The Cap Agreement will terminate on
the date that is the earliest to occur of the Distribution Date in August 2010,
the date on which the Notes have been paid in full, the occurrence and
continuation of an Event of Default resulting in a liquidation of the Financed
Student Loans and the date on which the Cap Agreement is terminated in
accordance with its terms pursuant to an early termination.
In accordance with the terms of the Cap Agreement, the Cap Provider
will pay to the Trust on each Distribution Date, any Noteholders' Interest Index
Carryover created on such Distribution Date. In consideration for entering into
the Cap Agreement, the Cap Provider will be entitled to an upfront fee on the
Closing Date and to reimbursement for all sums paid to Noteholders as
Noteholders' Interest Index Carryover but on a subordinated basis and only to
the extent funds are available therefor on subsequent Distribution Dates after
making all prior distributions on such Distribution Date in accordance with the
payment priorities set forth above under "--Distributions--Distributions from
the Collection Account."
Defaults Under the Cap Agreement. "Events of Default" under the Cap
Agreement are limited to: (i) failure of the Cap Provider or the Trust to pay
any amount when due under the Cap Agreement; provided, however, that in the case
of the Trust, the Trust has Available Funds remaining to pay such obligations on
any Distribution Date after making all other required distributions with more
senior payment priorities in accordance with the priorities set forth above
under "--Distributions--Distributions from the Collection Account;" and (ii)
certain events of insolvency or bankruptcy of the Cap Provider. THE SECURITIES
GUARANTY INSURANCE POLICY DOES NOT PROVIDE ANY INSURANCE COVERAGE IN THE EVENT
OF A DEFAULT BY THE CAP PROVIDER.
Termination Event. A "Termination Event" under the Cap Agreement
consists of the following event under the ISDA Master Cap Agreement:
"Illegality," which generally relates to changes in law causing it to become
unlawful for a party to perform its obligations under the Cap Agreement.
Payments Upon Termination. In the event the Cap Agreement is terminated
due to a Termination Event or an Event of Default, the Cap Provider shall pay to
the Trust as liquidated damages an amount equal to the fee it received on the
Closing Date. The amount of liquidated damages is not expected to be sufficient
to find a replacement interest rate cap and there is no obligation of the Trust,
the Seller, the Indenture Trustee, the Administrator, the Cap Provider or any
other person to find a replacement interest rate cap provider if the Cap
Agreement is terminated. Prospective Noteholders should note that the amount of
such fee may be insufficient to offset any
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Noteholders' Interest Index Carryover on future Distribution Dates. In the event
that the Cap Agreement is terminated and the Cap Provider is owed any sums for
amounts previously paid to the Trust under the Cap Agreement, the Cap Provider
shall be entitled to reimbursement from the Trust for all such sums, but only to
the extent Available Funds are available therefor on subsequent Distribution
Dates after making all other required distributions with more senior priorities
in accordance with the payment priorities set forth above under
"--Distributions--Distributions from the Collection Account."
THE SWAP COUNTERPARTY AND CAP PROVIDER
KBUSA is a national banking association and a wholly owned subsidiary
of KeyCorp. KBUSA is engaged in consumer loan activities nationally, including,
automobile lending and leasing, home equity financing of both first- and
second-home mortgages, education lending, and marine and recreational vehicle
financing. As of March 31, 2000, KBUSA had total assets of approximately $5.0
billion, total liabilities of approximately $3.9 billion and approximately $1.0
billion in stockholder's equity. KBUSA's business is subject to examination and
regulation by federal banking authorities. KBUSA's primary federal bank
regulatory authority is the Office of the Comptroller of the Currency. The
principal executive offices of KBUSA are located at Key Tower, 127 Public
Square, Cleveland, Ohio 44114 and its telephone number is (216) 689-6300.
Additional information regarding KBUSA, in any of its capacities as described
herein, including call reports, are available upon written request from the
Administrator at the above address.
KeyCorp is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files, reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities of
the Commission, at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's regional offices at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such material can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Such material is also available on
the Commission's internet site on the world wide web located at
http://www.sec.gov. In addition, such reports, proxy statements and other
information concerning KeyCorp can be inspected at the offices of the New York
Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
As of June 1, 2000, KBUSA has long term debt ratings of A+, A1 and A by
Fitch, Inc. ("Fitch"), Moody's Investors Service, Inc. ("Moody's") and Standard
and Poor's, a division of The McGraw-Hill Companies Inc. ("S&P"), respectively.
The obligations of the Swap Counterparty are not guaranteed by the Securities
Insurer. If the rating of the Swap Counterparty (or any successor credit support
provider) is withdrawn, suspended or reduced below A3 or its equivalent by any
Rating Agency (such withdrawal, suspension or reduction, a "Rating Agency
Downgrade"), the Swap Counterparty is required, no later than the 30th day
following such Rating Agency Downgrade, at the Swap Counterparty's expense,
either to (i)
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obtain a substitute Swap Counterparty, acceptable to the Securities Insurer,
that has a long-term debt rating of at least A3 or its equivalent by each such
Rating Agency or (ii) enter into arrangements reasonably satisfactory to the
Indenture Trustee and the Securities Insurer, including collateral arrangements,
guarantees or letters of credit, which arrangements in the view of such Rating
Agency will result in the total negation of the effect or impact of such Rating
Agency Downgrade on the Noteholders and the Securities Insurer. The Swap
Counterparty will have the right to consent to any amendments, supplements or
modifications to each of the Transfer and Servicing Agreements.
THE OBLIGATIONS OF KBUSA, IN ITS CAPACITIES AS SWAP COUNTERPARTY AND
CAP PROVIDER, ARE NOT GUARANTEED BY KEYCORP OR KEYBANK NATIONAL ASSOCIATION.
THE SECURITIES INSURER
Pursuant to the Transfer and Servicing Agreements, the Securities
Insurer will be deemed to be treated as a 100% holder of the Class A Notes for
all purposes until the occurrence of a Securities Insurer Default. As a result,
the Securities Insurer will have the right to exercise all of the rights of the
Noteholders including the right to declare an Event of Default under the
Indenture, accelerate the Notes, direct the Indenture Trustee to liquidate the
collateral, direct the Trust to terminate the Interest Rate Swap in the event of
a Swap Counterparty default, and remove the Master Servicer following a servicer
termination event, and will have the right to consent to the appointment of any
successor master servicer or administrator and to consent to all amendments and
actions that require Noteholder consent, on behalf of the Noteholders, except
for certain amendments and consents that could affect the amount or timing of
distributions required to be made.
In the event of a downgrade in the ratings of the Securities Insurer
below A3 and A- by both Moody's and S&P, respectively, the Administrator may,
but is not required to, substitute a new guaranty insurance policy with another
insurer having a rating of AAA by each Rating Agency; provided that the
Securities Insurer is reimbursed for all amounts due and owing at the time of
such substitution or replacement.
"Securities Insurer Default" means (i) the failure and continuance of
the Securities Insurer to make a payment in accordance with the terms of the
Securities Guaranty Insurance Policy, or (ii) if an Insolvency Event (as defined
in the Sale and Servicing Agreement) with respect to the Securities Insurer
occurs.
STATEMENTS TO INDENTURE TRUSTEE AND TRUST
Prior to each Distribution Date, the Administrator (based on the
periodic statements and other information provided to it by the Master Servicer
or the Sub-Servicers) will provide to the Indenture Trustee and the Trust, as of
the close of business on the last day of the preceding Collection Period, a
statement which will include the following information with respect to such
Distribution Date or the preceding Collection Period as to the Notes and the
Certificates, to the extent applicable:
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(1) the amount of the distribution allocable to principal of each
Class of Securities;
(2) the amount of the distribution allocable to interest on each
Class of Securities, together with the interest rates
applicable with respect thereto (indicating whether such
interest rates are based on the Formula Rate or on the Student
Loan Rate and specifying what each such interest rate would
have been if it had been calculated using the alternate basis;
provided that no such calculation of the Student Loan Rate
will be required to be made unless the Investor Index for such
Interest Period is 100 basis points greater than the Investor
Index of the preceding Determination Date or, with respect to
Treasury Bill Indexed Securities only, the 52-week Treasury
Bill Rate is 100 basis points less than the 91-day Treasury
Bill Rate as of such Determination Date);
(3) the amount of the distribution, if any, allocable to any
Noteholders' Interest Index Carryover, together with the
outstanding amount, if any, of each thereof after giving
effect to any such distribution;
(4) the Pool Balance as of the close of business on the last day
of the preceding Collection Period, after giving effect to
payments allocated to principal reported as described in
clause (1) above;
(5) the aggregate outstanding principal balance of each Class of
Notes, and each Pool Factor as of such Distribution Date,
after giving effect to payments allocated to principal
reported under clause (1) above;
(6) the amount of the Master Servicing Fee paid to the Master
Servicer and the amount of the Administration Fee paid to the
Administrator with respect to such Collection Period, and the
amount, if any, of the Master Servicing Fee remaining unpaid
after giving effect to any such payments;
(7) the amount of the aggregate Realized Losses, if any, for such
Collection Period and the balance of Financed Student Loans
that are delinquent in each delinquency period as of the end
of such Collection Period;
(8) the balance of the Reserve Account on such Distribution Date,
after giving effect to changes therein on such Distribution
Date;
(9) the amount of any Interest and Expense Draw on such
Distribution Date and the amount of any Realized Loss Draw on
such Distribution Date;
(10) for Distribution Dates during the Funding Period, the
remaining Pre-Funded Amount on such Distribution Date, after
giving effect to changes therein during the related Collection
Period;
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(11) for the first Distribution Date, the amount, if any, of the
Subsequent Pool Pre-Funded Amount remaining in the Subsequent
Pool Pre-Funding Subaccount that has not been used to acquire
Subsequent Pool Student Loans and is being paid out to the
Noteholders and Certificateholders;
(12) for the first Distribution Date on or following the end of the
Funding Period, the amount of any remaining Pre-Funded Amount
that has not been used to make Additional Fundings and is
being paid out to the Noteholders;
(13) the aggregate amount of TERI's Guarantee Payments deposited
into the Collection Account (net of any amounts paid to the
Seller under clause (1) of "--Distributions from the
Collection Account" above) expressed as a percentage of the
Adjusted Initial Pool Balance;
(14) the amount of any payments made under the Cap Agreement on
such Distribution Date and the aggregate amount, if any, owing
to the Cap Provider for previous payments under the Cap
Agreement;
(15) the amount of any payments received or made by the Trust under
the Interest Rate Swap on such Distribution Date, and the
aggregate amount, if any, either owed to or owed by the Swap
Counterparty with respect to amounts not paid or received by
the Trust on previous Distribution Dates; and
(16) the amount of any draws on such Distribution Date made on each
of the Securities Guaranty Insurance Policy, the amount, if
any, paid to the Securities Insurer for Insured Payments on
such Distribution Date, and the aggregate amount, if any,
owing to the Securities Insurer for all unreimbursed Insured
Payments made to the Trust.
"Realized Losses" means, the excess of the principal balance
of the Liquidated Student Loans over the Liquidation Proceeds to the
extent allocable to principal.
"52-week Treasury Bill Rate" means, on any date of
determination, the bond equivalent rate of 52-week Treasury Bills
auctioned at the final auction held prior to the preceding June 1.
TERMINATION
The obligations of the Master Servicer, the Seller, the Administrator,
the Eligible Lender Trustee and the Indenture Trustee pursuant to the Transfer
and Servicing Agreements will terminate upon (a) the maturity or other
liquidation of the last Financed Student Loan and the disposition of any amount
received upon liquidation of any remaining Financed Student Loans, (b) the
payment to the holders of Notes of all amounts required to be paid to them
pursuant to the Transfer and Servicing Agreements, and (c) the payment of all
amounts due and owing to the Securities Insurer, the Swap Counterparty and the
Cap Provider. In order to avoid excessive administrative expense, the Master
Servicer 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
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Pool Balance is 5% or less than the Adjusted Initial Pool Balance, all remaining
Financed Student Loans at a price sufficient to retire the Notes (including the
repayment of any Noteholders' Interest Index Carryover) concurrently therewith
and the payment of all amounts due and owing to the Securities Insurer, the Swap
Counterparty and the Cap Provider. 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, the
Securities Insurer, the Swap Counterparty and Cap Provider therefrom, will be
conveyed and transferred to the Certificateholder.
Any Financed Student Loans remaining in the Trust as of the end of the
Collection Period immediately preceding the August 2010 Distribution Date will
be offered for sale by the Indenture Trustee. KeyCorp, its affiliates and
unrelated third parties may offer bids to purchase such Financed Student Loans
on such Distribution Date. The Administrator shall, subject to the satisfaction
of certain conditions set forth in and to assure compliance with the Sale and
Servicing Agreement, direct the Indenture Trustee to auction the Financed
Student Loans in the aggregate or in two separate pools. No assurance can be
given that the method selected by the Administrator will result in the highest
possible sale price for the Financed Student Loans or that one bid for all the
Financed Student Loans, or a combination bids for two pools comprising the
Financed Student Loans, will be equal to or in excess of the Minimum Purchase
Amount. If at least two bids are received either for the whole pool or any
separate pool of Financed Student Loans, the Indenture Trustee will solicit and
resolicit bids from all participating bidders until only one bid for each such
pool remains or the remaining bidders decline to resubmit bids. The Indenture
Trustee will accept the highest of such remaining bids (or the combination of
the highest bid for each pool if two pools of Financed Student Loans are being
sold separately), if any single bid (or the sum of the two highest bids) are
equal to or in excess of an amount (the "Minimum Purchase Amount") equal to the
greatest of
(1) the Auction Purchase Amount;
(2) the fair market value of such Financed Student Loans as of the
end of the Collection Period immediately preceding such
Distribution Date; and
(3) the sum of (a) the aggregate unpaid principal amount of the
Notes plus accrued and unpaid interest thereon payable on such
Distribution Date plus any Noteholders' Interest Index
Carryover, (b) the amounts due and owing to the Securities
Insurer, the Swap Counterparty (including any termination
payments) and Cap Provider.
If at least two bids are not received or the highest bid for all the
Financed Student Loans (or combination of the two highest bids for two separate
pools of Financed Student Loans) after the resolicitation process is completed
is not equal to or in excess of the Minimum Purchase Amount, the Indenture
Trustee will not consummate such sale. In addition to the foregoing, the
Indenture Trustee shall not accept any bid from a prospective purchaser, unless
such prospective purchaser agrees to pay all, if any, deconversion fees owed to
a Sub-Servicer if such purchaser's bid is accepted and it chooses to replace a
Sub-Servicer as the servicer of the Financed Student Loans it is purchasing. In
connection with the determination of the Minimum Purchase Amount, the Indenture
Trustee may consult and, at the direction of the Seller, shall consult, with a
financial advisor, including the Underwriters or the Administrator, to determine
if the fair market value of
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the Financed Student Loans has been offered. The net proceeds of any such sale
will be used to redeem any outstanding Notes 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 August 2010 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 August
2010 Distribution Date the Specified Collateral Balance shall be reduced to zero
and all Available Funds remaining after applying such amounts to pay the Master
Servicing Fee, the Administration Fee, fees due to the Securities Insurer, the
Noteholders' Interest Distribution Amount, will be paid as principal to the
holders of Notes until the outstanding principal balance of the Notes has been
reduced to zero. The Interest Rate Swap will terminate upon the consummation of
a successful auction and the Swap Counterparty may be owed a termination payment
which may be substantial. The likelihood of receiving a bid at least equal to
the Minimum Purchase Amount will be reduced to the extent a substantial
termination payment is owed to the Swap Counterparty or significant amounts are
owed to the Cap Provider or to the Securities Insurer.
"Auction Purchase Amount" with respect to the Financed Student Loans
means the aggregate unpaid principal balance owed by the applicable borrowers
thereon plus accrued interest thereon to the date of purchase less the amount on
deposit in the Reserve Account as for such date.
ADMINISTRATOR
The Seller, in its capacity as Administrator, will enter into the
Administration Agreement with the Trust and the Indenture Trustee, and the Sale
and Servicing Agreement with the Trust, the Seller, the Master Servicer and the
Eligible Lender Trustee. For a description of the Administrator's duties, see
"Description of the Transfer and Servicing Agreements - Administrator" in the
Prospectus.
As compensation for the performance of the Administrator's obligations
under the Administration Agreement and the Sale and Servicing Agreement and as
reimbursement for its expenses related thereto, the Administrator will be
entitled to an administration fee in an amount equal to $3,000 per quarter (the
"Administration Fee").
THE SECURITIES GUARANTY INSURANCE POLICY
AND THE SECURITIES INSURER
THE SECURITIES GUARANTY INSURANCE POLICY
The following information has been supplied by MBIA Insurance
Corporation (the "Securities Insurer") for inclusion in this Prospectus
Supplement. The Securities Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or any information or
disclosure contained in this Prospectus Supplement, or omitted herefrom, other
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than with respect to the accuracy of the information regarding the Note Guaranty
Insurance Policy (the "Securities Guaranty Insurance Policy") and the Securities
Insurer set forth under the heading "The Securities Guaranty Insurance Policy
and the Securities Insurer." Additionally, the Securities Insurer makes no
representation regarding the Notes or the advisability of investing in any Class
of Notes.
The Securities Insurer, in consideration of the payment of a premium
and subject to the terms of the Securities Guaranty Insurance Policy, will
unconditionally and irrevocably guarantee to any Noteholder, as applicable, that
an amount equal to each full and complete Insured Payment will be received from
the Securities Insurer by the Indenture Trustee or its successors, as trustee
for the Noteholders, on behalf of the Noteholders, for distribution by the
Indenture Trustee to each Noteholder of each Noteholder's proportionate share of
the applicable Insured Payment.
The Securities Insurer's obligations under the Securities Guaranty
Insurance Policy with respect to a particular Insured Payment will be discharged
to the extent funds equal to the applicable Insured Payment are received by the
Indenture Trustee whether or not those funds are properly applied by the
Indenture Trustee. Insured Payments shall be made only at the time set forth in
the Securities Guaranty Insurance Policy and no accelerated Insured Payments
will be made regardless of any acceleration of any Class of Notes, unless such
acceleration is at the sole option of the Securities Insurer.
Notwithstanding the foregoing paragraph, the Securities Guaranty
Insurance Policy does not cover shortfalls, if any, attributable to the
liability of the Trust, or the Indenture Trustee, for withholding taxes, if any
(including interest and penalties in respect of any liability for withholding
taxes). The Securities Guaranty Insurance Policy does not cover, and Insured
Payments shall not include, any Noteholders' Interest Index Carryover.
The Securities Insurer will pay any Insured Payment that is a
Preference Amount on the business day following receipt on a business day by the
Securities Insurer's fiscal agent of:
- a certified copy of the order requiring the return of a preference
payment,
- an opinion of counsel satisfactory to the Securities Insurer that
the order is final and not subject to appeal,
- an assignment in a form reasonably required by the Securities
Insurer, irrevocably assigning to the Securities Insurer all
rights and claims of the Noteholders, relating to or arising under
the Notes, against the debtor which made the preference payment or
otherwise with respect to the preference payment, and
- appropriate instruments to effect the appointment of the
Securities Insurer as agent for the related Noteholders, in any
legal proceeding related to the preference payment, the
instruments being in a form satisfactory to the Securities
Insurer;
provided that if the documents received after 12:00 p.m., New York time, on that
business day, they will be deemed to be received on the following business day.
Payments by the Securities
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Insurer will be disbursed to the receiver or trustee in bankruptcy named in the
final order of the court exercising jurisdiction on behalf of the related
Noteholders, and not to any Noteholder, directly unless the related Noteholder
returned principal or interest paid on the Notes the receiver or trustee in
bankruptcy, in which case that payment will be disbursed to the related
Noteholder.
The Securities Insurer will pay any other amount payable under each of
the Securities Guaranty Insurance Policy no later than 12:00 p.m. New York time,
on the later of the Distribution Date on which the related Deficiency Amount is
due or the third business day following receipt in New York, New York on a
business day by State Street Bank and Trust Company, N.A., as fiscal agent for
the Securities Insurer, or any successor fiscal agent appointed by the
Securities Insurer of a notice from the Indenture Trustee, specifying the
Insured Payment which is due and owing on the applicable Distribution Date;
provided that if the notice is received after 12:00 p.m., New York time, on that
business day, it will be deemed to be received on the following business day. If
any Notice received by the Securities Insurer's fiscal agent is not in proper
form or is otherwise insufficient for the purpose of making a claim under the
Securities Guaranty Insurance Policy, it will be deemed not to have been
received by the Securities Insurer's fiscal agent for purposes of this
paragraph, and the Securities Insurer or the fiscal agent, as the case may be,
will promptly so advise the Indenture Trustee, and the Indenture Trustee may
submit an amended notice.
Insured Payments due under the Securities Guaranty Insurance Policy
unless otherwise stated therein will be disbursed by the Securities Insurer's
fiscal agent to the Indenture Trustee, on behalf of the Noteholders, by wire
transfer of immediately available funds in the amount of the Insured Payment
less, in respect of Insured Payments related to Preference Amounts, any amounts
held by the Indenture Trustee for the payment of the Insured Payment and legally
available therefor.
The fiscal agent is the agent of the Securities Insurer only and the
fiscal agent will in no event be liable to Noteholders for any acts of the
fiscal agent or any failure of the Securities Insurer to deposit, or cause to be
deposited, sufficient funds to make payments due under the Securities Guaranty
Insurance Policy.
Subject to the terms of the Indenture, the Securities Insurer will be
subrogated to the rights of each Noteholder to receive payments under the Notes
to the extent of any payment by the Securities Insurer under the Securities
Guaranty Insurance Policy.
As used in the Securities Guaranty Insurance Policy, the following
terms shall have the following meanings:
"Deficiency Amount" means, (a) as of any Distribution Date, the excess,
if any, of (1) the Noteholders' Interest Distribution Amount on such
Distribution Date, over (2) Available Funds for such Distribution Date after
giving effect to the payment of the Servicing Fee, the Administration Fee and
all amounts due to the Securities Insurer for such Distribution Date, plus the
application of any amounts available on such Distribution Date to cover such
payments from amounts on deposit in the Reserve Account and the Pre-Funding
Account, and (b) on either the Class A-1 Notes Final Maturity Date or the Class
A-2 Notes Final Maturity Date, the unpaid
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principal balance of the Class A-1 Notes, in the case of the Class A-1 Notes
Final Maturity Date, or the unpaid principal balance of the Class A-2 Notes, in
the case of the Class A-2 Notes Final Maturity Date, in each case after giving
effect to any distributions on such date and the application of any amounts
available on such Distribution Date to cover such payments from amounts on
deposit in the Reserve Account.
"Insured Payment" means (a) as of any Distribution Date, any Deficiency
Amount and (b) any Preference Amount.
"Preference Amount" means any amount previously distributed to any
Noteholder on the related Class of Notes that is recoverable and sought to be
recovered as a voidable preference by a trustee in bankruptcy pursuant to the
United States Bankruptcy Code (11 U.S.C.), as amended from time to time in
accordance with a final nonappealable order of a court having competent
jurisdiction.
Capitalized terms used in the Securities Guaranty Insurance Policy and
not otherwise defined in the Securities Guaranty Insurance Policy shall have the
meanings set forth in the Indenture, as of the date of execution of the
Securities Guaranty Insurance Policy, without giving effect to any subsequent
amendment to or modification of the Indenture, unless such amendment or
modification has been approved in writing by the Securities Insurer.
The Securities Guaranty Insurance Policy is not cancelable for any
reason. The premium on each Securities Guaranty Insurance Policy is not
refundable for any reason, including payment, or provision being made for
payment, prior to maturity of the related Notes or Certificates.
THE SECURITIES GUARANTY INSURANCE POLICY IS BEING ISSUED UNDER AND
PURSUANT TO, AND WILL BE CONSTRUED UNDER, THE LAWS OF THE STATE OF NEW YORK,
WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF.
The insurance provided by the Securities Guaranty Insurance Policy is
not covered by the Property/Casualty Insurance Security Fund specified in
Article 76 of the New York Insurance Law.
A form of the Securities Guaranty Insurance Policy is attached to this
Prospectus Supplement as Appendix B.
THE SECURITIES INSURER
The Securities Insurer is the principal operating subsidiary of MBIA
Inc., a New York Stock Exchange listed company. MBIA Inc. is not obligated to
pay the debts of or claims against the Securities Insurer. The Securities
Insurer is domiciled in the State of New York and licensed to do business in and
is subject to regulation under the laws of all 50 states, the District of
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern
Mariana Islands, the Virgin Islands of the United States and the Territory of
Guam. The Securities Insurer has two European branches, one in the Republic of
France and the other in the Kingdom of
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<PAGE> 102
Spain. New York has laws prescribing minimum capital requirements, limiting
classes and concentrations of investments and requiring the approval of policy
rates and forms. State laws also regulate the amount of both the aggregate and
individual risks that may be insured, the payment of dividends by the Securities
Insurer, changes in control and transactions among affiliates. Additionally, the
Securities Insurer is required to maintain contingency reserves on its
liabilities in specified amounts and for specified periods of time.
FINANCIAL INFORMATION ABOUT THE SECURITIES INSURER
The consolidated financial statements of the Securities Insurer, a
wholly owned subsidiary of MBIA Inc., and its subsidiaries as of December 31,
1999 and December 31, 1998 and for each of the three years in the period ended
December 31, 1999, prepared in accordance with generally accepted accounting
principles, included in the Annual Report on Form 10-K of MBIA Inc. for the year
ended December 31, 1999 and the consolidated financial statements of the
Securities Insurer and its subsidiaries as of March 31, 2000 and for the
three-month period ended March 31, 2000 and March 31, 1999, included in the
Quarterly Report on Form 10-Q of MBIA Inc. for the period ended March 31, 2000,
are hereby incorporated by reference into this Prospectus Supplement and shall
be deemed to be a part hereof. Any statement contained in a document
incorporated by reference in this Prospectus Supplement shall be modified or
superceded for purposes of this Prospectus Supplement to the extent that a
statement contained in this Prospectus Supplement or in any other subsequently
filed document which also is incorporated by reference in this Prospectus
Supplement modifies or supercedes that statement. Any statement so modified or
superceded shall not be deemed, except as so modified or superceded, to
constitute a part of this Prospectus Supplement.
All financial statements of the Securities Insurer and its subsidiaries
included in documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the date
of this Prospectus Supplement and prior to the termination of the offering of
the Notes and the Certificates shall be deemed to be incorporated by reference
into this Prospectus Supplement and to be a part hereof from the respective
dates of filing the documents.
The tables below present selected financial information of the
Securities Insurer determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities and generally
accepted accounting principles:
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<TABLE>
<CAPTION>
STATUTORY ACCOUNTING PRACTICES
------------------------------
DECEMBER 31, 1999 MARCH 31, 2000
----------------- --------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets........................... $ 7,045 $ 7,188
Liabilities............................... 4,632 4.770
Capital and Surplus....................... 2,413 2,418
</TABLE>
<TABLE>
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
----------------------------------------
DECEMBER 31, 1999 MARCH 31, 2000
----------------- --------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets.................................... $ 7,446 $ 7,675
Liabilities............................... 3,218 3,315
Shareholder's Equity...................... 4,228 4,360
</TABLE>
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION ABOUT THE SECURITIES INSURER
Copies of the financial statements of the Securities Insurer
incorporated by reference in this Prospectus Supplement and copies of the
Securities Insurers 1999 year-end audited financial statements prepared in
accordance with statutory accounting practices are available, without charge,
from the Securities Insurer. The address of the Securities Insurer is 113 King
Street, Armonk, New York 10504. The telephone number of the Securities Insurer
is (914) 273-4545.
FINANCIAL STRENGTH RATINGS OF THE SECURITIES INSURER
Moody's rates the financial strength of the Securities Insurer "Aaa."
S&P rates the financial strength of the Securities Insurer "AAA."
Fitch rates the financial strength of the Securities Insurer "AAA."
Each rating of the Securities Insurer should be evaluated
independently. The ratings reflect the respective rating agency's current
assessment of the creditworthiness of the Securities Insurer and its ability to
pay claims on its policies of insurance. Any further explanation as to the
significance of the above ratings may be obtained only from the applicable
rating agency.
The above ratings are not recommendations to buy, sell or hold any
Class of the Notes or the Certificates, and the ratings may be subject to
revision or withdrawal at any time by the rating agencies. Any downward revision
or withdrawal of any of the above ratings may have an adverse effect on the
market price of the Notes. The Securities Insurer does not guaranty the market
price of any Class of the Notes nor does it guaranty that the ratings on any
Class of the Notes will not be revised or withdrawn.
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<PAGE> 104
INCOME TAX CONSEQUENCES
Thompson Hine & Flory LLP, federal tax counsel to the Trust ("Federal
Tax Counsel"), is of the opinion that the Trust will not be classified as an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes and that the Notes will be characterized as debt for
federal income tax purposes.
Kirkpatrick & Lockhart LLP, Pennsylvania tax counsel ("Pennsylvania Tax
Counsel") is of the opinion that the same characterizations of the Notes and the
Trust would apply for Pennsylvania state income tax purposes as for federal
income tax purposes.
The Seller and the Master Servicer will agree, and the
Certificateholders will agree to treat the Trust as a division of the Seller for
purposes of federal, state and local income and franchise tax with the assets of
the Trust being the assets held by the Seller, the Notes being debt of the Trust
and the Trust being disregarded as an entity separate from the Seller.
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 disregarded entity, the Trust would be subject to a corporate level
income tax. Any such corporate income tax could materially reduce or eliminate
cash that would otherwise be available to make payments on the Notes.
We recommend that investors carefully review the information under the
caption "Income Tax Consequences" in the Prospectus.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and/or Section 4975 of the Internal Revenue Code of 1986, as
amended (the "Code"), prohibit a pension, profit-sharing or other employee
benefit plan, as well as individual retirement accounts, and certain types of
Keogh Plans, and other plans subject to Section 4975 of the Code (each a
"Benefit Plan") from engaging in certain transactions with persons that are
"parties in interest" under ERISA or "disqualified persons" under the Code with
respect to such Benefit Plan. A violation of these "prohibited transaction"
rules may result in an excise tax or other penalties and liabilities under ERISA
and the Code for such persons. Title I of ERISA also requires that fiduciaries
of a Benefit Plan subject to ERISA make investments that are prudent,
diversified (except if prudent not to do so) and in accordance with governing
plan documents.
Certain transactions involving the purchase, holding or transfer of the
Notes might be deemed to constitute prohibited transactions under ERISA and the
Code if assets of the Trust were deemed to be assets of a Benefit Plan. Under a
regulation issued by the United States Department of Labor (the "Plan Assets
Regulation"), the assets of the Trust would be treated as plan assets of a
Benefit Plan for the purposes of ERISA and the Code only if the Benefit Plan
acquires an "Equity Interest" in the Trust and none of the exceptions contained
in the Plan Assets Regulation is 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
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<PAGE> 105
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.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement relating to the Notes (the "Underwriting Agreements"), the Seller has
agreed to cause the Trust to sell to the underwriters named below (collectively,
the "Underwriters"), and each of the Underwriters has severally agreed to
purchase, the principal amount of Class A-1 Notes and Class A-2 Notes set forth
opposite its name:
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL AMOUNT
AMOUNT OF CLASS OF CLASS A-2
UNDERWRITER A-1 NOTES NOTES TOTAL
----------- --------------- ---------------- -----
<S> <C> <C> <C>
Deutsche Bank $ $ $
Securities Inc.
McDonald Investments $ $ $
</TABLE>
In the respective Underwriting Agreements, the Underwriters have
agreed, subject to the terms and conditions set forth therein, to purchase all
the Notes offered hereby if any of the Notes are purchased. The Seller has been
advised by the Underwriters that the Underwriters propose initially to offer the
Notes to the public at the respective public offering prices set forth on the
cover page of this Prospectus Supplement, and to certain dealers at such prices
less a concession not in
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<PAGE> 106
excess of _____% per Class A-1 Note and _____% per Class A-2 Note. The
Underwriters may allow and such dealers may reallow to other dealers a discount
not in excess of _____% per Class A-1 Note and _____% per Class A-2 Note. After
the initial public offering, such public offering prices, concessions and
reallowances may be changed.
The representative, on behalf of the underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bides in accordance with Regulation M under the Securities Exchange Act
of 1934, as amended. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the representative to reclaim a selling concession from a
syndicate member when the Notes originally sold by such syndicate member are
purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Notes to be higher than it would
otherwise be in the absence of such transactions. These transactions, if
commenced, may be discontinued at any time.
Out of pocket expenses for this offering are estimated to be
approximately $____________________.
The Notes are a new issue of securities with no established trading
market. The Seller does not intend to apply for listing of the Notes on a
national securities exchange, but has been advised by Deutsche Bank Securities
Inc. that it intends to, and by McDonald Investments Inc. ("McDonald
Investments") that it may, make a market in the Notes. The Underwriters are not
obligated, however, to make a market in the Notes 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 Notes.
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.
Deutsche Bank Securities Inc. is engaged from time to time by KeyCorp,
the parent corporation of the Seller, to provide investment banking services.
Each of Bankers Trust Company, which is acting as Indenture Trustee,
and Deutsche Bank Securities Inc., which is acting as an Underwriter and
representative of the Underwriters, is an indirect, wholly-owned subsidiary of
Deutsche Bank AG.
After the initial distribution of the Notes by the Underwriters, this
Prospectus Supplement may be used by McDonald Investments, a wholly-owned
subsidiary of KeyCorp and an affiliate of the Seller, the Administrator and the
Master Servicer, or its successors, in connection with offers
S-104
<PAGE> 107
and sales relating to market-making transactions in the Notes. McDonald
Investments may act as principal or agent in such transactions, but has no
obligation to do so. McDonald Investments is a member of the New York Stock
Exchange, Inc. Such transactions will be at prices related to prevailing market
prices at the time of sale.
Pursuant to an Agreement and Plan of Merger dated as of June 15, 1998
between KeyCorp and McDonald & Company Investment, Inc. ("McDonald"), a
full-service investment banking and securities brokerage company headquartered
in Cleveland, Ohio, on October 23, 1998, McDonald was merged with and into
KeyCorp. On November 9, 1998, the merger of Key Capital Markets, Inc., a
wholly-owned broker-dealer subsidiary of KeyCorp, into McDonald & Company
Securities, Inc. (a wholly-owned subsidiary of the former McDonald) was
completed and the surviving entity was renamed McDonald Investments Inc.
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 $___________.
EXPERTS
The balance sheet of KeyCorp Student Loan Trust 2000-A, as of June 5,
2000, appearing as part of Appendix A in this Prospectus Supplement, and
incorporated by reference into the Registration Statement (as defined in the
Prospectus), has been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing as part of Appendix A to this Prospectus
Supplement, and incorporated by reference into the Registration Statement. Such
financial statement is included herein, and incorporated by reference into the
Registration Statement, in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
The consolidated balance sheets of MBIA Insurance Corporation and its
subsidiaries as of December 31, 1999 and December 31, 1998, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999, are
hereby incorporated by reference in this Prospectus Supplement, in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters relating to the Securities will be passed upon
for the Trust, the Seller and the Administrator by Forrest F. Stanley, Esq.,
General Counsel and Assistant Secretary of the Seller, as counsel for the
Seller, and by Thompson Hine & Flory LLP, Cleveland, Ohio and for the
Underwriters by Stroock & Stroock & Lavan LLP, New York, New York. Certain
federal income tax and other matters will be passed upon for the Trust by
Thompson Hine & Flory LLP. Certain Pennsylvania state income tax matters will be
passed upon for the Trust by Kirkpatrick & Lockhart LLP.
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<PAGE> 108
INDEX OF PRINCIPAL TERMS
Set forth below is a list of the defined terms used in this Prospectus
Supplement and the pages on which the definitions of such terms may be found
herein.
<TABLE>
<CAPTION>
PAGE
<S> <C>
52-week Treasury Bill Rate.....................................................................................S-94
91-day Treasury Bill Rate......................................................................................S-66
accrued interest factor........................................................................................S-67
Additional Funding.............................................................................................S-71
Additional Student Loans.......................................................................................S-28
Adjusted Initial Pool Balance..................................................................................S-47
Administration Agreement.......................................................................................S-69
Administration Fee.............................................................................................S-96
Agency Operating Fund..........................................................................................S-53
ASA............................................................................................................S-24
Assigned Rights................................................................................................S-23
Auction Purchase Amount........................................................................................S-96
Available Funds................................................................................................S-78
Bankruptcy Code................................................................................................S-51
Benefit Plan..................................................................................................S-102
Cap Agreement..................................................................................................S-23
Cap Provider...................................................................................................S-23
Cede...........................................................................................................S-62
Class..........................................................................................................S-62
Class A Note Deficiency Amount.................................................................................S-98
Class A Notes..................................................................................................S-24
Class A-1 Notes................................................................................................S-24
Class A-1 Notes Final Maturity Date............................................................................S-65
Class A-2 Notes................................................................................................S-24
Class A-2 Notes Final Maturity Date............................................................................S-65
Closing Date...................................................................................................S-22
Closing Date Deposit...........................................................................................S-25
Code..........................................................................................................S-102
Collection Account.............................................................................................S-23
Collection Period..............................................................................................S-63
Commission.....................................................................................................S-91
CSAC...........................................................................................................S-24
Cutoff Date....................................................................................................S-27
Deferral Period................................................................................................S-29
Department.....................................................................................................S-22
Depository.....................................................................................................S-62
Determination Date.............................................................................................S-78
disqualified persons..........................................................................................S-102
Distribution Dates..............................................................................................S-3
</TABLE>
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<PAGE> 109
<TABLE>
<S> <C>
DOE Data Book..................................................................................................S-53
DTC............................................................................................................S-62
DUAL Loans.....................................................................................................S-32
ECMC...........................................................................................................S-24
Eligible Deposit Account.......................................................................................S-70
Eligible Institution...........................................................................................S-70
Eligible Investments...........................................................................................S-70
Eligible Lender Trustee........................................................................................S-22
Equity Interest...............................................................................................S-102
ERISA.........................................................................................................S-102
Escrow Account.................................................................................................S-23
Expected Interest Collections..................................................................................S-64
FDIC...........................................................................................................S-71
Federal Assistance.............................................................................................S-24
Federal Consolidation Loan.....................................................................................S-46
Federal Consolidation Loan Rebate..............................................................................S-78
Federal Direct Consolidation Loans.............................................................................S-46
Federal Guarantors.............................................................................................S-24
Federal Loans..................................................................................................S-24
Federal Origination Fee........................................................................................S-78
Federal Reserve Fund...........................................................................................S-53
Federal Tax Counsel...........................................................................................S-102
Fee Advances...................................................................................................S-30
Final Maturity Dates............................................................................................S-6
Financed Federal Loans.........................................................................................S-22
Financed Private Loans.........................................................................................S-22
Financed Student Loans.........................................................................................S-22
Fitch..........................................................................................................S-91
Fleet..........................................................................................................S-27
Fleet Sale Agreement...........................................................................................S-27
Forbearance Periods............................................................................................S-29
Formula Rate...................................................................................................S-63
Funding Period.................................................................................................S-74
GLHEC..........................................................................................................S-24
Grace Period...................................................................................................S-47
Great Lakes....................................................................................................S-26
Guarantee Agreement............................................................................................S-24
Guarantee Agreements...........................................................................................S-24
Guarantee Payments.............................................................................................S-24
Guaranteed Private Loans.......................................................................................S-22
Guarantors......................................................................................................S-3
HESC...........................................................................................................S-24
Higher Education Act...........................................................................................S-24
Indenture......................................................................................................S-62
Indenture Trustee...............................................................................................S-3
</TABLE>
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<PAGE> 110
<TABLE>
<S> <C>
Index Maturity.................................................................................................S-68
Initial Financed Student Loan Pool Balance.....................................................................S-84
Initial Financed Student Loans.................................................................................S-22
Initial Pool Student Loans.....................................................................................S-23
Initial Pre-Funded Amount......................................................................................S-71
Insured Payment................................................................................................S-99
Interest and Expense Draw......................................................................................S-86
Interest Period................................................................................................S-62
Interest Rate Swap.............................................................................................S-23
Interest Subsidy Payments......................................................................................S-48
Investment Earnings............................................................................................S-70
Investor Index.................................................................................................S-63
KBUSA..........................................................................................................S-25
Keys2Repay Program.............................................................................................S-77
LIBOR..........................................................................................................S-68
LIBOR Determination Date.......................................................................................S-68
LIBOR Indexed Securities........................................................................................S-4
Liquidated Student Loans.......................................................................................S-79
Liquidation Proceeds...........................................................................................S-79
Lock-In Period.................................................................................................S-67
Margin.........................................................................................................S-63
Master Servicer................................................................................................S-25
Master Servicer Default........................................................................................S-74
Master Servicing Fee Percentage................................................................................S-27
Maximum TERI Payments Amount...................................................................................S-81
McDonald......................................................................................................S-105
McDonald Investments..........................................................................................S-104
MHEAA..........................................................................................................S-24
Minimum Purchase Amount........................................................................................S-95
Monthly Servicing Payment Date.................................................................................S-27
Moody's........................................................................................................S-91
Net Trust Swap Payment.........................................................................................S-87
Net Trust Swap Payment Carryover Shortfall.....................................................................S-82
Net Trust Swap Receipt.........................................................................................S-88
Non-Guaranteed Graduate Private Loans..........................................................................S-85
Non-Guaranteed Private Graduate Loan Trigger Event.............................................................S-85
Non-Guaranteed Private Loans...................................................................................S-22
Non-Guaranteed Private Undergraduate Loan Trigger Event........................................................S-84
Non-Guaranteed Undergraduate Private Loans.....................................................................S-84
Note Interest Rate.............................................................................................S-62
Noteholders....................................................................................................S-46
Noteholders' Distribution Amount...............................................................................S-82
Noteholders' Interest Carryover Shortfall......................................................................S-82
Noteholders' Interest Distribution Amount......................................................................S-82
Noteholders' Interest Index Carryover..........................................................................S-64
</TABLE>
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<PAGE> 111
<TABLE>
<S> <C>
Noteholders' Principal Distribution Amount.....................................................................S-83
NSLP...........................................................................................................S-24
Obligors.......................................................................................................S-83
Other Additional Pre-Funded Amount.............................................................................S-71
Other Additional Pre-Funding Subaccount........................................................................S-71
Other Subsequent Student Loans.................................................................................S-28
Parity Date....................................................................................................S-65
Participants...................................................................................................S-62
parties in interest...........................................................................................S-102
Pennsylvania Tax Counsel......................................................................................S-102
PEP Loans......................................................................................................S-31
PHEAA..........................................................................................................S-24
Plan Assets Regulation........................................................................................S-102
PLUS Loans.....................................................................................................S-26
Pool Balance...................................................................................................S-83
Preference Amount..............................................................................................S-99
Pre-Funded Amount..............................................................................................S-22
Pre-Funding Account............................................................................................S-22
Prime Rate.....................................................................................................S-29
Prime Rate Loans...............................................................................................S-29
Principal Distribution Amount..................................................................................S-83
Private Consolidation Loans....................................................................................S-46
Private Graduate Loan Trigger Event............................................................................S-84
Private Loans..................................................................................................S-24
Programs.......................................................................................................S-28
prohibited transaction........................................................................................S-102
Prospectus.....................................................................................................S-11
Prospectus Supplement..........................................................................................S-11
PTCE..........................................................................................................S-103
Purchase Amount................................................................................................S-76
Purchase Price.................................................................................................S-69
Rating Agencies................................................................................................S-70
Rating Agency..................................................................................................S-70
Realized Loss Draw.............................................................................................S-86
Realized Losses................................................................................................S-94
Recoveries.....................................................................................................S-84
Reference Bank.................................................................................................S-68
Reserve Account.................................................................................................S-8
S&P............................................................................................................S-91
Sale and Servicing Agreement...................................................................................S-22
Secretary......................................................................................................S-51
Securities Guaranty Insurance Policy...........................................................................S-23
Securities Insurer.............................................................................................S-23
Securities Insurer Default.....................................................................................S-92
Securityholders................................................................................................S-26
</TABLE>
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<PAGE> 112
<TABLE>
<S> <C>
Seller.........................................................................................................S-22
Serial Loans...................................................................................................S-74
SLS Loans......................................................................................................S-26
Special Allowance Payments.....................................................................................S-48
Special Determination Date.....................................................................................S-47
Special Redemption Date........................................................................................S-47
Specified Collateral Balance...................................................................................S-83
Specified Reserve Account Balance..............................................................................S-86
Stafford Loans.................................................................................................S-26
Statistical Cutoff Date........................................................................................S-23
Student Loan Rate..............................................................................................S-63
Student Loans..................................................................................................S-22
Subsequent Cutoff Date.........................................................................................S-73
Subsequent Pool................................................................................................S-74
Subsequent Pool Pre-Funded Amount..............................................................................S-71
Subsequent Pool Pre-Funding Subaccount.........................................................................S-71
Subsequent Pool Student Loans..................................................................................S-27
Sub-Servicer...................................................................................................S-25
Sub-Servicers..................................................................................................S-25
Sub-Servicing Agreement........................................................................................S-26
Swap Counterparty..............................................................................................S-23
Telerate Page 3750.............................................................................................S-68
TERI...........................................................................................................S-48
TERI Alternative Loans.........................................................................................S-30
TERI Trigger Event.............................................................................................S-84
Three-Month LIBOR..............................................................................................S-68
Transfer Agreement.............................................................................................S-73
Transfer and Servicing Agreements..............................................................................S-69
Transfer Date..................................................................................................S-73
Treasury Bill Indexed Securities................................................................................S-4
Trigger Event..................................................................................................S-84
Trust..........................................................................................................S-22
Trust Accounts.................................................................................................S-70
Trust Agreement................................................................................................S-22
Underlying Federal Loans.......................................................................................S-46
Underlying Private Loans.......................................................................................S-73
Underwriters..................................................................................................S-103
Underwriting Agreements.......................................................................................S-103
Unsubsidized Stafford Loan.....................................................................................S-48
USAF...........................................................................................................S-24
</TABLE>
S-110
<PAGE> 113
APPENDIX A
REPORT OF INDEPENDENT AUDITORS
Bank One, National Association, and
Bank One Delaware, Inc.
as Trustees of the KeyCorp Student Loan Trust 2000-A
We have audited the accompanying balance sheet of KeyCorp Student Loan Trust
2000-A (the "Trust") as of June 5, 2000. This balance sheet is the
responsibility of the Trustees for the Trust. Our responsibility is to express
an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates made
by the Trustees on behalf of the Trust, as well as evaluating the overall
balance sheet presentation. We believe that our audit of the balance sheet
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of the Trust at June 5, 2000, in
conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Cleveland, Ohio
June 5, 2000
A-1
<PAGE> 114
KEYCORP STUDENT LOAN TRUST 2000-A
BALANCE SHEET
JUNE 5, 2000
<TABLE>
<S> <C>
ASSETS
Cash $ 10
-------------
Total Assets $ 10
=============
EQUITY
Equity of the Trust $ 10
-------------
Total Equity $ 10
=============
</TABLE>
See accompanying notes to the balance sheet
A-2
<PAGE> 115
KEYCORP STUDENT LOAN TRUST 2000-A
NOTES TO BALANCE SHEET
JUNE 5, 2000
ORGANIZATION AND OPERATION
KeyCorp Student Loan Trust 2000-A (the "Trust"), is a Delaware statutory
business trust formed on May 31, 2000, with Bank One, National Association as
Eligible Lender Trustee and Bank One Delaware, Inc. as Delaware Trustee. The
Trust was organized to exclusively acquire certain graduate and undergraduate
student loans; to issue and sell securities collateralized by such loans; and to
engage in other transactions, including entering agreements that are incidental
and necessary, suitable and convenient to the foregoing and permitted under
Delaware law.
At June 5, 2000, the Trust had not commenced operations except for the conduct
of organizational matters and activities relating to the public offering of
notes.
Key Bank USA, National Association, as Initial Beneficiary of the Trust, bears
administrative expenses on its behalf.
ACCOUNTING POLICIES
Cash, the only asset of the Trust at June 5, 2000, is stated at the amount held
on behalf of the Trust by Bank One, National Association.
A-3
<PAGE> 116
[Intentionally Left Blank]
<PAGE> 117
APPENDIX B
FORM OF SECURITIES GUARANTY INSURANCE POLICY
OBLIGATIONS: $[ ] POLICY NUMBER: [ ]
------------------------ -
MBIA Insurance Corporation (the "Insurer"), in consideration of the
payment of the premium and subject to the terms of this Note Guaranty Insurance
Policy (this "Policy"), hereby unconditionally and irrevocably guarantees to any
Owner that an amount equal to each full and complete Insured Payment will be
received from the Insurer by [ ], or its successors, as trustee for the Owners
(the "Trustee"), on behalf of the Owners, for distribution by the Trustee to
each Owner of each Owner's proportionate share of the Insured Payment. The
Insurer's obligations hereunder with respect to a particular Insured Payment
shall be discharged to the extent funds equal to the applicable Insured Payment
are received by the Trustee, whether or not such funds are properly applied by
the Trustee. Insured Payments shall be made only at the time set forth in this
Policy, and no accelerated Insured Payments shall be made regardless of any
acceleration of the Obligations, unless such acceleration is at the sole option
of the Insurer.
Notwithstanding the foregoing paragraph, this Policy does not cover
shortfalls, if any, attributable to the liability of the Trust or the Trustee
for withholding taxes, if any (including interest and penalties in respect of
any such liability). This Policy does not cover, and Insured Payments shall not
include, any Noteholders' Interest Index Carryover.
The Insurer will pay any Insured Payment that is a Preference Amount on
the Business Day following receipt on a Business Day by the Fiscal Agent (as
described below) of (a) a certified copy of the order requiring the return of a
preference payment, (b) an opinion of counsel satisfactory to the Insurer that
such order is final and not subject to appeal, (c) an assignment in such form as
is reasonably required by the Insurer, irrevocably assigning to the Insurer all
rights and claims of the Owner relating to or arising under the Obligations
against the debtor which made such preference payment or otherwise with respect
to such preference payment and (d) appropriate instruments to effect the
appointment of the Insurer as agent for such Owner in any legal proceeding
related to such preference payment, such instruments being in a form
satisfactory to the Insurer, provided that if such documents are received after
12:00 noon, New York City time, on such Business Day, they will be deemed to be
received on the following Business Day. Such payments shall be disbursed to the
receiver or trustee in bankruptcy named in the final order of the court
exercising jurisdiction on behalf of the Owner and not to any Owner directly
unless such Owner has returned principal or interest paid on the Obligations to
such receiver or trustee in bankruptcy, in which case such payment shall be
disbursed to such Owner.
The Insurer will pay any other amount payable hereunder no later than
12:00 noon, New York City time, on the later of the Distribution Date on which
the related Deficiency Amount is due or the third Business Day following receipt
in New York, New York on a Business Day by State Street Bank and Trust Company,
N.A., as Fiscal Agent for the Insurer,
<PAGE> 118
or any successor fiscal agent appointed by the Insurer (the "Fiscal Agent"), of
a Notice (as described below), provided that if such Notice is received after
12:00 noon, New York City time, on such Business Day, it will be deemed to be
received on the following Business Day. If any such Notice received by the
Fiscal Agent is not in proper form or is otherwise insufficient for the purpose
of making claim hereunder, it shall be deemed not to have been received by the
Fiscal Agent for purposes of this paragraph, and the Insurer or the Fiscal
Agent, as the case may be, shall promptly so advise the Trustee and the Trustee
may submit an amended Notice.
Insured Payments due hereunder, unless otherwise stated herein, will be
disbursed by the Fiscal Agent to the Trustee on behalf of the Owners by wire
transfer of immediately available funds in the amount of the Insured Payment
less, in respect of Insured Payments related to Preference Amounts, any amount
held by the Trustee for the payment of such Insured Payment and legally
available therefor.
The Fiscal Agent is the agent of the Insurer only, and the Fiscal Agent
shall in no event be liable to Owners for any acts of the Fiscal Agent or any
failure of the Insurer to deposit, or cause to be deposited, sufficient funds to
make payments due under this Policy.
Subject to the terms of the Agreement, the Insurer shall be subrogated
to the rights of each Owner to receive payments under the Obligations to the
extent of any payment by the Insurer hereunder.
As used herein, the following terms shall have the following meanings:
"Agreement" means the Indenture dated as of [ ] among [ ], as Issuer,
and the Trustee, as trustee, without regard to any amendment or supplement
thereto, unless such amendment or supplement has been approved in writing by the
Insurer.
"Business Day" means any day other than (a) a Saturday or a Sunday (b)
a day on which the Insurer is closed or (c) a day on which banking institutions
in New York City or in the city in which the corporate trust office of the
Trustee under the Agreement is located are authorized or obligated by law or
executive order to close.
"Deficiency Amount" means (a) as of any Distribution Date, the excess,
if any, of (1) the Noteholders' Interest Distribution Amount on such
Distribution Date, over (2) Available Funds for such Distribution Date after
giving effect to the payment of the Servicing Fee, the Administration Fee and
all amounts due to the Securities Insurer for such Distribution Date, plus the
application of any amounts available on such Distribution Date to cover such
payments from amounts on deposit in the Reserve Account and the Pre-Funding
Account, and (b) on either the Class A-1 Notes Final Maturity Date or the Class
A-2 Notes Final Maturity Date, the unpaid principal balance of the Class A-1
Notes, in the case of the Class A-1 Notes Final Maturity Date, or the unpaid
principal balance of the Class A-2 Notes, in the case of the Class A-2 Notes
Final Maturity Date, in each case after giving effect to any distributions on
such date and the application of any amounts available on such Distribution Date
to cover such payments from amounts on deposit in the Reserve Account.
<PAGE> 119
"Insured Payment" means (a) as of any Distribution Date, any Deficiency
Amount and (b) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed
in writing by facsimile substantially in the form of Exhibit A attached hereto,
the original of which is subsequently delivered by registered or certified mail,
from the Trustee specifying the Insured Payment which shall be due and owing on
the applicable Distribution Date.
"Owner" means each Noteholder (as defined in the Agreement) (other than
the Issuer, the Trustee, the Eligible Lender Trustee, the Seller, the
Administrator, the Depositor, the Master Servicer or any Sub-Servicer) who, on
the applicable Distribution Date, is entitled under the terms of the applicable
Notes to payment thereunder.
"Preference Amount" means any amount previously distributed to an Owner
on the Obligations that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the United States Bankruptcy
Code (11 U.S.C.), as amended from time to time in accordance with a final
nonappealable order of a court having competent jurisdiction.
Capitalized terms used herein and not otherwise defined herein shall
have the respective meanings set forth in the Agreement as of the date of
execution of this Policy, without giving effect to any subsequent amendment to
or modification of the Agreement unless such amendment or modification has been
approved in writing by the Insurer.
Any notice hereunder or service of process on the Fiscal Agent may be
made at the address listed below for the Fiscal Agent or such other address as
the Insurer shall specify in writing to the Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York 10006, Attention: Municipal Registrar and Paying Agency, or such
other address as the Fiscal Agent shall specify to the Trustee in writing.
THIS POLICY IS BEING ISSUED UNDER AND PURSUANT TO, AND SHALL BE
CONSTRUED UNDER, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE
CONFLICT OF LAWS PRINCIPLES THEREOF.
The insurance provided by this Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
This Policy is not cancelable for any reason. The premium on this
Policy is not refundable for any reason, including payment, or provision being
made for payment, prior to maturity of the Obligations.
<PAGE> 120
IN WITNESS WHEREOF, the Insurer has caused this Policy to be executed
and attested this [___] day of [___], [___].
MBIA INSURANCE CORPORATION
By
Title_____________________
Attest:
By _______________________________
Secretary
<PAGE> 121
EXHIBIT A
TO NOTE GUARANTY INSURANCE
POLICY NUMBER: [___]
NOTICE UNDER NOTE GUARANTY
INSURANCE POLICY NUMBER: [___]
State Street Bank and Trust Company, N.A., as Fiscal Agent
for MBIA Insurance Corporation
15th Floor
61 Broadway
New York, NY 10006
Attention: Municipal Registrar and
Paying Agency
MBIA Insurance Corporation
113 King Street
Armonk, NY 10504
The undersigned, a duly authorized officer of [NAME OF TRUSTEE],
as trustee (the "Trustee"), hereby certifies to State Street Bank and
Trust Company, N.A. (the "Fiscal Agent") and MBIA Insurance Corporation
(the "Insurer"), with reference to Note Guaranty Insurance Policy
Number: [_______] (the "Policy") issued by the Insurer in respect of
the $[_______] [______________] (the "Obligations"), that:
1. the Trustee is the trustee under the Indenture dated
as of [__________________________] among [________________], as Issuer,
and the Trustee, as trustee for the Owners;
2. the amount due under clause (a) of the definition of
Deficiency Amount for the Distribution Date occurring on
[________________] (the "Applicable Distribution Date") is
$[__________________];
3. the amount due under clause (b) of the definition of
Deficiency Amount for the Applicable Distribution Date is
$[__________________];
4. the sum of the amounts listed in paragraphs (b) and
(c) above is $[__________________] (the "Deficiency Amount");
5. the amount of previously distributed payments on the
Obligations that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the
Bankruptcy Code in accordance with a final nonappealable order of a
court having competent jurisdiction is $[_______] (the "Preference
Amount");
B-1
<PAGE> 122
6. the total Insured Payment due is $[___________],
which amount equals the sum of the Deficiency Amount and the Preference
Amount;
7. the Trustee is making a claim under and pursuant to the
terms of the Policy for the dollar amount of the Insured Payment set
forth in (d) above to be applied to the payment of the Deficiency
Amount for the Applicable Distribution Date in accordance with the
Agreement and for the dollar amount of the Insured Paymentset forth in
(e) above to be applied to the payment of any Preference Amount; and
8. the Trustee directs that payment of the Insured
Payment be made to the following account by bank wire transfer of
federal or other immediately available funds in accordance with the
terms of the Policy: [TRUSTEE'S ACCOUNT NUMBER].
Any capitalized term used in this Notice and not otherwise defined
herein shall have the meaning assigned thereto in the Policy.
Any Person Who Knowingly And With Intent To Defraud Any Insurance
Company Or Other Person Files An Application For Insurance Or Statement Of Claim
Containing Any Materially False Information, Or Conceals For The Purpose Of
Misleading, Information Concerning Any Fact Material Thereto, Commits A
Fraudulent Insurance Act, Which Is A Crime, And Shall Also Be Subject To A Civil
Penalty Not To Exceed Five Thousand Dollars And The Stated Value Of The Claim
For Each Such Violation.
IN WITNESS WHEREOF, the Trustee has executed and delivered
this Notice under the Policy as of the [________] day of
[_______________________], [_______].
[NAME OF TRUSTEE], as Trustee
By
Title________________________
<PAGE> 123
PROSPECTUS
KEYCORP STUDENT LOAN TRUSTS
Issuer
KEY BANK USA, NATIONAL ASSOCIATION
Seller and Master Servicer
Asset Backed Notes
Asset Backed Certificates
SECURITIES OFFERED
- asset backed notes and asset backed certificates
- rated in one of four highest rating categories by at least one
nationally recognized rating organization
- not listed on any trading exchange
- obligations only of the related trust
You should carefully consider the risk factors beginning on page 6.
The securities are not bank deposits and are not insured by the Federal Deposit
Insurance Corporation.
This prospectus must be accompanied by a prospectus supplement for the
particular series.
ASSETS
- student loans
- may include one or more forms of credit enhancement
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. MAKING ANY CONTRARY REPRESENTATION IS A
CRIMINAL OFFENSE.
The seller may offer securities through underwriters or by other methods
described under the caption "Plan of Distribution."
The date of this Prospectus is June 9, 2000
<PAGE> 124
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
RISK FACTORS......................................................................................................6
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..................................................................13
FORMATION OF THE TRUSTS..........................................................................................13
The Trusts..............................................................................................13
Eligible Lender Trustee.................................................................................14
USE OF PROCEEDS..................................................................................................15
THE SELLER, THE ADMINISTRATOR, THE MASTER SERVICER AND THE SUB-SERVICERS.........................................15
The Seller, Administrator and Master Servicer...........................................................15
General .......................................................................................15
Services and Fees of Administrator.............................................................15
Master Servicer................................................................................15
The Sub-Servicers.......................................................................................17
THE STUDENT LOAN POOLS...........................................................................................18
General.................................................................................................18
THE STUDENT LOAN FINANCING BUSINESS..............................................................................19
Programs Offered by the Seller..........................................................................19
Description of Federal Loans Under the Programs.........................................................20
General .......................................................................................20
Stafford Loan Program..........................................................................21
(1) Eligibility Requirements..................................................................22
(2) Loan Limits...............................................................................22
(3) Interest..................................................................................23
(4) Repayment.................................................................................24
(5) Grace Periods, Deferral Periods, Forbearance Periods......................................25
(6) Interest Subsidy Payments.................................................................25
(7) Special Allowance Payments................................................................25
SLS Loan Program...............................................................................27
PLUS Loan Program..............................................................................28
Federal Consolidation Loan Program.............................................................29
Undergraduate Federal Loans....................................................................31
Graduate Federal Loans.........................................................................32
Description of Private Loans Under the Programs.........................................................33
General .......................................................................................33
Private Undergraduate Loans....................................................................34
Eligibility Requirements.......................................................................34
Loan Limits....................................................................................35
</TABLE>
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<TABLE>
<S> <C>
Interest ......................................................................................35
Repayment......................................................................................35
Grace Periods Deferral Periods, Forbearance Periods............................................35
Private Graduate Loans.........................................................................35
Payment Terms..................................................................................37
Private Consolidation Loans....................................................................39
Insurance of Student Loans; Guarantors of Student Loans.................................................40
Federal Guarantors.............................................................................40
Federal Insurance and Reinsurance of Federal Guarantors........................................41
Private Guarantors.............................................................................44
Claims and Recovery Rates...............................................................................44
Origination Process.....................................................................................44
Servicing and Collections Process.......................................................................46
Incentive Programs......................................................................................47
WEIGHTED AVERAGE LIVES OF THE SECURITIES.........................................................................47
POOL FACTORS AND TRADING INFORMATION.............................................................................50
DESCRIPTION OF THE NOTES.........................................................................................50
General.................................................................................................50
Principal of and Interest on the Notes..................................................................51
The Indenture...........................................................................................52
Modification of Indenture......................................................................52
Events of Default; Rights upon Event of Default................................................53
Certain Covenants..............................................................................57
Annual Compliance Statement....................................................................58
Indenture Trustee's Annual Report..............................................................58
Satisfaction and Discharge of Indenture........................................................58
The Indenture Trustee..........................................................................58
DESCRIPTION OF THE CERTIFICATES..................................................................................59
General.................................................................................................59
Principal and Interest in Respect of the Certificates...................................................60
CERTAIN INFORMATION REGARDING THE SECURITIES.....................................................................60
Fixed Rate Securities...................................................................................60
Floating Rate Securities................................................................................60
Book-Entry Registration.................................................................................61
Definitive Securities...................................................................................66
List of Securityholders.................................................................................67
Reports to Securityholders..............................................................................68
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS.............................................................68
General.................................................................................................68
Sale of Student Loans; Representations and Warranties...................................................69
</TABLE>
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<TABLE>
<S> <C>
Additional Fundings.....................................................................................70
Accounts................................................................................................71
Servicing Procedures....................................................................................72
Payments on Student Loans...............................................................................73
Master Servicer Covenants...............................................................................73
Master Servicing Compensation...........................................................................75
Distributions...........................................................................................75
Credit and Cash Flow Enhancement........................................................................76
General .......................................................................................76
Reserve Account................................................................................76
Statements to Indenture Trustee and Trust...............................................................77
Evidence as to Compliance...............................................................................78
Certain Matters Regarding the Master Servicer and the Sub-Servicers.....................................79
Master Servicer Default; Administrator Default..........................................................80
Rights Upon Master Servicer Default and Administrator Default...........................................82
Waiver of Past Defaults.................................................................................82
Insolvency Event........................................................................................83
Amendment...............................................................................................84
Payment of Notes........................................................................................84
Seller Liability........................................................................................84
Termination.............................................................................................85
Administrator...........................................................................................86
CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS.......................................................................87
Transfer of Student Loans...............................................................................87
Certain Matters Relating to Receivership................................................................88
Consumer Protection Laws................................................................................89
Loan Origination and Servicing Procedures Applicable to Student Loans...................................89
Failure to Comply with Third-Party Servicer Regulations May Adversely Affect
Loan Servicing........................................................................................90
Bankruptcy Considerations...............................................................................91
Recent Developments.....................................................................................91
Emergency Student Loan Consolidation Act of 1997...............................................91
FY 1998 Budget.................................................................................92
1998 Amendment.................................................................................92
1998 Reauthorization Bill......................................................................92
INCOME TAX CONSEQUENCES..........................................................................................94
FEDERAL TAX CONSEQUENCES FOR TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE.....................................95
Tax Characterization of the Trust.......................................................................95
Tax Consequences to Holders of the Notes................................................................95
Treatment of the Notes as Indebtedness.........................................................95
</TABLE>
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<TABLE>
<S> <C>
Original Issue Discount........................................................................95
Interest Income on the Notes...................................................................96
Sale or Other Disposition......................................................................96
Foreign Holders................................................................................96
Backup Withholding.............................................................................98
Possible Alternative Treatments of the Notes...................................................98
FASITs..................................................................................................98
Tax Consequences to Holders of the Certificates.........................................................99
Classification as a Partnership.........................................................................99
Treatment of the Trust as a Partnership........................................................99
Partnership Taxation...........................................................................99
Guaranteed Payments...........................................................................100
Allocation of Tax Items.......................................................................100
Computation of Income.........................................................................101
Section 708 Termination.......................................................................101
Discount and Premium..........................................................................102
Disposition of Certificates...................................................................102
Allocations Between Transferors and Transferees...............................................103
Section 754 Election..........................................................................103
Administrative Matters........................................................................103
Tax Consequences to Foreign Certificateholders................................................104
Backup Withholding............................................................................105
FEDERAL TAX CONSEQUENCES FOR TRUSTS IN WHICH ALL CERTIFICATES ARE RETAINED BY THE SELLER........................105
Tax Characterization of the Trust......................................................................105
Tax Consequences to Holders of the Notes...............................................................106
Treatment of the Notes as Indebtedness........................................................106
PENNSYLVANIA STATE TAX CONSEQUENCES.............................................................................106
Pennsylvania Income and Franchise Tax Consequences with Respect to the Notes...........................106
Pennsylvania Income and Franchise Tax Consequences with Respect to the
Certificates.........................................................................................106
ERISA CONSIDERATIONS............................................................................................107
The Notes..............................................................................................107
The Certificates.......................................................................................108
PLAN OF DISTRIBUTION............................................................................................109
LEGAL MATTERS...................................................................................................111
INDEX OF PRINCIPAL TERMS........................................................................................112
</TABLE>
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RISK FACTORS
We recommend that you consider the following factors and the additional
factors described under "Risk Factors" in the related prospectus supplement
before purchasing the securities.
CREDIT ENHANCEMENT
MAY NOT PROTECT YOU
FROM ALL LOSSES Although every trust will include some form of credit
enhancement, that credit enhancement may not cover
every class of securities issued by a trust. In
addition, every form of credit enhancement will have
certain limitations on, and exclusions from coverage.
As a result, there is always a risk that you may not
recover the full amount of your investment.
GUARANTEES OF STUDENT
LOANS MAY NOT PREVENT
LOSSES A significant number of the student loans in a trust
will be guaranteed by either a federal or a private
guarantor. However, those guarantees may not protect
you against all losses for several reasons,
including:
- federal guarantees are generally limited to
98% of the principal amount of the student
loan;
- if Key Bank USA, National Association fails
to follow prescribed origination procedures
or if the master servicer or any
sub-servicers fail to follow required
servicing procedures, the applicable
guarantors may refuse to make guarantee
payments to the applicable trust and if the
loans are federally insured, the Department
may refuse to make reinsurance payments to
the applicable federal guarantors or to make
interest subsidy or special allowance
payments to the trust; and
- private guarantors are not reinsured by or
entitled to any assistance from the
Department. If the loan loss reserves of a
private guarantor are not sufficient, that
private guarantor may not be able to honor
its obligations to make guarantee payments.
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<PAGE> 129
DEFAULTS ON STUDENT LOANS
WITHOUT GUARANTEES MAY
RESULT IN LOSSES A trust may include student loans that are
not guaranteed by any federal or private
guarantor, or by any other party or
governmental agency. Since all student
loans, whether guaranteed or not, are
unsecured, if a borrower under one of these
student loans defaults, the applicable trust
may suffer a loss.
THE FINANCIAL CONDITION OF
FEDERAL GUARANTORS MAY BE
ADVERSELY AFFECTED BY SEVERAL
FACTORS The financial condition of the federal
guarantors may be adversely affected by a
number of factors including:
- the amount of claims made against
such federal guarantor as a result
of borrower defaults;
- the amount of claims reimbursed to
such federal guarantor from the
Department;
- changes in legislation that may
reduce expenditures from the
Department that support federal
guarantors or that may require
federal guarantors to pay more of
their reserves to the Department;
- loss of reinsurance benefits due to
the master servicer's or a
sub-servicer's failure to follow
required servicing procedures; and
- expansion of the federal direct
student loan program.
If the financial status of the guarantors
deteriorates, the guarantors may fail to
make guarantee payments to the trustee. In
such event, you may suffer delays in the
payment of principal and interest on your
securities.
REINSURANCE OF FEDERAL
GUARANTORS MAY NOT
PREVENT DELAYS OR LOSSES If a federal guarantor fails to make
guarantee payments, the applicable trust may
submit claims directly to the Department.
However, the Department may determine that
the federal guarantor is able to meet its
obligations, and the Department will not
make those payments. Even if the Department
determines to make those payments, there may
7
<PAGE> 130
be delays in making the necessary
determination. Loss or delay of any such
guarantee payments, interest subsidy
payments or special allowance payments could
adversely affect the related trust's ability
to pay timely interest and principal. In
such event, you may suffer a loss on your
investment.
THE TRUST IS DEPENDENT UPON
THE PERFORMANCE BY VARIOUS
PARTIES OF THEIR OBLIGATIONS The trust is relying, and the performance of
the securities depends, on the performance
of the seller, the master servicer and the
sub-servicers of their respective
obligations. Any failure to perform could
have material adverse consequences as
follows:
- FAILURE TO HONOR PURCHASE
OBLIGATIONS MAY CAUSE LOSSES. Key
Bank USA, National Association, as
seller and master servicer, or the
applicable sub-servicer, will be
obligated to purchase student loans
from a trust with respect to which
it materially breaches
representations, warranties or
covenants. You can not be assured,
however, that Key Bank USA,
National Association, or the
applicable sub-servicer, will have
the financial resources to purchase
such student loans. The failure to
so purchase a student loan would
not constitute an event of default
under the related indenture or
permit the exercise of remedies
thereunder. However, the breach of
such representations, warranties or
covenants may cause you to suffer a
loss on your investment.
- FAILURE TO COMPLY WITH THIRD-PARTY
SERVICER REGULATIONS MAY ADVERSELY
AFFECT LOAN SERVICING. The
Department regulates each servicer
of federal student loans. Under
certain of these regulations, a
third-party servicer (such as one
of the sub-servicers) is jointly
and severally liable with its
client lenders for liabilities to
the Department arising from the
sub-servicer's violation of
applicable requirements. In
addition, if a sub-servicer fails
to meet standards of financial
responsibility or administrative
capability included in the
regulations, or violates other
requirements, the Department may
fine the sub-servicer and/or limit,
suspend, or terminate such
sub-servicer's eligibility to
contract to service federal student
loans. If a sub-
8
<PAGE> 131
servicer were so fined or held
liable, or its eligibility were
limited, suspended, or terminated,
its ability to properly service the
federal loans and to satisfy its
obligation to purchase federal
loans with respect to which it
breaches its representations,
warranties or covenants could be
adversely affected. Moreover, if
the Department terminates a
sub-servicer's eligibility, a
servicing transfer will take place
and there will be delays in
collections and temporary
disruptions in servicing. Any
servicing transfer will at least
temporarily adversely affect
payments to you.
- THE TRUST'S INTEREST IN ITS STUDENT
LOANS COULD BE DEFEATED BY ACTIONS
OF THE SUB-SERVICERS AS custodians.
The applicable sub-servicer, as
custodian on behalf of the master
servicer with respect to each
trust, will have custody of the
promissory notes evidencing the
student loans it services. Although
the accounts of the seller will be
marked to indicate the sale and
although the seller will cause UCC
financing statements to be filed
with the appropriate authorities,
the student loans will not be
physically segregated, stamped or
otherwise marked to indicate that
such student loans have been sold
to the eligible lender trustee. If,
through inadvertence or otherwise,
any of the student loans were sold
to another party, or a security
interest therein were granted to
another party that purchased (or
took such security interest in) any
of such student loans in the
ordinary course of its business and
took possession of such student
loans, then the purchaser (or
secured party) would acquire an
interest in the student loans
superior to the interest of the
eligible lender trustee, if the
purchaser (or secured party)
acquired such student loans without
knowledge of the eligible lender
trustee's interest.
- INSOLVENCY OF THE MASTER SERVICER,
A SUB-SERVICER OR THE ADMINISTRATOR
MAY CAUSE LOSSES. In the event of
default by the master servicer, a
sub-servicer or the administrator
resulting solely from certain
events of insolvency or bankruptcy,
a court, conservator, receiver or
liquidator may have the power to
prevent either the indenture
trustee or the noteholders from
appointing a successor master
servicer or administrator, or
prevent the master servicer from
appointing a new sub-servicer,
9
<PAGE> 132
as the case may be, and delays in
collections in respect of the
student loans may occur. Any delay
in the collections of student loans
may delay or reduce payments to
you.
CHANGES IN LEGISLATION MAY
ADVERSELY AFFECT STUDENT
LOANS AND FEDERAL GUARANTORS You can not be certain that the Higher
Education Act or other relevant federal or
state laws, rules and regulations will not
be amended or modified in the future in a
manner that will adversely affect the
federal student loan programs described in
this prospectus, the student loans made
thereunder or the financial condition of the
federal guarantors.
In addition, if the direct student loan
program expands, the sub-servicers may
experience increased costs due to reduced
economies of scale or other adverse effects
on their business to the extent the volume
of loans serviced by the sub-servicers is
reduced. Such cost increases could reduce
the ability of the sub-servicers to satisfy
their obligations to service the student
loans or to purchase student loans in the
event of certain breaches of its covenants.
CERTAIN POLICIES OF THE
DEPARTMENT MAY REDUCE
AMOUNTS AVAILABLE
FOR PAYMENTS ON
YOUR SECURITIES Each trust will be obligated to pay to the
Department a monthly rebate at an annualized
rate of generally 1.05% of the outstanding
principal balance on each federal
consolidation loan which is a part of the
related trust. This rebate will be payable
prior to distributions made to you. In
addition, the trust must pay to the
Department a 0.50% origination fee on the
initial principal balance of each student
loan which is originated on its behalf by
the eligible lender trustee after the
applicable closing date. This fee will be
deducted by the Department out of interest
subsidy payments and special allowance
payments otherwise payable to the trust(s).
In such event the amount available to be
distributed to you will be reduced. Under
certain circumstances, the related trust is
obligated to pay any portion of the unpaid
fee from other assets of that trust prior to
making distributions to you. As a result,
the payment of the rebate fee and
origination fee to the Department will
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affect the rate and timing of payments to
you. Moreover, if the origination fee is
deducted from interest subsidy payments and
special allowance payments the interest rate
payable on your securities may be capped at
a lower rate. In such event, the value of
your investment may be impaired.
Due to a Department policy limiting the
granting of new lender identification
numbers, all of the trusts established by
the seller to securitize federal student
loans may use a common Department lender
identification number. The Department
regards the eligible lender trustee as the
party primarily responsible to the
Department for any liabilities owed to the
Department or federal guarantors resulting
from the eligible lender trustee's
activities in the federal student loan
program. If the Department or a federal
guarantor determines such a liability exists
in connection with a trust using the shared
lender identification number, the Department
or such federal guarantor may collect that
liability or offset such liability from
amounts due the eligible lender trustee
under the shared lender identification
number.
Because the servicing agreements for the
trusts established by the seller, which
share a lender identification number, will
require the eligible lender trustee or the
master servicer to allocate to the proper
trust shortfalls or an offset by the
Department or a federal guarantor arising
from the student loans held by the eligible
lender trustee on each trust's behalf, if
the amount available for indemnification by
one trust to another trust is insufficient,
you may suffer a loss on your investment as
a result of the performance of another
trust.
NOTEHOLDERS' RIGHT TO CONTROL
UPON CERTAIN DEFAULTS
MAY ADVERSELY AFFECT
CERTIFICATEHOLDERS In the event of a default by the master
servicer or the administrator, the indenture
trustee or the noteholders, may remove the
master servicer or the administrator, as the
case may be, without the consent of the
eligible lender trustee or any of the
certificateholders. In addition, the
noteholders have the ability, with certain
specified exceptions, to waive defaults by
the master servicer or the administrator,
including defaults that could materially
adversely affect the certificateholders.
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CONSUMER PROTECTION LAWS
MAY AFFECT ENFORCEABILITY OF
STUDENT LOANS Numerous federal and state consumer
protection laws and related regulations
impose substantial requirements upon lenders
and servicers involved in consumer finance.
Also, some state laws impose finance charge
ceilings and other restrictions on certain
consumer transactions and require contract
disclosures in addition to those required
under federal law. These requirements impose
specific statutory liability that could
affect an assignee's ability to enforce
consumer finance contracts such as the
student loans. In addition, the remedies
available to the indenture trustee or the
noteholders upon an event of default under
the indenture may not be readily available
or may be limited by applicable state and
federal laws.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Key Bank USA, National Association, as originator of each trust, has
filed with the Securities and Exchange Commission (the "Commission") a
Registration Statement (together with all amendments and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the securities offered pursuant to this
prospectus. The Registration Statement, contains information which is not
contained in this prospectus. Prospective investors may read the Registration
Statement and make copies of it at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; and at the
Commission's regional offices at Seven World Trade Center, New York, New York
10048, and 500 West Madison Street, 14th Floor, Chicago, Illinois 60661. Copies
of the Registration Statement may be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission maintains a Web site at http://www.sec.gov
containing registration statements and other information regarding registrants,
including Key Bank USA, National Association, that file electronically with the
Commission.
All documents filed by Key Bank USA, National Association, as
originator of any trust, pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), subsequent to
the date of this prospectus and prior to the termination of the offering of the
securities shall be deemed to be incorporated by reference in this prospectus.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this prospectus to the extent that a statement contained herein
or in any subsequently filed document which also is to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this prospectus.
Key Bank USA, National Association will provide without charge to each
person, including any beneficial owner of securities, to whom a copy of this
prospectus is delivered, on the written or oral request of any such person, a
copy of any or all of the documents incorporated herein or in any related
prospectus supplement by reference, except the exhibits to such documents
(unless such exhibits are specifically incorporated by reference in such
documents). Requests for such copies should be directed to Key Bank USA,
National Association, Education Resources, 800 Superior Avenue, 4th Floor,
Cleveland, Ohio 44114, Attention: Education Loan Trust Administrator (Telephone:
(800) 523-7248).
FORMATION OF THE TRUSTS
THE TRUSTS
With respect to each series of Securities, the Seller will establish a
separate trust (each a "Trust") pursuant to the respective trust agreement (each
a "Trust Agreement"), for the transactions described herein and in the related
Prospectus Supplement. The property of each Trust will consist of
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<PAGE> 136
(a) a pool of undergraduate loans and/or graduate school student
loans (the "Student Loans"), legal title to which is held by
the related eligible lender trustee (the "Eligible Lender
Trustee") on behalf of each Trust,
(b) all funds collected or to be collected in respect thereof
(including any Guarantee Payments with respect thereto) on or
after the applicable date specified in the related Prospectus
Supplement (the "Cutoff Date"),
(c) any other rights under certain collateral agreements with
respect to certain Private Graduate Loans to the extent
assigned to each Trust by the Seller, and
(d) all moneys and investments on deposit in any Collection
Account, any Pre-Funding Account, any Escrow Account, any
Negative Carry Account, any Reserve Account and any other
trust accounts or any other form of credit or cash flow
enhancement that may be obtained for the benefit of holders of
one or more classes of such Securities. To the extent provided
in the applicable Prospectus Supplement, the Notes will be
collateralized by the property of the related Trust. To
facilitate servicing and to minimize administrative burden and
expense, the Master Servicer will be appointed by the Eligible
Lender Trustee as the custodian, and the Master Servicer will
then appoint the Sub-Servicers as the custodians on its
behalf, of the promissory notes representing the Student Loans
that each services.
The principal offices of each Trust and the related Eligible Lender
Trustee will be specified in the applicable Prospectus Supplement.
If specified in a Prospectus Supplement, an election may be made to
treat a Trust as a "financial asset securitization improvement trust" (a
"FASIT") for federal income tax purposes. See "Federal Tax Consequences For
Trusts For Which a Partnership Election is Made--FASITs" herein.
ELIGIBLE LENDER TRUSTEE
The Eligible Lender Trustee for each Trust will be such entity as is
specified in the related Prospectus Supplement. The Eligible Lender Trustee on
behalf of the related Trust will acquire legal title to all the related Student
Loans acquired pursuant to the related Sale and Servicing Agreement and will
enter into a Guarantee Agreement or comparable arrangement, if applicable, with
each of the Guarantors with respect to the Student Loans which are guaranteed or
insured. Each Eligible Lender Trustee will qualify as an eligible lender and
owner of all Federal Loans and Private Loans for all purposes under the Higher
Education Act and the Guarantee Agreements. Failure of the Federal Loans to be
owned by an eligible lender would result in the loss of any Federal Guarantee
Payments from any Federal Guarantor and any Federal Assistance with respect to
such Federal Loans. See "The Student Loan Financing Business--Description of
Federal Loans Under the Programs." An Eligible Lender Trustee's liability in
connection with the issuance and sale of the Notes and the Certificates is
limited solely to the express obligations
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<PAGE> 137
of the Eligible Lender Trustee as set forth in the related Trust Agreement and
the related Sale and Servicing Agreement. See "Description of the Transfer and
Servicing Agreements." The Seller plans to maintain normal commercial banking
relations with the Eligible Lender Trustee.
USE OF PROCEEDS
The net proceeds from the sale of Securities of a given series will be
used by the applicable Trust to purchase the related Student Loans on the
Closing Date from the Seller and to make the initial deposit into the Reserve
Account, Pre-Funding Account or Negative Carry Account, if any. The Seller will
use such net proceeds paid to it with respect to any such Trust for general
corporate purposes.
THE SELLER, THE ADMINISTRATOR, THE MASTER SERVICER
AND THE SUB-SERVICERS
THE SELLER, ADMINISTRATOR AND MASTER SERVICER
General. Key Bank USA, National Association ("KBUSA"), will act as
seller (the "Seller") and as master servicer (the "Master Servicer"), pursuant
to the related Sale and Servicing Agreement, and as administrator (the
"Administrator") pursuant to the related Administration Agreement.
KBUSA is a national banking association and a wholly owned subsidiary
of KeyCorp. KBUSA is engaged in consumer loan activities nationally, including,
automobile lending and leasing, home equity financing of both first- and
second-home mortgages, education lending, and marine and recreational vehicle
financing. The principal executive offices of KBUSA are located at Key Tower,
127 Public Square, Cleveland, Ohio 44114 and its telephone number is (216)
689-6300.
Services and Fees of Administrator. Pursuant to the related
Administration Agreement, the Administrator will be responsible for preparing
and filing claim forms on behalf of the Eligible Lender Trustee for Interest
Subsidy Payments and Special Allowance Payments from the United States
Department of Education (the "Department") and is required to provide notices
and reports and to perform other administrative obligations required by the
related Indenture, the Trust Agreement and the Sale and Servicing Agreement. See
"Description of the Transfer and Servicing Agreements--Administrator."
Master Servicer. KBUSA, in its capacity as Master Servicer will be
responsible for master servicing the Student Loans. The Master Servicer will
arrange for and oversee the performance of each Sub-Servicer of its respective
servicing obligations with respect to the Student Loans. In consideration for
performing its obligations under the applicable Sale and Servicing Agreement,
the Master Servicer will receive in the aggregate, subject to certain
limitations described herein, a monthly fee payable by each Trust as specified
in the related Prospectus Supplement and certain one-time fixed fees for each
Student Loan for which a forbearance period was granted or
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<PAGE> 138
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 Master Servicer will in turn be solely responsible for all
compensation due to the Sub-Servicers for the performance of their respective
obligations pursuant to the related Sub-Servicing Agreements. See "Description
of Transfer and Servicing Agreements--Servicing Compensation."
Year 2000. The Year 2000 ("Year 2000") issue refers to the fact that
many computer systems were originally programmed using two digits rather than
four digits to identify the applicable year. As a result, certain systems might,
during the Year 2000, interpret the year as 1900 rather than 2000. Unless
hardware, system software and applications are corrected to be Year 2000
compliant, computers and the devices they control could generate miscalculations
and create operational problems.
To address this issue, KeyCorp ("KeyCorp"), the parent of KBUSA, for
the operations of KBUSA, as well as its other operating subsidiaries, developed
an extensive plan in 1995 to deal with the Year 2000 issue and formed an
implementation team comprising internal personnel and third-party experts.
During 1999, KeyCorp continued to modify all computer systems to operate
properly in the Year 2000 and beyond. If left unchecked, the Year 2000 problem
could have affected anything from complex computer systems to telephone systems,
automatic teller machines ("ATMs"), and elevators.
KeyCorp completed all phases of the plan by the end of 1999 and at the
turn of the millennium, and through the first quarter of 2000, neither KeyCorp
nor KBUSA experienced any operational problems. KeyCorp will continue to monitor
the systems to ensure they continue to operate properly and appropriate
modifications will be made, if necessary.
KeyCorp has not detected any meaningful credit quality issues arising
from client difficulties with Year 2000 conversations. Nonetheless, it is
possible that such issues may arise over an extended period of time. KeyCorp
will continue to monitor its loan portfolio for potential situations in need of
special attention. Further, KeyCorp did not experience a significant increase in
consumer withdrawals of deposits in anticipation of the millennium. As a result,
there was no material impact on KeyCorp's funding costs. Management of KeyCorp
was prepared for the possibility that some of the third-parties that KeyCorp
deals with (such as foreign banks, governmental agencies, clearing houses,
telephone companies, and other service providers) would suffer from Year 2000
computer problems. As of March 31, 2000, KeyCorp has not been advised that any
third-party that provides material products or services to KeyCorp has had
significant problems with its systems.
The cumulative cost of implementing KeyCorp's Year 2000 plan and
mitigating the adverse effects of potential Year 2000 problems was $50 million
as of December 31, 1999, and no additional costs are anticipated.
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THE SUB-SERVICERS
The sub-servicers (the "Sub-Servicers") under each Sale and Servicing
Agreement will be the entity or entities specified in the related Prospectus
Supplement.
With respect to the Student Loans it is servicing on behalf of the
Master Servicer and with respect to each Trust, each Sub-Servicer will be
required by the related sub-servicing agreement between such Sub-Servicer and
the Master Servicer (each a "Sub-Servicing Agreement") to perform the services
and duties customary to the servicing of Student Loans it is required to service
and to do so in the same manner as such Sub-Servicer has serviced Student Loans
on behalf of the Seller and/or the Master Servicer and otherwise in compliance
with all applicable standards and procedures. In addition, each Sub-Servicer is
required to maintain its eligibility as a third-party servicer under the Higher
Education Act. See "Description of the Transfer and Servicing
Agreements--Servicing Procedures." Each Sub-Servicer will be paid directly by
the Master Servicer for its services rendered under each Sub-Servicing
Agreement. The Trust will be an intended third-party beneficiary of each
Sub-Servicing Agreement. See "Description of the Transfer and Servicing
Agreements--Master Servicer Default; Administrator Default."
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THE STUDENT LOAN POOLS
GENERAL
The Student Loans to be sold by the Seller to the Eligible Lender
Trustee on behalf of a Trust pursuant to the related Sale and Servicing
Agreement will be selected from the Seller's portfolio of Student Loans by
several criteria, including that each Student Loan:
- was originated in the United States or its territories or
possessions under and in accordance with the Programs
(including, in the case of borrowers of Federal Loans, a
financial need analysis and, in the case of borrowers of
Private Loans, a creditworthiness evaluation);
- contains terms in accordance with those required by the
Programs, the Guarantee Agreements (with respect to those
Student Loans that are guaranteed or insured) and other
applicable requirements;
- no selection procedures believed by the Seller to be adverse
to the Securityholders of any series will be used in selecting
the related Student Loans; and
- satisfies the other criteria, if any, set forth in the related
Prospectus Supplement.
The Student Loans that comprise assets of each Trust will be held by
the related Eligible Lender Trustee, as trustee on behalf of such Trust. The
Eligible Lender Trustee will also enter into, on behalf of such Trust (with
respect to those Student Loans that are guaranteed or insured), Guarantee
Agreements with the Guarantors pursuant to which each of such Student Loans will
be guaranteed by one of such Guarantors. See "Formation of the Trusts--Eligible
Lender Trustee."
Information with respect to each pool of Student Loans for a given
Trust will be set forth in the related Prospectus Supplement, including, to the
extent appropriate, the composition, the distribution by loan type, loan payment
status, and states of borrowers' residence and the portion of such Student Loans
guaranteed by the specified Guarantors.
In the case of each series for which the related Trust may acquire
Student Loans from the Seller after the related Cutoff Date ("Additional
Fundings"), information with respect to the Student Loans eligible to be
acquired by the related Trust will be set forth in the related Prospectus
Supplement as will information regarding the duration and conditions of any
related funding period (a "Funding Period") or revolving period (a "Revolving
Period"), the circumstances under which Additional Fundings will be made during
such period, and, if Additional Fundings may continue to be made after such
period, the circumstances under which such Additional Fundings will be made.
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Each of the Student Loans provides or will provide for the amortization
of the outstanding principal balance of such Student Loan over a series of
regular payments. Each regular payment consists of an installment of interest
which is calculated on the basis of the outstanding principal balance of such
Student Loan multiplied by the applicable interest rate and further multiplied
by the period elapsed (as a fraction of a calendar year) since the preceding
payment of interest was made. As payments are received in respect of such
Student Loan, the amount received is applied first to interest accrued to the
date of payment and the balance is applied to reduce the unpaid principal
balance. Accordingly, if a borrower pays a regular installment before its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be less than it would have been
had the payment been made as scheduled, and the portion of the payment applied
to reduce the unpaid principal balance will be correspondingly greater.
Conversely, if a borrower pays a monthly installment after its scheduled due
date, a late fee, where applicable, will be assessed and the portion of the
payment allocable to the late fee and interest for the period since the
preceding payment was made will be greater than it would have been had the
payment been made as scheduled, and the portion of the payment applied to reduce
the unpaid principal balance will be correspondingly less. In either case,
subject to any applicable Deferral Periods or Forbearance Periods, the borrower
pays a regular installment until the final scheduled payment date, at which time
the amount of the final installment is increased or decreased as necessary to
repay the then outstanding principal balance of and any accrued but unpaid
interest on such Student Loan.
THE STUDENT LOAN FINANCING BUSINESS
PROGRAMS OFFERED BY THE SELLER
The Student Loans to be sold by the Seller to the Eligible Lender
Trustee on behalf of a Trust pursuant to the related Sale and Servicing
Agreement will be selected from Student Loans originated or acquired by the
Seller under various loan programs (the "Programs"). The proceeds of the loans
are used to finance a portion of the costs of
(1) undergraduate education ("Undergraduate Loans"),
(2) graduate education ("Graduate Loans") or
(3) post-graduate activities such as studying for bar exams or
participating in residency programs ("Post-Graduate Loans").
Undergraduate Loans and Graduate Loans may be originated through the
Federal Family Education Loan Program ("FFELP"). As described herein and in the
related Prospectus Supplement, substantially all payments of principal and
interest with respect to loans originated through FFELP (collectively, the
"Federal Loans") will be guaranteed against default, death, bankruptcy or
disability of the applicable borrower, and a closing of or a false certification
by such borrower's school, by certain federal guarantors pursuant to a guarantee
agreement to be entered into between such federal guarantors specified in the
related Prospectus Supplement
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(each a "Federal Guarantor" and collectively, the "Federal Guarantors") and the
applicable Eligible Lender Trustee (such agreements, each as amended or
supplemented from time to time, the "Federal Guarantee Agreements"). Each of the
Federal Guarantors is entitled, subject to certain conditions, to be reimbursed
by the Department for 75% to 100% of all Guarantee Payments it makes pursuant to
a program of federal reinsurance under the Higher Education Act of 1965, as
amended (such act, together with all rules and regulations promulgated
thereunder by the Department and/or the Federal Guarantors, the "Higher
Education Act"). In addition, each Eligible Lender Trustee, as a holder of the
Federal Loans on behalf of the related Trust, is entitled to receive from the
Department certain Interest Subsidy Payments and Special Allowance Payments with
respect to certain of such Federal Loans as described herein. See "--Description
of Federal Loans Under the Programs" below.
Payments of principal and interest with respect to the Private Loans
may be (1) unguaranteed by any federal or private guarantor, or by any other
party or governmental agency ("Private Unguaranteed Loans") or (2) guaranteed
against default, death, bankruptcy or disability of the applicable borrower
("Private Guaranteed Loans") by certain private guarantors pursuant to a
guarantee agreement to be entered into among private guarantors specified in the
related Prospectus Supplement (each a "Private Guarantor" and collectively,
"Private Guarantors," and together with the Federal Guarantors, the "Guarantors"
or individually a "Guarantor"), the Seller and the Eligible Lender Trustee, or
by Private Guarantors pursuant to surety bonds issued to the Seller and assigned
to each Eligible Lender Trustee on behalf of the related Trust (such agreement
and surety bonds, each as amended or supplemented from time to time, the
"Private Guarantee Agreements" and, together with the Federal Guarantee
Agreements, the "Guarantee Agreements"). Payments under the Private Guarantee
Agreements are referred to as "Private Guarantee Payments" and payments under
Federal Guarantee Agreements are referred to as "Federal Guarantee Payments."
Private Guarantee Payments and Federal Guarantee Payments are together referred
to as "Guarantee Payments." See "--Description of Private Loans Under the
Programs" below.
DESCRIPTION OF FEDERAL LOANS UNDER THE PROGRAMS
General. The following descriptions of Federal Stafford Loan Program
(the "Stafford Loan Program"), Federal Supplemental Loans for Students Program
(the "SLS Loan Program"), the Federal Parental Loans For Undergraduate Students
Loan Program (the "PLUS Loan Program"), and Federal Consolidation Loan Program
(the "Federal Consolidation Loan Program") (such programs being collectively
referred to herein as the "Federal Programs") as authorized under the Higher
Education Act are qualified in their entirety by reference to the Higher
Education Act. Since its original enactment in 1965, the Higher Education Act
has been amended and reauthorized several times, including by the Higher
Education Amendments of 1992 (the "1992 Amendments") and the Higher Education
Amendments of 1998 (the "1998 Amendments"). The 1992 Amendments extended the
principal provisions of the Federal Programs to September 30, 1998 (or, in the
case of borrowers who have received Federal Loans prior to that date, September
30, 2002), and the 1998 Amendments further extended the principal provisions of
the Federal Programs through June 30, 2003.
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There can be no assurance that the Higher Education Act or other
relevant federal or state laws, rules and regulations and the programs
implemented thereunder will not be amended or modified in the future in a manner
that will adversely impact the programs described in this Prospectus, the
related Prospectus Supplement and the student loans made thereunder, including
the Student Loans, or the Guarantors. In addition, future measures to reduce any
future federal budget deficit or for other purposes may adversely affect the
amount and nature of federal financial assistance available with respect to
these programs. In recent years, federal legislation has provided for the
recovery of certain funds held by guarantee agencies in order to achieve
reductions in federal spending. There can be no assurance that future federal
legislation or administrative actions will not adversely affect expenditures by
the Department or the financial condition of the Federal Guarantors. For a
discussion of each Federal Guarantor's claims-paying ability, see the related
Prospectus Supplement.
The Stafford Loan Program. "Stafford Loans" are loans made by eligible
lenders in accordance with the Higher Education Act to Eligible Students, based
on financial need, to finance a portion of the costs of attending an eligible
institution of higher education or a vocational school. The Higher Education Act
limits the amount of Stafford Loans that may be made to a student in any given
academic year, the amount a student may have outstanding in the aggregate and
specifies certain payment terms, including the interest rates that may be
charged on Stafford Loans. Holders of Stafford Loans complying with these
limitations and the other conditions specified in the Higher Education Act will
be entitled to the benefits of:
1. a guarantee of the payment of principal and interest with
respect to such Stafford Loans by a guarantee agency (the Federal
Guarantors in the case of the Federal Loans), which guarantee will be
supported by federal reinsurance of all or most of such guaranteed
amounts as described herein;
2. federal interest subsidy payments equal to the interest
payable on such Stafford Loans prior to the time the borrower begins
repayment of such Stafford Loans and during any applicable Deferral
Periods, together with interest on any such amounts not paid by the
Department when due ("Interest Subsidy Payments"); and
3. federal special allowance payments, in varying amounts,
during the term of such Stafford Loans to ensure that interest payable
on such Stafford Loans approximates current market interest rates,
together with interest on any such amounts not paid by the Department
when due ("Special Allowance Payments"), (such federal reinsurance
obligations, together with those obligations referred to in clauses (2)
and (3) above, being collectively referred to herein as "Federal
Assistance").
Certain Stafford Loans do not qualify for Interest Subsidy Payments but
otherwise qualify for all other forms of Federal Assistance ("Unsubsidized
Stafford Loans"). These loans are identical to Stafford Loans in all material
respects, except that interest accruing thereon during periods when the borrower
is in school or in a Deferral Period or Grace Period is either paid periodically
by the borrower during such periods or added periodically to the principal
balance of the loan by the holder thereof. A borrower qualifies for an
Unsubsidized Stafford Loan if, and to
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the extent that, the borrower's need for a Stafford Loan, as calculated pursuant
to the Higher Education Act, is more than the maximum subsidized Stafford Loan
authorized by statute.
(1) Eligibility Requirements. Subject to the annual and aggregate
limits on the amount of Stafford Loans that a student can borrow discussed
below, Stafford Loans are available to Eligible Students in amounts not
exceeding their unmet need for financing as determined in accordance with the
provisions of the Higher Education Act. "Eligible Students" are students that
are:
1. enrolled in, or admitted for enrollment in, an approved or
accredited undergraduate or graduate school;
2. enrolled in, or admitted for enrollment in, an acceptable
degree program;
3. attending at least half-time;
4. making satisfactory progress toward the completion of that
program according to the standards of the school;
5. U.S. citizens, U.S. nationals or eligible non-citizens;
6. not borrowers under Federal Loans, including the requested
loan, that exceed the applicable annual and aggregate limits;
and
7. not in default on any education loan or not required to refund
an educational grant.
Each Stafford Loan:
- must be unsecured;
- must provide for deferral of the obligation of the borrower to make
(x) interest payments for as long as the Department makes Interest
Subsidy Payments and (y) principal payments so long as the borrower
remains an Eligible Student and thereafter during any applicable Grace
Periods, Deferral Periods or Forbearance Periods; and
- must provide for repayment over a period not to exceed 10 years
(excluding any Deferral Periods or Forbearance Periods) from the date
repayment commences.
(2) Loan Limits. In order to qualify for assistance under the Stafford
Loan Program, the Higher Education Act imposes an annual limit on the amount of
Stafford Loans and other Federal Loans that may be made to any single student
and an aggregate limit on the amount of such Federal Loans such student may have
outstanding.
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The following chart sets forth the current and historic loan limits.
<TABLE>
<CAPTION>
ALL STUDENTS (1) INDEPENDENT STUDENTS(1)
---------------- ------------------------------
BASE AMOUNT ADDITIONAL
SUBSIDIZED SUBSIDIZED AND UNSUBSIDIZED MAXIMUM
SUBSIDIZED ON OR UNSUBSIDIZED ON ONLY ON OR AGGREGATE
BEFORE AFTER OR AFTER AFTER TOTAL
BORROWER'S ACADEMIC LEVEL 1/1/87 1/1/87 10/1/93(2) 7/1/94(3) AMOUNT IN
------------------------- ---------- ---------- --------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Undergraduate (per year)
1st year. $ 2,500 $ 2,625 $ 2,625 $ 4,000 $ 6,625
2nd year. $ 2,500 $ 2,625 $ 3,500 $ 4,000 $ 7,500
3rd year and above $ 2,500 $ 4,000 $ 5,500 $ 5,000 $10,500
Graduate (per year) $ 5,000 $ 7,500 $ 8,500 $10,000 $18,500
Aggregate Limit;
Undergraduate $12,500 $17,250 $23,000 $23,000 $46,000
Graduate (including
undergraduate) $25,000 $54,750 $65,500 $73,000 $138,500
</TABLE>
-----------------
(1) The loan limits are inclusive of both Stafford Loans and Student Loans.
(2) These amounts represent the combined maximum loan amount per year for
Stafford Loans and unsubsidized Stafford Loans. Accordingly, the maximum
amount that a student may borrow under an Unsubsidized Stafford Loan is the
difference between the combined maximum loan amount and the amount the
student received in the form of a Stafford Loan.
(3) Independent undergraduate students, graduate students or professional
students may borrow these additional amounts. In addition, dependent
undergraduate students may also receive these additional loan amounts if
the parents of such students are unable to provide the family contribution
amount and it is unlikely that the student's parents will qualify for a
PLUS Loan.
The annual loan limits are reduced in some instances where the student
is enrolled in a program that is less than one academic year or has less than a
full academic year remaining in his or her program. The Department has
discretion to raise these limits to accommodate highly specialized or
exceptionally expensive course of study.
(3) Interest. The borrower's interest rate on a Stafford Loan may be
fixed or variable. Stafford Loan interest rates are summarized in the chart
below.
<TABLE>
<CAPTION>
TRIGGER DATE(1) BORROWER RATE(2) MAXIMUM RATE INTEREST RATE MARGIN
--------------- ---------------- ------------ --------------------
<S> <C> <C> <C>
Prior to 01/01/81. 7% 7% N/A
01/01/81-09/12/83. 9% 9% N/A
09/13/83-06/30/88. 8% 8% N/A
07/01/88-09/30/92. 8% for 48 months; 8% for 48 months, 3.25%
thereafter, 91-Day then 10%
Treasury + Interest
Rate Margin
10/01/92-06/30/94. 91-Day Treasury + 9% 3.10%
Interest Rate Margin
07/01/94-06/30/95. 91-Day Treasury + 8.25% 3.10%
Interest Rate Margin
07/01/95-06/30/98. 91-Day Treasury + 8.25% 2.50% (In-School, Grace or
Interest Rate Margin Deferment); 3.10% (in repayment)
On or after 07/01/98 91-Day Treasury + 8.25% 1.70% (In-School, Grace or
Interest Rate Margin Deferment); 2.30% (in repayment)
</TABLE>
---------------------
(1) The Trigger Date for Stafford Loans made before October 1, 1992 is the
first day of enrollment period for which a borrower's first Stafford Loan
in made and for Stafford Loans made on October 1, 1992 and after the
Trigger Date is the date of the disbursement of a borrower's first Stafford
Loan.
(2) The rate for variable rate Stafford Loans applicable for any 12-month
period beginning on July 1 and ending on June 30, is determined on the
preceding June 1 and is equal to the lesser of (a) the applicable Maximum
Rate or (b) the sum of (i) the bond equivalent rate of 91-day Treasury
Bills auctioned at the final auction held prior to such June 1 and (ii) the
applicable Interest Rate Margin.
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<PAGE> 146
The 1992 Amendments provide that, for fixed rate loans made on or after
July 23, 1992 and for certain loans made to new borrowers on or after July 1,
1988, the lender must have converted by January 1, 1995 the interest rate on
such loans to an annual interest rate adjusted each July 1 equal to (a) for
certain loans made between July 1, 1988 and July 23, 1992, the 91-day Treasury
Bill rate at the final auction prior to the preceding June 1 plus 3.25%, and (b)
for loans made on or after July 23, 1992 and prior to July 1, 1998, the 91-day
Treasury Bill rate at the final auction prior to the preceding June 1 plus
3.10%. The variable interest rate does not apply to loans made prior to July 23,
1992 during the first 48 months of repayment.
Interest is payable on each Stafford Loan monthly in arrears until the
principal amount thereof is paid in full. However, prior to the date the
borrower begins repaying the principal of such Stafford Loan and during any
applicable Deferral Period, the borrower has no obligation to make interest
payments. Instead, the Department makes quarterly Interest Subsidy Payments to
the holder of the Subsidized Stafford Loans on behalf of the borrower during
such periods, in amounts equal to the accrued and unpaid interest for the
previous quarter with respect to such Stafford Loan. During a Forbearance
Period, the Department will not make any Interest Subsidy Payments; instead, at
the borrower's option, interest on each Stafford Loan may be paid currently or
capitalized and added to the outstanding principal balance of such Stafford Loan
at the end of such Forbearance Period. See "--(6) Interest Subsidy Payments"
below.
"91-day Treasury Bill Rate" means, on any date of determination, the
weighted average per annum discount rate (expressed on a bond equivalent basis
and applied on a daily basis) for 91-day Treasury Bills at the most recent
91-day Treasury Bills auction prior to such date as published by the Board of
Governors of the Federal Reserve System or as reported by the U.S. Treasury
Department.
(4) Repayment. No principal and/or interest payments with respect to a
Stafford Loan are required to be made during the time a borrower remains an
Eligible Student and during the existence of an applicable Grace Period,
Deferral Period or Forbearance Period. In general, a borrower must repay each
Stafford Loan in monthly installments over a period of not more than 10 years
(excluding any Deferral Period or Forbearance Period) after commencement of
repayment. New borrowers on or after October 7, 1998 who accumulate outstanding
loans under the Student Assistance General Provisions and FFELP totaling more
than $30,000, are entitled to extended repayment schedules of up to 25 years
subject to certain minimum repayment amounts. Any borrower may voluntarily
prepay without premium or penalty any Federal Loan and in connection therewith
may waive any Grace Period or Deferral Period. The Higher Education Act
presently requires a minimum annual principal and interest payment with respect
to a Stafford Loan of $600 in the aggregate (but in no event less than accrued
interest), unless the borrower and the lender agree to a lesser amount. For
Stafford Loans and SLS Loans first disbursed on or after July 1, 1993 to a
borrower who has no outstanding Federal Loans on the date such loan is made, the
borrower must be offered the opportunity to repay the loan according to a
graduated or income-sensitive repayment schedule established in accordance with
Department regulations. For Stafford Loans entering repayment on or after
October 1, 1995, borrowers may choose among several repayment options, including
the option to make interest only payments for limited periods.
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<PAGE> 147
(5) Grace Periods, Deferral Periods, Forbearance Periods. Borrowers of
Stafford Loans must generally commence repaying the loans following a period of
(a) not less than 9 months nor more than 12 months (with respect to loans for
which the applicable interest rate is 7% per annum) and (b) not more than 6
months (with respect to loans for which the applicable interest rate is other
than 7% per annum) (a "Grace Period") after the borrower ceases to be an
Eligible Student. However, subject to certain conditions, no principal
repayments need be made with respect to Stafford Loans during periods when the
borrower has returned to an eligible educational institution on at least a
half-time basis or is pursuing studies pursuant to an approved graduate
fellowship program, during certain other periods (varying from six months to
three years) when the borrower has joined the military or certain volunteer
organizations (for all loans made prior to July 1, 1993, or loans made after
such date to borrowers with loans already outstanding on such date), for periods
when the borrower is unable to secure employment (up to three years) or for
periods during which the borrower is experiencing economic hardship (for loans
made after July 1, 1993, to borrowers with no outstanding loans on such date)
(each, a "Deferral Period"). In addition, the lender may, and in some
circumstances must, allow, in accordance with standards and guidelines approved
by the applicable Federal Guarantor and the Department, periods of forbearance
during which the borrower may defer principal and/or interest payments because
of temporary financial hardship (a "Forbearance Period").
(6) Interest Subsidy Payments. Interest Subsidy Payments are payments
made quarterly to the holder of a subsidized Stafford Loan by the Department
with respect to those Stafford Loans as to which the applicable conditions of
the Higher Education Act have been satisfied, in an amount equal to the accrued
and unpaid interest on the outstanding principal amount of each Stafford Loan
for such quarter, commencing from the date such Stafford Loan is made until the
end of the applicable Grace Period after the borrower ceases to be an Eligible
Student and during any applicable Deferral Period. The Department will not make
Interest Subsidy Payments during any Forbearance Period. The Higher Education
Act provides that the holder of such a qualifying Stafford Loan has a
contractual right against the United States, to receive Interest Subsidy
Payments from the Department (including the right to receive interest on any
Interest Subsidy Payments not timely paid). Receipt of Interest Subsidy Payments
is conditioned on compliance with the requirements of the Higher Education Act,
including satisfaction of certain need-based criteria (and the delivery of
sufficient information by the borrower and the lender to the Department to
confirm the foregoing) and continued eligibility of the Stafford Loan for
federal reinsurance. Such eligibility may be lost, however, if the loans are not
originated and serviced, or are not held by an eligible lender, in accordance
with the requirements of the Higher Education Act and the applicable guarantee
agreements. See "--(1) Eligibility Requirements"; "Formation of the
Trusts--Eligible Lender Trustee" and "Description of the Transfer and Servicing
Agreements--Servicing Procedures." The Seller expects that each of the
subsidized Stafford Loans that are part of a pool of Student Loans will be
eligible to receive Interest Subsidy Payments.
(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
25
<PAGE> 148
percentage of the average outstanding principal amount of each such Federal Loan
during each quarter.
The percentage or rate used to determine the Special Allowance Payments
for a particular loan varies based on a number of factors, including when the
loan was disbursed and the period of enrollment with respect to which it was
made. Generally, the Special Allowance Payment with respect to a Federal Loan
for a quarter will be equal to the excess, if any, of (1) the amount of interest
that would be payable on such loan at a rate per annum equal to the average bond
equivalent rates of (x) 91-day Treasury Bills auctioned for such quarter plus
3.25% (3.10% for loans first disbursed on or after October 1, 1992 and before
October 1, 1998), or (y) for loans first disbursed on or after July 1, 1998 and
before January 1, 2000, 91-day Treasury Bills auctioned for such quarter plus
2.2% while borrowers are in-school, grace or deferment status, or 2.8% while
borrowers are in the repayment period, or (z) for loans first disbursed on or
after January 1, 2000 and before July 1, 2003, the 3-month commercial paper
(financial) rates in effect for each of the days in such quarter as reported by
the Federal Reserve in Publication H-15 (the "CP Rate"), plus 2.34% during
repayment periods or 1.74% while borrowers are in school, grace or deferment
periods (or 2.64% in the case of PLUS and Federal Consolidation Loans for which
the application is received on or after January 1, 2000 and before July 1,
2003), over (2) the stated amount of interest payable on such loan.
The Higher Education Act provides that a holder of a qualifying loan
who is entitled to receive Special Allowance Payments has a contractual right
against the United States to receive those Special Allowance Payments (including
the right to receive interest on any Special Allowance Payments not timely
paid). Receipt of Special Allowance Payments, however, is conditioned on
compliance with the requirements of the Higher Education Act, including
satisfaction of certain need-based criteria (and the delivery of sufficient
information by the borrower and the lender to the Department to confirm the
foregoing) and continued eligibility for federal reinsurance. Such eligibility
may be lost, however, if the loans are not originated and serviced, or are not
held by an eligible lender, in accordance with the requirements of the Higher
Education Act and the applicable guarantee agreement. See "--(1) Eligibility
Requirements;" "Formation of the Trusts--Eligible Lender Trustee" and
"Description of the Transfer and Servicing Agreements--Servicing Procedures."
The Seller expects that each of the Stafford Loans that are part of a pool of
Student Loans will be eligible to receive Special Allowance Payments, if any are
payable from time to time.
Interest Subsidy Payments and Special Allowance Payments are generally
received within 45 to 60 days after submission to the Department of the
applicable claims forms for any given calendar quarter, although there can be no
assurance that such payments will in fact be received from the Department within
that period. For each Trust, the related Administrator will agree to prepare and
file with the Department all such claims forms and any other required documents
or filings on behalf of the applicable Eligible Lender Trustee as owner of the
related Federal Loans on behalf of such Trust. The Administrator will also agree
to assist the Eligible Lender Trustee in monitoring, pursuing and obtaining such
Interest Subsidy Payments and Special Allowance Payments, if any, with respect
to such Federal Loans. Except under certain conditions described herein, each
Eligible Lender Trustee will be required to remit Interest Subsidy Payments and
26
<PAGE> 149
Special Allowance Payments it receives with respect to the Federal Loans within
two business days of receipt thereof to the related Collection Account.
The SLS Loan Program. In addition to the Stafford Loan Program, the
Higher Education Act provides a separate program to facilitate additional loans
to graduate and professional students and independent undergraduate students.
This program is referred to as the "Supplemental Loans for Students Program"
(the "SLS Loan Program"). As of July 1, 1994, the SLS Loan Program was
discontinued and SLS Loans are no longer made. The basic framework and principal
provisions of the Stafford Loan Program as described above are similar in many
respects to those that are applicable to loans under the SLS Loan Program ("SLS
Loans"). In particular, SLS Loans are subject to similar eligibility
requirements and, provided that such requirements are satisfied, are entitled to
the same guarantee and federal reinsurance arrangements. SLS Loans differ
significantly from Stafford Loans, however, in the context of the Interest
Subsidy Payments and Special Allowance Payments discussed above.
The annual and aggregate limitations that are applicable to SLS Loans
in the case of those constituting Student Loans are as follows: SLS Loans to a
single borrower cannot exceed $4,000 per academic year (or $10,000 for loans
first disbursed on or after July 1, 1993) and $20,000 in aggregate principal
amount (or $73,000 for loans first disbursed on or after July 1, 1993)
(exclusive of any capitalized interest) at any one time outstanding. SLS Loans
are also limited, generally, to the cost of attendance minus other financial aid
for which the borrower is eligible. A determination of a borrower's eligibility
for the Stafford Loan Program, among other programs, is a condition to the
making of an SLS Loan.
As specified by the Higher Education Act, the applicable interest rate
for an SLS Loan depends upon the date of issuance of the loan and the period of
enrollment for which the loan is made. The interest rate per annum for SLS Loans
made and disbursed on or after July 1, 1987 is fixed each July 1 for each
succeeding 12-month period at a rate equal to the sum of
(1) the bond equivalent rate of 52-week Treasury Bills auctioned
at the final auction held prior to the preceding June 1; and
(2) 3.25% (3.10% for loans first disbursed on and after October 1,
1992), with a maximum rate of 12% per annum (11% for loans
first disbursed on or after October 1, 1992).
Although holders of SLS Loans are not entitled to receive Interest
Subsidy Payments, interest on such SLS Loans accrues from the date each such SLS
Loan is made and may either be paid currently by a borrower or may be
capitalized and added to the outstanding principal amount of such SLS Loan at
the time the borrower begins repayment. SLS Loans are eligible for Special
Allowance Payments only if and to the extent that the interest rate for such SLS
Loans calculated based on the 52-week Treasury Bill rate referred to above would
exceed the applicable maximum borrower interest rate. Because the basis for
determining the amount, if any, of Special Allowance Payments due to lenders is
based on the 91-day Treasury Bill Rate while the interest rate for SLS Loans is
based on the 52-week Treasury Bill rate (which may differ from the 91-day
27
<PAGE> 150
Treasury Bill Rate), there can be no assurance that any Special Allowance
Payments will be due and payable with respect to SLS Loans even though such SLS
Loans are deemed to be eligible therefor. See "--(7) Special Allowance Payments"
above.
A borrower of an SLS Loan is required to begin repayment of the
principal of such SLS Loan within 60 days after the date the last installment of
such SLS Loan is advanced, subject to deferral so long as such borrower remains
an Eligible Student or as a result of any applicable Deferral Period or
Forbearance Period. In addition, any borrower of an SLS Loan made and advanced
after July 23, 1992, who also has Stafford Loans outstanding may defer
commencing repayment of such SLS Loan for the Grace Period applicable to such
Stafford Loans. For SLS Loans entering repayment on or after October 1, 1995,
borrowers may choose among several repayment options, including the option to
make interest only payments for limited periods.
The PLUS Loan Program The Higher Education Act authorizes Federal
Parental Loans For Undergraduate Students Loans ("PLUS Loans") to be made to
parents of eligible dependent students (the "PLUS Loan Program"). After July 1,
1993, only parents who do not have an adverse credit history or who can secure
an endorser without an adverse credit history are eligible for PLUS Loans. The
basic provisions applicable to Federal PLUS Loans are similar to those of
Stafford Loans with respect to the federal insurance and reinsurance on the
loans. However, PLUS Loans differ from Stafford Loans, particularly because
Interest Subsidy Payments are not available under the PLUS Loan Program and in
some instances Special Allowance Payments are more restricted.
PLUS Loans disbursed prior to July 1, 1993 are limited to $4,000 per
academic year with a maximum aggregate amount of $20,000. The only limit on the
annual and aggregate amounts of PLUS Loans first disbursed on or after July 1,
1993 is the cost of the student's education less other financial aid received,
including scholarship, grants and other student loans.
The interest rate determination for a PLUS Loan is dependent on when
the PLUS Loan was originally made and disbursed and the period of enrollment.
The interest rates for PLUS Loans are summarized in the following chart.
<TABLE>
<CAPTION>
INTEREST
TRIGGER DATE(1) BORROWER RATE(2) MAXIMUM RATE RATE MARGIN
--------------- ---------------- ------------ -----------
<S> <C> <C> <C>
Prior to 10/01/81 9% 9% N/A
10/01/81-10/30/82 14% 14% N/A
11/01/82-06/30/87 12% 12% N/A
07/01/87-09/30/92 52-Week Treasury + Interest Rate 12% 3.25%
Margin
10/01/92-06/30/94 52-Week Treasury + Interest Rate 10% 3.10%
Margin
07/01/94-06/30/98 52-Week Treasury + Interest Rate 9% 3.10%
Margin
After 6/30/98 91-Day Treasury + Interest Rate 9% 3.10%
Margin
</TABLE>
---------------------
(1) The Trigger Date for PLUS Loans made before October 1, 1992 is the first
day of enrollment period for which the PLUS Loan is made, and for PLUS
Loans made on October 1, 1992 and after the Trigger Date is the date of the
disbursement of the PLUS Loan, respectively.
(2) For PLUS Loans that carry a variable rate, the rate is set annually for
12-month periods beginning on July 1 and ending on June 30 on the preceding
June 1 and is equal to the lesser of (a) the applicable maximum rate and
(b) the sum of (i) the bond equivalent rate of 52-week Treasury Bills (or
91-day Treasury Bills in the case of loans made or disbursed on or after
June 30, 1998) auctioned at the final auction held prior to such June 1 and
(ii) the applicable Interest Rate Margin.
28
<PAGE> 151
A holder of a PLUS Loan is eligible to receive Special Allowance
Payments during any quarter if (a) the sum of (i) the average of the bond
equivalent rates of 91-day Treasury Bills auctioned during such quarter and (ii)
the Interest Rate Margin exceeds (b) the Maximum Rate.
Repayment of principal of a PLUS Loan is required to commence no later
than 60 days after the date of disbursement of such loan, subject to certain
deferral and forbearance provisions. The deferral provisions which apply are
more limited than those which apply to Stafford Loans and although Interest
Subsidy Payments are not available for such deferments, interest may be
capitalized during such periods upon agreement of the lender and borrower during
certain periods of educational enrollments and periods of unemployment or
hardship as specified under the Higher Education Act. Maximum loan repayment
periods and minimum payment amounts are the same as for Stafford Loans.
A borrower may refinance all outstanding PLUS Loans under a single
repayment schedule for principal and interest, with the new repayment period
calculated from the date of repayment of the most recent included loan. The
interest rate of such refinanced loan shall be the weighted average of the rates
of all PLUS Loans being refinanced. A second type of refinancing enables an
eligible lender to reissue a PLUS Loan which was initially originated at a fixed
rate prior to July 1, 1987 in order to permit the borrower to obtain the
variable interest rate available on PLUS Loans on and after July 1, 1987. If a
lender is unwilling to refinance the original PLUS Loan, the borrower may obtain
a loan from another lender for the purpose of discharging the loan and obtaining
a variable interest rate.
The Federal Consolidation Loan Program. The Higher Education Act
established a program to facilitate the ability of eligible borrowers of
Stafford Loans or SLS Loans (each, an "Underlying Federal Loan") to consolidate
such Underlying Federal Loans, together with such borrowers' other education
loans that are made or guaranteed by the federal government, into a single loan
(a "Federal Consolidation Loan"). Subject to the satisfaction of certain
conditions set forth in the Higher Education Act, including limitations on the
timing and payment of principal and interest with respect to Federal
Consolidation Loans and a requirement that the proceeds of Federal Consolidation
Loans are to be used to repay the respective Underlying Federal Loans (and any
other loans consolidated thereunder) of any borrower, each holder of a Federal
Consolidation Loan will be entitled to substantially the same guarantee and
federal reinsurance arrangements as are available on Stafford Loans and SLS
Loans. Federal Consolidation Loans, like Stafford Loans, are also eligible for
Interest Subsidy Payments and Special Allowance Payments. Under this program, an
eligible borrower of Federal Consolidation Loans means a borrower (i) with
outstanding Underlying Federal Loans and (ii) who has begun repaying, who is in
a grace period preceding repayment of, or who is a delinquent or defaulted
borrower who will, through such loan consolidation, recommence repayment of,
such Underlying Federal Loans. A married couple, each of whom has outstanding
Underlying Federal Loans, may apply for and obtain a single Federal
Consolidation Loan so long as both individuals agree to be held jointly and
severally liable on such Federal Consolidation Loan.
Under this program, a lender may make a Federal Consolidation Loan to
an eligible borrower at the request of the borrower if the lender holds an
outstanding Underlying Federal
29
<PAGE> 152
Loan of the borrower or the borrower certifies that he or she has been unable to
obtain a Federal Consolidation Loan from any of the holders of the outstanding
Underlying Federal Loans of the borrower. The lender making any Federal
Consolidation Loan will pay the amount thereof to the various lenders of the
respective Underlying Federal Loans and other loans being consolidated thereby.
The 1998 Amendments allows lenders to make Federal Consolidation Loans to
borrowers with multiple holders even if the lender does not own an Underlying
Federal Loan.
The Federal Direct Consolidation Loan Program (the "Federal Direct
Consolidation Loan Program") provides borrowers with the opportunity to
consolidate outstanding student loans at interest rates below, and
income-contingent repayment terms that some borrowers may find preferable to,
those that would be available from the Seller on a loan originated by the Seller
under the Federal Consolidation Loan Program. Borrowers generally make smaller
payments based on their earnings than in the standard ten-year plan, and the
government forgives loans that are not repaid in twenty-five years. For
applications received after October 1, 1998 and before January 31, 1999, the
Federal Direct Consolidation Loan Program established borrower rates at levels
lower than the statutory rate established by the 1998 Reauthorization Bill under
the Federal Family Education Loan Program. The 1998 Reauthorization Bill also
reduced the lender paid monthly fee on Federal Consolidation Loans from 1.05% to
0.62% per annum for loans made pursuant to applications received on or after
October 1, 1998 and on or before January 31, 1999. The lower rate applies only
to borrowers who applied before February 1, 1999. The availability of such
lower-rate, income-contingent loans may decrease the likelihood that the Seller
would be the originator of a Federal Consolidation Loan, as well as increase the
likelihood that a Federal Loan in a Trust will be prepaid through the issuance
of a Federal Direct Consolidation Loan (a "Federal Direct Consolidation Loan").
In accordance with the Higher Education Act, Federal Consolidation
Loans may bear interest, as negotiated between the individual borrower and
lender, at a rate per annum up to the weighted average of the interest rates on
the Underlying Federal Loans (rounded up to the nearest whole percent) or, for
loans made before July 1, 1994, 9%, whichever is greater. However, Federal
Consolidation Loans made on or after November 13, 1997 through September 30,
1998 will bear interest at the annual variable rate applicable to Stafford Loans
capped at 8.25%. Federal Consolidation Loans for which the application is
received on or after October 1, 1998 bear interest at a rate equal to the
weighted average interest rate of the loans consolidated, rounded up to the
nearest one-eighth percent and capped at 8.25%. Interest on Federal
Consolidation Loans accrues and, for applications received prior to January 1,
1993, is to be paid without Interest Subsidy Payments by the Department. For
Federal Consolidation Loans received on or after January 1, 1993, all interest
of the borrower is paid during all Deferral Periods. However, Federal
Consolidation Loan applications received on or after August 10, 1993 will only
be subsidized if all of the underlying loans being consolidated were subsidized
Stafford Loans; provided that, in the case of Federal Consolidation Loans made
on or after November 13, 1997, that portion of the Federal Consolidation Loan
that is comprised of subsidized Stafford Loans will retain its subsidy benefits
during Deferral Periods. In general, a borrower must repay each Federal
Consolidation Loan in scheduled monthly installments over a period of not more
than 10 to 30 years (excluding any Deferral Period and any Forbearance Period),
depending on the original principal amount of such Federal Consolidation Loan.
30
<PAGE> 153
Borrowers may voluntarily prepay all or a portion of any Federal Consolidation
Loan without premium or penalty. Repayment of a Federal Consolidation Loan must
commence within 60 days after all holders of Underlying Federal Loans have
discharged the liability of the borrower thereon; provided, however, that such
repayment obligation is deferred for as long as the borrower remains an Eligible
Student and during any applicable Deferral Period and Forbearance Period. For
Federal Consolidation Loans entering repayment on or after October 1, 1995,
borrowers may choose among several repayment options, including the option to
make interest only payments for limited periods. Special Allowance Payments are
made on Federal Consolidation Loans whenever the rate charged the borrower is
limited by the applicable fixed percentage rate cap. However, for applications
received on or after October 1, 1998, Special Allowance Payments are paid in
order to afford the lender a yield equal to the 91-day Treasury Bill Rate plus
3.1% whenever that formula exceeds the borrower's interest rate.
The Omnibus Budget Reconciliation Act of 1993 made a number of changes
to the Federal Consolidation Loan Program, including (i) requiring holders of
Federal Consolidation Loans made on or after October 1, 1993, to pay to the
Department a monthly fee equal to 1.05% per annum on the outstanding balance of
such loans (the "Federal Consolidation Loan Rebate"), (ii) requiring lenders of
Federal Consolidation Loans made on or after July 1, 1994, to offer borrowers
income-sensitive repayment schedules, (iii) repealing the $7,500 minimum
indebtedness requirement, and (iv) removing the 9% interest rate floor for
Federal Consolidation Loans made on or after July 1, 1994. In addition, with
respect to any Federal Loan (including Federal Consolidation Loans) made on or
after October 1, 1993, the lender must pay to the Department an origination fee
equal to 0.50% on the initial principal balance of such loan (the "Federal
Origination Fee"). With respect to any Federal Consolidation Loan originated by
the Seller and purchased by the Eligible Lender Trustee on behalf of the related
Trust, the related Trust must pay to the Department the Federal Origination Fee,
which fee will be deducted by the Department out of Interest Subsidy Payments
and Special Allowance Payments. If sufficient Interest Subsidy Payments and
Special Allowance Payments are not due to the applicable Trust to cover the
amount of the Federal Origination Fee, the balance of such Federal Origination
Fee may be deferred by the Department until sufficient Interest Subsidy Payments
and Special Allowance Payments accrue to cover such fee. If such amounts never
accrue, the applicable Trust would be obligated to pay any remaining fee from
other assets of that Trust prior to making distributions to Noteholders or
Certificateholders.
Undergraduate Federal Loans. The Seller originates or acquires Stafford
Loans and Federal Consolidation Loans for students attending eligible schools.
Eligible schools include institutions of higher education and
proprietary institutions. Institutions of higher education must meet certain
standards, which generally provide that the institution
- only admits persons who have a high school diploma or its equivalent,
- is legally authorized to operate within a state,
- provides not less than a two-year program with credit acceptable
toward a bachelor's degree,
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- is a public or non-profit institution and
- is credited by a nationally recognized accrediting agency or is
determined by the Department to meet the standards of an accredited
institution.
Eligible proprietary institutions of higher education include business,
trade and vocational schools meeting standards which provide that the
institution
- only admits persons who have a high school diploma or its equivalent,
or persons who are beyond the age of compulsory school attendance and
have the ability to benefit from the training offered (as defined in
the Higher Education Act),
- is authorized by a state to provide a program of vocational education
designed to fit individuals for useful employment in recognized
occupations,
- has been in existence for at least two years,
- provides at least a six-month training program to prepare students for
gainful employment in a recognized occupation and
- is accredited by a nationally recognized accrediting agency or is
specially accredited by the Department.
With specified exceptions, institutions are excluded from consideration
as educational institutions if the institution
- offers more than 50 percent of its courses by correspondence,
- enrolls 50 percent or more of its students in correspondence courses,
- has a student enrollment in which more than 25 percent of the students
are incarcerated or
- has a student enrollment in which more than 50 percent of the students
are admitted without a high school diploma or its equivalent on the
basis of their ability to benefit from the education provided (as
defined by statute and regulation).
Further, schools are specifically excluded from participation if
- the educational institution has filed for bankruptcy,
- the owner, or its chief executive officer, has been convicted or
pleaded "nolo contendere" or "guilty" to a crime involving the
acquisition, use or expenditure of federal student aid funds, or has
been judicially determined to have committed fraud involving funds
under the student aid program or
- the educational institution has a cohort default rate in excess of the
rate prescribed by the Act. In order to participate in the program,
the eligibility of a school must be approved by the Department under
standards established by regulation.
Graduate Federal Loans. The Seller originates or acquires Federal Loans
under loan programs (the "Federal Graduate Programs") to provide educational
financing to graduate and professional students enrolled in or recently
graduated from approved or accredited law schools, medical schools, dental
schools, graduate business schools and other graduate schools. The Federal
Graduate Programs originally targeted law school students but have been expanded
over
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the years to include virtually all graduate level fields of study. The Seller
(or its predecessors) has been originating loans under the Federal Graduate
Programs since 1990.
The following table sets forth the approved or accredited schools and
the acceptable degree programs for each graduate field of study:
<TABLE>
<CAPTION>
FIELD OF STUDY APPROVED/ACCREDITED SCHOOLS ACCEPTABLE DEGREE PROGRAMS
-------------- --------------------------- --------------------------
<S> <C> <C>
Law American Bar Association approved law schools that are Juris Doctor of Law or other
members of LSAC joint degree program
Medical Liaison Committee on Medical Education or American Medical Doctor or Doctor of
Osteopathic Association accredited graduate medical Osteopathy
schools
Dental American Dental Association accredited dental schools Graduate dental program
Business American Assembly of Collegiate Schools of Business Graduate business program
("AACSB") accredited graduate business schools; or AACSB
candidate schools accredited by the New England
Association of Schools and Colleges, the Middle States
Association of Colleges and Schools, the North Central
Association of Colleges and Schools, the Southern
Association of Colleges and Schools, the Western
Association of Schools and Colleges, or the North West
Association of Schools and Colleges
Graduate Schools accredited by the New England Association of Graduate level certificate or
Schools and Colleges, the Middle States Association of degree program
Colleges and Schools, The North Central Association of
Colleges and Schools, the Southern Association of Colleges
and Schools, the Western Association of Schools and
Colleges, or the North West Association of Schools and
Colleges
</TABLE>
DESCRIPTION OF PRIVATE LOANS UNDER THE PROGRAMS
General. In addition to the Federal Loans originated under the Higher
Education Act, the Seller and other lenders have developed student loan programs
that are not federally guaranteed for undergraduate students and/or their
parents ("Private Undergraduate Loans") and graduate students ("Private Graduate
Loans"), that can be used by borrowers to supplement their Federal Loans in
situations where the Federal Loans do not cover the cost of education. In
addition, a law student may also receive a bar examination loan (a "Bar Exam
Loan") to finance the costs of preparing for and taking one or more state bar
examinations if such student has applied for the loan within a limited period
before or after graduation. A medical or dental student may also receive a
residency loan (a "Residency Loan") to finance the cost of participating in one
or more medical or dental residency programs if such student has applied for the
loan within a limited period or after graduation.
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<PAGE> 156
The Private Undergraduate Loans, Private Graduate Loans, Bar Exam Loans
and Residency Loans are sometimes referred to collectively as the "Private
Loans." The holders of Private Loans are not entitled to receive any Federal
Assistance with respect thereto.
Private Undergraduate Loans. The Seller originates Key Alternative
Loans ("Key Alternative Loans"). Key Alternative Loans provide undergraduate
students supplemental fundings that allows such students the opportunity to
share the responsibility of education financing with or without a cosigner. Key
Alternative Loans were introduced to students in 1995 and are serviced on behalf
of the Seller by Great Lakes Educational Loan Services Inc. ("Great Lakes"). Key
Alternative Loans are not guaranteed by any federal or private guarantor, or by
any other party or governmental agency.
(1) Eligibility Requirements. In order to qualify for a Key
Alternative Loan, the borrower must meet the following eligibility
requirements:
- At least half-time undergraduate student at a Title IV eligible
institution (Prior to the 1998-1999 program year, the borrower
had to be a full-time student.)
- U.S. citizen/national or an eligible non-citizen
- Must meet the following credit criteria:
(a) No account has been 90 or more days delinquent in the past
two years.
(b) No record of bankruptcy, foreclosure, repossession, skips or
wages garnishment.
(c) No record of unpaid collections, charged-off accounts or
written-off accounts.
(d) No record of an open judgment or suit, unsatisfied tax lien,
unpaid prior educational loan default or other negative
public record items in the past seven years.
(e) Applicant can be approved without cosigner if the applicant
meets credit criteria, has acceptable credit bureau score
and sufficient credit history.
(f) If applicant does not meet the criteria applicant will be
declined.
(g) If applicant meets the criteria but has unacceptable credit
bureau score, a creditworthy cosigner will be required for
approval.
(h) Cosigner, if any, must pass the credit review process that
considers the above criteria and must score well compared
with other applicants.
(i) The credit bureau score requirements apply to both applicant
and cosigner.
A creditworthy cosigner may be required if the borrower has
insufficient credit history and/or is not a US citizen.
If a cosigner is required, the cosigner must also be a US
citizen/national or permanent resident and meet minimum credit criteria. The
cosigner does not have to be the borrower's parent or guardian.
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<PAGE> 157
(2) Loan Limits. The minimum annual loan amount for a Key Alternative
Loan is $1,000. The annual and aggregate maximum loan limits are as
follows:
PROGRAM YEAR YEAR IN SCHOOL ANNUAL MAXIMUM AGGREGATE MAXIMUM
------------ -------------- -------------- -----------------
1995-1996
through First year $5,000 $35,000
1997-1998 Second - Fifth years $7,500
1998-1999 First year $7,500 $47,500
Second - Fifth years $10,000
(3) Interest. Interest is payable by on each Key Alternative Loan on a
monthly basis until the principal amount is repaid in full. The
interest rate is calculated based on the 52-week Treasury Bill rate
plus a margin in the range of 2.85% to 3.10% during the interim period
and a margin in the range of 3.25% to 3.50% during the repayment
period. (The interest rate for the 1995-1996 program year was
calculated based on the 91-Day Treasury Bill Rate plus 3.50% during
the interim period and 3.65% during the repayment period). The rate
varies quarterly and is determined based on the most recent Treasury
Bill auction prior to each January, April, July, and October.
Borrowers may defer interest payments during the interim period. The
deferred interest will be capitalized once on the last day of the
interim period. (For loans originated during the 1995-1996 program
year, deferred interest was capitalized once annually every November
30th and once on the last day of the interim period.)
(4) Repayment. In general, borrowers must repay each Key Alternative
Loan in monthly installments until the loan is paid in full. The
repayment term is 10 years if the balance at repayment is less than
$15,000 or 15 years if the balance at repayment is $15,000 or more.
There is a minimum payment amount of $50 per month and there is no
prepayment penalty.
(5) Grace Periods Deferral Periods, Forbearance Periods. The repayment
period on a Key Alternative Loan generally begins after the Grace
Period, defined as six months after the student graduates or ceases to
be enrolled at least half-time at an accredited institution or five
years from the date of the first Key Alternative Loan disbursement. In
general, deferral periods are not permitted other than during the in
school and grace periods, when the borrower is still responsible for
the capitalization of the deferred interest. Borrowers may request
periods of forbearance related to the following areas: unemployment,
underemployment, hardship, practical and graduate school enrollment.
Forbearances are generally granted in 6 month increments except for
graduate school forbearance which is granted in 12 month increments.
Private Graduate Loans. The Seller originates or acquires Private
Graduate Loans to provide educational financing to help pay for the costs of:
- attending law, medical, dental, graduate, business, or other
graduate school,
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<PAGE> 158
- taking/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.
Private Graduate Loans consist of loans associated with the
above-mentioned fields of study (including Bar Exam and Residency Loans) and
Private Consolidation Loans. Subject to the satisfaction of the conditions
imposed by the applicable Program and the applicable Guarantee Agreement, the
Private Graduate Loans that are Private Guaranteed Loans are fully guaranteed
against nonpayment of principal and interest as a result of a borrower's
default, death, disability or bankruptcy by the Private Guarantors. These
Private Guarantors are not reinsured by the Department or any other governmental
entity. In order to qualify for the guarantee from the Private Guarantors, such
Private Graduate Loans may not be made to a single borrower in excess of the
annual and aggregate limits imposed by the applicable loan Program and may only
be made to Eligible Students who qualify pursuant to credit underwriting
standards established by the Seller and approved by the Private Guarantors. The
following table summarizes the annual, aggregate and cumulative loan limits for
each Private Graduate Loan:
<TABLE>
<CAPTION>
ANNUAL AGGREGATE CUMULATIVE
PROGRAM YEAR TYPE OF LOAN MAXIMUM MAXIMUM MAXIMUM(2)
------------ ------------ ------- --------- ----------
<S> <C> <C> <C> <C>
1991-1992 Law Loan $14,500 $43,500 $ 78,000
Bar Exam Loan $ 5,000 $ 5,000 $ 83,000
1992-1993 Law Loan $15,000 $45,000 $ 79,500
Bar Exam Loan $ 5,000 $ 5,000 $ 84,500
1993-1994 Law Loan $15,000 $45,000 $ 87,500
Bar Exam Loan $ 5,000 $ 5,000 $ 87,500
1994-1995 Law Loan $15,000 $45,000 $ 92,000
Bar Exam Loan $ 5,000 $ 5,000 $ 92,000
1995-1996 through
1997-1998 Law Loan Up to the cost of attendance N/A $120,000
Business Loan Up to the cost of attendance N/A $120,000
(1)
Dental Loan Up to the cost of attendance N/A $135,000
Graduate Loan Up to the cost of attendance N/A $120,000
Medical Loan Up to the cost of attendance N/A $165,000
Bar Exam Loan $5,000 $5,000 $ 5,000
Residency Loan $8,000 $8,000 $ 8,000
1998-1999 Law Loan Up to the cost of attendance N/A $130,000
Business Loan Up to the cost of attendance N/A $130,000
Dental Loan Up to the cost of attendance N/A $175,000;
$200,000
(post-doctoral)
Graduate Loan Up to the cost of attendance N/A $130,000
Medical Loan Up to the cost of attendance N/A None
Bar Exam Loan $7,500 $7,500 $ 7,500
Residency Loan $8,000 $8,000 $ 8,000
</TABLE>
(1) Students enrolled less than half-time can borrow a maximum annual amount of
the combined cost of tuition, fees, and a maximum of $500 for books and
supplies.
(2) Including graduate and undergraduate debt.
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<PAGE> 159
Payment Terms. Each Private Graduate Loan earns interest at a rate per
annum, reset quarterly, equal to the 91-day Treasury Bill Rate plus a margin,
depending on the type of loan. The following table sets forth the applicable
interest rate for each type of Private Graduate Loan:
<TABLE>
<CAPTION>
INTEREST MARGIN
OVER 91-DAY
PROGRAM YEAR TYPE OF LOAN TREASURY BILL RATE
------------ ------------ ------------------
<S> <C> <C> <C>
Interim (1) Repayment (2)
1991-1992 Law & Bar Exam Loans 3.25% 3.25%
1992-1993 Law & Bar Exam Loans 3.25% 3.40%
1993-1994 Law & Bar Exam Loans 3.25% 3.40%
1994-1995 Law & Bar Exam Loans 3.25% 3.40%
1995-1996 through
1997-1998 Law Loan 3.25% 3.40%
Medical Loan 2.50% 2.75%
Dental Loan 2.50% 3.00%
Business Loan 3.25% 3.40%
Graduate Loan 3.25% 3.40%
Bar Exam Loan 3.25% 3.40%
Residency Loan 2.50% 2.75%
1998-1999(3) Law Loan 2.90%-3.25% 2.50%-3.25%
Medical Loan 2.50% 2.25%-2.85%
Dental Loan 2.50%-2.75% 2.25%-3.00%
Business Loan 3.25%-3.00% 2.50%-3.25%
Graduate Loan 3.25%-3.40% 2.50%-3.40%
Bar Exam Loan 2.90%-3.25% 2.50%-3.25%
Residency Loan 2.50% 2.25%-2.85%
Dental Residency Loan 2.50%-2.75% 2.25%-3.00%
</TABLE>
(1) "Interim" represents any period while the borrower is attending school or
during a specified grace period.
(2) "Repayment" represents the period after the specified grace period, in
which the borrower is required to make payments or enter into some type of
deferment or forbearance period.
(3) For 1998-1999, two separate loan programs apply. In one program, the margin
is determined based on the borrower's choice of repayment terms, which
range from 10 to 25 years (the "Keys2Repay Program"). The other program has
one margin regardless of interim, repayment period, or repayment term.
Interest accrues on the outstanding principal amount of each Private
Graduate Loan from the date the lender makes such Private Graduate Loan and is
payable monthly by each borrower commencing a certain number of months after the
borrower graduates or otherwise ceases to be enrolled at least half-time in an
approved institution (the "Private Loan Repayment Commencement Date"). In the
case of Private Graduate Loans made during the 1990-1991 program year that
period is approximately six months. For all other Private Graduate Loans, the
period is approximately nine months, except that in the case of Medical or
Residency Loans, the period, generally, is extended to nine months after the
borrower completes any required residency (generally, up to a maximum of 57
months after graduation), subject to deferral or forbearance as discussed below.
Subject to certain conditions, borrowers of Private Graduate Loans (other than
Private Consolidation Loans) may receive the benefits of certain deferral
periods (either prior to commencing repayment or thereafter) similar to those
applicable to Stafford Loans, during which borrowers are permitted to defer
principal payments and to capitalize the interest accruing on such Private
Graduate Loans. In addition, borrowers of Private Graduate Loans (other than
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<PAGE> 160
Private Consolidation Loans) may, subject to certain conditions, qualify, at the
discretion of the lender (in accordance with standards and guidelines approved
by the Private Guarantors if applicable), for periods of forbearance because of
temporary financial hardship, during which borrowers may defer or make reduced
principal payments on such Private Graduate Loans. Interest on each Private
Graduate Loan that accrues prior to the Private Loan Repayment Commencement Date
may, at the option of the borrower, be paid currently or be capitalized and
added to the principal amount outstanding for such Private Graduate Loan on that
date. Each student with outstanding Private Graduate Loans (other than Private
Consolidation Loans) is obligated to make scheduled payments of principal at the
same time that he or she makes interest payments in an amount sufficient to
repay such Private Graduate Loan in full over a period not to exceed 15 years
(or, with respect to each Private Graduate Loan made since the commencement of
the 1990-1991 program year, 20 years, except with respect to Private Graduate
Loans made under the Keys2Repay Program, where the repayment term can be 10, 15
or 25 years at the borrower's option) after the Private Loan Repayment
Commencement Date with respect to such Private Graduate Loan. Repayment of
principal and interest on Business Loans commences no later than 36 months after
the date of the first disbursement of the first Business Loan to a specific
borrower. Any student may at any time voluntarily prepay all or any portion of
his or her outstanding Private Loans (including paying accrued interest prior to
the Private Loan Repayment Commencement Date quarterly in lieu of capitalizing
such amounts) without premium or penalty. Private Graduate Loans presently
require a minimum annual principal and interest payment of $600 in the aggregate
(but in no event less than accrued interest), unless the borrower and the lender
agree to a lesser amount. For Private Graduate Loans entering repayment on or
after October 1, 1995, borrowers may choose among several repayment options,
including the option to make interest only payments for limited periods.
With respect to each Private Loan (other than Private Consolidation
Loans) made to a student since the commencement of the 1992-1993 program year, a
fee equal to a percentage of the original principal amount of such Private
Graduate Loan is charged to such student on the last day preceding the
applicable Private Loan Repayment Commencement Date.
Unless the student pays such fee, the Seller will make an additional
loan (a "Fee Advance") to such student in an amount equal to such fee, which
will be added to the principal balance of such Private Graduate Loan and repaid
over the term thereof. See "Description of the Transfer and Servicing
Agreements--Additional Fundings" for a discussion of the transfer of such Fee
Advance to the related Trust.
PROGRAM YEAR TYPE OF LOAN SUPPLEMENTAL FEE
1990-1991 through
1995-1996 Law Loan 2%
Bar Exam Loan 2%
1996-1997 Law Loan 4%
Medical Loan 2%
Dental Loan 2%
Business Loan 2%
Graduate Loan 3%
Bar Exam Loan 3%
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Residency Loan 2%
1997-1998 Law Loan 1.5%-6.9%
Medical Loan 1.5%-6.9%
Dental Loan 1.5%-6.9%
Business Loan 1.5%-6.9%
Graduate Loan 1.5%-6.9%
Bar Exam Loan 1.5%-6.9%
Residency Loan 1.5%-2.0%
1998-1999(1) Law Loan 1.5%-6.9%
Medical Loan 1.5%-2.0%
Dental Loan 1.5%-6.9%
Business Loan 1.5%-6.9%
Graduate Loan 1.5%-6.9%
Bar Exam Loan 1.5%-6.9%
Residency Loan 1.5%-2.0%
Dental Residency Loan 1.5%-6.9%
(1) For 1998-1999, two separate loan programs apply. One program determines the
fee based on the loan type. The other program determines the fee based on
the borrower's past credit behavior, except the Medical and Residency
Loans, which are 1.5%.
Private Consolidation Loans. The Seller has established a private
consolidation loan program (the "Private Consolidation Loan Program") to
facilitate the ability of eligible borrowers of Private Graduate Loans
("Underlying Private Graduate Loans") to consolidate such Underlying Private
Graduate Loans into a single loan (a "Private Consolidation Loan"; together with
Federal Consolidation Loans, sometimes referred to herein as "Consolidation
Loans"). The Private Consolidation Loan Program commenced in November, 1994.
Subject to the satisfaction of certain conditions set forth in the programs
relating to Private Graduate Loans, including limitations on the timing and
payment of principal and interest with respect to Private Consolidation Loans
and a requirement that the proceeds of a Private Consolidation Loan be used to
repay the respective Underlying Private Graduate Loans of any borrower, each
holder of a Private Consolidation Loan will be entitled to substantially the
same guarantee arrangements, if any, as are available on the Underlying Private
Graduate Loans. Currently, all of the Underlying Private Graduate Loans that are
consolidated under the Private Consolidation Program are Private Graduate Loans
that were guaranteed by TERI against default, death, bankruptcy or disability of
the applicable borrower, and the resulting Private Consolidation Loan is
similarly guaranteed by TERI. Under this program, an eligible borrower of a
Private Consolidation Loan guaranteed by TERI means a borrower (i) with
outstanding Underlying Private Graduate Loans of at least $7,500 and (ii) who
has begun repaying and is not more than 45 days delinquent in required payments
on any Underlying Private Graduate Loan. A borrower of a guaranteed Private
Consolidation Loan must consolidate all of his or her eligible loans and in
doing so will generally forgo all opportunities for deferment or forbearance.
Private Consolidation Loans that are guaranteed will bear interest at
the rate applicable to the type of Underlying Graduate Loan for which the
greatest principal amount of Underlying Graduate Loans to be consolidated is
outstanding. Such Private Consolidation Loans made prior to May 1, 1997 are
repayable over a period of 15-25 years and such Private Consolidation Loans made
on or after May 1, 1997 are or will be repayable over a period of 25 to 30
years, in each
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<PAGE> 162
case, depending on the original principal amount of such Private Consolidation
Loan. The Private Loan Repayment Commencement Date with respect to a Private
Consolidation Loan will occur immediately upon disbursement, with no provision
for deferment or forbearance. The borrower of a Private Consolidation Loan will
be offered repayment options similar to those available for other Private
Graduate Loans. With respect to each such Private Consolidation Loan, a fee
equal to 1% of the amount paid to discharge the Underlying Private Graduate
Loans will be charged to the borrower and included in the original principal
amount of such Private Consolidation Loan (a "Private Consolidation Fee
Advance").
The Seller currently intends to expand the Private Consolidation Loan
Program to allow the consolidation of unguaranteed Underlying Private Graduate
Loans, and/or other unguaranteed private undergraduate and graduate student loan
debt and any other education related debt (excluding credit card debt) used for
education purposes, into a single Private Consolidation Loan that is similarly
not guaranteed by any federal or private guarantor, or by any other party or
governmental agency. The Seller anticipates that it will commence such expanded
Program on or about January 1, 2000. Borrowers of such unguaranteed Private
Consolidation Loans will be required to satisfy certain conditions, including
limitations on the timing and payment of principal and interest with respect to
such Private Consolidation Loans and a requirement that the proceeds of the
Private Consolidation Loan be used to repay all the Underlying Private Graduate
Loans and any other student or education loans of the borrower that were
consolidated.
To be eligible for an unguaranteed Private Consolidation Loan, the
borrower must (i) have outstanding Underlying Private Graduate Loans or other
private undergraduate and/or graduate student loan debt and/or other education
related debt (excluding credit card debt) used for education purposes, (ii) have
begun repaying and is not more than 45 days delinquent in required payments on
any such student loan, and (iii) meet credit eligibility requirements similar to
those applicable to Private Graduate Loans. A borrower of an unguaranteed
Private Consolidation Loan must consolidate all of his or her eligible
Underlying Private Graduate Loans and in doing so will generally forego all
opportunities for deferment or forbearance.
If so specified and described in the related Prospectus Supplement, the
Seller may also include Private Loans in the related Trust that have been
purchased from other lenders that were originated pursuant to programs similar
to those offered by the Seller.
INSURANCE OF STUDENT LOANS; GUARANTORS OF STUDENT LOANS
Federal Guarantors. The Higher Education Act authorizes Federal
Guarantors to support education financing and credit needs of students at
post-secondary schools. The Higher Education Act encourages every state either
to establish its own agency or to designate another Federal Guarantor in
cooperation with the Secretary. Under various programs throughout the United
States of America, Federal Guarantors insure and sometimes service guaranteed
student loans. The Federal Guarantors are reinsured by the federal government
for from 80% to 100% of each default claim paid, depending on their claims
experience, for loans disbursed prior to October 1, 1993, from 78% to 98% of
each default claim paid for loans disbursed on or after October 1, 1993 and
prior to October 1, 1998, and from 75% to 95% of each default claim paid
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<PAGE> 163
for loans disbursed on or after October 1, 1998. Federal Guarantors are
reinsured by the federal government for 100% of death, disability, bankruptcy,
closed school and false certification claims paid. Loans guaranteed under the
lender of last resort provisions of the Higher Education Act are also 100%
guaranteed and reinsured. See"--Federal Insurance and Reinsurance of Federal
Guarantors" below.
Federal Guarantors collect a one-time insurance premium ranging from 0%
to 3% of the principal amount of each guaranteed loan, depending on the Federal
Guarantor. Federal Guarantors are prohibited from charging insurance premiums on
loans made under the Unsubsidized Stafford Loan Program (the "Unsubsidized
Stafford Loan Program") prior to July 1, 1994. On such loans made prior to July
1, 1994, the Higher Education Act requires that a 6.5% combined loan origination
fee and insurance premium be paid by the borrower on Unsubsidized Stafford
Loans. This fee is passed through to the Department by the originating lender.
Effective July 1, 1994, the maximum insurance premium and origination fee for
Stafford Loans and Unsubsidized Stafford Loans are 1% and 3%, respectively.
Each Federal Loan to be sold to an Eligible Lender Trustee on behalf of
a Trust will be guaranteed as to principal and interest by a Federal Guarantor
pursuant to a Federal Guarantee Agreement between such Federal Guarantor and the
applicable Eligible Lender Trustee. The applicable Prospectus Supplement for
each Trust will identify each related Federal Guarantor for the Federal Loans
held by such Trust as of the applicable Closing Date and the amount of such
Federal Loans it is guaranteeing for such Trust.
Federal Insurance and Reinsurance of Federal Guarantors. A Federal Loan
is considered to be in default for purposes of the Higher Education Act when the
borrower fails to make an installment payment when due or to comply with other
terms of the loan, and if the failure persists for 270 days in the case of a
loan repayable in monthly installments or for 330 days in the case of a loan
repayable in less frequent installments. Under certain circumstances a loan
deemed ineligible for federal reinsurance may be restored to eligibility.
Procedures for such restoration of eligibility are discussed below.
If the loan in default is covered by federal loan insurance in
accordance with the provisions of the Higher Education Act, the Department is to
pay the applicable Federal Guarantor, as insurance beneficiary, the amount of
the loss sustained thereby, upon notice and determination of such amount, within
90 days of such notification, subject to reduction as described below.
If the loan is guaranteed by a Federal Guarantor, the eligible lender
is reimbursed by the Federal Guarantor for 100% (or not less than 98% for loans
disbursed on or after October 1, 1993) of the unpaid principal balance of the
defaulted loan plus accrued and unpaid interest thereon so long as the eligible
lender has properly originated and serviced such loan. Under the Higher
Education Act, the Department enters into a guarantee agreement with each
Federal Guarantor, which provides for federal reinsurance for amounts paid to
eligible lenders by the Federal Guarantor with respect to defaulted loans.
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Pursuant to such agreements, the Department also agrees to reimburse a
Federal Guarantor for 100% of the amounts expended in connection with a claim
resulting from the death, bankruptcy, total and permanent disability of a
borrower, the death of a student whose parent is the borrower of a PLUS Loan or
claims by borrowers who received loans on or after January 1, 1986 and who are
unable to complete the programs in which they are enrolled due to school closure
or borrowers whose borrowing eligibility was falsely certified by the eligible
institution; such claims are not included in calculating a Federal Guarantor's
claims rate experience for federal reinsurance purposes. The Department also
agrees to reimburse a Federal Guarantor for 100% of the amounts expended in
connection with claims on loans made under the lender of last resort provisions.
The Department is also required to repay the unpaid balance of any loan if the
borrower files for relief under Chapter 12 or 13 of the Bankruptcy Code or files
for relief under Chapter 7 or 11 of the Bankruptcy Code and has been in
repayment for more than 7 years or commences an action for a determination of
dischargeability under Section 523(a)(8)(b) of the Bankruptcy Code, and is
authorized to acquire the loans of borrowers who are at high risk of default and
who request an alternative repayment option from the Department. See, "Certain
Legal Aspects of the Student Loans - Bankruptcy Considerations" herein.
The amount of such reinsurance payment to the Federal Guarantor for
default claims is subject to reduction based upon the annual default claims rate
of the Federal Guarantor, calculated to equal the amount of federal reinsurance
claims paid by the Department to the Federal Guarantor during any fiscal year as
a percentage of the original principal amount of guaranteed loans in repayment
at the end of the prior federal fiscal year. The formula is summarized as
follows:
<TABLE>
<CAPTION>
CLAIMS RATE OF FEDERAL GUARANTORS REIMBURSEMENT BY THE DEPARTMENT OF EDUCATION (1)
--------------------------------- ------------------------------------------------
<S> <C>
0% to and including 5% 98%
Greater than 5% to and including 9% 98% of claims to and including 5%; 88% of claims greater than 5%
Greater than 9%... 98% of claims to and including 5%; 88% of claims greater than 5% to
and including 9%; and 78% of claims greater than 9%
</TABLE>
-------------------
(1) Each of the reimbursement percentages listed above is increased by two
percentage points for a loan made prior to October 1, 1993 and decreased by
three percentage points for a loan made on or after October 1, 1998.
The claims experience for any Federal Guarantor is not accumulated from
year to year for purposes of this test but is determined solely on the basis of
claims filed in any one federal fiscal year. The Higher Education Act provides
that, subject to compliance with the Higher Education Act, Federal Guarantors
are deemed to have a contractual right against the United States to receive
reinsurance in accordance with its provisions.
On August 10, 1993 President Clinton signed the Omnibus Budget
Reconciliation Act of 1993 (the "1993 Act"), which made a number of changes that
may adversely affect the financial condition of the Federal Guarantors,
including reducing to 98% the maximum percentage of Guarantee Payments the
Department will reimburse for loans first disbursed on or after October 1, 1993,
reducing substantially the premiums and default collections that Federal
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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 risk that the resources
available to the Federal Guarantors to meet their guarantee obligations will be
significantly reduced. Such changes could result in a reduction of a Trust's
ability to pay principal and interest on the related Notes and Certificates, as
a result of a reduction in the ability of the Federal Guarantors to make
Guarantee Payments to the Eligible Lender Trustee with respect to the related
Student Loans. In addition, this legislation sought to greatly expand the loan
volume under the direct lending program (the "Federal Direct Student Loan
Program") to a target of approximately 60% of student loan demand in academic
year 1998-1999, although only about 35% of such loan demand is currently being
met by the direct lending program. The expansion of this program in the future
could result in increasing reductions in the volume of Federal Loans made by the
Seller. Such changes could have an adverse effect on the financial condition of
the Federal Guarantors and on the ability of a Federal Guarantor to satisfy its
obligations under its Guarantee Agreement with respect to the Federal Loans. See
"Risk Factors--Changes in Legislation May Adversely Affect Student Loans and
Federal Guarantors." The 1998 Reauthorization Bill created additional risks that
the resources available to the Federal Guarantors to meet their guarantee
obligations will be further reduced in the future, by mandating additional
recall of guarantor reserves and reducing reinsurance to guarantors from 98% to
95%.
Pursuant to the 1992 Amendments and additional changes made in 1997 and
1998, each Federal Guarantor is required to maintain a current minimum reserve
level of at least .25% of the aggregate principal amount of all outstanding
Federal Loans guaranteed by such Federal Guarantor. Annually, the Department
will collect information from each Federal Guarantor to determine the amount of
such Federal Guarantor's reserves and other information regarding its solvency.
If a Federal Guarantor's current reserve level falls below the required minimum
for any two consecutive years, that Federal Guarantor's annual claims rate
exceeds 5% or the Department determines that a Federal Guarantor's
administrative or financial condition jeopardizes that Federal Guarantor's
continued ability to perform its responsibilities, then that Federal Guarantor
must submit and implement a management plan acceptable to the Department. The
1992 Amendments also provide that under certain circumstances the Department is
authorized, on terms and conditions satisfactory to the Department, but is not
obligated, to terminate its reimbursement agreement with any Federal Guarantor.
In that event, however, the Department is required to assume the functions of
such Federal Guarantor and in connection therewith is authorized to do one or
more of the following: to assume the guarantee obligations of, to assign to
other guarantors the guarantee obligations of, or to make advances to, a Federal
Guarantor in order to assist such Federal Guarantor in meeting its immediate
cash needs and to ensure
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uninterrupted payment of default claims to lenders or to take any other action
the Department deems necessary to ensure the continued availability of student
loans and the full honoring of guarantee claims thereunder. In addition, the
1992 Amendments provide that if the Department determines that a Federal
Guarantor is unable to meet its guarantee obligations, holders of Federal Loans
covered thereby may submit guarantee claims directly to the Department until
such time as such guarantee obligations are transferred to a new guarantor
capable of meeting such obligations or until a successor guarantor assumes such
obligations. There can be no assurance that the Department would under any given
circumstances assume such obligation to ensure satisfaction of a guarantee
obligation by exercising its right to terminate a reimbursement agreement with a
Federal Guarantor or by making a determination that such Federal Guarantor is
unable to meet its guarantee obligations.
Private Guarantors. Private Loans are not entitled to any federal
reinsurance or assistance from the Department or any other governmental entity.
Although each Private Guarantor maintains a loan loss reserve intended to absorb
losses arising from its guarantee commitments, there can be no assurance that
the amount of such reserve will be sufficient to cover the obligations of such
Private Guarantor over the term of the related Private Loans.
CLAIMS AND RECOVERY RATES
Certain historical information concerning guarantee claims and recovery
rates of the Guarantors for the Student Loans held by the related Trust as of
the applicable Closing Date with respect to each series of Securities will be
set forth in each Prospectus Supplement. There can be no assurance that the
claim and recovery experience on any pool of Student Loans with respect to a
given Trust will be comparable to prior experience or to any such information.
ORIGINATION PROCESS
The Higher Education Act specifies rules regarding loan origination
practices, which lenders must comply with in order for their Federal Loans to be
guaranteed and to be eligible to receive Federal Assistance. Lenders are
prohibited from offering points, premiums, payments or other inducements,
directly or indirectly, to any educational institution, guarantee agency or
individual in order to secure loan applications, and no lender may conduct
unsolicited mailings of student loan applications to students who have not
previously received student loans from that lender.
With respect to all Student Loans, whether Federal Loans or Private
Loans (other than Consolidation Loans and Key Alternative Loans discussed
below), the Seller forwards each application for such Student Loans (which
should include an executed promissory note) to either a marketing agent or the
Seller's origination department. On behalf of the Seller, either the marketing
agent or the origination department reviews each application to confirm its
completeness, to confirm that the applicant is an Eligible Student and that such
loan complies with certain other conditions of the applicable Program. In
addition, a credit report of each applicant for Private Graduate Loans is
obtained from an authorized credit reporting service, which the Seller then uses
to determine, in consultation with the Private Guarantors, if
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applicable, whether such applicant satisfies certain specified credit
underwriting criteria. The credit-underwriting criteria for Private Guaranteed
Loans are as follows:
- No account that has been 90 or more days delinquent in the past two
years, and no more than one account is currently more than 60 days
delinquent.
- No record of bankruptcy, foreclosure, repossession, skips or wages
garnishment.
- No record of unpaid collections, charged-off accounts or written-off
accounts.
- No record of an open judgment or suit, unsatisfied tax lien, unpaid
prior educational loan default or other negative public record items
in the past six years.
- No record of bankruptcy in the past seven years.
- Credit criteria for the 1993-1994 program year also includes the
requirement that no account has been delinquent 90 or more days in the
past two years.
- Credit criteria for the 1994-1995 and subsequent program years also
include requirements that no account has been delinquent 90 or more
days in the past five years (or two years with respect to any borrower
who obtained a loan in 1993-1994), and there have been no more than
three inquiries and none with respect to any previous borrower to an
authorized credit reporting agency in the past six months.
- Credit criteria for the 1995-1996 and subsequent program years include
the additional requirement that no more than two accounts have been
more than 60 days delinquent in the past two years.
The credit-underwriting criteria for Private Unguaranteed Loans are as follows:
1. No more than 3 accounts rated 30 days are more delinquent in the past
2 years.
2. No more than one account is currently rated 60 days or more
delinquent.
3. No more than 2 accounts rated 60 or more days delinquent in the past 2
years.
4. No account more than 90 days delinquent in the past five years.
5. No record of bankruptcy discharge in the past 7 years.
6. No record of foreclosure, repossession, open judgment or suit,
unsatisfied tax lien, unpaid prior educational loan default or other
negative public credit in the past 6 years.
7. No record of unpaid collections, charged-off accounts or written-off
accounts.
8. No more than 3 authorized inquiries in the past 6 months.
9. Applicants with no credit history will be approved.
10. Applicants who meet the criteria 2-8, but do not meet the minimum
credit score determined by the Seller must obtain a co-signer to be
eligible.
11. Applicants with credit card balances greater than $20,000 must have a
credit worthy co-signer.
12. No single or combination of paid charged-off or paid collection
accounts totaling more than $100 reported within last 2 years.
13. If revolving credit balances are greater than $8,000, total credit
card usage cannot exceed 75% (a negative decision can be overridden if
applicant has minimum credit bureau score).
14. A credit bureau score may be used to enhance applicants position for
all other criteria.
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The origination of Federal Loans must comply with the provisions of the
Higher Education Act, and therefore does not consider the creditworthiness of
borrowers applying for Stafford Loans.
Any borrower inquiries concerning Federal Consolidation Loans or
Private Consolidation Loans are forwarded to the appropriate Sub-Servicer, who
contacts the borrower, prepares and sends to the borrower an application (which
includes a promissory note) for a Consolidation Loan for the borrower's review
and signature. Each Sub-Servicer is required to obtain certifications from the
lenders of the loans to be consolidated and to review the loan application and
the certifications to confirm that the borrower is eligible for a Federal
Consolidation Loan or Private Consolidation Loan, as the case may be. Upon
approval of an application for a Consolidation Loan, the applicable lender
causes the proceeds of such Consolidation Loan to be disbursed to each lender of
the loans being consolidated in amounts sufficient to retire each of such loans.
For each Consolidation Loan that is made by the Seller, a Sub-Servicer retains
the completed loan application and executed promissory note as custodian.
Applications for Key Alternative Loans are entered into the processing
system and are checked for completeness. If the borrower is ineligible for the
loan due to a processing denial reason an ineligibility letter is sent to the
borrower. Great Lakes sends an electronic transmission of applicant information
on each complete application to the Seller's system for credit review. Approved
applications are transmitted back to Great Lakes on a daily basis, where an
approval letter is generated and sent to the applicant, cosigner and the school.
Denied applicants are sent an adverse action letter from the credit department
the day the application is denied. If an applicant feels they have been denied
based on inaccurate or incomplete information contained in a credit report, they
can request a review (within 60 days of initial denial). Denied applicants may
have their loan reconsidered with a written request and supporting
documentation. A credit representative will review denied loan applicants
documentation and approve or deny the request. Each appeal is handled based on
its individual merits.
SERVICING AND COLLECTIONS PROCESS
The Higher Education Act, the programs relating to Private Loans and
the applicable Guarantee Agreements require the holder of Student Loans to cause
specified procedures, including due diligence procedures and the taking of
specific steps at specific intervals, to be performed with respect to the
servicing of the Student Loans that are designed to ensure that such Student
Loans are repaid on a timely basis by or on behalf of borrowers. Each
Sub-Servicer performs such procedures on behalf of the Seller and the Master
Servicer and will agree, pursuant to the related Sub-Servicing Agreement, to
perform specified and detailed servicing and collection procedures with respect
to the Student Loans on behalf of the related Trust. Such procedures generally
include periodic attempts to contact any delinquent borrower by telephone and by
mail, commencing with a written notice at the tenth day of delinquency and
including multiple written notices and telephone calls to the borrower
thereafter at specified times during any such delinquency. All telephone calls
and letters are automatically registered, and a synopsis of each call or the
mailing of each letter is noted in each Sub-Servicer's loan file for the
borrower.
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Each Sub-Servicer also will be required to perform skip tracing procedures on
delinquent borrowers whose current location is unknown, including contacting
such borrowers' schools and references. Failure to comply with the established
procedures could adversely affect the ability of the applicable Eligible Lender
Trustee, as holder of legal title to the applicable Student Loans on behalf of
the related Trust, to realize the benefits of any Guarantee Agreement or to
receive the benefits of Federal Assistance from the Department with respect
thereto. Failure to comply with certain of the established procedures with
respect to a Federal Loan may also result in the denial of coverage under a
Guarantee Agreement for certain accrued interest amounts, in circumstances where
such failure has not caused the loss of the guarantee of the principal of such
Federal Loan.
At prescribed times prior to submitting a claim for payment under a
Guarantee Agreement for a delinquent Student Loan, each Sub-Servicer is required
to notify the applicable Guarantor of the existence of such delinquency. These
requests notify the Guarantors of seriously delinquent accounts and allow the
Guarantors to make additional attempts to collect on such loans prior to the
filing of claims. If a loan is delinquent for 180 days (in the case of Federal
Loans made prior to the enactment date of the 1998 Reauthorization Bill), 270
days (in the case of Federal Loans made on or after October 7, 1998), or 150
days (in the case of Private Guaranteed Loans), the applicable Sub-Servicer may
file a default claim with the respective Guarantor. Failure to file a claim
within 270 days (in the case of Federal Loans made prior to the enactment date
of the 1998 Reauthorization Bill), 360 days (in the case of Federal Loans made
on or after October 7, 1998), or 180 days (in the case of Private Guaranteed
Loans) of delinquency may result in denial of the guarantee claim with respect
to such loan. A Sub-Servicer's failure to file a guarantee claim in a timely
fashion would constitute a breach of its covenants and create an obligation of
such Sub-Servicer to purchase the applicable Student Loan. See "Description of
the Transfer and Servicing Agreements--Master Servicer Covenants."
INCENTIVE PROGRAMS
The Seller has offered, and may continue to offer, incentive programs
to certain Student Loan borrowers. If any incentive programs are applicable to
the Student Loans in a Trust, such incentive programs will be described in the
related Prospectus Supplement Any incentive program not in existence as of the
date of such Prospectus Supplement, or not described in the related Prospectus
Supplement, that effectively reduces borrower payments on Financed Student Loans
and, with respect to Financed Federal Loans, is not required by the Higher
Education Act, will be applicable to the Financed Student Loans only if and to
the extent that the applicable Trust receives payment from the Seller (or the
Seller deposits or causes a deposit to be made into the related Collection
Account) in an amount sufficient to offset such effective yield reductions.
WEIGHTED AVERAGE LIVES OF THE SECURITIES
The rate of payment of principal of the Notes and the Certificates of
any series and the yield on the Notes and the Certificates of any series will be
affected by prepayments of the Student Loans that may occur as described below.
All the Student Loans are prepayable in whole or in part by the borrowers at any
time (including by means of Federal Consolidation Loans,
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Private Consolidation Loans or consolidation loans made under the Federal Direct
Student Loan Program as discussed below) or as a result of a borrower's default,
death, disability or bankruptcy and subsequent liquidation or collection of
Guarantee Payments with respect thereto. The rate of such prepayments cannot be
predicted and may be influenced by a variety of economic, social and other
factors, including those described below. In general, the rate of prepayments
may tend to increase to the extent that alternative financing becomes available
at prevailing interest rates which fall significantly below the interest rates
applicable to the Student Loans. However, because many of the Student Loans bear
interest at a rate that either actually or effectively is floating, it is
impossible to determine whether changes in prevailing interest rates will be
similar to or vary from changes in the interest rates on the Student Loans.
To the extent borrowers of Student Loans elect to borrow Consolidation
Loans with respect to such Student Loans:
(1) from the Seller, after the Funding Period but not beyond the end
of the Revolving Period, and collections on the Student Loans are
not available to purchase such Consolidation Loans,
(2) from the Seller, after the end of the Revolving Period, or
(3) from another lender at any time,
Noteholders of a series (and after the Notes have been paid in full,
Certificateholders of such series) will collectively receive as a prepayment of
principal the aggregate principal amount of such Student Loans. Any such
prepayments will result in a more rapid amortization of the Securities of a
series then would otherwise be the case. The volume of existing loans that may
be repaid in this fashion is not determinable at this time. However, if the
Seller makes any such Consolidation Loan during a Funding Period or prior to the
end of the Revolving Period (in which event the Seller will then sell that
Consolidation Loan to the applicable Eligible Lender Trustee, to the extent that
funds are available in the applicable Escrow Account and during the Funding
Period, the Pre-Funding Account or following the Funding Period but prior to the
end of the Revolving Period, the applicable Collection Account from amounts
which constitute available loan purchase funds, for the purchase thereof), the
aggregate outstanding principal balance of Student Loans (after giving effect to
the addition of such Consolidation Loans) will be at least equal to and in most
cases greater than such balance prior to such prepayment, although the portion
of the loan guaranteed will be 98% with respect to any Federal Consolidation
Loan made on or after October 1, 1993, even if the Underlying Federal Loans were
100% guaranteed. See "The Student Loan Financing Business--Description of
Federal Loans Under the Programs--Federal Consolidation Loans." There can be no
assurance that borrowers with Student Loans will not seek to obtain
Consolidation Loans with respect to such Student Loans or, if they do so, that
such Consolidation Loans will not be made by the Seller after the end of a
Funding Period when collections on the Student Loans are not available to
purchase such Consolidation Loans, on or after the end of the Revolving Period
or by another lender at any time.
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In addition, the Seller will be obligated to repurchase any Student
Loan pursuant to the applicable Sale and Servicing Agreement as a result of a
breach of any of its representations and warranties, and the Master Servicer
will be obligated to purchase any Student Loan pursuant to the Sale and
Servicing Agreement as a result of a breach of certain covenants with respect to
such Student Loan, in each case where such breach materially adversely affects
the interests of the Certificateholders or the Noteholders of a series in that
Student Loan and is not cured within the applicable cure period (it being
understood that any such breach that does not affect any Guarantor's obligation
to guarantee payment of such Student Loan will not be considered to have a
material adverse effect for this purpose). See "Description of the Transfer and
Servicing Agreements--Sale of Student Loans; Representations and Warranties" and
"--Servicer Covenants." See also "Description of the Transfer and Servicing
Agreements---Additional Fundings" regarding the prepayment of principal to
Noteholders and Certificateholders of a series if as of the date specified in
the applicable Prospectus Supplement the amount on deposit in the related
Pre-Funding Account has not been reduced to zero and the prepayment of principal
to Noteholders of a series as a result of excess funds remaining on deposit in
the Pre-Funding Account at the end of the Funding Period, "--Insolvency Event"
regarding the sale of the Student Loans if a Seller Insolvency Event occurs and
"--Termination" regarding the Seller's option to purchase the Student Loans when
the aggregate Pool Balance is less than or equal to 5% of the initial Pool
Balance of a series and the auction of the Student Loans occurs on or after the
date specified in the related Prospectus Supplement.
On the other hand, scheduled payments with respect to, and maturities
of, the Student Loans may be extended, including pursuant to Grace Periods,
Deferral Periods and, under certain circumstances, Forbearance Periods prior to
the end of the Revolving Period or of refinancings through Consolidation Loans
to the extent such Consolidation Loans are sold to an Eligible Lender Trustee on
behalf of a Trust as described above. In that event, the fact that such
Consolidation Loans will likely have longer maturities than the Student Loans
they are replacing may lengthen the remaining term of the Student Loans and the
average life of the Notes and the Certificates of a series. The rate of payment
of principal of the Notes and the Certificates of a series and the yield on the
Notes and the Certificates of a series may also be affected by the rate of
defaults resulting in losses on defaulted Student Loans which have been
liquidated, by the severity of those losses and by the timing of those losses,
which may affect the ability of the Guarantors to make Guarantee Payments with
respect thereto. In addition, the maturity of many of the Student Loans will
extend well beyond the final scheduled Distribution Dates of the Notes and the
Certificates of a series.
The rate of prepayment on the Student Loans cannot be predicted, and
any reinvestment risks resulting from a faster or slower incidence of prepayment
of Student Loans will be borne entirely by the Securityholders of a series. Such
reinvestment risks may include the risk that interest rates and the relevant
spreads above particular interest rate bases are lower at the time
Securityholders of a series receive payments from the related Trust than such
interest rates and such spreads would otherwise have been had such prepayments
not been made or had such prepayments been made at a different time.
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POOL FACTORS AND TRADING INFORMATION
Each of the "Note Pool Factor" for each class of Notes and the
"Certificate Pool Factor" for each class of Certificates (each, a "Pool Factor")
will be a seven-digit decimal which the Administrator will compute for each
Distribution Date indicating the remaining outstanding principal amount of such
class of Notes or the remaining principal balance for such class of Certificates
(the "Certificate Balance"), respectively, as of that Distribution Date (after
giving effect to distributions to be made on such Distribution Date), as a
fraction of the initial outstanding principal amount of such class of the Notes
or the initial Certificate Balance for such class of Certificates, respectively.
Each Pool Factor will be 1.0000000 as of the Closing Date, and thereafter will
decline to reflect reductions in the outstanding principal amount of the
applicable class of Notes or reductions of the Certificate Balance of the
applicable class of Certificates, as applicable. A Securityholder's portion of
the aggregate outstanding principal amount of the related class of Notes or of
the aggregate outstanding Certificate Balance for the related class of
Certificates, as applicable, is the product of (x) the original denomination of
that Securityholder's Note or Certificate and (y) the applicable Pool Factor.
Pursuant to the related Indenture and the related Trust Agreement, the
Securityholders will receive reports on or about each Distribution Date
concerning the payments received on the Student Loans, the Pool Balance (as such
term is defined in the related Prospectus Supplement, the "Pool Balance"), the
applicable Pool Factor and various other items of information. Securityholders
of record during any calendar year will be furnished information for tax
reporting purposes not later than the latest date permitted by law. See "Certain
Information Regarding the Securities--Reports to Securityholders."
DESCRIPTION OF THE NOTES
GENERAL
With respect to each Trust, one or more classes of notes (the "Notes")
of a given series will be issued pursuant to the terms of an indenture (an
"Indenture") between the Trust and the trustee under such Indenture (the
"Indenture Trustee"), a form of which has been filed as an exhibit to the
Registration Statement of which this Prospectus (this "Prospectus") is a part.
The following summary describes the material terms of the Notes and the
Indenture. The summary does not purport to be complete and is qualified in its
entirety by reference to all the provisions of the Notes and the Indenture.
Unless otherwise specified in the related Prospectus Supplement (each a
"Prospectus Supplement"), each class of Notes will initially be represented by
one or more Notes, in each case registered in the name of the nominee of The
Depository Trust Company ("DTC") (together with any successor depository
selected by the Administrator, the "Depository") except as set forth below.
Unless otherwise specified in the related Prospectus Supplement, the Notes will
be available for purchase in denominations of $1,000 and integral multiples
thereof in book-entry form only. The Trust has been informed by DTC that DTC's
nominee will be Cede & Co.
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("Cede"), unless another nominee is specified in the related Prospectus
Supplement. Accordingly, such nominee is expected to be the holder of record of
the Notes of each class. Unless and until Definitive Notes are issued under the
limited circumstances described herein, no Noteholder will be entitled to
receive a physical certificate representing a Note. All references herein and in
the related Prospectus Supplement to actions by Noteholders of Notes held in
book-entry form refer to actions taken by DTC upon instructions from its
participating organizations (the "Participants") and all references herein to
distributions, notices, reports and statements to Noteholders refer to
distributions, notices, reports and statements to DTC or its nominee, as the
case may be, as the registered holder of the Notes for distribution to
Noteholders in accordance with DTC's procedures with respect thereto. See
"Certain Information Regarding the Securities--Book-Entry Registration"
and"--Definitive Securities."
PRINCIPAL OF AND INTEREST ON THE NOTES
The timing and priority of payment, seniority, allocations of losses,
interest as a per annum interest rate (the "Interest Rate") and amount of or
method of determining payments of principal and interest on each class of Notes
of a given series will be described in the related Prospectus Supplement. The
right of holders of any class of Notes to receive payments of principal and
interest may be senior or subordinate to the rights of holders of any other
class or classes of Notes of such series, as described in the related Prospectus
Supplement. Payments of interest on the Notes of such series will be made prior
to payments of principal thereon. Each class of Notes may have a different
Interest Rate, which may be a fixed, variable or adjustable Interest Rate or any
combination of the foregoing. The related Prospectus Supplement will specify the
Interest Rate for each class of Notes of a given series or the method for
determining such Interest Rate See also "Certain Information Regarding the
Securities--Fixed Rate Securities" and "--Floating Rate Securities." One or more
classes of the Notes of a series may be redeemable in whole or in part under the
circumstances specified in the related Prospectus Supplement, including as a
result of the exercise by the Seller, or such other party as may be named in the
related Prospectus Supplement, of its option to purchase the related Student
Loans.
Unless otherwise specified in the related Prospectus Supplement,
Noteholders of all classes within a series will have the same priority with
respect to payments of interest. Under certain circumstances, the amount
available for such payments could be less than the amount of interest payable on
the Notes on any of the dates specified for payments in the related Prospectus
Supplement (each, a "Distribution Date"), in which case each class of
Noteholders will receive its ratable share (based upon the aggregate amount of
interest due to such class of Noteholders) of the aggregate amount available to
be distributed in respect of interest on the Notes of such series. See
"Description of the Transfer and Servicing Agreements--Distributions" and
"--Credit and Cash Flow Enhancement."
In the case of a series of Notes which includes two or more classes of
Notes, the sequential order and priority of payment in respect of principal and
interest, and any schedule or formula or other provisions applicable to the
determination thereof, of each such class will be set forth in the related
Prospectus Supplement. Payments in respect of principal and interest of any
class of Notes will be made on a pro rata basis among all the Noteholders of
such class.
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In the case of a series of Notes relating to a Trust having a
Pre-Funding Account or Escrow Account, the Notes of such series will be redeemed
in part on the Distribution Date on or immediately following the last day of the
related Funding Period or Revolving Period, respectively, in the event that any
amount remains on deposit in the applicable account after giving effect to all
Additional Fundings on or prior to such date, in an aggregate principal amount
described in the related Prospectus Supplement.
See "Description of the Transfer and Servicing Agreements--Credit and
Cash Flow Enhancement--Reserve Account" for a description of the Reserve Account
and the distribution of amounts in excess of the Specified Reserve Account
Balance (as defined in the related Prospectus Supplement, the "Specified Reserve
Account Balance").
THE INDENTURE
Modification of Indenture. With respect to each Trust, with the consent
of the holders of a majority of the specified senior class(es) of outstanding
Notes of the related series, the Indenture Trustee and the Trust may execute a
supplemental indenture to add provisions to, or change in any manner or
eliminate any provisions of, the Indenture with respect to the Notes, or to
modify (except as provided below) in any manner the rights of the related
Noteholders.
Unless otherwise specified in the related Prospectus Supplement with
respect to a series of Notes, however, without the consent of the holder of each
such outstanding Note affected thereby, no supplemental indenture will:
(1) change the due date of any installment of principal of or
interest on any such Note or reduce the principal amount thereof,
the interest rate specified thereon or the redemption price with
respect thereto or change any place of payment where or the coin
or currency in which any such Note or any interest thereon is
payable,
(2) impair the right to institute suit for the enforcement of certain
provisions of the related Indenture regarding payment,
(3) reduce the percentage of the aggregate amount of the outstanding
Notes of such series, the consent of the holders of which is
required for any such supplemental indenture or the consent of
the holders of which is required for any waiver of compliance
with certain provisions of the related Indenture or of certain
defaults thereunder and their consequences as provided for in
such Indenture,
(4) modify or alter the provisions of the related Indenture regarding
the voting of Notes held by the applicable Trust, the Seller, an
affiliate of either of them or any obligor on such Notes,
(5) reduce the percentage of the aggregate outstanding amount of such
Notes, the consent of the holders of which is required to direct
the related Eligible Lender
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Trustee on behalf of the applicable Trust to sell or liquidate
the Student Loans if the proceeds of such sale would be
insufficient to pay the principal amount and accrued but unpaid
interest on the outstanding Notes of such series,
(6) decrease the percentage of the aggregate principal amount of such
Notes required to amend the sections of the related Indenture
which specify the applicable percentage of aggregate principal
amount of such Notes necessary to amend the related Indenture or
certain other related agreements, or
(7) permit the creation of any lien ranking prior to or on a parity
with the lien of the related Indenture with respect to any of the
collateral for the Notes of such series or, except as otherwise
permitted or contemplated in such Indenture, terminate the lien
of such Indenture on any such collateral or deprive the holder of
any Note of the security afforded by the lien of such Indenture.
The applicable Trust and the related Indenture Trustee may also enter
into supplemental indentures without obtaining the consent of Noteholders of
such series, for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the related Indenture or of
modifying in any manner the rights of Noteholders of such series so long as such
action will not, in the opinion of counsel satisfactory to the applicable
Indenture Trustee, materially and adversely affect the interest of any
Noteholder of such series.
Events of Default; Rights upon Event of Default. With respect to the
Notes of a given series, an "Event of Default" under the related Indenture will
include the following:
(a) a default for five days or more in the payment of any interest on
any such Note after the same becomes due and payable;
(b) a default in the payment of the principal of or any installment
of the principal of any such Note when the same becomes due and
payable;
(c) a default in the observance or performance of any covenant or
agreement of the applicable Trust made in the related Indenture
and the continuation of any such default for a period of 30 days
after notice thereof is given to the applicable Trust by the
applicable Indenture Trustee or to the applicable Trust and the
applicable Indenture Trustee by the holders of at least 25% in
principal amount of such Notes then outstanding;
(d) any representation or warranty made by the applicable Trust in
the related Indenture or in any certificate delivered pursuant
thereto or in connection therewith having been incorrect in a
material respect as of the time made, and such breach is not
cured within 30 days after notice thereof is given to such Trust
by the applicable Indenture Trustee or to such Trust and the
applicable Indenture Trustee by the holders of at least 25% in
principal amount of the Notes of such series then outstanding; or
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(e) certain events of bankruptcy, insolvency, receivership or
liquidation of such Trust.
However, the amount of principal required to be distributed to
Noteholders of such series under the related Indenture on any Distribution Date
will generally be limited to amounts available after payment of all prior
obligations of such Trust. Therefore, the failure to pay principal on a class of
Notes generally will not result in the occurrence of an Event of Default until
the final scheduled Distribution Date for such class of Notes.
If, with respect to any series of Notes, interest is paid at a variable
rate based on an index, the related Prospectus Supplement may provide that, in
the event that, for any Distribution Date, the Interest Rate as calculated based
on the index is less than an alternate rate calculated for such Distribution
Date based on interest collections on the Student Loans (the amount of such
difference, the "Interest Index Carryover"), the Interest Rate for such
Distribution Date will be such alternate rate and the Interest Index Carryover
shall be payable as described in such Prospectus Supplement. Payment of the
Interest Index Carryover generally will be lower in priority than payment of
interest on the Notes at the Interest Rate (whether the Interest Rate is based
on the index or such alternate rate) and, accordingly, the nonpayment of the
Interest Index Carryover on any Distribution Date will not generally constitute
a default in the payment of interest on such Notes.
If an Event of Default should occur and be continuing with respect to
the Notes of any series, the related Indenture Trustee or holders of a majority
in principal amount of the specified senior class(es) of such Notes then
outstanding may declare the principal of such Notes to be immediately due and
payable. Unless otherwise specified in the related Prospectus Supplement, such
declaration may be rescinded by the holders of a majority in principal amount of
the specified senior class(es) of such Notes then outstanding if (x) the related
Trust has paid or deposited with the Indenture Trustee a sum equal to all
amounts then due with respect to the Notes (without giving effect to such
acceleration) and (y) all Events of Default, other than the nonpayment of the
principal of the Notes that has become due solely by such acceleration, have
been cured or, under the circumstances described below, waived.
If the Notes of any series have been declared to be due and payable
following an Event of Default with respect thereto, the related Indenture
Trustee may, in its discretion, exercise remedies as a secured party, require
the related Eligible Lender Trustee to sell the Student Loans or elect to have
the related Eligible Lender Trustee maintain possession of the Student Loans and
continue to apply collections with respect to such Student Loans as if there had
been no declaration of acceleration. Unless otherwise specified in the related
Prospectus Supplement, however, the related Indenture Trustee is prohibited from
directing the related Eligible Lender Trustee to sell the Student Loans
following an Event of Default, other than a default in the payment of any
principal or a default for five days or more in the payment of any interest on
any Note with respect to any series, unless:
(1) the holders of all such outstanding Notes consent to such sale;
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(2) the proceeds of such sale are sufficient to pay in full the
principal of and the accrued interest on such outstanding Notes
at the date of such sale; or
(3) the related Indenture Trustee determines that the collections on
the Student Loans would not be sufficient on an ongoing basis to
make all payments on such Notes as such payments would have
become due if such obligations had not been declared due and
payable, and the related Indenture Trustee obtains the consent of
the holders of 66 2/3% of the aggregate principal amount of such
Notes then outstanding;
provided, that the Indenture Trustee may not sell or otherwise liquidate the
Student Loans following an Event of Default, other than a default in the payment
of any principal on the final scheduled Distribution Date for a class of Notes
or a default of five days or more on the payment of any interest on any Note
when due, unless:
(a) the proceeds of the sale or liquidation of the Student Loans
distributable to the Certificateholders are sufficient to pay to
the Certificateholders the outstanding Certificate Balance plus
accrued and unpaid interest thereon; or
(b) after receipt of notice from the Eligible Lender Trustee that the
proceeds of such sale or liquidation distributable to the
Certificateholders would not be sufficient to pay to the
Certificateholders the outstanding Certificate Balance plus
accrued and unpaid interest thereon, the Certificateholders of at
least a majority of the outstanding Certificate Balance consent
thereto;
provided, further that the Indenture Trustee may not sell or otherwise liquidate
the Student Loans following an Event of Default, other than a default in the
payment of any principal on the final scheduled Distribution Date for a class of
Notes or a default of five days or more on the payment of any interest on any
Note when due unless:
(x) proceeds of the sale or liquidation of the Student Loans
distributable from such sale are sufficient (1) to pay to
Noteholders, the outstanding principal balance of the Notes
(other than the Noteholders' Interest Carryover Shortfall (as
defined in each Prospectus Supplement)) and (2) to pay to
Certificateholders, the outstanding Certificate Balance plus
accrued and unpaid interest thereon (other than the
Certificateholders' Interest Carryover Shortfall (as defined in
each Prospectus Supplement)); or
(y) after receipt of notice from the Eligible Lender Trustee that the
proceeds of such sale or liquidation would not be sufficient (1)
to pay to Noteholders, the outstanding principal balance of the
Notes (other than the Noteholders' Interest Carryover Shortfall)
and (2) to pay to Certificateholders the outstanding Certificate
Balance plus accrued and unpaid interest thereon (other than the
Certificateholders' Interest Carryover Shortfall).
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If the proceeds of any such sale are insufficient to pay the then outstanding
principal amount of the Notes and any accrued interest, such proceeds shall be
distributed to the holders of Notes on a pro rata basis, based on the amount
then owing on each class of Notes.
Subject to the provisions of the applicable Indenture relating to the
duties of the related Indenture Trustee, if an Event of Default should occur and
be continuing with respect to a series of Notes, the related Indenture Trustee
will be under no obligation to exercise any of the rights or powers under the
applicable Indenture at the request or direction of any of the holders of such
Notes, if such Indenture Trustee reasonably believes it will not be adequately
indemnified against the costs, expenses and liabilities which might be incurred
by it in complying with such request. Subject to such provisions for
indemnification and certain limitations contained in the related Indenture, the
holders of a majority in principal amount of the specified senior class(es) of
outstanding Notes of a given series will have the right to direct the time,
method and place of conducting any proceeding or any remedy available to such
Indenture Trustee and the holders of a majority in principal amount of the
specified senior class(es) of such Notes then outstanding may, in certain cases,
waive any default with respect thereto, except a default in the payment of
principal or interest or a default in respect of a covenant or provision of the
applicable Indenture that cannot be modified without the waiver or consent of
all the holders of such outstanding Notes or more junior class of Notes.
Unless otherwise specified in the related Prospectus Supplement, no
holder of Notes of any series will have the right to institute any proceeding
with respect to the related Indenture, unless:
(a) such holder previously has given to the applicable Indenture
Trustee written notice of a continuing Event of Default,
(b) the holders of not less than 25% in principal amount of such
outstanding Notes have requested in writing that such Indenture
Trustee institute such proceeding in its own name as Indenture
Trustee,
(c) such holder or holders have offered such Indenture Trustee
reasonable indemnity,
(d) such Indenture Trustee has for 60 days failed to institute such
proceeding, and
(e) no direction inconsistent with such written request has been
given to such Indenture Trustee during such 60-day period by the
holders of a majority of the specified senior class(es) of
outstanding Notes of such outstanding Notes.
In addition, each Indenture Trustee and the related Noteholders will
covenant that they will not at any time institute against the applicable Trust
any bankruptcy, reorganization or other proceeding under any federal or state
bankruptcy or similar law.
With respect to any Trust, none of the related Indenture Trustee, the
Seller, the Administrator, the Master Servicer, the Sub-Servicers or the
Eligible Lender Trustee in its
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individual capacity, or any holder of a Certificate representing an ownership
interest in the applicable Trust, or any of their respective owners,
beneficiaries, agents, officers, directors, employees, successors or assigns
will, in the absence of an express agreement to the contrary, be personally
liable for the payment of the principal of or interest on the Notes or for the
agreements of the Trust contained in the Indenture.
Certain Covenants. Each Indenture will provide that the related Trust
may not consolidate with or merge into any other entity, unless:
(a) the entity formed by or surviving such consolidation or merger is
organized under the laws of the United States of America, any
state thereof or the District of Columbia,
(b) such entity expressly assumes such Trust's obligation to make due
and punctual payments upon the Notes of the related series and
the performance or observance of every agreement and covenant of
such Trust under the related Indenture,
(c) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation,
(d) such Trust has been advised that the ratings of the Notes and the
Certificates of the related series would not be reduced or
withdrawn by the Rating Agencies (as such term is defined in the
related Prospectus Supplement, each a "Rating Agency" and
collectively, the "Rating Agencies") as a result of such merger
or consolidation, and
(e) such Trust has received an opinion of counsel to the effect that
such consolidation or merger would have no material adverse
federal or Pennsylvania state tax consequence to such Trust or to
any Certificateholder or Noteholder of the related series.
Each Trust will not, among other things:
- except as expressly permitted by the applicable Indenture, the
applicable Transfer and Servicing Agreements or certain related
documents (collectively, the "Related Documents"), sell,
transfer, exchange or otherwise dispose of any of the assets of
such Trust,
- claim any credit on or make any deduction from the principal and
interest payable in respect of the Notes of the related series
(other than amounts withheld under the Code or applicable state
law) or assert any claim against any present or former holder of
such Notes because of the payment of taxes levied or assessed
upon such Trust,
- except as contemplated by the Related Documents, dissolve or
liquidate in whole or in part,
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- permit the validity or effectiveness of the applicable Indenture
to be impaired or permit any person to be released from any
covenants or obligations with respect to such Notes under the
applicable Indenture except as may be expressly permitted
thereby, or
- permit any lien, charge, excise, claim, security interest,
mortgage or other encumbrance to be created on or extend to or
otherwise arise upon or burden the assets of the Trust or any
part thereof, or any interest therein or the proceeds thereof,
except as expressly permitted by the Related Documents.
No Trust may engage in any activity other than financing, purchasing,
owning, selling and managing Student Loans and the other assets of the Trust and
making Additional Fundings, in each case in the manner contemplated by the
Related Documents and activities incidental thereto. No Trust will incur, assume
or guarantee any indebtedness other than indebtedness incurred pursuant to the
Notes of the related series and the applicable Indenture or otherwise in
accordance with the Related Documents.
Annual Compliance Statement. Each Trust will be required to file
annually with the applicable Indenture Trustee a written statement as to the
fulfillment of its obligations under the related Indenture.
Indenture Trustee's Annual Report. Each Indenture Trustee will be
required to mail each year to all related Noteholders a brief report relating
to, among other things, its eligibility and qualification to continue as such
Indenture Trustee under the applicable Indenture, any amounts advanced by it
under the Indenture, the amount, interest rate and maturity date of certain
indebtedness owing by such Trust to the applicable Indenture Trustee in its
individual capacity, the property and funds physically held by the applicable
Indenture Trustee as such and any action taken by it that materially affects the
related Notes and that has not been previously reported.
Satisfaction and Discharge of Indenture. An Indenture will be
discharged with respect to the collateral securing the related Notes upon the
delivery to the related Indenture Trustee for cancellation of all such Notes or,
with certain limitations, upon deposit with such Indenture Trustee of funds
sufficient for the payment in full of all such Notes.
The Indenture Trustee. The Indenture Trustee for a series of Notes will
be specified in the related Prospectus Supplement. The Indenture Trustee for any
series may resign at any time, in which event the Trust will be obligated to
appoint a successor trustee for such series. The Trust may also remove any such
Indenture Trustee if such Indenture Trustee ceases to be eligible to continue as
such under the related Indenture or if such Indenture Trustee becomes insolvent.
In such circumstances, the Trust will be obligated to appoint a successor
trustee for the applicable series of Notes. Any resignation or removal of the
Indenture Trustee and appointment of a successor trustee for any series of Notes
does not become effective until acceptance of the appointment by the successor
trustee for such series.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
With respect to each Trust, one or more classes of certificates
("Certificates" and together with the Notes, the "Securities") of a given series
will, unless otherwise specified in the related Prospectus Supplement, be issued
pursuant to the terms of a Trust Agreement, a form of which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
following summary describes the material terms of the Certificates and the Trust
Agreement. The summary does not purport to be complete and is qualified in its
entirety by reference to all the provisions of the Certificates and the Trust
Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
class of Certificates will initially be represented by a single Certificate
registered in the name of the Depository, except as set forth below. Unless
otherwise specified in the related Prospectus Supplement and except for the
Certificates of a given series purchased by the Seller or an affiliate of the
Seller specified in the related Prospectus Supplement, the Certificates will be
available for purchase in minimum denominations of $1,000 and integral multiples
of $1,000 in excess thereof in book-entry form only. The Seller has been
informed by DTC that DTC's nominee will be Cede, unless another nominee is
specified in the related Prospectus Supplement. Accordingly, such nominee is
expected to be the holder of record of the Certificates of any series that are
not purchased by the Seller or an affiliate of the Seller. Unless and until
Definitive Certificates are issued under the limited circumstances described
herein or in the related Prospectus Supplement, no Certificateholder (other than
the Seller or an affiliate of the Seller) will be entitled to receive a physical
certificate representing a Certificate. All references herein and in the related
Prospectus Supplement to actions by Certificateholders (other than the Seller or
an affiliate of the Seller) refer to actions taken by DTC upon instructions from
the Participants and all references herein and in the related Prospectus
Supplement to distributions, notices, reports and statements to
Certificateholders (other than the Seller or an affiliate of the Seller) refer
to distributions, notices, reports and statements to DTC or its nominee, as the
case may be, as the registered holder of the Certificates, for distribution to
Certificateholders in accordance with DTC's procedures with respect thereto. See
"Certain Information Regarding the Securities--Book-Entry Registration" and
"--Definitive Securities." Unless otherwise specified in the related Prospectus
Supplement, Certificates of a given series owned by the Seller or its affiliates
will be entitled to equal and proportionate benefits under the applicable Trust
Agreement, except that, assuming that all Certificates of a given series are not
all owned by the Seller and its affiliates, the Certificates owned by the Seller
and its affiliates will be deemed not to be outstanding for the purpose of
determining whether the requisite percentage of Certificateholders has given any
request, demand, authorization, direction, notice, consent or other action under
the Related Documents (other than the commencement by the related Trust of a
voluntary proceeding in bankruptcy as described under "Description of the
Transfer and Servicing Agreements--Insolvency Event").
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PRINCIPAL AND INTEREST IN RESPECT OF THE CERTIFICATES
The timing and priority of distributions, seniority, allocations of
losses, interest at a per annum interest rate (the "Pass-Through Rate") and
amount of or method of determining distributions with respect to principal and
interest of each class of Certificates of a given series will be described in
the related Prospectus Supplement. Distributions of interest on such
Certificates will be made on each Distribution Date and will be made prior to
distributions with respect to principal of such Certificates. Each class of
Certificates may have a different Pass-Through Rate, which may be a fixed,
variable or adjustable Pass-Through Rate or any combination of the foregoing.
The related Prospectus Supplement will specify the Pass-Through Rate for each
class of Certificates of a given series or the method for determining such
Pass-Through Rate. See also "Certain Information Regarding the Securities--Fixed
Rate Securities" and "--Floating Rate Securities." Distributions in respect of
the Certificates of a given series may be subordinate to payments in respect of
the Notes of such series as more fully described in the related Prospectus
Supplement. Distributions in respect of interest on and principal of any class
of Certificates will be made on a pro rata basis among all the
Certificateholders of such class.
In the case of a series of Certificates which includes two or more
classes of Certificates, the timing, sequential order, priority of payment or
amount of distributions in respect of interest and principal, and any schedule
or formula or other provisions applicable to the determination thereof, of each
such class shall be as set forth in the related Prospectus Supplement.
See "Description of the Transfer and Servicing Agreements--Credit and
Cash Flow Enhancement--Reserve Account" for a description of the Reserve Account
and the distribution of amounts in excess of the Specified Reserve Account
Balance.
CERTAIN INFORMATION REGARDING THE SECURITIES
FIXED RATE SECURITIES
Each class of Securities may bear interest at a fixed rate per annum
("Fixed Rate Securities") or at a variable or adjustable rate per annum
("Floating Rate Securities"), as more fully described below and in the
applicable Prospectus Supplement. Each class of Fixed Rate Securities will bear
interest at the applicable per annum Interest Rate or Pass-Through Rate, as the
case may be, specified in the applicable Prospectus Supplement. Interest on each
class of Fixed Rate Securities will be computed on the basis of a 360-day year
of twelve 30-day months. See "Description of the Notes--Principal of and
Interest on the Notes" and "Description of the Certificates--Principal and
Interest in Respect of the Certificates."
FLOATING RATE SECURITIES
Each class of Floating Rate Securities will bear interest for each
applicable Interest Reset Period (as such term is defined in the related
Prospectus Supplement with respect to a class of Floating Rate Securities,
"Interest Reset Period") at a rate per annum determined by reference to
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an interest rate basis (the "Base Rate"), plus or minus the Spread, if any, or
multiplied by the Spread Multiplier, if any, in each case as specified in the
related Prospectus Supplement. The "Spread" is the number of basis points (one
basis point equals one one-hundredth of a percentage point) that may be
specified in the applicable Prospectus Supplement as being applicable to such
class, and the "Spread Multiplier" is the percentage that may be specified in
the applicable Prospectus Supplement as being applicable to such class.
The applicable Prospectus Supplement will designate a Base Rate for a
given Floating Rate Security based on the London interbank offered rate
("LIBOR"), commercial paper rates, Federal funds rates, U.S. Government treasury
securities rates, negotiable certificates of deposit rates or another rate or
rates as set forth in such Prospectus Supplement.
As specified in the applicable Prospectus Supplement, Floating Rate
Securities of a given class may also have either or both of the following (in
each case expressed as a rate per annum): (a) a maximum limitation, or ceiling,
on the rate at which interest may accrue during any interest period and (b) a
minimum limitation, or floor, on the rate at which interest may accrue during
any interest period. In addition to any maximum interest rate that may be
applicable to any class of Floating Rate Securities, the interest rate
applicable to any class of Floating Rate Securities will in no event be higher
than the maximum rate permitted by applicable law, as the same may be modified
by United States law of general application.
Each Trust with respect to which a class of Floating Rate Securities
will be issued will appoint, and enter into agreements with, a calculation agent
(each, a "Calculation Agent") to calculate interest rates on each such class of
Floating Rate Securities issued with respect thereto. The applicable Prospectus
Supplement will set forth the identity of the Calculation Agent for each such
class of Floating Rate Securities of a given series, which may be the
Administrator, the Eligible Lender Trustee or the Indenture Trustee with respect
to such series. All determinations of interest by the Calculation Agent shall,
in the absence of manifest error, be conclusive for all purposes and binding on
the holders of Floating Rate Securities of a given class. Unless otherwise
specified in the applicable Prospectus Supplement, all percentages resulting
from any calculation of the rate of interest on a Floating Rate Security will be
rounded, if necessary, to the nearest 1/100,000 of 1% (.0000001), with five
one-millionths of a percentage point rounded upward.
BOOK-ENTRY REGISTRATION
Persons acquiring beneficial ownership interests in the Notes may hold
their interests through DTC in the United States or Clearstream Banking, societe
anonyme ("Clearstream") or The Euroclear System ("Euroclear") in Europe and
persons acquiring beneficial ownership interests in the Certificates may hold
their interests through DTC. Securities will be registered in the name of Cede
as nominee for DTC. Clearstream and Euroclear will hold omnibus positions with
respect to the Notes on behalf of Clearstream Participants and the Euroclear
Participants, respectively, through customers' securities accounts in
Clearstream's and Euroclear's name on the books of their respective depositaries
(collectively, the "Depositories") which in turn will hold such positions in
customers' securities accounts in the Depositories' names on the books of DTC.
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DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the UCC and a "clearing agency" registered
pursuant to Section 17A of the Exchange Act. DTC was created to hold securities
for its Participants and to facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entries,
thereby eliminating the need for physical movement of certificates.
"Participants" include securities brokers and dealers, banks, trust companies
and clearing corporations. Indirect access to the DTC system also is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Noteholders and Certificateholders (collectively, "Securityholders")
that are not Participants or Indirect Participants but desire to purchase, sell
or otherwise transfer ownership of, or other interests in, Securities held
through DTC may do so only through Participants and Indirect Participants. In
addition, Securityholders will receive all distributions of principal and
interest from the related Indenture Trustee or the related Eligible Lender
Trustee, as applicable (the "Applicable Trustee"), through Participants and
Indirect Participants. Under a book-entry format, Securityholders may experience
some delay in their receipt of payments, since such payments will be forwarded
by the Applicable Trustee to DTC's nominee. DTC will forward such payments to
its Participants, which thereafter will forward them to Indirect Participants or
Securityholders. Except for the Seller or an affiliate of the Seller with
respect to any series of Securities, it is anticipated that the only
"Securityholder," "Certificateholder" and "Noteholder" will be DTC's nominee.
Securityholders will not be recognized by the Applicable Trustee as Noteholders
or Certificateholders, as such terms are used in each Indenture and each Trust
Agreement, respectively, and Securityholders will be permitted to exercise the
rights of Securityholders only indirectly through DTC and its Participants.
Transfers between DTC participants will occur in the ordinary way in
accordance with DTC Rules. Transfers between Clearstream 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
Clearstream or Euroclear as a result of a transaction with a DTC Participant
will be made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Such credits or any transactions
in such securities settled during such processing will be reported to the
relevant Euroclear Participants or Clearstream Participants on such business
day. Cash received in Clearstream or Euroclear as a result of sales of
securities by or through a Clearstream Participant or a Euroclear Participant to
a Participant will be received with value on the DTC settlement date but will be
available in the relevant Clearstream or Euroclear cash account only as of the
business day following settlement in DTC.
Cross-market transfers between persons holding Notes directly or
indirectly through DTC, on the one hand, and directly or indirectly through
Clearstream Participants or Euroclear Participants, on the other, will be
effected in DTC in accordance with DTC Rules on behalf of the
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relevant European international clearing system by its Depository; however, such
cross-market transactions will require delivery of instructions to the relevant
European international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system will, if
the transaction meets its settlement requirements, deliver instructions to its
Depositary to take action to effect final settlement on its behalf by delivering
or receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same-day funds settlement applicable to DTC.
Clearstream Participants and Euroclear Participants may not deliver instructions
directly to the Depositaries.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of Securities among Participants on whose behalf it acts with respect to the
Securities and to receive and transmit distributions of principal of, and
interest on, the Securities. Participants and Indirect Participants with which
Securityholders have accounts with respect to the Securities similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Securityholders. Accordingly, although
Securityholders will not possess Securities, the Rules provide a mechanism by
which Participants will receive payments and will be able to transfer their
interests.
Because DTC can only act on behalf of Participants, which in turn act
on behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to such
Securities, may be limited due to the lack of a physical certificate for such
Securities.
Management of DTC is aware that some computer applications, systems and
the like for processing data ("Systems") that are dependent upon calendar dates,
including dates before, on, and after January 1, 2000, may encounter "Year 2000
problems" DTC has informed Participants and Indirect Participants and other
members of the financial community (the "Industry") that it has developed and is
implementing a program so that its Systems, as the same relate to the timely
payment of distributions (including principal and interest payments) to
securityholders, book-entry deliveries, and settlement of trades within DTC
("Depository Services"), continue to function appropriately. This program
includes a technical assessment and a remediation plan, each of which is
complete. Additionally, DTC's plan includes a testing phase, which is expected
to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including, but not limited to, issuers and their
agents, as well as DTC's Participants and Indirect Participants, third party
vendors from whom DTC licenses software and hardware, and 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
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appropriate, testing) of their services. In addition, DTC is in the process of
developing such contingency plans as it deems appropriate.
Appropriate to DTC, the information in the preceding two paragraphs
with respect to DTC has been provided to the Industry for informational purposes
only and is not intended to serve as a representation, warranty, or contract
modification of any kind.
Clearstream Banking, societe anonyme ("Clearstream"), located at 67 Bd
Grande-Duchesse Charlotte, L-2967 Luxembourg, was incorporated in 1970 as "Cedel
S.A.," a company with limited liability under Luxembourg law (a societe
anonyme), Cedel S.A. subsequently changed its name to Cedelbank ("Cedelbank").
On January 10, 2000, Cedelbank's parent company, Cedel International, societe
anonyme ("CI") merged its clearing, settlement and custody business with that of
Deutsche Borse Clearing AG ("DBC"). The merger involved the transfer by CI of
substantially all of its assets and liabilities (including its shares in
Cedelbank) to a new Luxembourg company, New Cedel International, societe anonyme
("New CI"), which is 50% owned by CI and 50% owned by DBC's parent company
Deutsche Borse AG. The shareholders of these two entities are banks, securities
dealers and financial institutions. CI currently has 92 shareholders, including
U.S. financial institutions or their subsidiaries. No single entity may own more
than 5 percent of CI's stock.
In furtherance of the merger, the Board of Directors of New CI decided
to rename the companies in the group in order to give them a cohesive brand
name. The new brand name that was chosen is "Clearstream." Effective as of
January 14, 2000, New CI has been renamed "Clearstream International, societe
anonyme," On January 18, 2000, Cedelbank was renamed "Clearstream Banking,
societe anonyme," and Cedel Global Services was renamed "Clearstream Services,
societe anonyme."
On January 17, 2000, DBC was renamed "Clearstream Banking AG." This
means that there are now two entities in the corporate group headed by
Clearstream International that share the name "Clearstream Banking," the entity
previously named "Cedelbank" and the entity previously named "Deutsche Borse
Clearing AG."
Clearstream holds securities for its customers ("Clearstream
Participants") and facilitates the clearance and settlement of securities
transactions between Clearstream customers through electronic book-entry changes
in accounts of Clearstream customers, thereby eliminating the need for physical
movement of certificates. Transactions may be settled by Clearstream in any of
36 currencies, including United States Dollars. Clearstream provides to its
customers, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream also deals with domestic securities markets
in over 30 countries through established depository and custodial relationships.
Clearstream is registered as a bank in Luxembourg, and as such is subject to
regulation by the Commission de Surveillance du Secteur Financier, (the "CSSF"),
which supervises Luxembourg banks. Clearstream's customers are world-wide
financial institutions including underwriters, securities brokers and dealers,
banks, trust companies and clearing corporations. Clearstream's U.S. customers
are limited to securities brokers and dealers, and
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banks. Currently, Clearstream has approximately 2,000 customers located in over
80 countries, including all major European countries, Canada and the United
States. Indirect access to Clearstream is available to other institutions that
clear through or maintain a custodial relationship with an account holder of
Clearstream. Clearstream has established an electronic bridge with the Euroclear
Operator to facilitate settlement of trades between Clearstream and the
Euroclear Operator.
The Euroclear System ("Euroclear") was created in 1968 to hold
securities for participants of Euroclear ("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. Euroclear 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. Euroclear is operated by Morgan
Guaranty Trust Company of New York, Brussels, Belgium office (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems, S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by the
Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries and may include any underwriters, agents or dealers with respect
to the Notes offered hereby. Indirect access to Euroclear 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 Euroclear and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear 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 Clearstream or
Euroclear will be credited to the cash accounts of Clearstream Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depository. Such distributions will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations.
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Clearstream 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 Clearstream Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to its
Depository's ability to effect such actions on its behalf through DTC.
DTC has advised the Administrator that it will take any action
permitted to be taken by a Securityholder under the related Indenture or the
related Trust Agreement, as the case may be, only at the direction of one or
more Participants to whose accounts with DTC the Securities are credited. DTC
may take conflicting actions with respect to other undivided interests to the
extent that such actions are taken on behalf of Participants whose holdings
include such undivided interests.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of interests in the Notes among
Participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
NONE OF THE TRUST, THE SELLER, THE MASTER SERVICER, ANY SUB-SERVICERS,
THE ADMINISTRATOR, THE ELIGIBLE LENDER TRUSTEE, THE INDENTURE TRUSTEE NOR THE
UNDERWRITERS WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO ANY PARTICIPANTS,
CLEARSTREAM 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, CLEARSTREAM OR EUROCLEAR OR ANY PARTICIPANT, (2) THE PAYMENT BY DTC,
CLEARSTREAM 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, CLEARSTREAM PARTICIPANT OR EUROCLEAR
PARTICIPANT OF ANY NOTICE TO ANY BENEFICIAL OWNER WHICH IS REQUIRED OR PERMITTED
UNDER THE TERMS OF THE INDENTURE OR THE TRUST AGREEMENT TO BE GIVEN TO
SECURITYHOLDERS OR (4) ANY OTHER ACTION TAKEN BY DTC AS THE SECURITYHOLDER.
DEFINITIVE SECURITIES
Except with respect to the Certificates of a given series that may be
purchased by the Seller or an affiliate of the Seller, the Notes and the
Certificates of a given series will be issued in fully registered, certificated
form ("Definitive Notes" and "Definitive Certificates", respectively, and
collectively referred to herein as "Definitive Securities") to Noteholders or
Certificateholders or their respective nominees, rather than to DTC or its
nominee, only if:
(a) the related Administrator advises the Applicable Trustee in
writing that DTC is no longer willing or able to discharge
properly its responsibilities as depository with respect to the
Securities and the Administrator is unable to locate a qualified
successor,
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(b) the Administrator, at its option, elects to terminate the
book-entry system through DTC, or
(c) after the occurrence of an Event of Default or a Master Servicer
Default, Securityholders representing at least a majority of the
outstanding principal amount of the applicable class of Notes or
the Certificates, as the case may be, of such series advise the
Applicable Trustee through DTC in writing that the continuation
of a book-entry system through DTC (or a successor thereto) with
respect to the Notes of such class or Certificates of such series
is no longer in the best interest of the holders of such
Securities.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Applicable Trustee will be required to notify all applicable
Securityholders of a given series through Participants of the availability of
Definitive Securities. Upon surrender by DTC of the Definitive Securities
representing the corresponding Securities and receipt of instructions for
re-registration, the Applicable Trustee will reissue such Securities as
Definitive Securities to such Securityholders.
Distributions of principal of, and interest on, such Definitive
Securities will thereafter be made by the Applicable Trustee in accordance with
the procedures set forth in the related Indenture or the related Trust
Agreement, as the case may be, directly to holders of Definitive Securities in
whose names the Definitive Securities were registered at the close of business
on the applicable Record Date which will be the business day preceding each
Distribution Date, unless otherwise specified in the related Prospectus
Supplement (the "Record Date") specified for such Securities in the related
Prospectus Supplement. Such distributions will be made by check mailed to the
address of such holder as it appears on the register maintained by the
Applicable Trustee. The final payment on any such Definitive Security, however,
will be made only upon presentation and surrender of such Definitive Security at
the office or agency specified in the notice of final distribution to applicable
Securityholders.
Definitive Securities will be transferable and exchangeable at the
offices of the Applicable Trustee or of a registrar named in a notice delivered
to holders of Definitive Securities. No service charge will be imposed for any
registration of transfer or exchange, but the Applicable Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
LIST OF SECURITYHOLDERS
Three or more holders of Notes or one or more holders of Notes
evidencing not less than 25% of the aggregate outstanding principal balance of
such Notes may, by written request to the related Indenture Trustee, obtain
access to the list of all Noteholders maintained by such Indenture Trustee for
the purpose of communicating with other Noteholders with respect to their rights
under the related Indenture or such Notes. Such Indenture Trustee may elect not
to afford the requesting Noteholders access to the list of Noteholders if it
agrees to mail the desired
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communication or proxy, on behalf and at the expense of the requesting
Noteholders, to all Noteholders of such series.
Three or more Certificateholders of such series or one or more holders
of such Certificates evidencing not less than 25% of the Certificate Balance of
such Certificates may, by written request to the related Eligible Lender
Trustee, obtain access to the list of all Certificateholders for the purpose of
communicating with other Certificateholders with respect to their rights under
the related Trust Agreement or under such Certificates.
REPORTS TO SECURITYHOLDERS
With respect to each series of Securities, on each Distribution Date,
the Applicable Trustee will provide to Securityholders of record as of the
related Record Date a statement setting forth substantially the same information
as is required to be provided on the periodic report provided to the related
Indenture Trustee and the related Trust described under "Description of the
Transfer and Servicing Agreements--Statements to Indenture Trustee and Trust."
Such statements will be filed with the Commission during the period required by
Rule 15d-1 under the Exchange Act and will not be filed with the Commission
thereafter. The statements provided to Securityholders will not constitute
financial statements prepared in accordance with generally accepted accounting
principles.
Unless and until Definitive Notes or Definitive Certificates are
issued, quarterly and annual unaudited reports containing information concerning
the Student Loans will be prepared by Key Bank USA, National Association and
sent on behalf of the related Trust only to Cede, as nominee of DTC and
registered holder of the Notes and the Certificates, but will not be sent to any
beneficial holder of the Securities.
Within the prescribed period of time for tax reporting purposes after
the end of each calendar year during the term of each Trust, the Applicable
Trustee will mail to each person who at any time during such calendar year was a
Securityholder with respect to such Trust and received any payment thereon, a
statement containing certain information for the purposes of such
Securityholder's preparation of federal income tax returns. See "Income Tax
Consequences."
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
GENERAL
The following is a summary of the material terms of each Sale and
Servicing Agreement (each a "Sale and Servicing Agreement"), pursuant to which
the related Eligible Lender Trustee on behalf of a Trust will purchase Student
Loans from the Seller and the Master Servicer will (or will cause the related
Sub-Servicers to) service the same; each Administration Agreement, pursuant to
which the Administrator will undertake certain administrative duties with
respect to a Trust and the Student Loans; and each Trust Agreement, pursuant to
which a Trust will be created and the related Certificates will be issued
(collectively, the "Transfer and Servicing
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Agreements"). Forms of each of the Transfer and Servicing Agreements have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part. However, this summary does not purport to be complete and is qualified in
its entirety by reference to all of the provisions of the Transfer and Servicing
Agreements.
In addition, and if so provided in the related Prospectus Supplement,
the Master Servicer may directly assume servicing responsibilities for some or
all of a pool of Financed Student Loans without a sub-servicer, or the related
Trust may contract directly with one or more Sub-Servicers, pursuant to the
related Sale and Servicing Agreement, to perform all of the requisite servicing
responsibilities with respect to the related pool of Financed Student Loans
without the appointment of a master servicer, on the terms and conditions set
forth herein and therein.
Notwithstanding the foregoing, and if so provided in the related
Prospectus Supplement, KBUSA may also choose not to act as Master Servicer with
respect to a Trust. In such instance, the related Sub-Servicer (or
Sub-Servicers) will enter into the Sale and Servicing Agreement, as servicer (or
servicers), with the related Trust directly and will undertake to perform all of
the obligations and responsibilities of the Master Servicer set forth herein and
in the related Prospectus Supplement with respect to the Student Loans it is
responsible for servicing on the terms and conditions set forth in the related
Prospectus Supplement and such Sale and Servicing Agreement.
SALE OF STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
On or prior to the Closing Date specified with respect to any given
Trust in the related Prospectus Supplement (the "Closing Date"), the Seller will
sell and assign to the related Eligible Lender Trustee on behalf of such Trust,
without recourse, except as provided in the Sale and Servicing Agreement, its
entire interest in the Student Loans, all collections received and to be
received with respect thereto for the period on and after the Cutoff Date and
all the Assigned Rights pursuant to the Sale and Servicing Agreement. Each
Student Loan will be identified in a schedule appearing as an exhibit to such
Sale and Servicing Agreement. Each Eligible Lender Trustee will, concurrently
with such sale and assignment, execute, authenticate and deliver the related
Certificates and Notes. The net proceeds received from the sale of the related
Notes and Certificates will be applied to the purchase of the Student Loans.
In each Sale and Servicing Agreement, the Seller will make certain
representations and warranties with respect to the Student Loans to a Trust for
the benefit of the Certificateholders and the Noteholders of a given series,
including, among other things, that:
- each Student Loan, on the date on which it is transferred to such
Trust, is free and clear of all security interests, liens,
charges and encumbrances and no offsets, defenses or
counterclaims with respect thereto have been asserted or
threatened;
- the information provided with respect to the Student Loans is
true and correct as of the Cutoff Date; and
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- each Student Loan, at the time it was originated, complied and,
at the Closing Date, complies in all material respects with
applicable federal and state laws (including, without limitation,
the Higher Education Act) and applicable restrictions imposed by
the Programs or any Guarantee Agreement.
Following the discovery by or notice to the Seller of a breach of any
representation or warranty with respect to any Student Loan that materially and
adversely affects the interests of the related Certificateholders or the
Noteholders in such Student Loan (it being understood that any such breach that
does not affect any Guarantor's obligation to guarantee payment of such Student
Loan will not be considered to have such a material adverse effect), the Seller
will, unless such breach is cured within 60 days, repurchase such Student Loan
from the related Eligible Lender Trustee, as of the first day following the end
of such 60-day period that is the last day of a Collection Period (as such term
is defined in the related Prospectus Supplement, the "Collection Period") at a
price equal to the unpaid principal balance owed by the applicable borrower plus
accrued interest thereon to the day of repurchase (the "Purchase Amount"). In
addition, the Seller will reimburse the related Trust with respect to a Federal
Loan for any accrued interest amounts that a Federal Guarantor refuses to pay
pursuant to its Guarantee Agreement due to, or for any Interest Subsidy Payments
and Special Allowance Payments that are lost or that must be repaid to the
Department as a result of, a breach of any such representation or warranty by
the Seller. The repurchase and reimbursement obligations of the Seller will
constitute the sole remedy available to or on behalf of the related Trust, the
Certificateholders or the Noteholders for any such uncured breach. The Seller's
repurchase and reimbursement obligations are contractual obligations pursuant to
the Sale and Servicing Agreement that may be enforced against the Seller, but
the breach of which will not constitute an Event of Default.
To assure uniform quality in servicing and to reduce administrative
costs, the Master Servicer will appoint each Sub-Servicer the custodian of the
promissory notes representing the Student Loans which such Sub-Servicer is
servicing and any other related documents on behalf of the Master Servicer with
respect to each Trust. The Seller's, the Master Servicer's and the
Sub-Servicers' records and computer systems will reflect the sale and assignment
by the Seller of the Student Loans to the related Eligible Lender Trustee on
behalf of the related Trust, and UCC financing statements reflecting such sale
and assignment will be filed.
ADDITIONAL FUNDINGS
In the case of a Trust having a Pre-Funding Account or an Escrow
Account, such Trust will use funds on deposit in such account from time to time
during the related Funding Period or Revolving Period, respectively, (x) to make
interest payments to Noteholders and Certificateholders in lieu of collections
of interest on certain of the Student Loans to the extent such interest is not
paid currently but is capitalized and added to the principal balance of such
Student Loans and (y) to fund the addition of Student Loans to the Trust under
the circumstances and having the characteristics described in the related
Prospectus Supplement ("Additional Fundings"). Such additional Student Loans may
be purchased by the Trust from the Seller or may be originated by the Trust, if
and to the extent specified in the related Prospectus Supplement.
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There can be no assurance that substantially all of the amounts on
deposit in any Pre-Funding Account or Escrow Account will be expended during the
related Funding Period or Revolving Period, respectively. If the amount
initially deposited into a Pre-Funding Account or an Escrow Account for a series
has not been reduced to zero by the end of the related Funding Period or
Revolving Period, respectively, the amounts remaining on deposit therein will be
distributed to the related Securityholders in the amounts described in the
related Prospectus Supplement.
If and to the extent specified in the related Prospectus Supplement,
the related Trust may use distributions on the Student Loans, or may exchange
Student Loans with the Seller, in order to pay for Additional Fundings after any
Funding Period or Revolving Period.
ACCOUNTS
With respect to each Trust, and to the extent provided in the related
Prospectus Supplement, the Administrator will establish and maintain one or more
accounts entitled the "Collection Account", the "Pre-Funding Account", the
"Escrow Account", the "Negative Carry Account" and the "Reserve Account"
(collectively, the "Trust Accounts"), in the name of the Indenture Trustee on
behalf of the Noteholders and the Certificateholders.
For any series of Securities funds in the Trust Accounts will be
invested as provided in the related Sale and Servicing Agreement in Eligible
Investments. "Eligible Investments" are generally limited to short-term U.S.
government backed securities, certain highly rated commercial paper and money
market funds and other investments acceptable to the Rating Agencies as being
consistent with the rating of the Securities. Subject to certain conditions,
Eligible Investments may include securities or other obligations issued by the
Seller or its affiliates, or trusts originated by the Seller or its affiliates,
or shares of investment companies for which the Seller or its affiliates may
serve as the investment advisor. Eligible Investments are limited to obligations
or securities that mature not later than the business day immediately preceding
the next Distribution Date. Investment earnings on funds deposited in the Trust
Accounts, net of losses and investment expenses (collectively, "Investment
Earnings"), will be deposited in the Collection Account on each Distribution
Date and will be treated as collections of interest on the related Student
Loans.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in such account, so long as any of the
securities of such depository institution have a credit rating from each Rating
Agency in one of its generic rating categories which signifies investment grade.
Any such accounts may be maintained with the Seller or any of its affiliates, if
such accounts meet the requirements described in clause (a) of the preceding
sentence. "Eligible Institution" means a depository institution (which may be,
without limitation, the Seller or an affiliate thereof, or the Indenture Trustee
or an affiliate thereof) organized under
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the laws of the United States of America or any one of the states thereof or the
District of Columbia (or any domestic branch of a foreign bank), which has a
long-term unsecured debt rating acceptable and/or a short-term unsecured debt
rating or certificate of deposit rating acceptable to the Rating Agencies, and
the deposits of which are insured by the Federal Deposit Insurance Corporation
(the "FDIC").
SERVICING PROCEDURES
Pursuant to each Sale and Servicing Agreement, the Master Servicer will
agree to service, and perform all other related tasks with respect to, all the
Student Loans acquired from time to time on behalf of each Trust. So long as no
claim is being made against a Guarantor for any Student Loan, the Master
Servicer will designate the related Sub-Servicer to hold as custodian on its
behalf and on behalf of the Trust, the notes evidencing, and other documents
relating to, that Student Loan. Pursuant to the related Sale and Servicing
Agreement, the Master Servicer is responsible for performing all services and
duties customary to the servicing of Student Loans (including all collection
practices), and to do so (or to cause the Sub-Servicers to do so) with
reasonable care and in compliance with, and to otherwise comply with, all
standards and procedures provided for in the Higher Education Act, the Guarantee
Agreements and all other applicable federal and state laws. Notwithstanding the
foregoing, the Master Servicer may designate one or more Sub-Servicers to
perform some or all of the requisite duties listed above; provided, however,
that irrespective of the performance or non-performance by a Sub-Servicer, the
Master Servicer shall not be relieved of its responsibilities and obligations
under the Sale and Servicing Agreement.
Without limiting the foregoing, the duties of the Master Servicer (any
or all of which may be delegated by the Master Servicer to a Sub-Servicer) with
respect to each Trust under the related Sale and Servicing Agreement will
include, but not be limited to, the following: collecting and depositing into
the Collection Account (or in the event that daily deposits are not required,
paying to the Administrator) all payments, including claiming and obtaining any
Guarantee Payments, but excluding such tasks with respect to any Interest
Subsidy Payments and Special Allowance Payments with respect to the Student
Loans (as to which the Administrator and the Eligible Lender Trustee will
perform, see "--Administrator" below, responding to inquiries from borrowers
under the Student Loans, investigating delinquencies and sending out statements,
payment coupons and tax reporting information to borrowers. Notwithstanding the
foregoing, if any of the foregoing activities requires any consents, approvals
or licenses under the Higher Education Act or otherwise, the Master Servicer
shall designate one or more Sub-Servicers that possess such required consents,
approvals and licenses to perform some or all of the requisite duties listed
above; provided, however, that irrespective of the performance or
non-performance by such Sub-Servicer, the Master Servicer shall be responsible
for any failure of a Sub-Servicer to perform such activities. In addition, the
Master Servicer will (or will cause each Sub-Servicer to) keep ongoing records
with respect to such Student Loans and collections thereon and will furnish
quarterly and annual statements with respect to such information to the
Administrator, in accordance with the Master Servicer's or such Sub-Servicer's
customary servicing practices, as applicable, with respect to Student Loans and
as otherwise required in the related Sale and Servicing Agreement.
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PAYMENTS ON STUDENT LOANS
With respect to each Trust, except as provided below, the Master
Servicer will (or will cause each Sub-Servicer to) deposit all payments on
Student Loans (from whatever source), and all proceeds of Student Loans
collected by it during each Collection Period into the Collection Account within
two business days of receipt thereof. Except as provided below, the Eligible
Lender Trustee will deposit all Interest Subsidy Payments and all Special
Allowance Payments with respect to the Student Loans received by it during each
Collection Period into the Collection Account within two business days of
receipt thereof.
However, in the event that KBUSA satisfies certain requirements for
quarterly remittances and the Rating Agencies affirm their ratings of the Notes
and the Certificates of each series at the initial level, then so long as KBUSA
is the Administrator and provided that (x) there exists no Administrator Default
and (y) each other condition to making quarterly deposits as may be specified by
the Rating Agencies is satisfied, the Eligible Lender Trustee and the Master
Servicer will (and the Master Servicer will cause each Sub-Servicer to) pay all
the amounts referred to in the preceding paragraph that would otherwise be
deposited into the Collection Account to the Administrator, and the
Administrator will not be required to deposit such amounts into the Collection
Account until on or before the business day immediately preceding each Monthly
Servicing Payment Date (as such term is defined in the related Prospectus
Supplement, the "Monthly Servicing Payment Date") (to the extent of the Master
Servicing Fee payable on such date) and on or before the business day
immediately preceding each Distribution Date (to the extent of the remainder of
such amounts). In such event, the Administrator will deposit the aggregate
Purchase Amount of each Student Loans repurchased by the Seller and purchased by
the Master Servicer (or a Sub-Servicer) into the Collection Account on or before
the business day preceding each Distribution Date. Pending deposit into the
Collection Account, collections may be invested by the Administrator at its own
risk and for its own benefit, and will not be segregated from funds of the
Administrator.
MASTER SERVICER COVENANTS
With respect to each Trust, the Master Servicer will covenant in the
related Sale and Servicing Agreement that:
(a) it will (or will cause each Sub-Servicer to) duly satisfy all
obligations on its part to be fulfilled under or in connection
with the Student Loans, maintain in effect all qualifications
required in order to service the Student Loans and comply in all
material respects with all requirements of law in connection with
servicing the Student Loans, the failure to comply with which
would have a materially adverse effect on the related
Certificateholders or Noteholders;
(b) it will not permit (nor will it allow any Sub-Servicer to permit)
any rescission or cancellation of a Student Loan except as
ordered by a court of competent
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jurisdiction or other government authority or as otherwise
consented to by the related Eligible Lender Trustee and the
related Indenture Trustee;
(c) it will do nothing to (nor will it permit any Sub-Servicer to)
impair the rights of the related Certificateholders and the
related Noteholders in the Student Loans; and
(d) it will not (nor will it permit any Sub-Servicer to) reschedule,
revise, defer or otherwise compromise with respect to payments
due on any Student Loan except pursuant to any applicable
deferral or forbearance periods or otherwise in accordance with
its guidelines for servicing student loans in general and those
of the Seller in particular and any applicable Program
requirements.
If specified in the related Prospectus Supplement, certain incentive
programs currently or hereafter made available by the Seller to borrowers may
also be made available by the Master Servicer (or a Sub-Servicer) to borrowers
with Financed Student Loans and if an incentive program is not in existence as
of the date of the related Prospectus Supplement or not described in such
Prospectus Supplement, then any such incentive program that effectively reduces
borrower payments on Financed Student Loans and, with respect to Financed
Federal Loans, is not required by the Higher Education Act, will be applicable
to the Financed Student Loans only if and to the extent that the Master Servicer
(or a Sub-Servicer) receives payment on behalf of the Trust from the Seller in
an amount sufficient to offset such effective yield reductions. See "The Student
Loan Financing Business--Incentive Programs" herein.
Under the terms of the related Sale and Servicing Agreement, unless
otherwise specified in the related Prospectus Supplement, if the Seller or the
Master Servicer discovers, or receives written notice, that any covenant of
Master Servicer set forth above has not been complied with by the Master
Servicer in all material respects and such noncompliance has not been cured
within 60 days thereafter and has a materially adverse effect on the interest of
the related Certificateholders or Noteholders in any Student Loan (it being
understood that any such breach that does not affect any Guarantor's obligation
to guarantee payment of such Student Loan will not be considered to have such a
material adverse effect), unless such breach is cured, the Master Servicer will
purchase such Student Loan as of the first day following the end of such 60-day
period that is the last day of a Collection Period. In that event, the Master
Servicer will be obligated to deposit into the Collection Account an amount
equal to the Purchase Amount of such Student Loan and the related Trust's
interest in any such purchased Student Loan will be automatically assigned to
the Master Servicer. In addition, the Master Servicer will reimburse the related
Trust with respect to any Federal Loan for any accrued interest amounts that a
Federal Guarantor refuses to pay pursuant to its Guarantee Agreement due to, or
for any Interest Subsidy Payments and Special Allowance Payments that are lost
or that must be repaid to the Department as a result of, a breach of any such
covenant of the Master Servicer.
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MASTER SERVICING COMPENSATION
With respect to any Trust, the Master Servicer will be entitled to
receive a servicing fee monthly in an amount in the aggregate equal to a
specified amount per annum of the Pool Balance as of the last day of the
preceding calendar month as set forth in the related Prospectus Supplement and,
if applicable, certain one-time fixed fees for each Student Loan, together with
other administrative fees, late fees and similar charges specified in the
related Prospectus Supplement as compensation for performing the functions as
servicers for the related Trust described above (the "Master Servicing Fee").
The Master Servicing Fee (together with any portion of the Master Servicing Fee
that remains unpaid from prior Distribution Dates) will be paid as specified in
the applicable Prospectus Supplement.
The Master Servicing Fee will compensate the Master Servicer for
performing (or causing the Sub-Servicers to perform) the functions of third
party servicers of student loans as agents for their beneficial owner, including
collecting and posting all payments, responding to inquiries of borrowers on the
Student Loans, investigating delinquencies, pursuing, filing and collecting any
Guarantee Payments, accounting for collections and furnishing monthly and annual
statements to the Administrator. The Master Servicing Fee also will reimburse
the Master Servicer for certain taxes, accounting fees, outside auditor fees,
data processing costs and other costs incurred by the Master Servicer or the
Sub-Servicers in connection with administering the Student Loans. The monthly
fees of the Sub-Servicers will be paid solely by the Master Servicer pursuant to
the terms of the applicable Sub-Servicing Agreement.
If provided in the related Prospects Supplement, in the event of (x)
any sale of the Student Loans on behalf of the Trust to any person (other than
the Seller, the Master Servicer, the Administrator, or the Sub-Servicers) in
which the purchaser elects to deconvert the Student Loans and not retain the
applicable Sub-Servicer as the servicer of such Student Loans, or (y) any
termination of the applicable Sub-Servicer of the Student Loans, except for any
termination for cause or as a result of any unremedied defaults by the
applicable Sub-Servicer, the Trust shall pay to the Master Servicer, as a part
of the Master Servicing Fee, a deconversion fee per loan based on the status of
the loan at the time of deconversion, in the amount set forth in the related
Prospectus Supplement, but only to the extent that the Master Servicer is so
obligated to the applicable Sub-Servicer.
DISTRIBUTIONS
With respect to each series of Securities, beginning on the
Distribution Date specified in the related Prospectus Supplement, distributions
of principal and interest on each class of such Securities entitled thereto will
be made by the applicable Trustee to the Noteholders and the Certificateholders
of such series. The timing, calculation, allocation, order, source, priorities
of and requirements for all payments to each class of Noteholders and all
distributions to each class of Certificateholders of such series will be set
forth in the related Prospectus Supplement.
With respect to each Trust, collections on the related Student Loans
will be distributed from the Collection Account on each Distribution Date to
Noteholders and Certificateholders to
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the extent provided in the related Prospectus Supplement. Credit and cash flow
enhancement, such as a Reserve Account, will be available to cover any
shortfalls in the amount available for distribution on such date to the extent
specified in the related Prospectus Supplement. As more fully described in the
related Prospectus Supplement, and unless otherwise specified therein,
distributions in respect of principal and/or interest of a class of Securities
of a given series will be subordinate to distributions in respect of interest on
one or more other classes of such series, and distributions in respect of the
Certificates of such series may be subordinate to payments in respect of the
Notes of such series.
CREDIT AND CASH FLOW ENHANCEMENT
General. The amounts and types of credit enhancement arrangements and
the provider thereof, if applicable, with respect to each class of Securities of
a given series, if any, will be set forth in the related Prospectus Supplement.
If and to the extent provided in the related Prospectus Supplement, credit
enhancement may be in the form of subordination of one or more classes of
Securities, Reserve Accounts, over-collateralization, letters of credit, credit
or liquidity facilities, surety bonds, guaranteed investment contracts,
repurchase obligations, interest rate swaps, interest rate caps, interest rate
floors, currency swaps, other agreements with respect to third party payments or
other support, cash deposits or such other arrangements as may be described in
the related Prospectus Supplement or any combination of two or more of the
foregoing. If specified in the applicable Prospectus Supplement, credit
enhancement for a class of Securities may cover one or more other classes of
Securities of the same series, and credit enhancement for a series of Securities
may cover one or more other series of Securities.
The presence of a Reserve Account and other forms of credit enhancement
for the benefit of any class or series of Securities is intended to enhance the
likelihood of receipt by the Securityholders of such class or series of the full
amount of principal and interest due thereon and to decrease the likelihood that
such Securityholders will experience losses. The credit enhancement for a class
or series of Securities generally will not provide protection against all risks
of loss and will not guarantee repayment of the entire principal balance and
interest thereon. If losses occur which exceed the amount covered by any credit
enhancement or which are not covered by any credit enhancement, Securityholders
of any class or series will bear their allocable share of deficiencies, as
described in the related Prospectus Supplement. In addition, if a form of credit
enhancement covers more than one series of Securities, Securityholders of any
such series will be subject to the risk that such credit enhancement will be
exhausted by the claims of Securityholders of other series.
Reserve Account. If so provided in the related Prospectus Supplement,
pursuant to the related Sale and Servicing Agreement, the Seller will establish
for a series or class of Securities a Reserve Account, as specified in the
related Prospectus Supplement, which will be maintained in the name of the
applicable Indenture Trustee. Unless otherwise provided in the related
Prospectus Supplement, the Reserve Account will be funded by an initial deposit
by the Seller on the Closing Date in the amount set forth in the related
Prospectus Supplement. As further described in the related Prospectus
Supplement, the amount on deposit in the Reserve Account will be increased on
each Distribution Date thereafter up to the Specified Reserve Account
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Balance by the deposit therein of the amount of collections on the related
Student Loans remaining on each such Distribution Date after the payment of all
other required payments and distributions on such date. Amounts in the Reserve
Account will be available to cover shortfalls in amounts due to the holders of
those classes of Securities specified in the related Prospectus Supplement in
the manner and under the circumstances specified therein. The related Prospectus
Supplement will also specify to whom and the manner and circumstances under
which amounts on deposit in the Reserve Account (after giving effect to all
other required distributions to be made by the applicable Trust) in excess of
the Specified Reserve Account Balance will be distributed.
The Reserve Account is intended to enhance the likelihood of timely
receipt by the holders of Notes and the holders of Certificates of the full
amount of interest due them and to decrease the likelihood that such holders
will experience losses. In certain circumstances, however, the Reserve Account
could be depleted.
STATEMENTS TO INDENTURE TRUSTEE AND TRUST
Prior to each Distribution Date with respect to each series of
Securities, the Administrator (based on the periodic statements and other
information provided to it by the Master Servicer or the Sub-Servicers) will
provide to the Indenture Trustee and the Trust, as of the close of business on
the last day of the preceding Collection Period, a statement which will include
the following information (and any other information so specified in the related
Prospectus Supplement) with respect to such Distribution Date or the preceding
Collection Period as to the Notes and the Certificates of such series, to the
extent applicable:
1. the amount of the distribution allocable to principal of each class
of Securities;
2. the amount of the distribution allocable to interest on each class
of Securities;
3. the amount of the distribution, if any, allocable to any Interest
Index Carryover together with the outstanding amount, if any, thereof after
giving effect to any such distribution;
4. the Pool Balance as of the close of business on the last day of the
preceding Collection Period, after giving effect to payments allocated to
principal reported as described in clause (1.) above;
5. the aggregate outstanding principal balance of each class of Notes,
the Certificate Balance and each Pool Factor as of such Distribution Date,
after giving effect to payments allocated to principal reported under
clause (1.) above;
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6. the amount of the Master Servicing Fee and any Excess Master
Servicing Fee paid to the Master Servicer and the amount of the
Administration Fee paid to the Administrator with respect to such
Collection Period;
7. the Interest Rate or Pass-Through Rate applicable for any class of
Notes or Certificates of such series with variable or adjustable rates;
8. the amount of the aggregate realized losses, if any, for such
Collection Period and the balance of Student Loans that are delinquent in
each delinquency period as of the end of such Collection Period;
9. the Certificateholders' Index Carryover Shortfall, the Noteholders'
Index Carryover Shortfall, the Noteholders' Interest Carryover Shortfall,
the Noteholders' Principal Carryover Shortfall, the Certificateholders'
Interest Carryover Shortfall and the Certificateholders' Principal
Carryover Shortfall (each as defined in the related Prospectus Supplement),
if any, in each case as applicable to each class of Securities, and the
change in such amounts from the preceding statement;
10. the aggregate Purchase Amounts for Student Loans, if any, that
were purchased in such Collection Period;
11. the balance of the Reserve Account (if any) on such Distribution
Date, after giving effect to changes therein on such Distribution Date;
12. for Distribution Dates during the Funding Period (if any), the
remaining Pre-Funded Amount (as such term is defined in the related
Prospectus Supplement, the "Pre-Funded Amount") on such Distribution Date,
after giving effect to changes therein during the related Collection Period
or for each Distribution date during the Revolving Period (if any), the
amount on deposit in the Escrow Account; and
13. the aggregate amount of TERI Guarantee Payments deposited into the
Collection Account (net of certain specified amounts) expressed as a
percentage of the Initial Pool Balance.
Each amount set forth pursuant to subclauses (1), (2) (5) and (6) with respect
to the Notes or the Certificates of any series will be expressed as a dollar
amount per $1,000 of the initial principal amount of such Notes or the initial
Certificate Balance of such Certificates, as applicable.
EVIDENCE AS TO COMPLIANCE
Each Sale and Servicing Agreement will provide that a firm of
independent public accountants will furnish to the Trust and the Indenture
Trustee annually a statement (based on a limited examination of certain
documents and records and on such accounting and auditing procedures considered
appropriate under the circumstances) as to compliance by the Master Servicer and
the Sub-Servicers during the preceding calendar year (or, in the case of the
first such
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certificate, the period from the applicable Closing Date) with certain standards
under the related Sale and Servicing Agreement relating to the servicing of the
Student Loans.
Each Sale and Servicing Agreement will further provide that a firm of
independent public accountants (which may be the same firm referred to in the
immediately preceding paragraph) will furnish to the Trust and the Indenture
Trustee annually a statement (based on the examination of certain documents and
records and on such accounting and auditing procedures considered appropriate
under the circumstances) as to compliance by the Administrator during the
preceding calendar year (or, in the case of the first such certificate, the
period from the applicable Closing Date) with all applicable standards under the
related Sale and Servicing Agreement and the Administration Agreement relating
to the administration of the Trust and the Student Loans.
Each Sale and Servicing Agreement will also provide for delivery to the
Trust and the Indenture Trustee, concurrently with the delivery of each
statement of compliance referred to above, of a certificate signed by an officer
of the Master Servicer or the Administrator, as the case may be, stating that,
to his knowledge, the Master Servicer or the Administrator, as the case may be,
has fulfilled its obligations under the Sale and Servicing Agreement throughout
the preceding calendar year (or, in the case of the first such certificate, the
period from the applicable Closing Date) or, if there has been a default in the
fulfillment of any such obligation, describing each such default. Each of the
Master Servicer, the Administrator and the Sub-Servicers will agree to give the
Indenture Trustee and the Eligible Lender Trustee notice of certain Master
Servicer Defaults and Administrator Defaults under the Sale and Servicing
Agreement.
Copies of such statements and certificates may be obtained by
Securityholders by a request in writing addressed to the Applicable Trustee.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE SUB-SERVICERS
Each Sale and Servicing Agreement will provide that the Master Servicer
may not resign from its obligations and duties as Master Servicer thereunder,
except upon determination that the Master Servicer's performance of such duties
is no longer permissible under applicable law. No such resignation will become
effective until the related Indenture Trustee or a successor servicer has
assumed such Master Servicer's servicing obligations and duties under the Sale
and Servicing Agreement.
Each Sub-Servicing Agreement will provide that the Sub-Servicer may not
resign from its obligations and duties as Sub-Servicer thereunder without the
consent of the Master Servicer, except upon determination that a Sub-Servicer's
performance of such duties is no longer permissible under applicable law. No
such resignation will become effective until the Master Servicer, the related
Indenture Trustee or a successor servicer has assumed such Sub-Servicer's
servicing obligations and duties under the Sub-Servicing Agreement. The Master
Servicer may remove a Sub-Servicer at its discretion and either may undertake
such servicing responsibilities itself or substitute one or more new
Sub-Servicers, with the consent, but only to the extent provided in the related
Prospectus Supplement and required by the related Sale and Servicing Agreement,
of the Eligible Lender Trustee and each Rating Agency; provided, however, the
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Master Servicer shall be solely responsible for any termination payments due to
such removed Sub-Servicer.
Each Sale and Servicing Agreement will further provide that neither the
Master Servicer nor any of its directors, officers, employees or agents will be
under any liability to the related Trust or the related Noteholders or
Certificateholders for taking any action or for refraining from taking any
action pursuant to the related Sale and Servicing Agreement, or for errors in
judgment; provided, however, that, unless otherwise limited in the related
Prospectus Supplement, neither the Master Servicer nor any such person will be
protected against any liability that would otherwise be imposed by reason of
willful misfeasance, bad faith or negligence in the performance of the Master
Servicer's duties thereunder or by reason of reckless disregard of its
obligations and duties thereunder. In addition, each Sale and Servicing
Agreement will provide that the Master Servicer is under no obligation to appear
in, prosecute, or defend any legal action that is not incidental to its
servicing responsibilities under such Sale and Servicing Agreement and that, in
its opinion, may cause it to incur any expense or liability.
Under the circumstances specified in each Sale and Servicing Agreement,
any entity into which the Master Servicer may be merged or consolidated, or any
entity resulting from any merger or consolidation to which the Master Servicer
is a party, or any entity succeeding to the business of the Master Servicer,
which corporation or other entity in each of the foregoing cases assumes the
obligations of the Master Servicer, will be the successor of the Master Servicer
under such Sale and Servicing Agreement; and under the circumstances specified
in each Sub-Servicing Agreement, any entity into which a Sub-Servicer may be
merged or consolidated, or any entity resulting from any merger or consolidation
to which the Sub-Servicer is a party, or any entity succeeding to the business
of the Sub-Servicer, which corporation or other entity in each of the foregoing
cases assumes the obligations of the Sub-Servicer, will be the successor of the
Sub-Servicer under such Sub-Servicing Agreement.
MASTER SERVICER DEFAULT; ADMINISTRATOR DEFAULT
Except as otherwise provided in the related Prospectus Supplement, a
"Master Servicer Default" under each Sale and Servicing Agreement will consist
of:
(1) any failure by the Master Servicer to deliver (or to cause a
Sub-Servicer to deliver) to the Indenture Trustee for deposit in
any of the Trust Accounts (or, in the event that daily deposits
into the Collection Account are not required, to the
Administrator) any collections, Guarantee Payments or other
amounts received with respect to the Student Loans, which failure
continues unremedied for three business days after written notice
from the Indenture Trustee or the Eligible Lender Trustee is
received by the Master Servicer or after discovery by the Master
Servicer;
(2) any failure by the Master Servicer to duly observe or perform in
any material respect any other covenant or agreement in the
related Sale and Servicing Agreement, which failure materially
and adversely affects the rights of Noteholders or
Certificateholders and which continues unremedied for 60 days
after the giving of
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written notice of such failure (x) to the Master Servicer by the
Indenture Trustee, the Eligible Lender Trustee, the Master
Servicer or the Administrator or (y) to the Master Servicer and
to the Indenture Trustee and the Eligible Lender Trustee by
holders of Notes or Certificates, as applicable, evidencing not
less than 25% in principal amount of the outstanding Notes or
Certificates;
(3) certain events of insolvency, readjustment of debt, marshaling of
assets and liabilities, or similar proceedings with respect to
the Master Servicer and certain actions by the Master Servicer
indicating its insolvency, reorganization pursuant to bankruptcy
proceedings or inability to pay its obligations; and
(4) failure by the Master Servicer to comply with any requirements
under the Higher Education Act resulting in a loss of its
eligibility as a third-party servicer.
Except as otherwise provided in the related Prospectus Supplement,
"Administrator Default" under each Sale and Servicing Agreement or each
Administration Agreement will consist of
(1) (A) in the event that daily deposits into the Collection Account
are not required, any failure by the Administrator to deliver to
the Indenture Trustee for deposit in any of the Trust Accounts
any required payment on or before the business day prior to any
monthly servicing payment date or Distribution Date, as
applicable, or (B) any failure by the Administrator to direct the
Indenture Trustee to make any required distributions from any of
the Trust Accounts on any monthly servicing payment date or any
Distribution Date, which failure in case of either clause (A) or
(B) continues unremedied for three business days after written
notice from the Indenture Trustee or the Eligible Lender Trustee
is received by the Administrator or after discovery by the
Administrator;
(2) any failure by the Administrator duly to observe or perform in
any material respect any other covenant or agreement in each
Administration Agreement or each Sale and Servicing Agreement
which failure materially and adversely affects the rights of
Noteholders or Certificateholders and which continues unremedied
for 60 days after the giving of written notice of such failure
(x) to the Administrator by the Indenture Trustee or the Eligible
Lender Trustee or (y) to the Administrator, the Master Servicer
and to the Indenture Trustee and the Eligible Lender Trustee by
holders of Notes or Certificates, as applicable, evidencing not
less than 25% in principal amount of the outstanding Notes or
Certificates; and
(3) certain events of insolvency, readjustment of debt, marshaling of
assets and liabilities, or similar proceedings with respect to
the Administrator and certain actions by the Administrator
indicating its insolvency or inability to pay its obligations.
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RIGHTS UPON MASTER SERVICER DEFAULT AND ADMINISTRATOR DEFAULT
As long as a Master Servicer Default under a Sale and Servicing
Agreement or an Administrator Default under a Sale and Servicing Agreement or an
Administration Agreement, as the case may be, remains unremedied, the Indenture
Trustee or holders of the specified senior class(es) of Notes evidencing not
less than 25% in aggregate outstanding principal amount of such specified senior
class(es) of Notes may terminate all the rights and obligations of the Master
Servicer under such Sale and Servicing Agreement and/or the Administrator under
such Sale and Servicing Agreement or such Administration Agreement, as the case
may be, whereupon a successor servicer or administrator appointed by the related
Indenture Trustee, or such Indenture Trustee, will succeed to all of the
responsibilities, duties and liabilities of the applicable Master Servicer under
such Sale and Servicing Agreement or the Administrator under such Sale and
Servicing Agreement and such Administration Agreement, as the case may be, and
will be entitled to similar compensation arrangements. If, however, a bankruptcy
trustee or similar official has been appointed for the Master Servicer or the
Administrator, as applicable, and no Master Servicer Default or Administrator
Default, as the case may be, other than such appointment has occurred, such
trustee or official may have the power to prevent the Indenture Trustee or the
such specified senior Noteholders from effecting such a transfer. In the event
that such Indenture Trustee is unwilling or unable to so act, it may appoint, or
petition a court of competent jurisdiction for the appointment of, a successor
servicer whose regular business includes the servicing of student loans or a
successor administrator whose regular business includes administering trusts
containing pools of loans or receivables. The Indenture Trustee may make such
arrangements for compensation to be paid, which in no event may be greater than
the compensation to the Master Servicer under such Sale and Servicing Agreement
or the Administrator under such Sale and Servicing Agreement and such
Administration Agreement, as the case may be, unless such compensation
arrangements will result in a downgrading of any related class of Notes or
Certificates by any Rating Agency. In the event a Master Servicer Default or an
Administrator Default, as the case may be, occurs and is continuing, such
Indenture Trustee or the holders of such specified senior class(es) of Notes, as
described above, may cause the removal of the Master Servicer or the
Administrator, as the case may be, without the consent of the related Eligible
Lender Trustee or any of the holders of any other class(es) of Notes or
Certificates. Moreover, only the Indenture Trustee or the holders of the
specified senior class(es) of Notes, and not the Eligible Lender Trustee or the
holders of any other class(es) of Notes or Certificates, have the ability to
remove the Master Servicer or the Administrator, as the case may be, if a Master
Servicer Default or an Administrator Default, as the case may be, occurs and is
continuing.
WAIVER OF PAST DEFAULTS
With respect to each Trust, the holders of Notes evidencing at least a
majority in principal amount of the then specified senior class(es) of
outstanding Notes (or the holders of a more junior class of Notes evidencing not
less than a majority of the outstanding principal balance of such class of
Notes, in the case of any Master Servicer Default which does not adversely
affect the Indenture Trustee or the Noteholders of each more senior class of
Notes of the related series, or the holders of Certificates evidencing not less
than a majority of the outstanding Certificate Balance, in the case of any
Master Servicer Default which does not adversely affect the Indenture Trustee or
the
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Noteholders of any class of the related series), may, on behalf of all
Noteholders and Certificateholders, waive any default by the Master Servicer, in
the performance of its obligations under the related Sale and Servicing
Agreement, or any default by the Administrator of its obligations under the
related Sale and Servicing Agreement and the related Administration Agreement,
as the case may be, and their respective consequences, except a default in
making any required deposits to or payments from any of the Trust Accounts or
giving instructions regarding the same in accordance with such Sale and
Servicing Agreement. Therefore, the Noteholders have the ability, except as
noted above, to waive defaults by the Master Servicer or the Administrator, as
the case may be, which could materially adversely affect the Certificateholders.
No such waiver will impair the Noteholders' or the Certificateholders' rights
with respect to subsequent defaults.
Unless and until Definitive Securities are issued, holders of Notes and
Certificates will not be recognized by the Indenture Trustee or the Eligible
Lender Trustee as "Noteholders" or "Certificateholders," as the case may be (as
such terms are used in the Indenture and the Trust Agreement, respectively).
Hence, until Definitive Securities are issued, holders of such Securities will
only be able to exercise the rights of Securityholders indirectly through DTC,
Clearstream or Euroclear and their respective participating organizations.
INSOLVENCY EVENT
If set forth in a related Prospectus Supplement, if any of certain
events of insolvency or receivership, readjustment of debt, marshaling of assets
and liabilities, or similar proceedings with respect to the Seller or a special
purpose affiliate of the Seller or certain actions by the Seller or such
affiliate indicating its insolvency or inability to pay its obligations (each, a
"Seller Insolvency Event") occurs, the Student Loans will be liquidated and the
related Trust will be terminated 90 days after the date of such Seller
Insolvency Event, unless, before the end of such 90-day period, the Eligible
Lender Trustee shall have received written instructions from the holders of the
Certificates (other than the Seller) representing more than 50% of the aggregate
unpaid principal amount of the Certificates (not including the principal amount
of Certificates held by the Seller) to the effect that such group disapproves of
the liquidation of the Student Loans and termination of the related Trust.
Promptly after the occurrence of any Seller Insolvency Event, notice thereof is
required to be given to Noteholders and Certificateholders; provided that any
failure to give such required notice will not prevent or delay termination of
the related Trust. Upon termination of the related Trust, the Eligible Lender
Trustee will direct the Indenture Trustee promptly to sell the assets of the
related Trust (other than the Trust Accounts) in a commercially reasonable
manner and on commercially reasonable terms. Each of the Guarantors and certain
other unrelated third parties will be given the opportunity, upon 30 days' prior
notice of any such proposed sale, to bid to purchase the Student Loans and, if
any such entity is the highest bidder, the Student Loans must be sold to that
entity. The proceeds from any such sale, disposition or liquidation of the
Student Loans will be treated as collections thereon and deposited in the
Collection Account. If the proceeds from the liquidation of the Student Loans
and any amounts on deposit in the Reserve Account (if any) are not sufficient to
pay the Notes in full, the amount of principal returned to the holders of Notes
will be delayed and the holders of Notes will incur a loss. If such amounts are
not sufficient to pay the Notes and the Certificates in full, the amount of
principal returned to the holders of Certificates will be delayed and the
holders of Certificates will incur a loss.
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Each Trust Agreement will provide that the Eligible Lender Trustee does
not have the power to commence a voluntary proceeding in bankruptcy relating to
the Trust without the unanimous prior approval of all holders of Certificates
and the delivery to the Eligible Lender Trustee by each holder of Certificates
of a certificate certifying that such holder reasonably believes that the
related Trust is insolvent.
AMENDMENT
Each of the Transfer and Servicing Agreements may be amended by the
parties thereto, without the consent of the related Noteholders or the
Certificateholders, for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of such Transfer and Servicing
Agreements or of modifying in any manner the rights of such Noteholders or
Certificateholders; provided that such action will not, in the opinion of
counsel satisfactory to the related Indenture Trustee and the related Eligible
Lender Trustee, materially and adversely affect the interest of any such
Noteholder or Certificateholder. Each of the Transfer and Servicing Agreements
may also be amended by the Seller, the Administrator, the Master Servicer, the
related Eligible Lender Trustee and the related Indenture Trustee, as
applicable, with the consent of the holders of Notes of the related series
evidencing at least a majority in principal amount of each class of then
outstanding Notes rated in a similar category by the applicable Rating Agencies
and the holders of Certificates of the related series evidencing at least a
majority of the Certificate Balance for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of such Transfer
and Servicing Agreements or of modifying in any manner the rights of the holders
of Notes or the holders of Certificates; provided, that no such amendment may
(x) increase or reduce in any manner the amount of, or accelerate or delay the
timing of, collections of payments (including any Guarantee Payments) with
respect to the Student Loans or distributions that are required to be made for
the benefit of the holders of Notes or the holders of Certificates or (y) reduce
the aforesaid percentage of the Notes or Certificates which are required to
consent to any such amendment, without the consent of the holders of all the
outstanding Notes and Certificates.
PAYMENT OF NOTES
Upon the payment in full of all outstanding Notes of a given series and
the satisfaction and discharge of the related Indenture, the Eligible Lender
Trustee will succeed to all the rights of the Indenture Trustee, and the
Certificateholders of such series will succeed to all the rights of the
Noteholders of such series, under the related Sale and Servicing Agreement,
except as otherwise provided therein.
SELLER LIABILITY
Under each Trust Agreement, the Seller will agree to be liable directly
to an injured party for the entire amount of any losses, claims, damages or
liabilities (other than those incurred by a holder of Notes or a holder of
Certificates in the capacity of an investor) arising out of or based on the
arrangement created by the Trust Agreement as though such arrangement created a
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partnership under the Delaware Revised Uniform Limited Partnership Act in which
the Seller was a general partner.
TERMINATION
With respect to each Trust, the obligations of the Seller, the Master
Servicer, the Administrator, the related Eligible Lender Trustee and the related
Indenture Trustee pursuant to the related Transfer and Servicing Agreements will
terminate upon (x) the maturity or other liquidation of the last related Student
Loan and the disposition of any amount received upon liquidation of any such
remaining Student Loans and (y) the payment to the Noteholders and the
Certificateholders of the related series of all amounts required to be paid to
them pursuant to such Transfer and Servicing Agreements.
If so specified in the related Prospectus Supplement, in order to avoid
excessive administrative expense, the Master Servicer or another party will be
permitted at its option to purchase from the related Eligible Lender Trustee, as
of the end of any Collection Period immediately preceding a Distribution Date,
if the then outstanding Pool Balance is less than the percentage specified in
the related Prospectus Supplement of the Initial Pool Balance (as defined in the
related Prospectus Supplement, the "Initial Pool Balance"), all remaining
related Student Loans at a price equal to the aggregate Purchase Amounts thereof
as of the end of such Collection Period, which amounts will be used to retire
the related Notes and Certificates concurrently therewith. Upon termination of a
Trust, as more fully described in the related Prospectus Supplement, all right,
title and interest in the Student Loans and other funds of such Trust, after
giving effect to any final distributions to Noteholders and Certificateholders
of the related series therefrom, will be conveyed and transferred to the Seller
or such other party.
If so provided in the related Prospectus Supplement, any Student Loans
remaining in the related Trust as of the end of the Collection Period
immediately preceding the Distribution Date which occurs immediately after the
10th anniversary of the Closing Date (the "Auction Date") will be offered for
sale in one or more pools by the related Indenture Trustee. KeyCorp and its
Affiliates and unrelated third parties may offer bids to purchase such Student
Loans on such Distribution Date. If at least two bids are received, the
Indenture Trustee will solicit and resolicit bids from all participating bidders
until only one bid remains or the remaining bidders decline to resubmit bids.
The Indenture Trustee will accept the highest of such remaining bids if it or
they, if for separate pools, are equal to or in excess of an amount (the
"Minimum Purchase Amount") equal to the greatest of:
- the Auction Purchase Amount (as such term is defined in the
related Prospectus Supplement, the "Auction Purchase Amount"),
- the fair market value of such Student Loans as of the end of the
Collection Period immediately preceding such Distribution Date,
and
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- the aggregate unpaid principal amount of the related Notes and
principal balance of the related Certificates plus, in each case,
accrued and unpaid interest thereon payable on such Distribution
Date (other than any Interest Index Carryover).
If at least two bids are not received or the highest bid or combination of bids
after the resolicitation process is completed is not equal to or in excess of
the Minimum Purchase Amount, the Indenture Trustee will not consummate such
sale. In connection with the determination of the Minimum Purchase Amount, the
Indenture Trustee may consult and, at the direction of the Seller, shall
consult, with a financial advisor, including the Underwriters or the
Administrator, to determine if the fair market value of the Student Loans has
been offered. The net proceeds of any such sale will be used to redeem any
outstanding Notes and to retire any outstanding Certificates on such
Distribution Date. If the sale is not consummated in accordance with the
foregoing, the Indenture Trustee may, but shall not be under any obligation to,
solicit bids to purchase the Student Loans on future Distribution Dates upon
terms similar to those described above. No assurance can be given as to whether
the Indenture Trustee will be successful in soliciting acceptable bids to
purchase the Student Loans on either the Auction Date or any subsequent
Distribution Date. The related Prospectus Supplement will specify what will
happen in the event the Student Loans are not sold in accordance with the
foregoing.
ADMINISTRATOR
The Administrator will enter into an agreement (as amended and
supplemented from time to time, an "Administration Agreement") with each Trust
and the related Indenture Trustee and a Sale and Servicing Agreement with the
related Trust, the Seller, the Master Servicer and the Eligible Lender Trustee,
pursuant to which the Administrator will agree, to the extent provided therein,
(a) in the event that daily deposits into the Collection Account are
not required, to deliver to the Indenture Trustee for deposit in
any of the Trust Accounts any required payment on or before the
business day prior to any monthly servicing payment date or any
Distribution Date, as applicable,
(b) to direct the Indenture Trustee to make the required
distributions from the Trust Accounts on each monthly servicing
payment date and each Distribution Date,
(c) to prepare and file with the Department all appropriate claim
forms and other documents and filings on behalf of the Eligible
Lender Trustee in order to claim any Interest Subsidy Payments
and Special Allowance Payments that may be payable in respect of
each Collection Period with respect to the Federal Loans,
(d) to prepare (based on the periodic reports received from the
Master Servicer or the Sub-Servicers) and provide periodic
statements to the Eligible Lender Trustee and the Indenture
Trustee with respect to distributions to Noteholders and
Certificateholders and any related federal income tax reporting
information as required by the related Sale and Servicing
Agreement, and
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(e) to provide the notices and to perform other administrative
obligations required by the Indenture, the Trust Agreement and
the Sale and Servicing Agreement. As compensation for the
performance of the Administrator's obligations under the
Administration Agreement and the Sale and Servicing Agreement and
as reimbursement for its expenses related thereto, the
Administrator will be entitled to an administration fee in an
amount set forth in the related Prospectus Supplement (the
"Administration Fee").
CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS
TRANSFER OF STUDENT LOANS
The Seller intends that the transfer of the Student Loans by it to the
related Eligible Lender Trustee on behalf of each Trust will constitute a valid
sale and assignment of such Student Loans. In addition, the Seller has taken and
will take all actions that are required under applicable state law to perfect
the Eligible Lender Trustee's ownership interest in the Financed Student Loans
and the collection with respect thereto. Notwithstanding the foregoing, if the
transfer of the Student Loans is deemed to be an assignment of collateral as
security for the benefit of a Trust, a security interest in the Student Loans
may, pursuant to the provisions of 20 U.S.C. ss. 1087-2(d)(3), be perfected
either through the taking of possession of such loans or by the filing of notice
of such security interest in the manner provided by the applicable Uniform
Commercial Code ("UCC") for perfection of security interests in accounts. A
financing statement or statements covering the Student Loans will be filed under
the UCC to protect the interest of the Eligible Lender Trustee in the event the
transfer by the Seller is deemed to be an assignment of collateral as security
for the benefit of the Trust.
If the transfer of the Student Loans is deemed to be an assignment as
security for the benefit of a Trust, there are certain limited circumstances
under the UCC in which prior or subsequent transferees of Student Loans coming
into existence after the Closing Date could have an interest in such Student
Loans with priority over the related Eligible Lender Trustee's interest. A tax
or other government lien on property of the Seller arising prior to the time a
Student Loan comes into existence may also have priority over the interest of
the related Eligible Lender Trustee in such Student Loan. Furthermore, if the
FDIC were appointed as a receiver or conservator of the Seller, the FDIC's
administrative expenses may also have priority over the interest of the Eligible
Lender Trustee in such Student Loans. Under the related Sale and Servicing
Agreement, however, the Seller will warrant that it has caused the Student Loans
to be transferred to the related Eligible Lender Trustee on behalf of a Trust
free and clear of the lien of any third party. In addition, the Seller will
covenant that it will not sell, pledge, assign, transfer or grant any lien on
any Student Loan held by a Trust (or any interest therein) other than to the
related Eligible Lender Trustee on behalf of a Trust, except as provided below.
Pursuant to each Sale and Servicing Agreement, the Sub-Servicer as
custodian on behalf of the Master Servicer and the related Trust will have
custody of the promissory notes evidencing
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the Student Loans following the sale of the Student Loans to the related
Eligible Lender Trustee. Although the accounts and computer records of the
Seller and, the Master Servicer and the related Sub-Servicer will be marked to
indicate the sale and although the Seller will cause UCC financing statements to
be filed with the appropriate authorities, the Student Loans will not be
physically segregated, stamped or otherwise marked to indicate that such Student
Loans have been sold to such Eligible Lender Trustee. If, through inadvertence
or otherwise, any of the Student Loans were sold to another party, or a security
interest therein were granted to another party, that purchased (or took such
security interest in) any of such Student Loans in the ordinary course of its
business and took possession of such Student Loans, then the purchaser (or
secured party) might acquire an interest in the Student Loans superior to the
interest of the Eligible Lender Trustee if the purchaser (or secured party)
acquired (or took a security interest in) the Student Loans for new value and
without actual knowledge of the related Eligible Lender Trustee's interest. See
"Description of the Transfer and Servicing Agreements--Sale of Student Loans;
Representations and Warranties."
With respect to each Trust, in the event of a Master Servicer Default
resulting solely from certain events of insolvency or bankruptcy that may occur
with respect to the Seller, the Master Servicer, a court, trustee-in-bankruptcy,
conservator, receiver or liquidator may have the power to prevent either the
related Indenture Trustee or Noteholders of the related series from appointing a
successor Master Servicer. See "Description of the Transfer and Servicing
Agreements--Rights Upon Master Servicer Default; Administrator Default."
CERTAIN MATTERS RELATING TO RECEIVERSHIP
The Federal Deposit Insurance Act ("FDIA"), as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), sets forth
certain powers that the FDIC could exercise if it were appointed as receiver or
conservator of the Seller.
Subject to clarification by FDIC regulations or interpretations, it
would appear from the positions taken by the FDIC that the FDIC, in its capacity
as a receiver or conservator for the Seller, would not interfere with the timely
transfer to the Trust of collections with respect to the Student Loans. To the
extent that the transfer of the Student Loans is deemed to create a security
interest, and that interest was validly perfected before the Seller's insolvency
and was not taken in contemplation of insolvency or with the intent to hinder,
delay or defraud the Seller or its creditors, based upon opinions and statements
of policy issued by the general counsel of the FDIC addressing the
enforceability against the FDIC, as conservator or receiver for a depository
institution, of a security interest in collateral granted by such depository
institution, such security interest should not be subject to avoidance and
payments to the Trust with respect to the Student Loans should not be subject to
recovery by the FDIC as receiver or conservator of the Seller. If, however, the
FDIC were to assert a contrary position, certain provisions of the FDIA which,
at the request of the FDIC, have been applied in recent lawsuits to avoid
security interests in collateral granted by depository institutions, would
permit the FDIC to avoid such security interest, thereby resulting in possible
delays and reductions in payments on the Notes and the Certificates. In
addition, if the FDIC were to require the Indenture Trustee or the Eligible
Lender Trustee to establish its right to such payments by submitting to and
completing the administrative claims procedure under the FDIA, as
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amended by FIRREA, delays in payments on the Notes and the Certificates and
possible reductions in the amount of those payments could occur.
In the event of a Master Servicer Default or an Administrator Default
resulting solely from certain events of insolvency or bankruptcy that may occur
with respect to the Master Servicer or the Administrator, a court, conservator,
receiver or liquidator may have the power to prevent either the Indenture
Trustee or Noteholders from appointing a successor Master Servicer or
Administrator, as the case may be. See "Description of the Transfer and
Servicing Agreements--Rights Upon Master Servicer Default; Administrator
Default."
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon lenders and servicers involved
in consumer finance. Also, some state laws impose finance charge ceilings and
other restrictions on certain consumer transactions and require contract
disclosures in addition to those required under federal law. These requirements
impose specific statutory liabilities upon lenders who fail to comply with their
provisions. These requirements are generally inapplicable to Federal Loans, but
in certain circumstances, a Trust may be liable for certain violations of
consumer protection laws that may apply to the Student Loans, either as assignee
or as the party directly responsible for obligations arising after the transfer.
For a discussion of a Trust's rights if the Student Loans were not originated or
serviced in compliance in all material respects with applicable laws, see
"Description of the Transfer and Servicing Agreements--Sale of Student Loans;
Representations and Warranties" and "--Master Servicer Covenants."
LOAN ORIGINATION AND SERVICING PROCEDURES APPLICABLE TO STUDENT LOANS
The Higher Education Act, including the implementing regulations
thereunder, imposes specified requirements, guidelines and procedures with
respect to originating and servicing student loans such as the Federal Loans.
Generally, those procedures require that completed loan applications be
processed, a determination of whether an applicant is an eligible borrower under
applicable standards (including a review of a financial need analysis) be made,
the borrower's responsibilities under the loan be explained to him or her, the
promissory note evidencing the loan be executed by the borrower and then that
the loan proceeds be disbursed in a specified manner by the lender. After the
loan is made, the lender or servicing agent must establish repayment terms with
the borrower, properly administer deferrals and forbearances and credit the
borrower for payments made thereon. If a borrower becomes delinquent in repaying
a loan, a lender or a servicing agent must perform certain collection procedures
(primarily telephone calls and demand letters) which vary depending upon the
length of time a loan is delinquent. The Master Servicer has agreed pursuant to
the related Sale and Servicing Agreement to perform (or to cause a Sub-Servicer
to perform) collection and servicing procedures on behalf of the related Trust.
However, failure to follow these procedures or failure of the originator of the
loan to follow procedures relating to the origination of any Federal Loans could
result in adverse consequences. Any such failure could result in the
Department's refusal to make reinsurance payments to the Federal Guarantors or
to make Interest Subsidy Payments and Special Allowance
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Payments to the Eligible Lender Trustee with respect to such Federal Loans or in
the Federal Guarantors' refusal to honor their Guarantee Agreements with the
Eligible Lender Trustee with respect to such Federal Loans. Failure of the
Federal Guarantors to receive reinsurance payments from the Department could
adversely affect the Federal Guarantors' ability or legal obligation to make
Guarantee Payments to the related Eligible Lender Trustee with respect to such
Federal Loans.
Loss of any such Guarantee Payments, Interest Subsidy Payments or
Special Allowance Payments could adversely affect the amount of Available Funds
(as such term is defined in the related Prospectus Supplement, the "Available
Funds") on any Distribution Date and the related Trust's ability to pay
principal and interest on the Notes of the related series and to make
distributions in respect of the Certificates of the related series. Under
certain circumstances, unless otherwise specified in the related Prospectus
Supplement, the related Trust has the right, pursuant to the related Sale and
Servicing Agreement, to cause the Seller to repurchase any Student Loan, or to
cause the Master Servicer to arrange for the purchase of any Student Loan, if a
breach of the representations, warranties or covenants of the Seller or the
Master Servicer, as the case may be, with respect to such Student Loan has a
material adverse effect on the interest of the Trust therein and such breach is
not cured within any applicable cure period. See "Description of the Transfer
and Servicing Agreements--Sale of Student Loans; Representations and Warranties"
and "--Servicer Covenants." The failure of the Seller to so purchase, or of the
Master Servicer to arrange for the purchase of, a Student Loan, if so required,
would constitute a breach of the related Sale and Servicing Agreement,
enforceable by the related Eligible Lender Trustee on behalf of the related
Trust or by the related Indenture Trustee on behalf of the Noteholders of the
related series, but would not constitute an Event of Default under the
Indenture.
FAILURE TO COMPLY WITH THIRD-PARTY SERVICER REGULATIONS MAY ADVERSELY AFFECT
LOAN SERVICING
On November 29, 1994, the Secretary of the Department of Education (the
"Secretary") published final regulations amending FFELP. These regulations,
among other things, establish requirements governing contracts between holders
of federal loans and third-party servicers, establish standards of
administrative and financial responsibility for third-party servicers that
administer any aspect of a guarantee agency's or lender's participation in the
FFELP and establish sanctions for third-party servicers.
Under these regulations, a third-party servicer (such as one of the
Sub-Servicers) is jointly and severally liable with its client lenders for
liabilities to the Department arising from the servicer's violation of
applicable requirements. In addition, if the servicer fails to meet standards of
financial responsibility or administrative capability included in the
regulations, or violates other FFELP requirements, the regulations authorize the
Department to fine the servicer and/or limit, suspend, or terminate the
servicer's eligibility to contract to service FFELP loans. The effect of such a
limitation or termination on the servicer's eligibility to service loans already
on its system, or to accept new loans for servicing under existing contracts, is
unclear. There can be no assurance that a Sub-Servicer will not be fined or held
liable by the Department liabilities arising out of its FFELP
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activities for the Master Servicer or other client lenders, or that its
eligibility will not be limited, suspended, or terminated in the future. If a
Sub-Servicer were so fined or held liable, or its eligibility were limited,
suspended, or terminated, its ability to properly service the federal loans and
to satisfy its obligation to purchase federal loans with respect to which it
breaches its representations, warranties or covenants under its related
Sub-Servicing Agreement could be adversely affected. However, in the event of a
termination of eligibility, each Sub-Servicing Agreement will provide for the
removal of the applicable Sub-Servicer and the appointment of a successor
sub-servicer.
BANKRUPTCY CONSIDERATIONS
Effective for bankruptcy actions commenced on or after October 8, 1998,
Federal Loans are generally not dischargeable by a borrower in bankruptcy
pursuant to the United States Bankruptcy Code, as amended, as codified in 11
U.S.C. ss.ss.101-1330 (the "Bankruptcy Code"), unless excepting such debt from
discharge will impose an undue hardship on the debtor and the debtor's
dependents. However, Private Loans are generally dischargeable by a borrower in
bankruptcy unless such Private Loan has been made under any program funded in
whole or in part by a governmental unit or non-profit institution.
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.
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FY 1998 Budget. In the 1997 Budget Reconciliation Act (P.L. 105-33),
several changes were made to the Higher Education Act that impact the FFELP.
These provisions include, among other things, requiring federal guarantors to
return $1 billion of their reserves to the U.S. Treasury by September 1, 2002
(to be paid in annual installments), greater restrictions on use of reserves by
federal guarantors and a continuation of the administrative cost allowance
payable to federal guarantors (which is a fee paid to federal guarantors equal
to 0.85% of new loans guaranteed).
1998 Amendments. On May 22, 1998, Congress passed, and on June 9, 1998,
the President signed into law, a temporary measure relating to the Higher
Education Act and FFELP loans as part of the Intermodal Surface Transportation
Efficiency Act of 1998 that revised interest rate changes under the FFELP that
were scheduled to become effective on July 1, 1998. For loans made during the
period July 1, 1998 through September 30, 1998, the borrower interest rate for
Stafford Loans and Unsubsidized Stafford Loans is reduced to a rate of 91-day
Treasury Bill Rate plus 2.30% (1.70% during school, grace and deferment),
subject to a maximum rate of 8.25%. As described below, The formula for Special
Allowance Payments on Stafford Loans and Unsubsidized Stafford Loans is
calculated to produce a yield to the loan holder of 91-day Treasury Bill Rate
plus 2.80% (2.20% during school, grace and deferment).
1998 Reauthorization Bill. On October 7, 1998, President Clinton signed
into law the Higher Education Amendments of 1998 (the "1998 Reauthorization
Bill"), which enacted significant reforms in FFELP. The major provisions of the
1998 Reauthorization Bill include the following:
- All references to a "transition" to full implementation of the
Federal Direct Student Loan Program were deleted from the FFELP
statute.
- Guarantor reserve funds were restructured so that federal
guarantors are provided with additional flexibility in choosing
how to spend certain funds they receive.
- Additional recall of reserve funds by the Secretary was mandated,
amounting to $85 million in fiscal year 2002, $82.5 million in
fiscal year 2006, and $82.5 million in fiscal year 2007. However,
certain minimum reserve levels are protected from recall.
- The administrative cost allowance was replaced by two (2) new
payments, a Student Loan processing and issuance fee equal to 65
basis points (40 basis points for loans made on or after October
1, 2003) paid at the time a loan is guaranteed, and an account
maintenance fee of 12 basis points (10 basis points for fiscal
years 2001-2003) paid annually on outstanding guaranteed Student
Loans.
- The percentage of collections on defaulted Student Loans a
federal guarantor is permitted to retain is reduced from 27% to
24% (23% beginning on October 1,
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2003) plus the complement of the reinsurance percentage
applicable at the time a claim was paid to the lender on the
Student Loan.
- Federal reinsurance provided to federal guarantors is reduced
from 98% to 95% for Student Loans first disbursed on or after
October 1, 1998.
- The delinquency period required for a loan to be declared in
default is increased from 180 days to 240 days for loans on which
the first day of delinquency occurs on or after the date of
enactment of the 1998 Reauthorization Bill.
- Interest rates charged to borrowers on Stafford Loans, and the
yield for Stafford Loan holders established by the 1998
Amendments, were made permanent.
- Federal Consolidation Loan interest rates were revised to equal
the weighted average of the loans consolidated rounded up to the
nearest one-eighth of 1%, capped at 8.25%. When the 91-day
Treasury Bill Rate plus 3.1% exceeds the borrower's interest
rate, Special Allowance Payments are made to make up the
difference.
- 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.
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- The Secretary is now required to pay off Student Loan amounts
owed by borrowers due to failure of the borrower's school to make
a tuition refund allocable to the Student Loan.
- Discharge of FFELP and certain other Student Loans in bankruptcy
is now limited to cases of undue hardship regardless of whether
the Student Loan has been due for more than seven (7) years prior
to the bankruptcy filing.
INCOME TAX CONSEQUENCES
Set forth below is a general summary of the material federal and
Pennsylvania state income tax consequences of the purchase, ownership and
disposition of the Notes and the Certificates. Thompson Hine & Flory LLP
("Federal Tax Counsel") has reviewed this summary with respect to federal income
tax matters and is of the opinion that the descriptions of the law and legal
conclusions contained herein are correct in all material respects and the
discussions hereunder fairly summarize the federal income tax considerations
that are likely to be material to Noteholders and Certificateholders.
Kirkpatrick & Lockhart LLP ("Pennsylvania Tax Counsel") has reviewed this
summary with respect to Pennsylvania income and franchise tax matters and is of
the opinion that the descriptions of the law and legal conclusions contained
herein are correct in all material respects and the discussions hereunder fairly
summarize the Pennsylvania income and franchise tax considerations that are
likely to be material to Noteholders and Certificateholders. The summary is
intended as an explanatory discussion of the possible effects of certain federal
and Pennsylvania income tax consequences to holders generally, but does not
purport to furnish information in the level of detail or with the attention to a
holder's specific tax circumstances that would be provided by a holder's own tax
advisor. For example, it does not discuss the tax treatment of Noteholders or
Certificateholders that are insurance companies, regulated investment companies
or dealers in securities. In addition, any discussion regarding the Notes is
limited to the federal and Pennsylvania income tax consequences of the initial
Noteholders and not a purchaser in the secondary market. Moreover, there are no
cases or Internal Revenue Service ("IRS") rulings on similar transactions
involving both debt and equity interests issued by a trust with terms similar to
those of the Notes and the Certificates. As a result, the IRS may disagree with
all or a part of the discussion below. Prospective investors are urged to
consult their own tax advisors in determining the federal, state, local, foreign
and any other tax consequences to them of the purchase, ownership and
disposition of the Notes and the Certificates.
With respect to federal tax matters, the following summary is based
upon current provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the Treasury Regulations promulgated thereunder and judicial or ruling
authority, all of which are subject to change, which change may be retroactive.
Each Trust will be provided with an opinion of Federal Tax Counsel regarding
certain federal income tax matters discussed below and an opinion of
Pennsylvania Tax Counsel regarding certain Pennsylvania State income tax matters
discussed below, which opinions will be filed with the Commission on a Form 8-K
prior to the sale of the securities issued by such Trust. An opinion of Federal
Tax Counsel, however, is not
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binding on the IRS or the courts. No ruling on any of the issues discussed below
will be sought from the IRS. For purposes of the following summary, references
to the Trust, the Notes, the Certificates and related terms, parties and
documents shall be deemed to refer, unless otherwise specified herein, to each
Trust and the Notes, Certificates and related terms, parties and documents
applicable to such Trust. EACH PROSPECTIVE INVESTOR SHOULD CONSULT WITH ITS TAX
ADVISOR AS TO THE FEDERAL, STATE, LOCAL, FOREIGN AND ANY OTHER TAX CONSEQUENCES
OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF SECURITIES SPECIFIC TO SUCH
PROSPECTIVE INVESTOR.
FEDERAL TAX CONSEQUENCES FOR TRUSTS
FOR WHICH A PARTNERSHIP ELECTION IS MADE
TAX CHARACTERIZATION OF THE TRUST
Federal Tax Counsel will deliver its opinion that the Trust will not be
an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Trust Agreement and related documents will be complied with.
There is, however, no specific authority with respect to the characterization
for federal income tax purposes of securities having the same terms as the Notes
and the Certificates.
Possible Alternative Treatment of the Trust. If, contrary to the
opinion of Federal Tax Counsel, the Trust were taxable for federal income tax
purposes as a corporation, the income from the Student Loans (reduced by
deductions, possibly including interest on the Notes) would be subject to
federal income tax at corporate rates, which could materially reduce or
eliminate the cash that would otherwise be available to make payments on the
Notes and the Certificates (and the Certificateholders could be liable for any
such tax that is unpaid by the Trust).
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. Federal Tax Counsel will
deliver an opinion to the Trust that the Notes will be classified as debt for
federal income tax purposes. The Seller will agree, and the Noteholders will
agree by their purchase of Notes, to treat the Notes as debt for federal income
tax purposes. The discussion below assumes this characterization of the Notes is
correct.
Original Issue Discount. The discussion below assumes that all payments
on the Notes are denominated in U.S. dollars, that the interest formula for the
Notes meets the requirements for "qualified stated interest" under Treasury
Regulations (the "OID Regulations") relating to original issue discount ("OID"),
and that any OID on the Notes (i.e., any excess of the stated redemption price
at maturity of the Notes, generally the principal amount of the Notes, over
their issue price) is less than a de minimis amount (i.e., 0.25% of their
principal amount multiplied by the weighted number of full years included in
their term), all within the meaning of the OID Regulations. If these conditions
are not satisfied with respect to any given series of Notes, additional tax
considerations with respect to such Notes will be disclosed in the related
Prospectus Supplement.
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Interest Income on the Notes. The stated interest on the Notes will be
taxable to a Noteholder as ordinary income when received or accrued in
accordance with the Noteholder's method of tax accounting. Based on the above
assumptions, the Notes will not be considered issued with OID. However, because
of limitations on the payment of interest on the Notes to the extent of the
Trust's having insufficient Available Funds, the IRS may contend that the Notes
should be treated as having been issued with OID. In such case, Noteholders
(regardless of whether they otherwise use the cash or accrual method of
accounting) would be required to include interest on the Notes in taxable income
on a constant-yield accrual basis. However, until the IRS determines otherwise,
the Trust intends to take the position that the Notes are not issued with OID.
Under the OID Regulations, a holder of a Note that was issued with a de
minimis amount of OID must include such OID generally in income, on a pro rata
basis, as principal payments are made on the Note. Alternatively, a Noteholder
may elect to accrue all interest, discount (including de minimis market discount
or OID) and premium in income as interest, based on a constant-yield method. A
purchaser who buys a Note for more or less than its principal amount will
generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
Sale or Other Disposition. If a Noteholder sells a Note, the holder
will recognize gain or loss in an amount equal to the difference between the
amount realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect to the
Note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by such Noteholder
with respect to such Note. Any such gain or loss will be capital gain or loss if
the Note was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in income. Any such
gain or loss would be long-term capital gain or loss if the Noteholder's holding
period exceeded one year. Capital losses generally may be used by a corporate
taxpayer only to offset capital gains, and by an individual taxpayer only to the
extent of capital gains plus $3,000 of other income.
Foreign Holders. Interest paid (or accrued) to a Noteholder who is a
nonresident alien, foreign corporation or other person that is not a United
States person as such term is defined in the Code and the Treasury Regulations
thereunder (a "foreign person") generally will be considered "portfolio
interest", and generally will not be subject to United States federal income tax
and withholding tax, provided, that
(a) the interest is not effectively connected with the conduct of a
trade or business within the United States by the foreign person
(b) the foreign person is not actually or constructively a "10
percent shareholder" of the Trust or the Seller (including a
holder of 10% of the outstanding Certificates)
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or a "controlled foreign corporation" with respect to which the
Trust or the Seller is a "related person" within the meaning of
the Code, and
(c) the foreign person provides the Trustee or other person who is
otherwise required to withhold U.S. tax with respect to the Notes
with an appropriate statement (on Form W-8, new Form W-8BEN or a
similar form), signed under penalty of perjury, certifying that
the beneficial owner of the Note is a foreign person and
providing the foreign person's name and address.
If a Note is held through a securities clearing organization or certain other
financial institutions, the organization or institution may provide the relevant
signed statement to the withholding agent; in that case, however, the signed
statement must be accompanied by a Form W-8, new Form W-8BEN or substitute form
provided by the foreign person that owns the Note. If such interest is not
portfolio interest, then it will be subject to United States federal income and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person generally will be exempt from
United States federal income and withholding tax, provided that (x) such gain is
not effectively connected with the conduct of a trade or business in the United
States by the foreign person and (y) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
If the interest, gain or income on a Note held by a foreign person is
effectively connected with the conduct of a trade or business in the United
States by the foreign person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement on Form
4224 or new Form W-8ECI), the holder generally will be subject to United States
federal income tax on the interest, gain or income at regular federal income tax
rates. In addition, if the foreign person is a foreign corporation, it may be
subject to a branch profits tax equal to 30% of its "effectively connected
earnings and profits" within the meaning of the Code for the taxable year, as
adjusted for certain items, unless it qualifies for a lower rate under an
applicable tax treaty (as modified by the branch profits tax rules).
Final regulations dealing with backup withholding and information
reporting on income paid to foreign persons and related matters (the "New
Withholding Regulations") were published in the Federal Register in October
1997. In general, the New Withholding Regulations do not significantly alter the
substantive withholding and information reporting requirements, but do unify
current certification procedures and forms and clarify reliance standards.
Generally, those persons currently required to file Form W-8 or Form 1001 (to
claim tax treaty benefits) will be required to file new Form W-8BEN or W-8IMY
(in the case of certain foreign intermediaries, partnerships and look-through
entities), while those persons currently required to file Form 4224 will be
required to file new Form W-8ECI. The New Withholding Regulations generally are
effective for payments of interest due after December 31, 2000, subject to
certain transition rules.
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PROSPECTIVE NOTEHOLDERS WHO ARE FOREIGN PERSONS ARE STRONGLY URGED TO CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO THE NEW WITHHOLDING REGULATIONS.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalty of perjury, a certificate setting forth the holder's
name, address, correct federal taxpayer identification number and a statement
that the holder is not subject to backup withholding. Should a nonexempt
Noteholder fail to provide the required certification, the related Trust will be
required to withhold 31% of the amount otherwise payable to the holder and remit
the withheld amount to the IRS as a credit against the holder's federal income
tax liability. As previously mentioned, the New Withholding Regulations
generally will be effective for payments made after December 31, 2000, subject
to certain transition rules, and all Noteholders should consult their own tax
advisors regarding the certifications, if any, that must be made in order to
avoid backup withholding after such date.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of Federal Tax Counsel, the IRS successfully asserted that one or more
classes of Notes did not represent debt for federal income tax purposes, such
class or classes of Notes might be treated as equity interests in the Trust. If
so treated, the Trust might be treated as a publicly traded partnership but it
would not be taxable as a corporation because it would meet certain qualifying
income tests.
Nonetheless, even if the Trust were not taxable as a corporation, the
treatment of Notes as equity interests in such a publicly traded partnership
could have adverse tax consequences to certain holders of such Notes. For
example, income from certain classes of Notes to certain tax-exempt entities
(including pension funds) might be "unrelated business taxable income," income
to foreign holders may be subject to U.S. withholding tax and U.S. tax return
filing requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of Trust expenses. In the
event one or more classes of Notes were treated as interests in a partnership,
the consequences governing the Certificates as equity interests in a partnership
described below under "Federal Tax Consequences For Trusts For Which a
Partnership Election is Made--Tax Consequences to Holders of the Certificates"
would generally apply to the holders of such Notes.
FASITS
Sections 860H through 860L to the Code (the "FASIT Provisions") provide
for a new type of entity for federal income tax purposes known as a "financial
asset securitization investment trust" (a "FASIT"). In general, the FASIT
legislation enables trusts such as the Trust to elect to be treated as a
pass-through entity not subject to federal entity-level income tax (except with
respect to certain prohibited transactions) and to issue securities that would
be treated as debt for federal income tax purposes. Many technical issues
relating to the taxation of FASITs and the holders of FASIT interests are
addressed in proposed Treasury Regulations issued February 4, 2000, including
proposed rules for determining whether the FASIT has engaged in a prohibited
loan origination transaction, and the requirement that more than 99
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percent of a FASIT's assets must be permitted assets, along with a listing of
assets qualifying as permitted assets. Additionally, these proposed Treasury
Regulations contain a broad anti-abuse rule to counteract those instances where
the IRS determines that a FASIT was formed or used for a purpose other than
promoting the spreading of credit risk on debt instruments by facilitating the
securitization of debt instruments. The proposed Treasury Regulations will
become effective on the date final Treasury Regulations are issued, except for
the anti-abuse rule which is proposed to apply beginning February 4, 2000. If a
Trust is intended to qualify as a FASIT for federal income tax purposes, the
Prospectus Supplement will so indicate and will further describe the tax
consequences of such election therein.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
The following discussion only applies to a Trust which issues one or
more classes of Certificates and assumes that all payments on the Certificates
are denominated in U.S. dollars, that a series of Securities includes a single
class of Certificates and that the Certificates are sold to both the Seller and
to persons other than the Seller. If these conditions are not satisfied with
respect to any given series of Certificates, any additional tax considerations
with respect to such Certificates will be disclosed in the applicable Prospectus
Supplement.
CLASSIFICATION AS A PARTNERSHIP
Treatment of the Trust as a Partnership. The Seller and the Master
Servicer will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust as a partnership for purposes of federal, state
and local income and franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
Trust, the partners of the partnership being the Certificateholders (including
the Seller both in its capacity as owner of Certificates and as recipient of
distributions from the Reserve Account, if any), and the Notes being debt of the
partnership. There is, however, no specific authority with respect to the proper
characterization of the arrangement involving the Trust, the Certificateholders,
the Noteholders, the Seller and the Master Servicer.
Under the provisions of Subchapter K of the Code, a partnership is not
considered a separate taxable entity. Instead, partnership income is allocated
to each of the partners and taxed in each partner's hands. The partnership is
generally treated as an entity, however, for computing partnership income,
determining the tax consequences of transactions between a partner and the
partnership, and characterizing the gain on the sale or exchange of a
partnership interest.
Partnership Taxation. As a partnership, the Trust will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account the holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest and finance charges earned on the Student Loans (including
appropriate adjustments for market discount, OID and bond premium), investment
income from investments of amounts on deposit in any related Trust Accounts and
any gain upon collection or disposition of Student Loans. The Trust's deductions
will consist primarily of interest accruing
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with respect to the Notes, servicing and other fees, and losses or deductions
upon collection or disposition of Student Loans.
Guaranteed Payments. Under the Trust Agreement, payments on the
Certificates at the Pass-Through Rate (including accruals on amounts previously
due on the Certificates but not yet distributed) will be treated as "guaranteed
payments" under Section 707(c) of the Code. Guaranteed payments are payments to
partners for the use of their capital and, in the present circumstances, are
treated as deductible to the Trust and ordinary income to the
Certificateholders. The Trust will have a calendar year and will deduct the
guaranteed payments under the accrual method of accounting. Certificateholders
with a calendar tax year are required to include the payments in income in their
taxable year that corresponds to the year in which the Trust deducts the
payments, and the Certificateholders with a different taxable year are required
to include the payments in income in their taxable year that includes the
December 31st of the year in which the Trust deducts the payments. It is
possible that guaranteed payments will not be treated as interest for all
purposes of the Code.
Allocation of Tax Items. The tax items of a partnership are allocable
to the partners in accordance with the Code, Treasury Regulations and the
partnership agreement (here, the Trust Agreement and related documents). The
Trust Agreement will provide, in general, that in addition to the guaranteed
payments described above, the Certificateholders will be allocated the following
tax items of the Trust for each Interest Period (as defined in the applicable
Prospectus Supplement, an "Interest Period"):
(a) any Trust income attributable to discount on the Student Loans
that corresponds to any excess of the principal amount of the
Certificates over their initial issue price;
(b) any Trust expense attributable to the amortization by the Trust
of premium on Student Loans that corresponds to any excess of the
issue price of Certificates over their principal amount; and
(c) all other amounts of income payable to the Certificateholders for
such Interest Period.
All remaining taxable income of the Trust will be allocated to the Seller.
Losses will generally be allocated in the manner in which they are borne. Based
on the economic arrangement of the parties, this approach for allocating Trust
tax items should be permissible under applicable Treasury Regulations, although
no assurance can be given that the IRS would not require a greater amount of
income to be allocated to Certificateholders. Moreover, even under the foregoing
method of allocation, Certificateholders may be allocated income equal to the
entire amount of interest accruing on the Certificates for an Interest Period,
based on the Pass-Through Rate plus the other items described above, even though
the Trust might not make (or have sufficient cash to make) current cash
distributions of such amount. Thus, cash basis holders will, in effect, be
required to report income from the Certificates on the accrual basis, and
Certificateholders may become liable for taxes on Trust income even if they have
not received cash from the Trust to pay such taxes. In addition, because tax
allocations and tax reporting will
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be done on a uniform basis for all Certificateholders but Certificateholders may
be purchasing Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the Trust.
Additionally, all of the guaranteed payments and the taxable income
allocated to a Certificateholder that is a tax-exempt entity may constitute
"unrelated business taxable income," which, under the Code, is generally taxable
to such a holder despite the holder's tax exempt status.
An individual taxpayer's share of expenses of the Trust (including fees
to the Master Servicer but not interest expenses) are miscellaneous itemized
deductions which are deductible only to the extent they exceed two percent of
the individual's adjusted gross income (and not at all for alternative minimum
tax purposes). Accordingly, such deductions might be disallowed to the
individual in whole or in part and might result in such holder being taxed on an
amount of income that exceeds the amount of cash actually distributed to such
holder over the life of the Trust. These deductions may also be subject to
reduction under Section 68 of the Code if an individual taxpayer's adjusted
gross income exceeds certain limits.
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each of the Student Loans,
the Trust might be required to incur additional expense, but it is believed that
there would not be a material adverse effect on Certificateholders.
Computation of Income. Taxable income of the Trust will be computed at
the Trust level and the portion allocated to the Certificateholders will be
allocated to them pro rata. Consequently, the method of accounting for taxable
income will be chosen by, and any elections (such as those described below with
respect to the market discount rules) will be made by the Trust rather than the
Certificateholders. The Trust intends, to the extent possible, to (x) have the
taxable income of the Trust computed under the accrual method of accounting and
(y) adopt a calendar-year taxable year for computing the taxable income of the
Trust. The tax year of the Trust, however, is generally determined by reference
to the tax years of the Certificateholders. An owner of a Certificate is
required to include its pro rata share of Trust income for a taxable year as
determined by the Trust in such Certificateholder's gross income for its taxable
year in which the taxable year of the Trust ends.
Section 708 Termination. Under Section 708 of the Code, if 50% or more
of the outstanding interests in the Trust are sold or exchanged within any
12-month period, the Trust will be deemed to terminate and then be reconstituted
for federal income tax purposes. If a termination occurs, the Trust will be
considered to contribute all of its assets and liabilities to the Trust, as a
new partnership, for an interest in the new partnership; and immediately
thereafter, the Trust, as the former partnership, will be considered to
distribute interests in the new partnership to the Certificateholders in
proportion to their respective interests in the former partnership in
liquidation of the former partnership. If a sale of the Certificates terminates
the Trust under Section 708 of the Code, a Certificateholder's basis in its
ownership interest would not change.
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The Trust's taxable year would also terminate as a result of a constructive
termination and, if the Certificateholder's taxable year is different from the
Trust's, the termination could result in the "bunching" of more than 12 month's
income or loss of the Trust in such Certificateholder's income tax return for
the year in which the Trust was deemed to terminate. A liquidation of interests
is not considered a sale or exchange of interests for purposes of applying this
constructive termination rule.
The Trust will not comply with certain technical requirements that
might apply if a constructive termination were to occur. As a result, the Trust
may be subject to certain tax penalties and may incur additional expenses if it
is required to comply with those requirements. Furthermore, the Trust might not
be able to comply due to a lack of data.
Discount and Premium. To the extent that OID, if any, on the Student
Loans exceeds a de minimis amount, the Trust would have OID income. As indicated
above, a portion of such OID income may be allocated to the Certificateholders.
Moreover, the purchase price paid by the Trust for the Student Loans
may be greater or less than the remaining aggregate principal balances of the
Student Loans at the time of purchase. If so, the Student Loans will have been
acquired at a premium or discount, as the case may be. (As indicated above, the
Trust will make this calculation on an aggregate basis, but might be required to
recompute it on a loan by loan basis.)
If the Trust acquires the Student Loans at a market discount or
premium, the Trust will elect to include any such discount in income currently
as it accrues over the life of the Student Loans or to offset any such premium
against interest income over the life of the Student Loans. As indicated above,
a portion of such market discount income or premium deduction may be allocated
to Certificateholders.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
Any such gain or loss would be long-term capital gain or loss if the
Certificateholder's holding period exceeded one year. A Certificateholder's tax
basis in a Certificate will generally equal the holder's cost increased by the
holder's share of Trust income (includible in gross income) and decreased by any
distributions received or losses allocated with respect to such Certificate. In
addition, both the tax basis in the Certificate and the amount realized on a
sale of a Certificate would include the holder's share of the Notes and other
liabilities of the Trust. A holder acquiring Certificates at different prices
may be required to maintain a single aggregate adjusted tax basis in the
Certificates and, upon sale or other disposition of some of the Certificates,
allocate a pro rata portion of such aggregate tax basis to the Certificates sold
(rather than maintaining a separate tax basis in each Certificate for purposes
of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's
share of unrecognized accrued market discount on the Student Loans would
generally be treated as ordinary income to the holder. Since the Trust will make
an election to include market discount, if any, in income
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currently as it accrues over the life of the Student Loans, there may be little,
if any, unrecognized accrued market discount at the time a Certificate is sold.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the
Trust's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect the tax liability and
tax basis of the holder) attributable to periods before the actual purchase
takes place.
The use of such a monthly convention may not be permitted by existing
laws and regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust might be reallocated among the Certificateholders. The Seller is
authorized to revise the Trust's method of allocation between transferors and
transferees to conform to a method permitted by future laws, regulations or
other IRS guidance.
Section 754 Election. In the event that a Certificateholder sells a
Certificate at a profit (or loss), the purchasing Certificateholder will have a
higher (or lower) basis in the Certificate than the selling Certificateholder
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust were to file an election under Section
754 of the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust will not make such election. As a
result, Certificateholders might be allocated a greater or lesser amount of
Trust income than would be appropriate based on their own purchase price for
Certificates.
Administrative Matters. The Eligible Lender Trustee is required to keep
or cause to be kept complete and accurate books of the Trust. The Eligible
Lender Trustee will file a partnership information return (IRS Form 1065) with
the IRS for each taxable year of the Trust and will report each
Certificateholder's allocable share of items of Trust income and expense to
holders and the IRS on Schedule K-1. The Trust will provide the Schedule K-1
information to nominees that fail to provide the Trust with the information
statement described below and such nominees will be required to forward such
information to the beneficial owners of the Certificates. Generally, holders
must file tax returns that are consistent with the information returns filed by
the Trust or be subject to penalties unless the holder timely notifies the IRS
of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust with
a statement containing certain
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information on the nominee, the beneficial owners and the Certificates so held.
Such information includes (1) the name, address and taxpayer identification
number of the nominee and (2) as to each beneficial owner (a) the name, address
and taxpayer identification number of such person, (b) whether such person is a
United States person, a tax-exempt entity or a foreign government, an
international organization, or any wholly owned agency or instrumentality of
either of the foregoing, and (c) certain information on Certificates that were
held, bought or sold on behalf of such person throughout the year. In addition,
brokers and financial institutions that hold Certificates through a nominee are
required to furnish directly to the Trust information as to themselves and their
ownership of Certificates. A clearing agency registered under Section 17A of the
Exchange Act that holds Certificates as a nominee is not required to furnish any
such information statement to the Trust. The information referred to above for
any calendar year must be furnished to the Trust on or before the following
January 31st. Nominees, brokers and financial institutions that fail to provide
the Trust with the information described above may be subject to penalties.
The Seller will be designated as "tax matters partner" in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in certain disputes with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before the later of three years after the date
on which the partnership information return is filed or the last day for filing
such return for such year (determined without regard to extensions). Any adverse
determination following an audit of the return of the Trust by the appropriate
taxing authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may be
precluded from separately litigating a proposed adjustment to the items of the
Trust. An adjustment could also result in an audit of a Certificateholder's
returns and adjustments of items not related to the income and losses of the
Trust.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust would be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Accordingly, the Trust will
withhold as if it were so engaged in order to protect the Trust from possible
adverse consequences of a failure to withhold. The Trust expects to withhold on
the portion of its taxable income that is allocable to foreign
Certificateholders pursuant to Section 1446 of the Code, as if such income were
effectively connected to a U.S. trade or business, at a rate of 35% for foreign
holders that are taxable as corporations and 39.6% for all other foreign
holders. Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Trust to change its withholding
procedures. In determining a holder's withholding status, the Trust may rely on
Form W-8, new Form W-8BEN, Form W-9 or the holder's certification of non-foreign
status signed under penalty of perjury.
As previously mentioned, the New Withholding Regulations generally will
be effective for payments made after December 31, 2000, subject to certain
transition rules. Under the New Withholding Regulations, generally, those
persons currently required to file Form W-8 or Form
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1001 (to claim tax treaty benefits) will be required to file new Form W-8BEN or
W-8IMY (in the case of certain foreign intermediaries, partnerships and
look-through entities), while those persons currently required to file Form 4224
will be required to file new Form W-8ECI. PROSPECTIVE CERTIFICATEHOLDERS WHO ARE
FOREIGN PERSONS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE NEW WITHHOLDING REGULATIONS.
Each foreign holder may be required to file a U.S. individual or
corporate income tax return (including in the case of a corporation, the branch
profits tax) on its share of the Trust's income. Each foreign holder must obtain
a taxpayer identification number from the IRS and submit that number to the
Trust in order to assure appropriate crediting of the taxes withheld. Each
foreign holder will be subject to United States federal income tax and
withholding tax at a rate of 30 percent on the holder's share of guaranteed
payments, unless reduced or eliminated pursuant to an applicable treaty. A
foreign holder generally would be entitled to file with the IRS a claim for
refund with respect to taxes withheld by the Trust in excess of those that are
withheld with respect to guaranteed payments, taking the position that those
taxes were not due because the Trust was not engaged in a U.S. trade or
business. EACH POTENTIAL FOREIGN CERTIFICATEHOLDER SHOULD CONSULT ITS TAX
ADVISOR AS TO WHETHER THE TAX CONSEQUENCES OF HOLDING A CERTIFICATE MAKE IT AN
UNSUITABLE INVESTMENT.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code. As previously mentioned, the New Withholding
Regulations generally will be effective for payments made after December 31,
2000, subject to certain transition rules and all Certificateholders should
consult their own tax advisors regarding the certifications, if any, that must
be made in order to avoid backup withholding after such date.
FEDERAL TAX CONSEQUENCES FOR TRUSTS IN WHICH ALL
CERTIFICATES ARE RETAINED BY THE SELLER
TAX CHARACTERIZATION OF THE TRUST
Federal Tax Counsel will deliver its opinion that a Trust, which issues
one or more classes of Notes to investors and all the Certificates of which are
retained by the Seller, will not be an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes, assuming
that no election will be made to treat the Trust as a corporation for federal
income tax purposes. In such a case, the Seller and the Master Servicer will
agree to treat the Trust as a division of the Seller for purposes of federal,
state and local income and franchise tax and any other tax measured in whole or
in part by income; consequently, the Trust will be disregarded as an entity
separate from the Seller.
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TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. As discussed above, Federal Tax
Counsel will deliver an opinion to the Trust that the Notes will be classified
as debt for federal income tax purposes. The Seller will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Assuming such characterization of the Notes is
correct, the federal income tax consequences to Noteholders described above
under "Federal Tax Consequences For Trusts For Which a Partnership Election is
Made--Tax Consequences to Holders of the Notes" would apply to the Noteholders.
PENNSYLVANIA STATE TAX CONSEQUENCES
PENNSYLVANIA INCOME AND FRANCHISE TAX CONSEQUENCES WITH RESPECT TO THE NOTES
If a majority of the Student Loans of a Trust are serviced by the
Pennsylvania Higher Education Assistance Agency ("PHEAA"), it may be argued that
the principal place of business of such Trust will be in the Commonwealth of
Pennsylvania. There is no authority in Pennsylvania addressing the question of
whether the Notes will be treated as debt or equity for Pennsylvania purposes.
Furthermore, Pennsylvania does not necessarily adopt Federal income tax
definitions in characterizing income for state tax purposes. Nonetheless,
subject to the foregoing uncertainties, if a majority of the Student Loans of a
Trust are serviced by PHEAA, Pennsylvania Tax Counsel will, prior to the
issuance of the Notes and Certificates, deliver its opinion to the Trust that,
assuming the Notes are treated as debt for Federal income tax purposes, the
Notes will be treated as debt for Pennsylvania income tax purposes. Noteholders
not otherwise subject to taxation in Pennsylvania should not become subject to
taxation in Pennsylvania solely because of a holder's ownership of Notes.
However, for Pennsylvania resident Noteholders otherwise subject to Pennsylvania
tax, the interest on the Notes will be included in Pennsylvania taxable income.
PENNSYLVANIA INCOME AND FRANCHISE TAX CONSEQUENCES WITH RESPECT TO THE
CERTIFICATES
Because state and local income and franchise tax laws vary greatly, it
is impossible to predict the income and franchise tax consequences to the
Certificateholders in all of the state and local taxing jurisdictions in which
they are already subject to tax. Certificateholders are urged to consult their
own advisors with respect to state and local income and franchise taxes.
However, Pennsylvania Tax Counsel will, prior to the issuance of the Notes and
Certificates, deliver its opinion that the Trust will not be subject to
Pennsylvania corporate net income tax or capital stock franchise tax or any
other Pennsylvania entity level income or franchise tax. There is no assurance,
however, that this conclusion will not be challenged by the Pennsylvania taxing
authorities or, if challenged, that the taxing authorities will not be
successful. If the Trust were subject to an entity level tax in Pennsylvania,
any such tax could materially reduce or eliminate cash that would otherwise be
distributable with respect to the Certificates (and Certificateholders could be
liable for any such tax that is unpaid by the Trust). Certificateholders not
otherwise subject to taxation in Pennsylvania should not become subject to
taxation in Pennsylvania solely because of a holding ownership of Certificates.
However, for Pennsylvania resident Certificateholders otherwise subject
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to Pennsylvania tax, the distributions on the Certificates will be included in
Pennsylvania taxable income.
THE FEDERAL AND PENNSYLVANIA TAX DISCUSSIONS SET FORTH ABOVE ARE
INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
NOTEHOLDER'S OR CERTIFICATEHOLDER'S PARTICULAR TAX SITUATION. PROSPECTIVE
PURCHASERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF SECURITIES,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS
AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL, PENNSYLVANIA OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and/or the Code impose certain requirements on employee benefit plans
and on certain other retirement plans and arrangements, including individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts (and, as applicable, insurance company general accounts)
in which such plans, accounts or arrangements are invested that are subject to
the fiduciary responsibility provisions of ERISA and Section 4975 of the Code
("Plans") and on persons who are fiduciaries with respect to such Plans in
connection with the investment of Plan assets. Certain employee benefit plans,
such as governmental plans (as defined in ERISA Section 3(32)), and, if no
election has been made under Section 410(d) of the Code, church plans (as
defined in Section 3(33) of ERISA) are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Notes without regard to the
ERISA considerations described below, subject to the provisions of other
applicable federal and state law. Any such plan which is qualified and exempt
from taxation under Sections 401(a) and 501(a) of the Code, however, is subject
to the prohibited transaction rules set forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, Section 406 of ERISA and Section 4975 of the
Code prohibit a broad range of transactions involving assets of Plan and persons
(parties in interest under ERISA and disqualified persons under the Code,
collectively, "Parties in Interest") who have certain specified relationships to
the Plan unless a statutory, regulatory or administrative exemption is
available. Certain Parties in Interest that participate in a prohibited
transaction may be subject to an excise tax imposed pursuant to Section 4975 of
the Code or a penalty imposed pursuant to Section 502(i) of ERISA, unless a
statutory, regulatory or administrative exemption is available. These prohibited
transactions generally are set forth in Section 406 of ERISA and Section 4975 of
the Code.
THE NOTES
Unless otherwise specified in the related Prospectus Supplement, the
Notes of each series may be purchased by a Plan. The Trust, any underwriter, the
Eligible Lender Trustee, the Indenture Trustee, the Master Servicer, the
Administrator, any provider of credit support or any of their affiliates may be
considered to be or may become Parties in Interest with respect to
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certain Plans. Prohibited transactions under Section 406 of ERISA and Section
4975 of the Code may arise if a Note is acquired by a Plan with respect to which
such persons are Parties in Interest unless such transactions are subject to one
or more statutory or administrative exemptions, such as:
- Prohibited Transaction Class Exemption ("PTCE") 96-23, which
exempts certain transactions effected on behalf of a Plan by an
"in-house asset manager";
- PTCE 90-1, which exempts certain transactions between insurance
company separate accounts and Parties in Interest;
- PTCE 91-38, which exempts certain transactions between bank
collective investment funds and Parties in Interest;
- PTCE 95-60, which exempts certain transactions between insurance
company general accounts and Parties in Interest; or
- PTCE 84-14, which exempts certain transactions effected on behalf
of a Plan by a "qualified professional asset manager."
There can be no assurance that any of these class exemptions will apply with
respect to any particular Plan investment in Notes or, even if it were deemed to
apply, that any exemption would apply to all prohibited transactions that may
occur in connection with such investment. Accordingly, prior to making an
investment in the Notes, investing Plans should determine whether the Trust, any
underwriter, the Eligible Lender Trustee, the Indenture Trustee, the Master
Servicer, the Administrator, or any provider of credit support or any of their
affiliates is a Party in Interest with respect to such Plan and, if so, whether
such transaction is subject to one or more statutory, regulatory or
administrative exemptions.
Any Plan fiduciary considering whether to invest in Notes on behalf of
a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment. Each Plan fiduciary also should determine whether,
under the general fiduciary standards of investment prudence and
diversification, an investment in the Notes is appropriate for the Plan,
considering the overall investment policy of the Plan and the composition of the
Plan's investment portfolio, as well as whether such investment is permitted
under the governing Plan instruments.
THE CERTIFICATES
Unless otherwise specified in the Prospectus Supplement, the
Certificates of each series may not be purchased by a Plan or by any entity
whose underlying assets include plan assets by reason of a plan's investment in
the entity (each, a "Benefit Plan"). Such purchase of an equity interest in the
Trust will result in the assets of the Trust being deemed assets of a Benefit
Plan for the purposes of ERISA and the Code and certain transactions involving
the Trust may then be deemed to constitute prohibited transactions under Section
406 of ERISA and Section 4975 of
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<PAGE> 231
the Code. A violation of the "prohibited transaction" rules may result in an
excise tax or other penalties and liabilities under ERISA and the Code for such
persons.
By its acceptance of a Certificate, each Certificateholder will be
deemed to have represented and warranted that it is not a Benefit Plan.
If a given series of Certificates may be acquired by a Benefit Plan
because of the application of an exception contained in a regulation or
administrative exemption issued by the United States Department of Labor, such
exception will be discussed in the related Prospectus Supplement.
* * *
A plan fiduciary considering the purchase of Securities of a given
series should consult its tax and/or legal advisors regarding whether the assets
of the related Trust would be considered plan assets, the possibility of
exemptive relief from the prohibited transaction rules and other issues and
their potential consequences.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement with
respect to the Notes of a given series and an underwriting agreement with
respect to the Certificates of such series (collectively, the "Underwriting
Agreements"), the Seller will agree to cause the related Trust to sell to the
underwriters named therein and in the related Prospectus Supplement, and each of
such underwriters will severally agree to purchase, the principal amount of each
class of Notes and Certificates, as the case may be, of the related series set
forth therein and in the related Prospectus Supplement.
In each of the Underwriting Agreements with respect to any given series
of Securities, the several underwriters will agree, subject to the terms and
conditions set forth therein, to purchase all the Notes and Certificates, as the
case may be, described therein which are offered hereby and by the related
Prospectus Supplement if any of such Notes and Certificates, as the case may be,
are purchased.
Each Prospectus Supplement will either (x) set forth the price at which
each class of Notes and Certificates, as the case may be, being offered thereby
will be offered to the public and any concessions that may be offered to certain
dealers participating in the offering of such Notes and Certificates, as the
case may be, or (y) specify that the related Notes and Certificates, as the case
may be, are to be resold by the underwriters in negotiated transactions at
varying prices to be determined at the time of such sale. After the initial
public offering of any such Notes and Certificates, as the case may be, such
public offering prices and such concessions may be changed.
Until the distribution of the Securities is completed, rules of the
Commission may limit the ability of the underwriters and certain selling group
members to bid for and purchase the
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Securities. As an exception to these rules, the underwriters are permitted to
engage in certain transactions that stabilize the price of the Securities. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Securities.
If an underwriter creates a short position in the Securities in
connection with the offering (i.e., if it sells more Securities than are set
forth on the cover page of the related Prospectus Supplement), the underwriter
may reduce that short position by purchasing Securities in the open market.
An underwriter may also impose a penalty bid on certain underwriters
and selling group members. This means that if the underwriter purchases
Securities in the open market to reduce the underwriters' short position or to
stabilize the price of the Securities, it may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
Securities as part of the offering.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
discourages resales of the security.
Neither the Seller nor the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Securities. In addition, neither
the Seller nor the underwriters make any representation that the underwriters
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
Each Underwriting Agreement will provide that the Seller will indemnify
the underwriters against certain civil liabilities, including liabilities under
the Securities Act, or contribute to payments the several underwriters may be
required to make in respect thereof.
Each Trust may, from time to time, invest the funds in its Trust
Accounts in Eligible Investments acquired from such underwriters.
Pursuant to each of the Underwriting Agreements with respect to a given
series of Securities, the closing of the sale of any class of Securities subject
to either thereof will be conditioned on the closing of the sale of all other
such classes subject to either thereof.
This Prospectus may be used by McDonald Investments Inc. ("McDonald
Investments"), a wholly-owned subsidiary of KeyCorp and an affiliate of the
Seller and the Master Servicer, or its successors, in connection with offers and
sales related to market-making transactions in the Securities in which McDonald
Investments acts as a principal. McDonald Investments may also act as agent in
such transactions. McDonald Investments is a member of the New York Stock
Exchange, Inc. McDonald Investments is not a bank or thrift, is an entity
separate from the Seller and the Master Servicer, and is solely responsible for
its own contractual obligations and commitments.
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The place and time of delivery for the Securities in respect of which
this Prospectus is delivered will be set forth in the related Prospectus
Supplement.
LEGAL MATTERS
Certain legal matters relating to the Securities of any series will be
passed upon for the related Trust, the Seller and the Administrator by Forrest
F. Stanley, Esq., General Counsel and Assistant Secretary of the Seller, as
counsel for the Seller, and by Thompson Hine & Flory LLP, Cleveland, Ohio.
Certain federal income tax and other matters will be passed upon for the Trust
by Thompson Hine & Flory LLP. Certain Pennsylvania state income tax matters will
be passed upon for each Trust by Kirkpatrick & Lockhart LLP.
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INDEX OF PRINCIPAL TERMS
Page
1992 Amendments..............................................................20
1993 Act.....................................................................43
1998 Amendments..............................................................20
1998 Reauthorization Bill....................................................93
91-day Treasury Bill Rate....................................................24
AACSB........................................................................33
Additional Fundings..........................................................18
Administration Agreement.....................................................86
Administration Fee...........................................................87
Administrator................................................................15
Administrator Default........................................................81
Applicable Trustee...........................................................62
Auction Date.................................................................86
Auction Purchase Amount......................................................86
Available Funds..............................................................90
Bankruptcy Code..............................................................92
Bar Exam Loan................................................................33
Base Rate....................................................................61
Benefit Plan................................................................109
Calculation Agent............................................................61
Cede.........................................................................51
Certificate Balance..........................................................50
Certificate Pool Factor......................................................50
Certificateholder............................................................62
Certificates.................................................................59
Clearstream..................................................................62
Clearstream Participants.....................................................64
Closing Date.................................................................69
Code.........................................................................95
Collection Account...........................................................71
Collection Period............................................................70
Commission...................................................................13
Consolidation Loans..........................................................39
Cooperative..................................................................65
CP Rate......................................................................26
Cutoff Date..................................................................14
Deferral Period..............................................................25
Definitive Certificates......................................................67
Definitive Notes.............................................................67
Definitive Securities........................................................67
Department...................................................................15
112
<PAGE> 235
Depositories.................................................................62
Depository...................................................................51
Depository Services..........................................................63
Distribution Date............................................................51
DTC..........................................................................51
Eligible Deposit Account.....................................................72
Eligible Institution.........................................................72
Eligible Investments.........................................................72
Eligible Lender Trustee......................................................14
Eligible Students............................................................22
ERISA.......................................................................108
Escrow Account...............................................................71
Euroclear....................................................................62
Euroclear Operator...........................................................65
Euroclear Participants.......................................................65
Event of Default.............................................................53
Exchange Act.................................................................13
FASIT........................................................................99
FASIT Provisions.............................................................99
FDIA.........................................................................89
FDIC.........................................................................72
Federal Assistance...........................................................21
Federal Consolidation Loan...................................................29
Federal Consolidation Loan Program...........................................20
Federal Consolidation Loan Rebate............................................31
Federal Direct Consolidation Loan............................................30
Federal Direct Consolidation Loan Program....................................30
Federal Direct Student Loan Program..........................................43
Federal Graduate Programs....................................................32
Federal Guarantee Agreements.................................................20
Federal Guarantee Payments...................................................20
Federal Guarantors...........................................................20
Federal Loans................................................................19
Federal Origination Fee......................................................31
Federal Programs.............................................................20
Federal Tax Counsel..........................................................95
Fee Advance..................................................................38
FFELP........................................................................19
FIRREA.......................................................................89
Fixed Rate Securities........................................................60
Floating Rate Securities.....................................................60
Forbearance Period...........................................................25
Funding Period...............................................................18
Grace Period.................................................................25
Graduate Loans...............................................................19
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Great Lakes..................................................................34
Guarantee Agreements.........................................................20
Guarantee Payments...........................................................20
Guarantors...................................................................20
Higher Education Act.........................................................20
Indenture....................................................................50
Indenture Trustee............................................................50
Indirect Participants........................................................62
Industry.....................................................................63
Initial Pool Balance.........................................................85
Interest Index Carryover.....................................................54
Interest Period.............................................................101
Interest Rate................................................................51
Interest Reset Period........................................................61
Interest Subsidy Payments....................................................21
Investment Earnings..........................................................72
IRS..........................................................................95
KBUSA........................................................................15
Key Alternative Loan.........................................................34
KEYCORP......................................................................16
Keys2Repay Program...........................................................37
LIBOR........................................................................61
Master Servicer..............................................................15
Master Servicer Default......................................................81
Master Servicing Fee.........................................................75
Minimum Purchase Amount......................................................86
Monthly Servicing Payment Date...............................................74
Negative Carry Account.......................................................71
New Withholding Regulations..................................................98
Note Pool Factor.............................................................50
Noteholder...................................................................62
Notes........................................................................50
OID..........................................................................96
OID Regulations..............................................................96
Participants.................................................................51
Parties in Interest.........................................................108
Pass-Through Rate............................................................60
Pennsylvania Tax Counsel.....................................................95
PHEAA.......................................................................107
Plans.......................................................................108
PLUS Loan....................................................................42
PLUS Loan Program............................................................20
PLUS Loans...................................................................28
Pool Balance.................................................................50
Pool Factor..................................................................50
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Post-Graduate Loans..........................................................19
Pre-Funded Amount............................................................79
Pre-Funding Account..........................................................71
Private Consolidation Fee Advance............................................40
Private Consolidation Loan...................................................39
Private Consolidation Loan Program...........................................39
Private Graduate Loans.......................................................33
Private Guarantee Agreements.................................................20
Private Guarantee Payments...................................................20
Private Guaranteed Loans.....................................................20
Private Guarantors...........................................................20
Private Loan Repayment Commencement Date.....................................37
Private Loans................................................................34
Private Undergraduate Loans..................................................33
Private Unguaranteed Loans...................................................20
Programs.....................................................................19
Prospectus...................................................................50
Prospectus Supplement........................................................51
PTCE........................................................................109
Purchase Amount..............................................................70
Rating Agency................................................................57
Record Date..................................................................67
Registration Statement.......................................................13
Related Documents............................................................57
Reserve Account..............................................................71
Residency Loan...............................................................33
Revolving Period.............................................................18
Rules........................................................................63
Sale and Servicing Agreement.................................................69
Secretary....................................................................91
Securities...................................................................59
Securityholders..............................................................62
Seller.......................................................................15
Seller Insolvency Event......................................................84
SLS Loan Program.............................................................20
SLS Loans....................................................................27
Special Allowance Payments...................................................21
Specified Reserve Account Balance............................................52
Spread.......................................................................61
Spread Multiplier............................................................61
Stafford Loan Program........................................................20
Stafford Loans...............................................................21
Student Loans................................................................14
Sub-Servicers................................................................17
Sub-Servicing Agreement......................................................17
115
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Systems......................................................................63
Terms and Conditions.........................................................65
Transfer and Servicing Agreements............................................69
Trust........................................................................13
Trust Accounts...............................................................71
Trust Agreement..............................................................13
UCC..........................................................................88
Undergraduate Loans..........................................................19
Underlying Federal Loan......................................................29
Underlying Private Graduate Loans............................................39
Underwriting Agreements.....................................................110
Unsubsidized Stafford Loan Program...........................................41
Unsubsidized Stafford Loans..................................................21
YEAR 2000....................................................................16
Year 2000 problems...........................................................63
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$550,000,000
KEYCORP STUDENT LOAN
TRUST 2000-A
$100,000,000
CLASS A-1 FLOATING RATE
ASSET-BACKED NOTES
$450,000,000
CLASS A-2 FLOATING RATE
ASSET-BACKED NOTES
KEY BANK USA, NATIONAL ASSOCIATION
SELLER AND MASTER SERVICER
PROSPECTUS SUPPLEMENT
JOINT LEAD MANAGER AND GLOBAL BOOKRUNNER
DEUTSCHE BANC ALEX. BROWN
JOINT LEAD MANAGER
MCDONALD INVESTMENTS
a KeyCorp Company
